BKR U.S. Land Rig Count: Down 6 rigs w/w to 727 rigs.
Earnings Calls this Week (cst):
Wed 4/19- BKR 730am , KMI 330pm
Thu 4/20- LBRT 900am
Fri 4/21- SLB 830am
WSJ- Saudi Arabia, U.A.E. Scoop Up Russian Oil Products at Steep Discounts Link
WSJ- The Year Crude Oil Markets Embraced Something New Link
WSJ- Berkshire Hathaway’s Energy Idea Is a Bad Fit for Texas Link
BB- Fuel That Powers the Global Economy Is Flashing Recession Signs Link
FT- UK’s biggest asset manager LGIM challenges Exxon’s climate plan Link
FT- Rising costs and competition threaten US boom in LNG projects Link
DEP Update: Heading back to Midland this week to cook for the Bynum kids as well as to host a few meetings. The following week members of the DEP team will be working hard at the World Oilman’s Poker Tournament in Las Vegas while the truly dedicated stay home to listen to earnings calls. For those interested in BBQ, we will host our OTC reception on May 1st at Sean Mitchell’s house and then on May 9th we will be cooking at the Merit Advisors Barrels and Clays outing in Gainesville, Texas. Lastly, special thanks to our golfing friends who joined us on Monday as well as to Jack McIntyre from ASAP Industries for picking up the drink tab. Next golf outing is tentatively set for October 23rd at the same course.
Our quest to host podcasts continues with the latest DEP In-Basin Observations podcast featuring a conversation with Chris Combs, recorded back in February. Chris is the President of Grizzly Manufacturing and is a veteran of the oilfield services industry. Chris visited the DEP offices, where we had the 2022 World Series trophy on display. Chris discussed the evolution of electric frac and how Grizzly is poised to play in that market. In fact, Grizzly Manufacturing recently showcased its EnviroFrac unit at their facility, again at the recent SPE Frac conference in the Woodlands, but most importantly, at our THRIVE conference. We hope you enjoy this podcast.
Permian BBQ Cook-Off: We are working on the sponsorship brochure this week and hope to go live with the event details in two weeks. We are kicking around an idea to have a college cook-off embedded within the broader Permian cook-off competition – likely going to target a few schools (i.e., Texas Tech, UT Austin, Texas A&M, Oklahoma and UVA, a DEP bias as one kid is there). If you happen to be plugged into one of those schools and/or willing to sponsor them (assuming they are interested), let us know. We are trying to track down loyal alumni of those schools now.
Astros Tickets: We have a bunch of tickets to Astros games this season (good seats). These are for clients, so let us know if you would ever like to go.
Sentiment Shift? As we built out our meeting schedule for this week’s Midland trip, we chatted with a small basket of Midland friends. These are privates tied to either well service, flowback or pressure pumping. Feedback amongst our group is consistent. Several weeks ago, the flurry of price concession request calls came in. With respect to our Permian well service friends, requests for lower rates were politely ignored. Some concessions were made in flowback. In all cases, however, the calls have essentially ceased. Remember, the basis for the E&P price concession requests a few weeks ago was market uncertainty when oil prices went sub-$70/bbl. Now with oil prices back over $80/bbl, it’s hard to ask for concessions. As we said in prior epistles, supply/demand for services should impact pricing, not the absolute level of the commodity price. Finally, our well service friends report good visibility with one contact noting a recent step-up in customer calls looking for equipment. How quickly the world changes.
COP Analyst Day: Details further in the note, but key observation vis-à-vis COP’s L48 capex is the company’s plan to spend about $6.5B this year. That’s assuming $80/bbl. Guidance from the COP slide deck suggests L48 spend ranging from $6B to $7B per year through 2028. The upper band reflects a ~$80/bbl commodity price and some cost inflation while the lower end of the band assumes $60/bbl and service cost deflation. The company did state a plan to continue to add D&C activity going forward, albeit the magnitude of the additions was not detailed. If one assumes any incremental spend comes from the Permian and if one further assumes about $150-$200M per rig for total D&C, this implies to us the potential for ~3-4 incremental rigs next year. Total guess on our part – we had some private contacts tell us it’s closer to $250M/rig in the Delaware while others with shorter lateral programs outside the Delaware contend the capex per rig per year is closer to $150M. Assuming a return of cost inflation in a sustained $80/bbl environment, we guess 3-4 rigs. Worth noting COP is 2/3 Delaware with ~80% of laterals over 1.5 miles.
Energy Ruminations = Benchmark Agency (IEA, OPEC, EIA) April Reports: Summary: The April IEA OMR and OPEC MOMR updated oil market projections for 2023 were essentially unchanged m/m. The sequential stasis conveys a placidity which is illusory as the range of outcomes continues to remain wide. Coming into the year, the most prominent demand fulcrum was China, while the most conspicuous supply swing factor was Russia. Saudi/GCC have now joined (if not transcended) China and Russia as the most consequential drivers for oil prices and market balances by reinvigorating their role as rational guardians of the oil market and by reasserting a “whatever it takes” vigilance. In this epistle, we devote some scrutiny to Saudi/GCC strategy and the likely forward path for recalibrating production and attempting to “manage” market sentiment and market balances.
OPEC Strategy, Forward Path: The Saudi declaration to reduce production by 500 KBD as a “precautionary measure aimed at supporting the stability of the oil market” has now shifted the locus of concern from insufficient demand to insufficient supply. UAE and Kuwait concurrently announced production cuts of 144 KBD and 128 KBD, respectively. Collectively, the targeted GCC production recalibration is ~770 KBD. It’s safe to assume that Saudi’s objective was firming downside support for oil prices and squeezing shorts. The oil market remains febrile and exceedingly sensitive to Saudi/macro pronouncements/developments, especially given the bloodletting in Q1 and one-sided positioning as a of a few weeks ago. The recent Saudi announcement was the equivalent of yelling “fire” in a crowded theater. Coming into this year, WTI was ~$80/bbl, the YTD low was ~$67/bbl in mid-March, and the current price is $83/bbl. Mission accomplished, for now. Additional professions were forthcoming from Iraq (211 KBD), Algeria (48 KBD) and Gabon (8 KBD), resulting in an aggregate targeted OPEC recalibration of ~1 MBD. Apart from core OPEC commitments, an OPEC+ coterie of Russia (500 KBD), Kazakhstan (78 KBD) and Oman, pledged production cuts totaling approximating 620 KBD – sounds good, but we’ll believe it when we see it (Russian March exports “soared” to record levels , according to the IEA – more below) as non-GCC professions have historically been symbolic rather than substantive. And with Brent at ~$87/bbl, we very much doubt non-GCC state actors will easily acquiesce to voluntary production cuts.
In the event the production recalibration is needed, the GCC consortium is likely to deliver. But, at this juncture, it’s far from clear this will be required. As we recently expressed: “We’ll see how much of the production recalibration is rhetorical vs. de facto as it could well converge (OPEC production targets to go into effect May 1st) with the early stages of a foreseen global demand inflection – if the latter does indeed happen, then the concern will revert from too loose to too tight.” Should the latest (April) OMR/MOMR estimates (basically unchanged m/m) of global market balances prove to be prophetic, the oil market will transition from surplus in 1H to deficit in 2H, based on current (March) OPEC production. This was our expectation coming into this year, and this remains our expectation.
March OPEC production, according to OPEC secondary sources, was 28.8 MBD (flat-to-down m/m). The Projected call on OPEC production to achieve inventory neutrality (according to OPEC/IEA), by Q, is as follows: Q1 = 28.5/28.3 MBD, Q2 = 28.5/29.1, Q3 = 29.7/30.3, Q4 = 30.3/30.4. Thus, as is, a non-trivial tightening is projected 2H. Should these estimates prove prescient, Saudi et al won’t need to cut given that current levels of production will soon result in cathartic inventory draws. What happens if they follow through on cuts irrespective of leading-edge demand inflecting? Then, yes, a price spike will likely ensue but to what end? Should this transpire, the global economy will be further enervated, demand suppressed, and price discovery will prove ephemeral. Triple-digit oil prices aren’t compatible with resilient, sustained, well-behaved demand and durable cyclical runway. Saudi/GCC know this. Saudi’s new best friend, China, knows this. India knows this. Will Saudi/GCC prove to be nimble and wise in attempting to manage market sentiment, recalibrate oil production and stimulate price discovery, while nurturing demand? One can hope.
Finally, one would be naïve to ignore Saudi/GCC/OPEC+ geopolitical motivations/considerations. In a recent Bloomberg interview, Larry Summers observed there are “troubling” signs that the US is losing global influence as other powers align together: “There’s a growing acceptance of fragmentation, and, even more troubling…a growing sense that we (US) may not be the best fragment to be associated with…” Mr. Summers recounted a recent exchange with a colleague at a spring meeting of global finance protagonists in Washington: “Somebody from a developing country said to me, ‘what we get from China is an airport. What we get from the US is a lecture.’” Mr. Summers went on to add that China’s orchestrating the reconciliation between Saudi and Iran was a “huge challenge for the US.” Summers concluded by expressing: “We are on the right side of history with our commitment to democracy, with our resistance to Russian aggression, but it’s looking a bit lonely on the right-side history, as those who seem much less on the right side of history are increasingly banding together on a whole range of structures.” This is yet another reminder government policies, often driven by cold-blooded self-interest, rather than for-the-good-of-mankind aspirations, are currently the most prominent driver of energy outcomes be they Saudi/GCC production policy, Russian revanchism, China covid liberation policy, the “Global South” increasingly aspiring for a multi-polar world which is less US-centric, willing takers of heavily discounted Russian barrels, US/EU/Western Democratic Alliance Russian oil embargo policy, reawakened and amplified energy security considerations, US industrial policy (IRA), Fed Policy, to name a few. We are in a world of new energy realism and complexity which has moved well beyond the analysis of prosaic, economically driven oil supply and demand fundamentals.
The following is a summary of the benchmark agency (IEA, OPEC, EIA) reports for the month of April, which were published last week.
- OPEC March vs. Recent Peak Production: OPEC March Oil production, according to OPEC secondary sources, averaged ~28.8 MBD (flat-to-down m/m) vs. recent (September) peak production of 29.8 MBD. March production by prominent OPEC member was as follows: Saudi = 10.4 MBD (recent peak ~11 MBD), Iraq = 4.4 (4.5), Iran = 2.6 (2.6), UAE = 3.0 (3.2), Kuwait = 2.7 (2.8).
- Global Demand Growth: Demand expectations were largely unchanged m/m. Global demand is expected to grow by ~2 MBD y/y, with non-OECD comprising 90% (IEA) of the y/y delta and Jet ~55-60% (IEA).
- China Demand Growth: China remains the fulcrum of global oil demand growth and is expected to vault by ~760 KBD-1.2 MBD y/y (OPEC lower-end, IEA higher). CNPC recently projected China 2023 oil demand growth of 750 KBD y/y, thus we favor the lower end of benchmark agency projections.
- Non-OPEC Production Growth: Non-OPEC ex-Russia total liquids production growth is forecast to rise by ~2 MBD, with the US, Brazil, Norway, Canada as the most prominent drivers of growth.
- US Oil Production Growth: We focus on the EIA’s US production estimate which we view as more reliable than those of OPEC/IEA. The EIA, in the latest STEO, increased its estimate of US oil production from 12.44 MBD to 12.54 MBD (+660 KBD y/y vs. prior +560 KBD), or by 100 KBD. Sensible, as January (latest monthly production print) ran much hotter than expected at 12.46 MBD (+347 KBD m/m, due to in part to normalization from weather-afflicted Dec). With continued rig count resilience coupled with firming oil prices, we do not envision, at this stage, enfeebled US production growth.
- Russian Oil Production: Both the IEA and OPEC estimates of Russian production now encompass a greater degree of realism as projected production deficits have moderated considerably given YTD resilience. The IEA is now projecting a y/y production contraction of only 530 KBD (OPEC ~750 KBD) vs. an earlier projected step-down of 1.3 MBD. According to the IEA, total March Russian liquids production approximated 10.95 MBD, ~450 KBD lower vs. pre-invasion levels, and black oil production declined by ~290 KBD m/m to 9.58 MBD. Russian exports vaulted to record levels in March, increasing by 600 KBD m/m to 8.1 MBD (products +450 KBD m/m to 3.1 MBD.
- Inventories: Global observed inventories “held steady” in Feb after “surging” by ~58 mb m/m in January. Preliminary March data for US, EUR, Japan shows a meaningful m/m contraction of ~39 mb.
LBRT / Siren Energy Acquisition: On Monday, LBRT announced the acquisition of Siren Energy for $78M in cash. The Siren acquisition will roll into a new LBRT segment called Liberty Power Innovations. We’ll hear more specifics on this enterprise on LBRT’s Q1 earnings call this week, but the announcement initially feels like a similar offering as VoltaGrid and NexTier’s Power Solutions segment. By way of background, Siren is an active player in supplying CNG / bulk fuel in the Permian Basin. We toured Siren’s first facility in Orla about two years ago, right before it opened. So, first off, congrats to the Siren team. With respect to deal metrics, no financial data was provided. We would assume LBRT had a three-year payback methodology or something similar and presumably that metric would be applied to a go-forward view, not trailing twelve months. Just a guess on our part. As for implications, the transaction highlights the continued push and opportunity set associated with the growing fleet of nat gas powered equipment. This is more than just CNG for frac, but also for other service lines too. We also couldn’t help noticing LBRT’s comment that LPI could pursue opportunities beyond the oilfield. We’ll look for specifics but would assume this would be back-up power generation for industrial and consumer use. A key question we have is the implication for the broader frac industry. That is, will all the other frac companies investing in natural gas burning equipment feel the need to go the LBRT route or will we see more Siren-type entities pop up to supply the needs of those in the industry not wishing to vertically integrate.
COP Analyst Day Details: COP held its first Analyst & Investor Meeting in more than three years, providing a detailed look at the company’s 10-year plan and emphasizing its diversified asset base and high-returns profile. The key takeaways were:
- The plan is predicated on $60 WTI and has a free-cash-flow breakeven of $35/Bbl.
- COP sees the ability to grow as a competitive advantage, as their US supply model suggests that 20% of total-industry activity in the L48 needs more than $60 to generate a return.
- At $60, COP will reinvest 50% of its cash flow and earmark a minimum of 30% for shareholder returns (mostly dividends). Additional cash flow above $60 gives management flexibility to increase share buybacks or variable dividends.
- CFO will grow at a 6% CAGR, FCF at an 11% CAGR.
- COP estimates its distribution capacity at $115B, or ~90% of its current market cap.
- Capex over the period is expected to average $10B per annum, with about $6B for L48 for 2024 through 2028 (this figure assumes some deflation from current service-price levels, given the lower assumed oil price), with the remainder coming from Alaska ($1B p.a. from legacy, $1-$1.5B from Willow), LNG (<$1B), and other international.
- COP estimates production growth for the period will be 4-5% p.a. for the next 10 years, with Unconventional (L48 and Montney) growing 6%, conventional reservoirs growing 3%, and LNG and Surmont (Canadian Oil Sands) growing 2% over the period.
- LNG growth will be substantial. COP has 6mmtpa of LNG today, which it expects to double by 2028. LNG is a significant pillar in its decarbonization efforts.
- Permian volumes are expected to grow by 7% p.a from >600 MBOE/d and plateau at more than 1 MMBOE/d (2/3 of activity in Delaware, 1/3 Midland). The Permian is expected to generate $45B of FCF at $60 WTI. The company will add rigs/crews to achieve this growth.
- COP is adding a rig in the Montney in 2024, which will allow growth of 100,000 B/d over the next decade.
- COP’s mix of shale, LNG, Oil Sands, and conventional Alaska and International assets give it an “unmitigated” decline rate 12-13% over a three-year basis, compared with that of a “typical company,” which they believe is in the “high teens.”
- Management addressed investor concerns around inventory, outlining ~20 BBOE of resource under $40/Bbl cost of supply (~$32/Bbl, on average). Of that, ~12B is in L48 (with >12,000 net well locations remaining) with the remainder in Alaska, Canada, LNG, and conventional international assets.
- In the Permian specifically, COP has been high-grading rigs, incorporating slim-hole designs, and prioritizing longer laterals, 80% of which are 1.5 miles or longer today. These longer laterals reduce cost of supply by 30-40% vs. 1-mile laterals.
- More than 50% of 2023 Permian wells will use simulfrac, up from 35% last year.
VTLE released preliminary results for Q1 ahead of its earnings release in May. Production for the quarter was 80.2 MBOE/d (48% oil), above its guide of 72.5-76.5 MBOE/d. The beat was largely due to earlier-than-expected production from new wells and less-than-expected downtime from offset completions. VTLE also closed its Driftwood acquisition on April 3rd, which will add 2.6 MMBOE/d this year. As a result, the company raised its full-year production guidance to 76-80 MBOE/d (47-49% oil), up from 72-76 MBOE/d (47-49% oil).
Refining Observations: Last week’s demand surge reversed this week. Gasoline demand QTD is flat with last year, and distillate and jet fuel are both running 3% below, albeit with just two weeks of data. Margins also took a hit this week but are still running at healthy levels by historical standards.
The EPA floated draconian emissions standards to reduce fossil-fuel consumption. The agency is proposing fleet-average CO2 emissions of 82 grams/mile for all cars, SUVs, and pickup trucks with 2027-2032 model years, a reduction of 56% from 2026 model-year standards. The effect would be higher EV demand, with some estimating that OEM compliance would require that 67% of all new cars sold would have to be electric, up from ~6% in 2022. The goal is to shrink US oil demand by 17B Bbls by 2055, or a 1.6 MMB/d decline from 2027-2055. It is unclear to us (and others we spoke with) that these goals are achievable, and some folks we spoke with think focusing solely on EVs may actually slow greenhouse-gas reduction efforts by ignoring CCUS, renewable fuels, and other technologies.
In the interesting-timing department, XOM and Toyota announced a partnership to test low-carbon fuels in gasoline engines (specifically to lower emissions without having to switch to an EV). The blends are made from renewable biomass and ethanol, and according to XOM, could cut emissions from ICE engines by as much as 75%. So far, the fuels have proved compatible with Toyota vehicles, but would require government-policy support.
Product Inventory, Demand, and Margin Charts
(Shaded areas show the 5-year range 2017-2021)
Source for Inventory and Demand Charts: Energy Information Administration, Bloomberg, LP
Source for Margin Charts: Bloomberg, LP
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