Energy Sector

[JRM]

On the topic of metals and minerals undersupply; remember that not only are we going to replace existing sources of energy (oil, natural gas, coal) with renewables, but the EXISTING renewables will need to be replaced or upgraded after 25 years approximately.  Wind turbines and solar panels installed 20 years ago are nearing end of life.  That's not to mention growth in energy requirements in places like India.

[LearningMachine]

2 hours ago, JRM said:

Wind turbines and solar panels installed 20 years ago are nearing end of life.  That's not to mention growth in energy requirements in places like India.

 

Those should be recyclable, no?

 

I still question the claim that metals needed will be 10X of what energy tonnage is today.  I'd like it to be true not for any investment in metals, but because that would be positive for energy needed for production & movement of that much metal, but I just don't see it. 

 

Investing in metal miners is way way harder because there is no cartel to protect the price by controlling supply.  Oil is the only commodity where a cartel is working on your behalf to at least keep somewhat inflation adjusted cashflow for its member countries.

Edited February 19, 2023 by LearningMachine

[bizaro86]

1 hour ago, LearningMachine said:

 

Those should be recyclable, no?

 

I still question the claim that metals needed will be 10X of what energy tonnage is today.  I'd like it to be true not for any investment in metals, but because that would be positive for energy needed for production & movement of that much metal, but I just don't see it. 

 

Investing in metal miners is way way harder because there is no cartel to protect the price by controlling supply.  Oil is the only commodity where a cartel is working on your behalf to at least keep somewhat inflation adjusted cashflow for its member countries.

 

Potash has similar cartel characteristics imo.

[LearningMachine]

53 minutes ago, bizaro86 said:

 

Potash has similar cartel characteristics imo.

 

Thanks @bizaro86 for raising that.  I think the difference is that NTR & MOS (who together own CanPotex 50% each), and BHP are still within the reach of U.S. antitrust law if they tried to signal to each other to reduce supply to keep prices high.  On the other hand, OPEC+ is not under U.S. antitrust law's reach & thus can openly discuss & announce production cuts to support prices. 

 

This is why NTR's two predecessors & MOS (three of who together owned CanPotex 1/3rd at the time) chose to pay $100M to settle the last antitrust lawsuit. 

 

I don't think NTR & MOS would want another antitrust lawsuit, and thus wouldn't be able to legally signal to each other to allocate production share to cut down supply when potash prices start coming down while BHP's new potash mine Jansen starts producing more.  They will be wary of the fact that any announcement of production cut by either to support prices could be used as evidence of signaling. 

Edited February 19, 2023 by LearningMachine

[JRM]

19 hours ago, LearningMachine said:

Those should be recyclable, no?

 

 

Turbine blades, no.  Batteries and solar panels, partially but requires energy to recycle and there's waste to dispose of.

[Pelagic]

https://www.bloomberg.com/news/articles/2022-02-25/offshore-wind-auction-raises-4-4-billion-to-topple-u-s-record

 

Some serious money being spent for these leases. I have to wonder what the timeline looks like for companies that just won. How long until they're achieving full production from the leases they just won, much less what their payback time looks like. Certainly a long road ahead both in terms of regulatory approval and actual construction and installation. On the flip side, could this be like the Ghawar Field of offshore wind? Relatively shallow depth, well understood wind patterns, and most importantly, close to massive demand.

 

 

Quote

Bids mounted rapidly over the three days and 64 rounds of bidding, ultimately reaching an average price per acre of $8,951 -- more than eight times the previous record of $1,043 set in a December 2018 auction of leases near Massachusetts, when three tracts were sold for $405 million. Still, the sums are well below what oil companies historically have paid for drilling rights in U.S. waters -- as much as $33,780 per acre -- with no similar assurance those plots will contain the crude they’re searching for.

 

[Gregmal]

Is it odd to anyone else how oil prices keep getting whacked on reports indicating consumer strength? 

[SharperDingaan]

27 minutes ago, Gregmal said:

Is it odd to anyone else how oil prices keep getting whacked on reports indicating consumer strength? 

 

China news is being 'actively' suppressed; China has been aggressively buying what Russia isn't selling to Europe, and then some (the six-week out 500K boe/d production cut has been quietly 'dropped'). 

https://oilprice.com/Energy/Energy-General/Europe-Hikes-Diesel-Imports-From-Middle-East-Asia-After-Russian-Ban.html

 

It is also a mystery as to how well the shipping restrictions have been working; most would think, not as well as expected. To some extent, there are also the possibilities around Ukraine rearming and air-cover.

 

A two-seater state-of-the-art plane flown by a Ukrainian pilot, launching state-of-the-art long range missiles at a key Russian oil facility could be very useful. Hence, GS USD 100 oil is not unrealistic 

 

SD     

 

Edited February 24, 2023 by SharperDingaan

[Spekulatius]

I think Russia is selling more crude than what they are telling. They were touting cuts in production but likely do just the opposite.

Edited February 24, 2023 by Spekulatius

[Xerxes]

Now that the European restrictions for refined petroleum products from Russia has kicked in, Russia has more incentive to refine less and sell more crude (unrefined) 

 

it is a lot easier to defy sanction through sea-based crude carrier phantom fleet than it is on refined products (supposedly)

[RadMan24]

Another clear disruption from the Ukraine war is the supply of ammonia to Europe, which is impacting the LPG trading market, and has been benefiting handysize shipping companies like NVGS. Of course, the overall LPG shipping industry is notorious for overbuilding and that is exactly the case right now for the VLGS ships (20% of order book), which is a risk investors need to look at, even though a company like NVGS is largley handysize (and there are various mitigators to consider including petro-capable ships vs fully refridge). Just throwing this plug out there for anyone familiar with these markets. 

[Ulti]

https://oilprice.com/Latest-Energy-News/World-News/Department-Of-Energy-Says-Its-Preparing-For-SPR-PurchasesNext-Year.html

[Sweet]

27 minutes ago, Ulti said:

https://oilprice.com/Latest-Energy-News/World-News/Department-Of-Energy-Says-Its-Preparing-For-SPR-PurchasesNext-Year.html

Is oil likely to be at the price they want to purchase at, especially sour crude?  Not sure I see prices at that level for a while.

[Ulti]

27 minutes ago, Sweet said:

Is oil likely to be at the price they want to purchase at, especially sour crude?  Not sure I see prices at that level for a while.

I kinda agree... they sold low and they might be buying higher next year. And this administration wants to buy it in the 60's so they look good.

[Sweet]

3 minutes ago, Ulti said:

I kinda agree... they sold low and they might be buying higher next year. And this administration wants to buy it in the 60's so they look good.

If they are expecting oil to hover around $70 - which I understand is their upper limit for purchase - I think they will be disappointed.

 

They should put a giant bid at $70 and just let it sit.

[Saluki]

57 minutes ago, Sweet said:

If they are expecting oil to hover around $70 - which I understand is their upper limit for purchase - I think they will be disappointed.

 

They should put a giant bid at $70 and just let it sit.

 

If they did that, I would quit my job and just sell $69 puts until I'm so rich that I can buy my own penis shaped rocket ship like Elon and Bezos. 

 

A lot of majors have their own trading desks.  Shell has Coral Energy trading for instance. Those guys lose money sometimes, and they are the ones drilling it and selling it, and they are talking to people everyday in that business.  If they can't predict the price of oil reliably, what edge does some GS14 employee in Washington, who comes into work at 9am and leaves at 5pm have? 

 

The SPR is supposed to be for emergencies, not for smoothing out inflation. They made a mistake selling.  And they probably will compound that by buying it back wrong.  

[Sweet]

EIA providing an explanation as to why the US oil weekly, and to a lesser extent the monthly, are all messed up, and what they intend to do about it:

 

[Spekulatius]

Oops:

https://finance.yahoo.com/news/windfall-tax-wipes-north-sea-120711857.html

[Sweet]

3 hours ago, Spekulatius said:

Oops:

https://finance.yahoo.com/news/windfall-tax-wipes-north-sea-120711857.html

Came to post this article.

 

From the BBC: 

 

“Harbour Energy posted pre-tax profits of $2.5bn (£2.1bn) for 2022.

 

But tax - including $1.5bn set aside for the Energy Profits Levy - left the company with $8m in post-tax profit.

 

The company has not revealed how many jobs may go, but it is understood hundreds of posts are under threat.”

 

Scandalous, from a supposedly free market government.

[Spekulatius]

7 minutes ago, Sweet said:

Came to post this article.

 

From the BBC: 

 

“Harbour Energy posted pre-tax profits of $2.5bn (£2.1bn) for 2022.

 

But tax - including $1.5bn set aside for the Energy Profits Levy - left the company with $8m in post-tax profit.

 

The company has not revealed how many jobs may go, but it is understood hundreds of posts are under threat.”

 

Scandalous, from a supposedly free market government.

I think this article is a bit misleading. There is more than meets the eye. $1.3B was a "deferred EPL charge" (what ever that is, but it looks like non-cash). Harbour had quite a bit of FCF. Taxes actually paid were a fraction of the nominal tax indicated.

 

[Sweet]

It’s an 35% energy profit levy which the UK government announced and which the company will have to pay this year or in the near future on any oil extracted in the UK.

 

This is in addition to a 40% corporation tax applied to UK oil and gas companies.

 

Therefore the combined tax rate on any oil extracted in the UK is 75% until 2028 when the levy expires.

 

https://www.gov.uk/government/publications/changes-to-the-energy-oil-and-gas-profits-levy/energy-oil-and-gas-profits-levy

 

Why this is a non-cash deferred charge I don’t understand.

 

Edited March 9, 2023 by Sweet

[mcliu]

1 hour ago, Sweet said:

Why this is a non-cash deferred charge I don’t understand.

Isn't this just accrual accounting?

If the EPL charge was due on Jan 1st, your financials for Dec 31 will not reflect the cash outlay (since it wasn't paid yet) but you need to accrue that expense since it was incurred in the previous period. And that's reflected on the balance sheet by a credit to deferred taxes.

[Sweet]

1 hour ago, mcliu said:

Isn't this just accrual accounting?

If the EPL charge was due on Jan 1st, your financials for Dec 31 will not reflect the cash outlay (since it wasn't paid yet) but you need to accrue that expense since it was incurred in the previous period. And that's reflected on the balance sheet by a credit to deferred taxes.

Perhaps, I’m really not sure.

[kab60]

Harbour is doing everything they can to affect politicians in the UK (so far without success), so they'll keep whining as much as they can.

 

While net profit was negligible due to accounting issues, they did 2,1B in FCF in 2022 and should do around 1B this year and probably the same in 2023 depending on how commodity prices behave.

 

They have some costly hedges that their bank partners forced upon them, which gradually expire and look much better from 2024 onwards.

 

I think the real risks here are M&A and gas prices, and then they also have very large longer term decommission liabilities, though that number was taken down meaningfully in 2022. Around 50% of production is NG, so they're clearly very affected by swings in NG prices, and after skyrocketing NG prices have plummeted.

 

I think the company is cheap, but I wouldn't be long if I didn't like the CEO and their capital allocation. She owns like 40m of stock IIRC, is American and sits on the board of Bank of NY Mellon. I feel much more comfortable in her company than I would in say Serica or Vermillion, and I also wouldn't have the guts to be 100% long NG. I talked with the Company earlier this year, and I know they looked at a number of deals, which they eventually pulled out of. I can't say I love the idea of them doing M&A as I can diversify myself, but I'm pretty comfortable that they won't be doing anything stupid. And while we wait they're retiring shares hand over fists while returning 200m annually in dividends, which combined with share repurchases increases the dividend on a per share basis.

 

EDIT: If they do 1B in FCF this year, they'll probably spend another 400m on buybacks and 200m on dividend with 400m to pay down debt. That should take net debt down to 500m, financed by a bond, and give them ample opportunities to do M&A if they so like. While their reserves are a little short on duration, they're nowhere near alarmingly short, debt is becoming neglible and buybacks look attractive at these levels, so they should be forced to rush into any deal. Management seems competent and disciplined. There's still some overhang from former PE owner selling.

Edited March 10, 2023 by kab60

[Mephistopheles]

On 10/5/2022 at 10:39 PM, Mephistopheles said:

 
yea they are pariahs. The Saudis are pariahs too. Point is that both are very powerful oil rich nations. If we want cheap oil , it would be better to be friends with both, as to at least make it a  bit more competitive amongst them. Even Iran and Saudi Arabia both get the power of oil, thus both play on the same team being OPEC even though they are enemies. The Russians, Chinese, Indians are friends with both. We should do the same.

 

https://www.wsj.com/articles/saudi-arabia-iran-restore-relations-in-deal-brokered-by-china-406393a1?mod=hp_lead_pos2