Energy Sector

[RadMan24]

WSJ had an interesting piece on this guy starting a new anti-ESG fund, with the first fund copying Blackrock's iShares US Energy ETF -- but will be voting and proposing shareholder resolutions, like "All current and future investments shall be evaluated exclusively through the lens of financially measurable return on investment." And to counter Larry Fink's overly confident letters to CEO, submit resolutions that state “All hiring at every level, including executive and board hiring, shall be based exclusively on job qualifications, without regard to race, sex, sexual orientation or political belief.”

 

WSJ article:

https://www.wsj.com/articles/how-your-retirement-account-got-politicized-blackrock-firms-money-investment-index-funds-markets-partisan-politics-11660058521?mod=Searchresults_pos1&page=1

 

I admire what he is trying to accomplish - the ESG train has gotten far too political, but how successful he will be remains to be seen. I hope he is though and may invest a little bit in his fund just to support the cause. 

 

https://www.businesswire.com/news/home/20220810005508/en/Strive-Launches-U.S.-Energy-Index-Fund-DRLL-to-Deliver-a-New-Shareholder-Mandate-to-U.S.-Energy-Companies

 

 

[Dinar]

18 hours ago, Ulti said:

I've got a question.... can the below figures be used to evaluate the worth of O&G companies as well as aquisitions? In a very rough sort of way ? And in US and Canada.

 

 

 

Denver company struck a deal to sell the business and its South Texas oil assets to Devon Energy Corp. for $1.8 billion Tuesday, more than double the price that the oil wells and mineral rights cost 18 months ago.Validus’ wells currently produce about 35,000 barrels of oil and natural gas per day, nearly 70% of which is crude oil. Production is growing on a pace to reach 40,000 barrels per day in 2023, Devon said.

https://www.bizjournals.com/denver/news/2022/08/09/validus-denver-devon-energy-acquisition-oil-texas.html?utm_source=sy&utm_medium=nsyp&utm_campaign=yh

No.  Clearly a company with 20 years worth of production reserves will be worth more than a company with 3 years left.  Also depends on marginal costs - some fields are much cheaper to produce than others, pipeline capacity esp for nat gas.  I know analysts have used price paid per barrel of production but it is not an intellectually correct way of approaching the problem and can have massive errors.

[Viking]

Speculation is OPEC currently has minimal spare capacity. Why do investors in oil care about OPEC spare capacity? The purpose of spare capacity is act as a shock absorber for the price of oil. Oil production is very volatile. It is quite common for 1 million barrels of production to get taken off line for periods of time. Spare capacity allows OPEC to fill in where needed. 
 

Why does OPEC want smooth pricing? Smooth pricing results in a more stable environment. OPEC nations need to create and manage national budgets - health, education, military etc - and a stable oil price is very helpful. A stable price also makes investment decisions easier for producers (wickedly volatile oil prices up to $120 and then down to $90 does not encourage investment). Extreme price volatility = less investment.

—————

I read OPEC historically targeted to have 5% of spare capacity. Global demand today is about 100 million barrels per day. So this suggests a target of 5 million barrels of spare capacity in a normal oil market. It sounds like only 2 OPEC producers have any spare capacity today: Saudi Arabia and UAE. And it is around 1.5 million barrels per day. So low that it WILL NOT BE TAPPED unless a true emergency arises. Why so low? Just like oil majors, OPEC members have been underinvesting in new oil production for the past 7 years. Bottom line, there are no longer any shock absorbers for the price of oil. People better pray there are no major shocks to demand…. (We have our own Game of Thrones playing out in Europe and winter is coming…).

—————

So what did we learn today? Shell just shuttered 400,000 barrels/day of capacity in Gulf of Mexico (pipeline leak). A couple of days ago, Russia turned off a pipeline running through southern Europe (it has since been turned back on). It is also hurricane season - which usually results in some Gulf of Mexico production getting shuttered short term depending on the paths taken. We also know OPEC currently has minimal spare capacity. As a result, any material reductions in the supply of oil will likely quickly push prices higher. The oil market is very tight. And will likely remain tight for years.

—————

Shell says oil output halted at three Gulf of Mexico platforms on pipeline outage
- https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-shell-says-oil-output-halted-at-three-gulf-of-mexico-platforms-on/

Oil major Shell said it had halted production at three of its U.S. Gulf of Mexico deep-water platforms after pipelines connecting the three were shut.

 

Shell, the leading operator in the U.S. Gulf of Mexico, said Mars, Ursa, and Olympus platforms have been shut-in. The three are designed to produce up to 410,000 barrels of oil per day combined, according to data on the company’s website.

 

The platforms deliver Mars sour crude, a grade prized by oil refiners in the United States and Asia. Shell said it was evaluating alternative ways to move the oil to shore.

Edited August 11, 2022 by Viking

[SharperDingaan]

On 8/10/2022 at 4:26 AM, Ulti said:

I've got a question.... can the below figures be used to evaluate the worth of O&G companies as well as aquisitions? In a very rough sort of way ? And in US and Canada.

 

This is only valid if you are valuing company holdings in the same fields. You need to adjust for different volumes, gas/water cuts, and egress capacity. Great production and infrastructure is worth squat if you cannot get it to market.

 

SD

[Viking]

1 hour ago, Viking said:

Speculation is OPEC currently has minimal spare capacity. Why do investors in oil care about OPEC spare capacity? The purpose of spare capacity is act as a shock absorber for the price of oil. Oil production is very volatile. It is quite common for 1 million barrels of production to get taken off line for periods of time. Spare capacity allows OPEC to fill in where needed. 
 

Why does OPEC want smooth pricing? Smooth pricing results in a more stable environment. OPEC nations need to create and manage national budgets - health, education, military etc - and a stable oil price is very helpful. A stable price also makes investment decisions easier for producers (wickedly volatile oil prices up to $120 and then down to $90 does not encourage investment). Extreme price volatility = less investment.

—————

I read OPEC historically targeted to have 5% of spare capacity. Global demand today is about 100 million barrels per day. So this suggests a target of 5 million barrels of spare capacity in a normal oil market. It sounds like only 2 OPEC producers have any spare capacity today: Saudi Arabia and UAE. And it is around 1.5 million barrels per day. So low that it WILL NOT BE TAPPED unless a true emergency arises. Why so low? Just like oil majors, OPEC members have been underinvesting in new oil production for the past 7 years. Bottom line, there are no longer any shock absorbers for the price of oil. People better pray there are no major shocks to demand…. (We have our own Game of Thrones playing out in Europe and winter is coming…).

—————

So what did we learn today? Shell just shuttered 400,000 barrels/day of capacity in Gulf of Mexico (pipeline leak). A couple of days ago, Russia turned off a pipeline running through southern Europe (it has since been turned back on). It is also hurricane season - which usually results in some Gulf of Mexico production getting shuttered short term depending on the paths taken. We also know OPEC currently has minimal spare capacity. As a result, any material reductions in the supply of oil will likely quickly push prices higher. The oil market is very tight. And will likely remain tight for years.

—————

Shell says oil output halted at three Gulf of Mexico platforms on pipeline outage
- https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-shell-says-oil-output-halted-at-three-gulf-of-mexico-platforms-on/

Oil major Shell said it had halted production at three of its U.S. Gulf of Mexico deep-water platforms after pipelines connecting the three were shut.

 

Shell, the leading operator in the U.S. Gulf of Mexico, said Mars, Ursa, and Olympus platforms have been shut-in. The three are designed to produce up to 410,000 barrels of oil per day combined, according to data on the company’s website.

 

The platforms deliver Mars sour crude, a grade prized by oil refiners in the United States and Asia. Shell said it was evaluating alternative ways to move the oil to shore.

In my post i forgot to mention that the SPR release is set to end in October. So that will remove about 1 million barrels/day from global oil supplies.

 

Where will the new supply come from? Not OPEC - as i discussed above they have no spare capacity. And despite what the White House says (see below) i am doubtful that US producers will be bringing that much new supply on to the market that fast (oil CEO’s on Q2 calls did not offer up and new barrels of supply to offset barrels lost when SPR releases stop).
—————

Regarding the SPR, the next really good question is what is the plan to replace the massive draw down that has been happening over the past year? And any oil taken out is to be replaced (in case it is needed to be used for a real emergency like a war). The current use hardly qualifies as an emergency. Regardless, replacing the oil that was removed from the SPR will simply add to global demand in the coming years. And make the current supply/demand imbalance worse =  higher prices. 

—————

The record-high release of crude oil from the U.S. Strategic Petroleum Reserve will end as scheduled this fall, the White House's Special Presidential Coordinator for International Energy Affairs Amos Hochstein told Yahoo Finance.

 

"We can't be an oil supplier. It's a reserve and so we have to keep that," Hochstein said, adding that he did not expect this to lead to price spikes because the oil industry was already preparing to increase production once the SPR release ended.

 

"There's a little bit of hysteria at the moment in the analysis of oil markets," Hochstein said, adding that he had had conversations with oil companies and had their word they would increase production to replace the oil that is currently coming out of the SPR.

 

The plan, announced in April, saw a total of 180 million barrelsof crude being released from the Strategic Petroleum Reserve to counter the inexorable increase in oil prices amid a tight market, at a rate of some 1 million bpd. 

 

- https://ca.finance.yahoo.com/news/u-spr-releases-set-end-133000190.html

Edited August 11, 2022 by Viking

[Viking]

Article from today on SPR. The last sentence in the article is priceless: “The withdrawals have pushed SPR's supply down to 464.6 million barrels, the lowest level since 1985. Turk said the department will use money from current sales to buy oil back at lower prices.”

 

Turk is Deputy U.S. Energy Secretary. He needs to open a hedge fund… 

 

- https://finance.yahoo.com/news/nine-companies-oil-u-strategic-183803786.html

[Spekulatius]

7 hours ago, Viking said:

Article from today on SPR. The last sentence in the article is priceless: “The withdrawals have pushed SPR's supply down to 464.6 million barrels, the lowest level since 1985. Turk said the department will use money from current sales to buy oil back at lower prices.”

 

Turk is Deputy U.S. Energy Secretary. He needs to open a hedge fund… 

 

- https://finance.yahoo.com/news/nine-companies-oil-u-strategic-183803786.html

Seems to be working so far. Selling into this oil spike was the right decision, imo. The US is energy self sufficient and does not need a strategic crude reserve currently. This was not the case when the strategic crude reserve was started in 1975.

[StevieV]

6 hours ago, Spekulatius said:

The US is energy self sufficient and does not need a strategic crude reserve currently.

 

I'm confused by this statement.  In 2021, the US consumed 18.7 million boe/day.  Latest data has US oil production at 12.2 million boe/day.  Am I missing something?

 

I believe it is much worse if you look at "green" energy.  Solar panels, lithium, cobalt, copper, rare earth magnets.  All are extremely reliant on non-US mining and production.  For example, just doing a quick search it looks like roughly 70% of worldwide solar panel construction is in China and about 3% in the US.

 

I think the considerations as to whether and to what extent the US should have an SPR go beyond whether the US is energy self-sufficient, but I don't understand where the premise that the US is  "energy self sufficient" comes from.

[rkbabang]

On 8/10/2022 at 9:36 PM, RadMan24 said:

I admire what he is trying to accomplish - the ESG train has gotten far too political, but how successful he will be remains to be seen. I hope he is though and may invest a little bit in his fund just to support the cause. 

 

Has gotten too political?   The "S" in ESG stands for social, it has always been entirely political.

[Spekulatius]

9 hours ago, StevieV said:

 

I'm confused by this statement.  In 2021, the US consumed 18.7 million boe/day.  Latest data has US oil production at 12.2 million boe/day.  Am I missing something?

 

I believe it is much worse if you look at "green" energy.  Solar panels, lithium, cobalt, copper, rare earth magnets.  All are extremely reliant on non-US mining and production.  For example, just doing a quick search it looks like roughly 70% of worldwide solar panel construction is in China and about 3% in the US.

 

I think the considerations as to whether and to what extent the US should have an SPR go beyond whether the US is energy self-sufficient, but I don't understand where the premise that the US is  "energy self sufficient" comes from.

Add NG gas to it, as well as other energy sources.

[Spekulatius]

I am currently in Europe and talked to my brother (living in Germany) about the energy situation and he thinks that Germany is on track to have the NG storage filled before winter, the reduced gas flows from Russia notwithstanding. In fact right now, the storage is already ~74% full.
Also, Polands storage is already full right now and the first (out of 5) LNG terminal (Brunsbüttel) on the German coast will be completed in Dezember 2022 and could actually help to alleviate the shortage for this winter. He think power prices will stay high until next winter and then drop a lot.

 

He watches this more than casually, because the company he works for (lumber mill) also operates a cogeneration power plant with wood chips as fuel and it‘s making a lot of money now, but he doesn’t think this will last past this year.

 

He thinks that the German government spreads a bit doom and gloom to force some savings that may not be necessary and think by next year the crisis will be over.

Edited August 12, 2022 by Spekulatius

[lnofeisone]

Spek - thanks for observation. I think your brother is right about Germany being able to get through this winter with the assumption that Russia maintains its current gas flow. Poland will also have the Baltic Pipe from Norway so they are covered and can probably spare gas. I suspect NG will stay elevated because there are still shortages for the entire EU but I don't have a crystal ball.

 

This article is particularly handy to see where all of Europe stands for their NG needs and storage.

https://www.intellinews.com/how-many-days-of-gas-consumption-are-in-europe-s-storage-tanks-250065/

 

 

[james22]

Texas Attorney General Ken Paxton said Monday that he joined a group of Republican state officials accusing BlackRock Inc. Chief Executive Office Larry Fink of relying on sustainable investments instead of shareholders’ profits. 

 

A group of attorneys general from 19 US states led by Arizona’s Mark Brnovich wrote a letter last week saying the world’s largest asset manager is pursuing environmental, social and governance investment policies to the detriment of their state pension funds.

 

https://www.bloomberg.com/news/articles/2022-08-08/texas-joins-republican-ags-slamming-larry-fink-on-esg-investment

 

Republicans, if they take back Congress in the midterms, plan to pursue legislation against environmental, social and governance, or ESG, investing, part of an effort to push corporations and the financial sector away from pro-climate rhetoric and make them re-embrace fossil fuels.

 

https://www.eenews.net/articles/republicans-plan-legislative-assault-on-woke-esg-firms/

[lessthaniv]

3 hours ago, Spekulatius said:

I am currently in Europe and talked to my brother (living in Germany) about the energy situation and he thinks that Germany is on track to have the NG storage filled before winter, the reduced gas flows from Russia notwithstanding. In fact right now, the storage is already ~74% full.
Also, Polands storage is already full right now and the first (out of 5) LNG terminal (Brunsbüttel) on the German coast will be completed in Dezember 2022 and could actually help to alleviate the shortage for this winter. He think power prices will stay high until next winter and then drop a lot.

 

He watches this more than casually, because the company he works for (lumber mill) also operates a cogeneration power plant with wood chips as fuel and it‘s making a lot of money now, but he doesn’t think this will last past this year.

 

He thinks that the German government spreads a bit doom and gloom to force some savings that may not be necessary and think by next year the crisis will be over.

Thx for sharing that. Interesting. 

[Gregmal]

On 6/25/2022 at 5:53 PM, Spekulatius said:

Kyle is never wrong but always a little early:

https://www.dallasnews.com/business/local-companies/2021/10/17/dallas-hedge-fund-manager-kyle-basss-bet-against-the-hong-kong-dollar-fizzles/

https://www.udfonline.com/wp-content/uploads/2019/04/Tab-91-UDF-The-Oil-Glut-Is-Destroying-Kyle-Bass-Hedge-Fund-Hayman-Capital-_-Fortune.pdf
 

What advice would you give someone Kyle? If you had a do over? Just. Getting. Started? 

[Dinar]

1 hour ago, Gregmal said:

What advice would you give someone Kyle? If you had a do over? Just. Getting. Started? 

Do not put 100% of the fund into the macro bet.  May be lose 1% per annum via option premium on a position that can go up 40-100x, and keep the rest in other investments/bets/strategies.  

[SharperDingaan]

Not directly related, but this will soon be impacting energy prices ...

The UK has proclaimed a once in 50 yr drought, and crops have begun failing for lack of water. Hay (& a lot of other crops) are being harvested 4-6 weeks early, at well below 'normal' yields, while farmers can; so much so, that it's getting hard to book a combiner. Lot of watercourses are now dried up cracked clay pans, unable to absorb rain quickly; the farming community expect that there will shortly be flooding to add to the crop failures.

 

Cant deliver petrol when roads, &/or processing facilities are underwater.

 

SD

[Phoenix01]

With all the volatility in the energy sector, how would you recommend hedging against sudden market sell offs?

 

Does buying short duration puts options on long positions make sense?  Are there better strategies?

[John Hjorth]

34 minutes ago, Phoenix01 said:

With all the volatility in the energy sector, how would you recommend hedging against sudden market sell offs?

 

Does buying short duration puts options on long positions make sense?  Are there better strategies?

 

Phoenix01,

 

If you are asking for advice for handling your oil positions related  to hedging, I personally think that you [in reality] are on your own here on CoBF. Please get used to it.

[LC]

Well dropping oil prices may bring down the dreaded “inflation” and which would give our federal banksters pause to continue raising rates…which would see equity/housing+consumer markets rise…could be a built in hedge but frankly the world never works so directly. So just something to keep in mind. 
 

 

[SharperDingaan]

9 hours ago, Phoenix01 said:

With all the volatility in the energy sector, how would you recommend hedging against sudden market sell offs?

 

Does buying short duration puts options on long positions make sense?  Are there better strategies?

 

The reality is that in live time, the market does not know when a a sell off is occurring.

All that an investor really knows is the directional price of their individual holdings should things work out. If the market and commodity tides rise/fall as expected, company prospects work out as advertised, investor 'sentiment' remains largely unchanged, etc. Some components to this are rational, but a great many are not - hence the volatility. We take three approaches to this. Anticipate what we think might happen, change sizing, take $ off the table.

 

We hedge by swing trading part of a position. If we sell 50% of our shares, we are 100% hedged at the price we sold at. If the price goes up, the unrealized gain on our remaining 50% exactly equals the unrealized loss on the 50% we need to buy back. However, if the swing trade is closed at a lower price that the shares were sold at, we have a realized short gain settled in cash. Cash that may be either withdrawn entirely or reinvested in additional shares to lower the cost base. We don't need an options market, and volatility is our friend.

 

Every commodity goes through cycles; todays beauty will slowly lose her teeth and become the ugly crone. However, the young daughters of todays crone, will grow up to become tomorrow's beauties. It means continuous change, and not holding a company 'for ever and ever'. Or systematically taking $ off the table.

 

Reinvest all those $ in another security, and you have simply changed tables in the casino.

However, permanently remove some of those $ (pay off mortgages, buy houses, pay for school, start a new venture, etc.), and you can both materially and permanently change your life. It means having the maturity to know what is important to you, and dancing to your own tune.  

 

Markets/money exists to serve you.

It's not the other way around.

 

SD

 

 

 

[scorpioncapital]

Is it possible to build value in commodity stocks or do they always get hit back down either from the commodity price dropping or payment of dividends? I've noticed in some commodity businesses either value builds up very slowly or it never builds up. It's like  bank account but with a leaky hole so that the average balance is always flat or declining.

[Phoenix01]

8 hours ago, SharperDingaan said:

 

The reality is that in live time, the market does not know when a a sell off is occurring.

All that an investor really knows is the directional price of their individual holdings should things work out. If the market and commodity tides rise/fall as expected, company prospects work out as advertised, investor 'sentiment' remains largely unchanged, etc. Some components to this are rational, but a great many are not - hence the volatility. We take three approaches to this. Anticipate what we think might happen, change sizing, take $ off the table.

 

We hedge by swing trading part of a position. If we sell 50% of our shares, we are 100% hedged at the price we sold at. If the price goes up, the unrealized gain on our remaining 50% exactly equals the unrealized loss on the 50% we need to buy back. However, if the swing trade is closed at a lower price that the shares were sold at, we have a realized short gain settled in cash. Cash that may be either withdrawn entirely or reinvested in additional shares to lower the cost base. We don't need an options market, and volatility is our friend.

 

Every commodity goes through cycles; todays beauty will slowly lose her teeth and become the ugly crone. However, the young daughters of todays crone, will grow up to become tomorrow's beauties. It means continuous change, and not holding a company 'for ever and ever'. Or systematically taking $ off the table.

 

Reinvest all those $ in another security, and you have simply changed tables in the casino.

However, permanently remove some of those $ (pay off mortgages, buy houses, pay for school, start a new venture, etc.), and you can both materially and permanently change your life. It means having the maturity to know what is important to you, and dancing to your own tune.  

 

Markets/money exists to serve you.

It's not the other way around.

 

SD

 

 

 

Thanks SD for generously sharing your wisdom.  Protecting the downside by taking $ off the table in times of doubt or once personal objectives are meet is very sound advice.  Make me think of Buffet's rules: 1) Don't lose money. 2) Don't forget rule #1.

 

These are the dangers of trying to capture all the Alpha. Pigs get fat and hogs get slaughtered.  Similar to Prem's warnings about reaching for yield.

[Viking]

19 hours ago, LC said:

Well dropping oil prices may bring down the dreaded “inflation” and which would give our federal banksters pause to continue raising rates…which would see equity/housing+consumer markets rise…could be a built in hedge but frankly the world never works so directly. So just something to keep in mind. 

The current narrative is inflation is rolling over. A key driver of this theme is falling oil prices - and falling gas prices. So we are getting a nice rally in the stock market. The bond market (longer end of the curve ) is also rallying with the 10 year bond down to 2.8%. Inflation is licked! Sweet!

 

Now how does the narrative change if oil goes to $150 a barrel at some point in the next 6-12 months? The problem with high inflation is just when you think you have it licked (it turns lower for a few months) something happens (like another commodity price spike due to a decade of underinvestment) that causes inflation to spike again. That was the frustrating experience of the 1970’s (inflation numbers came in for a decade like a never ending roller coaster ride at an amusement park). Just like that Groundhog Day movie. Except we are only at the beginning of the movie. Bill Murray is just now going to bed… and when he wakes up again (3-6 months from now) will we see inflation spiking again? Or will Bill get the girl after just one sleep? (Like Bill, the Fed would love to get this outcome.)
 

The Fed is in a bit of a pickle right now. Do they take their foot off the throat of the economy? Do they slow rate increases and wait and see what is going on with the economy? If they do this the stock market will continue to rally… and the rally could be epic (another 20% or more higher from here would not surprise me) which will loosen financial conditions… which will then lead to a stronger economy… that wealth effect thing. Which will then lead to higher inflation. 
 

Big stock market rally + stronger economy = higher demand for commodities = rising inflation (act 2) = big, big problem for Fed. If the Fed pivots policy too early and inflation turns higher then Fed credibility will be shot. And Powell might need to start looking for a new job. I continue to believe that the Fed is the key variable in where the stock market averages go over the next 6 months. Do they stay hawkish or do they begin to pivot?

Edited August 14, 2022 by Viking

[Eng12345]

14 minutes ago, Viking said:

Now how does the narrative change if oil goes to $150 a barrel at some point in the next 6-12 months? The problem with high inflation is just when you think you have it licked (it turns lower for a few months) something happens (like another commodity price spike due to a decade of underinvestment) that causes it to spike again. Just like that Groundhog Day movie. Except we are only just finishing day 1. Bill Murray is just now going to bed… and when he wakes up again (3-6 months from now) will we see inflation spiking again? Or will Bill finally get the girl? 

Viking - any idea on how many barrel per day delta from current market conditions we would need to be at to reach $150 oil?