September 6, 2024
Things I Learned This Week Over Labor Day
It felt like Sunday all day but the liquor stores were open. It is the end of summer. I know, some of you will say, “NO”, it is the equinox that occurs September 21st that herolds the beginning of Fall, my favorite season. School is back, football has started, it cooled down just to make a point. The day after Labor Day is when things heat up. Conferences resume (Enercom in Denver in August is the exception!), political ads are rolled out in a big way, people who work in offices are back in offices after summering in cooler climates. So, welcome back everyone, myself included, and let’s get down to making our industry and world a better place. That was not political but the New Year mantra!
Oil Broke Down. Below $70 as of this writing. Lowest oil price of the year. A year ago, $100 oil was a sure thing. Today, we are praying for support at $70. But we are sure about what’s next... Right?????
Another Marriage. Noble Drilling and Diamond Offshore Drilling are hitched. The combined company boasts the largest fleet of 7th generation dual-BOP drillships in the industry, and will have a backlog of $6.5 billion. And as an example of the strength in industry pricing over the last 2-3 years, the average day rate for 7th generation drillships is $460,000. The company now owns and operates 28 floaters and 13 jackup rigs. This follows the consolidation of the offshore contract drilling market over the last several years. Transocean, Ensco, Rowan, Pacific, Atwood, Seadrill, Saipem, Stenna, Fred Olsen, KCA Deutag, Maersk, Shelf, Odfjell, and Vantage Drilling, among others. And that list continues to shrink. So, consolidation, rising day rates, virtually no excess supply that can flood the market, and upward momentum as demonstrated by the increase in day rates and utilization, continues to move offshore drilling in a favorable direction. After about 6 or so years in the wilderness, it would appear that offshore oil and gas industry still has some life left in it.
Who’s Next? Exxon buys Pioneer for $65 billion, Chevron is buying Hess for $53 billion, Diamondback buys Endeavor for $26 billion, Oxy buys CrownRock for $12 billion. Devon paid $5 billion for Grayson Mill Energy in July 2024. California Resources buys the Exxon/Shell joint venture Aera Energy for $1.1 billion. Are we running out of companies? No, private equity has a large number of companies that they would love to monetize given a chance. But if private equity is trying to sell, where does the money come from for future deals? One big answer? Family offices. I know they have already been “discovered” but by their nature, making money on an investment is the goal, and other issues matter less. According to Andrew Dittmar at Enverus, private E&Ps have been involved in 169 sales since the beginning of 2023, which adds up to $78.3 billion of deal value and total associated production of 1.774 million barrels per day. Private operators produce about 40% of U.S. production. The amount of private equity capital available to the industry has diminished by up to 85% during the last five to seven years, according to Wil van Loh, of Quantum Capital.
Drum Roll Please. So, who are the biggest players? Where were they last year and how much are they worth? Shallow barrel, fish or not.
Stocks. BofA listed their global “contender and defender” stocks, a strategy that looks into earnings and price momentum. The “bottom-up” stock selection model showed preference towards the global financials and technology sectors. According to a note this week, earnings and price momentum are most positive for banks, diversified financials, semiconductors, insurance, and tech hardware. They are most negative for consumer staples, energy, and real estate. Targa Resources is the only energy stock on the list.
Size Matters. It is interesting to see that private companies still account for such a large part of drilling activity and that, while the rig operators are more consolidated, 30% of the market is outside the Big 4.
Playground Fight. The U.S. Steel fight is fun to watch. Biden/Harris want to shut down the sale, hoping to maintain an American steel company. Nippon Steel of Japan is offering $2.7 billion of capital for revitalizing older plants and will honor all union contracts. The CEO of U.S. Steel said that they would have to start shutting down mills if the sale doesn’t close, forcing layoffs. And while U.S. Steel has the country’s name in the title, it is a public company with shareholders around the world already. Ridiculous that the government is intervening this way considering stopping the sale would be a negative for all involved. And this isn’t just the Justice Department looking at the deal. The administration is also saying it has to get approval from the Committee on Foreign Investment in the United States. Members of that Committee include the Secretary of the Treasury, who chairs the committee, the Secretaries of State, Defense, Homeland Security, Commerce, Energy, in addition to the Attorney General, among others. Political grandstanding? I could have sworn Japan was one the countries we like.
Just Wait. Remember this summer when a big hurricane hit, earlier than ever before, proving that climate change was the cause? Of course, the NOAA has already come out and debunked that. But why stop a good story? The end of the world is nigh!!! Oh, wait. We are having a lull. A lull! How can a climate activist maintain momentum if the weather doesn’t cooperate? I loved this one – “Those conditions won’t last, meteorologists said, though it’s difficult to say when tropical cyclone activity will pick back up.” Okay fine. I hereby predict $100 oil. I won’t say which year or decade it will occur, but trust me, it will. Absurd, right? If it’s a storm, its climate change. If it’s not a storm, it is either collusion by the oil industry or misinformation by Mother Nature.
Not Enough. Okay, so we make sure the rice whales are safe. Now let’s shut down some LNG capacity as well. Remember, the NSA did a feasibility study of exporting LNG for President Obama and we have since become the largest provider of LNG in the world. It was fun. An education – “Environmental justice” issues and examples include inadequate access to healthy food, inadequate transportation, air and water pollution, and unsafe homes.
A district court in Washington DC vacated the permit for the NextDecade Rio Grande LNG project. Rice whales?? No. FERC had failed to sufficiently analyze how the project would affect “environmental justice”.
“Venture Global’s CP2 LNG project is contrary to the public interest and the permit should be denied. LNG export facilities like CP2 are dangerous, super-polluters that have no place in our neighborhoods or in a livable climate future."
FERC failed to fully and adequately assess the cumulative and direct environmental and health impacts that would be caused by air pollution from Commonwealth LNG, as required by the National Environmental Policy Act and Natural Gas Act. While the court stopped short of vacating FERC’s approval of the project, it returned the decision to FERC for reconsideration.
The Energy Department did grant a five-year license for a plant being built near Altamira, Mexico. NIMBY, but yours is fine. New Fortress.
The administration says it isn’t against fracking and the push to renewables is being stalled by low demand. This is killing off or causing increased financial risks to LNG projects that require years of lead time and surety of contracts. And this was once considered a goal, not a punishment.
Headlines.
OPEC+ is close to an agreement on delaying a planned increase in oil production after prices plunged amid fragile demand.
A decision by oil producers to delay returning barrels to the market won’t fix the problems facing OPEC+. It will only kick the can down the road.
Oil prices could be close to a bottom of around $70 to $72/bbl, set by prior technical support since early 2023 and the hope that OPEC+ could defend that range.
Shearwater to optimize Jubilee field in offshore Ghana with 4D seismic monitoring contract.
“We have seen 2024- 25 EBITDA estimates for pressure pumpers decline -26% and -23%, while average share performance has been down -8% year to date. On the land drilling side, we have seen 2024-25 EBITDA estimates decline by -9% and -8%.”
“We are here to help you decide.” CBS News
His Lips to Your Ears. A JP Morgan analyst made the following comments about PTEN following the company’s NYC dinner this week. I am including it because, while we all acknowledge that there is some weakness in the OFS market, this is near-term granularity. “We attended PTEN’s annual sell-side dinner at the Nasdaq with senior management. While results in the company’s U.S. Land segment are trending consistent with management’s expectations, they acknowledged softer conditions in their frac segment as 3Q24 gross profit in Completion Services is now expected to decline slightly on a sequential basis vs. their guide that called for a slight improvement in sequential profitability in frac. We think increased calendar white space as well as some higher quarter specific costs incurred in July for frac were the culprits for the revised outlook.” Not earth-shaking or dramatic and pretty well expected. That said, PTEN says it will be running with a 14% free cash flow yield by year-end, so something is still working.
And It Starts. ExxonMobil to sell conventional Permian oil assets for $1 billion amid shale production focus. The package includes older wells in the Permian’s Central basin that produce small but stable amounts of oil. This is according to people familiar with the matter who declined to be named because sale negotiations are private.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $69.20 per barrel (down ~8.8% week-over-week) and natural gas is $2.15 per MMBtu (up ~0.4% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.3 MM BOPD (up ~3.9% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 6.9 million barrels week-over-week vs. an estimated decrease of ~0.6 million barrels.
Frac Spread Count: There are currently 222 frac spreads operating in the U.S. (a decrease of 7 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 563 drilling rigs operating in the U.S. (a decrease of 3 rigs week-over-week).
Three Steps Forward, Fall Well Back. Mexico is headed back to the “bad ole days”. Outgoing President, Andres Manuel Lopez Obrador is overhauling many mainstays of Mexico, including the judicial system, wanting to fire all the judges and have them be elected by popular votes, a historical challenge in the neighborhood. The Supreme Court justices have reacted by going on strike. That is not all. He is changing many parts of the country’s ambitions towards a working democracy and improved freedoms. Before he hands over the reins to his “hand-picked” successor, he is making sure that the Presidency has major and undisputed power, protected by laws he has manufactured.
I’m Baaacccckkkk. Almost. Libya. Great place. I still have my pictures of the Roman ruins on the coast. But it has been a mess for a while. Civil war? At least different factions are trying to work together. So, about 500,000 barrels per day were taken off the market but oil prices didn’t really react much. In fact, oil prices dropped because of the weak outlook in China. Now Libya is putting that 500,000 barrels back into the market, further increasing supply in the face of flat to slightly declining demand. Isn’t that what we do in the oil business? Sign up big activity and equipment just before boom turns into a bust. It put oil prices below $70/barrel… the lowest oil price of the year.
Non-Linear. It turns out that most changes are not linear. And my world there has never been anything linear about the sciences, the cycles, or the technology. This particular article, though, was talking about aging. It turns out that aging is not linear but comes in cycles as well. So, I figure this is compounded when a downcycle in our business coincides with my aging. What I found out was in 1998 and 2014, my aging accelerated. I was hitting an aging burst already, and the 1998 correction and the stunning fall from June 2014 was epic. Now I feel old.
Charter Schools. The Biden/Harris administration is working to crush school competition. The latest budget calls for significant cuts to federal funding for charter schools. There seems to be a great deal of support at least in terms of empirical performance and favor of charter schools. Stanford university assessed the performance of students at 6,200 charter schools in 29 states from 2014 to 2019. That is a large data set. They found that, charter school students on average out-perform their peers in traditional public schools and that academic growth among low-income minority charter schools were the strongest. Why is this happening? Why would the Biden administration want to cut funding to something that is obviously so successful and popular? Democrats for Education Reform found that 80% of Black parents and 71% of Hispanics had a favorable view of charter schools. The issue - teachers unions. VP Harris said that she is the “most pro-union Presidential candidate ever”. Typically charter teachers don't belong to unions. The American Federation of Teachers, the National Education Association and other teachers’ unions don't like this at all. Unions run for the benefit of their members not for the educational quality of the students. That needs to be remembered. Florida has an interesting project going. If the union doesn't represent, by paid membership, more than 60% of the employees, the union is decertified. A competing union has been started in Florida that doesn't belong to a national chapter, so they don't, like others, send 70% of local dues to the national level. It's a union that is run by teachers for students and teachers. And it's gaining steam. It will be interesting to see how all this plays out. Something has to happen with education in this country. That is a given. More than 300,000 students have gone to charter schools over the last five years, and this is while traditional public schools are losing population. Let's not lose sight of what is important.
Shape of Things to Come?? Shell plans to lay off about 20% of its workforce, totaling to an estimated 18,000 employees in its oil exploration, development, and subsurface units as part of an effort to reduce operating expenses by $3 billion by the end of 2025.
Non-Woke Beer. We have seen a number of companies in several industries de-emphasizing DEI… Also known as diversity, equity and inclusion in HR departments. It was seen as racist and showed favoritism and pushed outcome over performance. That's just one view, but it seems to be the view taking hold lately. Coors Lite and Miller beers are the latest. The brewer said they would no longer participate in the human rights campaign or report to the group that scores companies based on inclusion. Nor will they have supplier diversity goals, which favor supply companies owned by women or minorities. Additionally, Lowes and Jack Daniels have changed their policies recently it seems. DEI hijacked the ESG movement, which was sad to say, but it seems to be meeting it's end.
PPHB Gulf Coast Energy & Industrial Panel: My firm, PPHB, is hosting a panel discussion in Lafayette on September 12th. Panelists include multiple managers and executives, all of which have strong energy industry experience and valuable insights into offshore oil & gas and industrial growth on the Gulf Coast. Click to Register!!
Any and all comments, arguments and rebuttals are welcome!
In addition to my association with PPHB, I serve on three private company boards. Merit Advisors is a property valuation company and I have long been a fan of optimizing how a business is run, not just the tools we make. Merit is in the business of savings companies’ money, actual cash, by doing a much more in-depth and realistic view of equipment and reserve valuations and I am very impressed with their work. I am also on the advisory board of Preng & Associates, a leading executive search boutique that specializes in all things related to Energy & Power. Nova is a gas compression company run by a very dynamic CEO with a very strong board and ownership.
I serve on the Advisory board of the Energy Workforce & Technology Council (formerly PESA), the National Ocean Industries Association (NOIA), and the Maguire Energy Institute at SMU my alma mater.
jim
214-755-3914 | james.wicklund@pphb.com
Leveraging deep industry knowledge and experience, since its formation in 2003, PPHB has advised on more than 180 transactions exceeding $11 Billion in total value. PPHB advises in mergers & acquisitions, both sell-side and buy-side, raises institutional private equity and debt and offers debt and restructuring advisory services. The firm provides clients with proven investment banking partners, committed to the industry, and committed to success.
