Energy Sector

[Spekulatius]

It’s cyclical,  always has been.

[UK]

6 hours ago, Sweet said:

Lol, always the way.

 

Glad I got out of this POS sector two years ago.  It would take a covid like crash to make me touch it again.  Look at Oxy, even Buffett can’t get this space right.

 

Not only are you looking at the long-term secular decline in oil use but many companies are not run in the interest of the shareholders.

 

And the oil investors are addicted to gloom and doom and wishing for world war three or some shit to pump oil up so they can make bank.  Or they blame politicians for keeping oil low - no shit they want low oil price.

 

It’s a wild sector.  One I do not miss.  But dam I made a lot of money in it.

 

 

I never made any big money from oil, but you buy these companies during extreme distress or panic, when they are visibly dirty cheap and sell when things normalise. Buying them fairly valued and rationalising your way out of this seems just does not work. Maybe finding some real small gems should work also despite of the cycle...

[Sweet]

4 hours ago, UK said:

 

I never made any big money from oil, but you buy these companies during extreme distress or panic, when they are visibly dirty cheap and sell when things normalise. Buying them fairly valued and rationalising your way out of this seems just does not work. Maybe finding some real small gems should work also despite of the cycle...

 

Yes it’s cyclic but finding the bottom in these cycles can take years too.  Hoping for breakouts to new highs for many of these companies is a big mistake.  There was some dangerous talk in this thread an about 2 years ago that this was a slam dunk from here - it seemed obvious to me the easy money had been made.  You can buy good companies for sure, but there are many more which are terrible and are ran in the interest of the board or founders.  The sector is something you rent but never own in my opinion - not anymore at least.  Exxon Mobil would have been a great hold decades ago, think there are so many better options now.

[TwoCitiesCapital]

11 hours ago, Sweet said:

 

Yes it’s cyclic but finding the bottom in these cycles can take years too.  Hoping for breakouts to new highs for many of these companies is a big mistake.  There was some dangerous talk in this thread an about 2 years ago that this was a slam dunk from here - it seemed obvious to me the easy money had been made.  You can buy good companies for sure, but there are many more which are terrible and are ran in the interest of the board or founders.  The sector is something you rent but never own in my opinion - not anymore at least.  Exxon Mobil would have been a great hold decades ago, think there are so many better options now.

 

I disagree. Obviously things peaked in 2021 like all things inflation-related did. And I'm not married to the positions - I have traded around my positions selling on pumps and adding on dumps. 

 

But even without that, my names in the energy sector have done reasonably well over the last 2-3 years. They haven't gone gang-busters, but they've continued to pay healthy dividends easily supported by cash flows at oil prices significantly lower than what was prevalent in 2021 post-invasion while having seriously de-risked balances sheets. 

 

Reserves continue to be drawn down, the industry continues to consolidate, and many companies are still acting responsibly with capital allocation, and energy will probably remain the single best inflation hedge there is for the foreseeable future.

 

I don't' really care that the share prices aren't rocketing higher and high single digit dividends are paid instead - the stage is still set for this to be a sector that likely outperforms most for the next 10 years IMO. 

Edited September 27 by TwoCitiesCapital

[TwoCitiesCapital]

I think it's wait and see - I'm curious to know what type of output increase the Saudis can sustainably do in the name of increasing their market share. 

 

Keep in mind their target price of $100/barrel didn't matter much and prices have trended significantly below that for years. I'm not entirely sure them "changing" tact means much or can be sustained.

 

Perhaps I am wrong - but time will tell. I will likely buy any downdraft in the meantime as an intentional flooding of the market to kill competition improves the prospects of all that survive. 

Edited September 27 by TwoCitiesCapital

[Sweet]

In ten years time, I see prices of the oil sector relatively the same with swings higher and lower.  Not an industry I’m interesting in owning, only ever renting at bottoms and playing mean reversion.  I gotten bitten once here before I made a killing, but I learned my lesson.  If you had decent management just sloshing cash back to shareholders it would of course do much better than the average oil company.  Shame there aren’t that many of those.

Edited October 4 by Sweet

[Ulti]

https://www.dwarkeshpatel.com/p/daniel-yergin
 

excellent interview about the 20 century oil with Pulitzer winner verging and where things are headed

[petec]

I found this video really interesting and (although I have no specific knowledge on the issue) it feels well-researched and coherent. 

 

What do people think? Is there a clear counterargument?

 

If true it would seem only a matter of time before the RRC has to regulate more, and I would think this is 

• Bad for Permian producers.
• Bad for land drillers & servicecos
• Good for pretty much all other oil producers and offshore drillers/service.
• Good for gas producers and US thermal coal (due to reduced associated gas).

Thoughts?

 

Thanks

 

Pete

 

 

 

[SharperDingaan]

The hard reality is that fundamental analysis as it is usually practised, is not especially productive. Similarly, technical analysis is not especially productive when the intent is swing trades over extended periods. You do well because you are reasonably good at forecasting whether the tide is coming in or out, and act appropriately; there is no place for buy and hold 'forever', whether that be in o/g, or any other commodity.

 

We would all be a lot better off were the Israelis to actually incapacitate some Iranian/Iraqi supply, and the Iranians were to actually incapacitate some Saudi supply. The market 'surplus' would come down significantly, the OPEC+ portion would decline as well, and Russian supply would remain constricted. Brent/WTI would rise by quite a bit, US shale/Cdn heavy would be back in business, lots of jobs, etc. Consumers pay more, and global alternative energy/EV continues to receive a market incentive. Everybody wins; those who swing-trade the opportunity winning even more.

 

Of course, it's not for everybody ...... but recognise that, and you could do very well 

 

SD

 

       

Edited October 2 by SharperDingaan

[nafregnum]

On 9/28/2024 at 2:09 AM, petec said:

I found this video really interesting and (although I have no specific knowledge on the issue) it feels well-researched and coherent. 

 

Thanks for posting that video - I didn't know any of that about wastewater. 

 

I caught myself wondering what the dynamics are like up in Alberta's oilfields. 

 

I think the pressure of the injected water eases as the water is able to spread out into the geological formation until pressure is equalized.  I imagine one cheapish solution might be to drill more re-injection wells and just pump slower into each one.  Seems like that might reduce seismicity and also the risk of causing nearby zombie blowouts.  Here's hoping they figure it out.

 

Edited October 4 by nafregnum

[petec]

5 hours ago, nafregnum said:

 

Thanks for posting that video - I didn't know any of that about wastewater. 

 

I caught myself wondering what the dynamics are like up in Alberta's oilfields. 

 

I think the pressure of the injected water eases as the water is able to spread out into the geological formation until pressure is equalized.  I imagine one cheapish solution might be to drill more re-injection wells and just pump slower into each one.  Seems like that might could seismicity and also the risk of causing nearby zombie blowouts.  Here's hoping they figure it out.

 

 

I don't think that works. First, if the water is able to spread due to the porosity of the rock or fractures, then drilling more wells won't help spread the water out. Second, any given rock has a finite (and calculable) capacity, and I believe the video mentions that Texas is close to max.

 

I have no idea whether the video is true though. There may be simple counterarguments, as you say.

[handycap5]

5 hours ago, petec said:

 

I don't think that works. First, if the water is able to spread due to the porosity of the rock or fractures, then drilling more wells won't help spread the water out. Second, any given rock has a finite (and calculable) capacity, and I believe the video mentions that Texas is close to max.

 

I have no idea whether the video is true though. There may be simple counterarguments, as you say.

 

I have been thinking about the water disposal problem for a few days. It is hard for me to imagine that water disposal inflation is material to Permian production over the next many years, barring some dramatic change in regulation. The increase in water cut has to be a glacial change. How much incremental cost could be it be to move water to other disposal sites with all the existing pipeline infrastructure and rights-of-way? So many past challenges and bottle necks have been surmounted (does anyone remember when they used to use sand from Michigan?). I'd love to hear counter-arguments from others. This seems to me to be more about forming a basis for regulatory change as a opposed to an argument about fundamental changing economics. 

 

[nafregnum]

On 9/27/2024 at 3:35 PM, Ulti said:

https://www.dwarkeshpatel.com/p/daniel-yergin
 

excellent interview about the 20 century oil with Pulitzer winner verging and where things are headed

 

Thanks for this!  Very interesting interview - I bought "The Prize" on Audible (it's abridged, so only 2.5 hrs) and am excited to listen to it.  

 

So, Oil was a main character in the 20th century world drama, alongside nuclear weaponry.  Seems like we're looking at advanced computer chips as the current alpha resource, and maybe electrical energy like Yergin said around 55 minutes in when he said Bill Gates mentioned data centers used to be measured in CPUs "20,000 CPU data center" and now it's a "3 Megawatt data center" ...

[petec]

On 10/4/2024 at 3:51 PM, handycap5 said:

 

I have been thinking about the water disposal problem for a few days. It is hard for me to imagine that water disposal inflation is material to Permian production over the next many years, barring some dramatic change in regulation. The increase in water cut has to be a glacial change. How much incremental cost could be it be to move water to other disposal sites with all the existing pipeline infrastructure and rights-of-way? So many past challenges and bottle necks have been surmounted (does anyone remember when they used to use sand from Michigan?). I'd love to hear counter-arguments from others. This seems to me to be more about forming a basis for regulatory change as a opposed to an argument about fundamental changing economics. 

 

 

The increase in water cut is not the issue. 

 

If that video is right, the issues are:

1. Storage capacity (in porous rocks) is finite, and they're mostly full in that area.
2. The increase in pressure is causing increased seismicity.

In other words it is a stock problem, not a flow problem.

 

If so, I would think the only long term solution is piping the water elsewhere. Good luck getting that permitted. It means literally exporting the environmental problem, and in huge volume - the Permian produces 4x as much water as oil, according to the video.

[bizaro86]

6 hours ago, petec said:

 

The increase in water cut is not the issue. 

 

If that video is right, the issues are:

1. Storage capacity (in porous rocks) is finite, and they're mostly full in that area.
2. The increase in pressure is causing increased seismicity.

In other words it is a stock problem, not a flow problem.

 

If so, I would think the only long term solution is piping the water elsewhere. Good luck getting that permitted. It means literally exporting the environmental problem, and in huge volume - the Permian produces 4x as much water as oil, according to the video.

 

The other long term solution is to put the water back where you found it - ie, into the same formation. That's what most conventional fields do, because there is generally a big benefit to using the water to waterflood. Now, extremely tight formations make that more difficult, but I have a feeling it gets figured out  before exporting brackish water to other states.

[Xerxes]

Then there is Imperial Oil. Massive outperformance for a “cyclical” company. 
 

not the only cannibal in the sector, but one that did well. 

[SharperDingaan]

The main production issues around fracking are water disposal, rock porosity, and concentration.

 

As soon as there's a frack, there's water injection into the reservoir, and a rising water cut as the well ages. Concentrate the fracking in a particular zone, and you've literally filled the rock pores with swimming pools full of highly saline water; and the less porous the rock, the higher the pressure.    

 

Generally, there are only 3 ways for that saline water to get out. (1) Via the collector bores (pushing oil ahead of itself), (2) Via migration into rock with greater porosity, and (3) Via rock slippage with the water/oil/gas mix acting as lubricant (seismic tremors). Inevitably, some of the saline water/gas mix eventually migrates to the surface.

 

Water cut cannot be left on the surface, it has to be either re-cycled into a new frack, or re-injected into the ground; ideally at lower pressures, and into a nearby deep and porous rock layer through which it will migrate elsewhere. Obviously, the lower the injection pressure, and the further from fault zones, the better. 

 

The drilling issue is conclusive attribution of injection at site X to a seismic event at location Y. Yes, the injection may have triggered the event, but the cumulative cause was part natural and part man-made; how much to each impossible to quantify.

 

Obviously the tighter the reservoir rock (low porosity), and the more fracking in concentrated areas of that tight reservoir, the bigger the potential issue. However, the good news is that these reservoirs are in sedimentary rocks, and the layers above/below the reservoir will often have a higher porosity (enabling migration of escaped water).

 

SD

 

 

 

 

  

Edited October 7 by SharperDingaan

[petec]

On 10/7/2024 at 7:56 PM, SharperDingaan said:

the cumulative cause was part natural and part man-made; how much to each impossible to quantify

Sure, but if seismicity is rising, the increase may (may) be directly attributable to man's activities.

[SharperDingaan]

2 hours ago, petec said:

Sure, but if seismicity is rising, the increase may (may) be directly attributable to man's activities.

 

The argument is that yes your firm may have triggered an event, but you weren't the only contributor to it. Quantify whether the firm contributed 5% or 60% to the event, and damages can calculated/paid - but until then, there's really nothing to report as the amount of damages is unknown.

 

SD   

[petec]

10 hours ago, SharperDingaan said:

 

The argument is that yes your firm may have triggered an event, but you weren't the only contributor to it. Quantify whether the firm contributed 5% or 60% to the event, and damages can calculated/paid - but until then, there's really nothing to report as the amount of damages is unknown.

 

SD   

 

That makes sense. But the video's argument is that future drilling needs to be more tightly regulated, with implications for costs. That's really what I am interested in.

[SharperDingaan]

3 hours ago, petec said:

 

That makes sense. But the video's argument is that future drilling needs to be more tightly regulated, with implications for costs. That's really what I am interested in.

 

Tighter regulation is 'cause shale gas has seeped into both the water table and the subsoil (cattle refuse to graze the land). In some places at night, you can literately see flame come out of the water and ground were you to light it off. Total costs rise (re tighter regulation); per well costs decline as production swings over to 'manufacturing' and there are now multiple bores in the same pay zone. Biases toward field consolidation, and bigger vs smaller producers.

 

Some argue that 'manufacturing' also mitigates the problem, as there are now many more and closer bores in the zone; reducing pressure, and giving the gas an easier way out than surface migration. While today's production suffers a higher gas cut, tomorrows's well also becomes a stand-alone viable gas producer (assuming multiple bores tied into the same well head); and it is also relatively straight forward to convert existing oil collection infrastructure to gas once the reservoir becomes primarily a gas producer. Changes the cash flow profile, and resultant valuation.

 

SD

  

 

 

[SharperDingaan]

Re the Middle East.

 

One might want to keep in mind that it is primarily Russia and Iran/Iraq that supplies (sanctions discounted) crude to China and India. Price has fallen as demand from China's slowdown has more than offset India's growth. Russia/Iran can either cut back supply to help raise/maintain price, or flood the market and rely on volume to swamp the price effect. 

 

Back in the day, both players had the excess capacity; not so much anymore. Iran has the ability to 'co-mingle' Iraqi production to 'boost' production, Russia doesn't. It's better for everyone in OPEC+ were these two to cut back supply .... in an enforceable way.

 

Lots of ways to keep the 'risk-on' premium up, and lots of room for ongoing Russian/Iranian/Iraqi 'accidents'. Can't supply what you cant produce, deliver, load, or repair .... and refineries, pipelines, pumping stations, etc. are inherently 'hazardous' infrastructure. It is also hard to get replacement parts for old equipment ... petroleum related, or otherwise.

 

The oil facilities are now targets, and it's in all the producers interests to keep it that way. 

 

SD

  

 

 

Edited October 27 by SharperDingaan

[fareastwarriors]

Oil Was Written Off. Now It’s the Most Productive US Industry

[wondering]

I was wondering if I could get @SharperDingaan's or anyone else on the board opinion on peak oil production.  What spurred this thought is a few YouTube videos I have watched with Art Berman, geologist and Doomberg (green chicken guy).

 

In short Art Berman's argument is that the US oil shale production is peaking and should be declining within the next few years.    When this happens oil prices should increase substantially because of the inelastic demand nature of oil.

 

The counter argument from Doomberg is that because of technical efficiencies (for example China converting trucks to run on natural gas and thus decreasing the need for diesel fuel), and lots of untapped or not fully exploited sources of oil in the world (for Argentina, Venezuela - if they sort out their political mess), peak oil production is a long way in the future - 50 - 100 years.  Doomberg argues because oil is so crucial to our way of life and to our standard of living, governments, companies, and engineers will extreme lengths to ensure the supply of oil is kept plentiful.

 

Here is a video from Art Berman explaining his position.

 

  

Here is a video with Doomberg debating with another analyst (taking the same position as Art Berman).

 

[Junior R]

Trump wants crude around $40 ...The question is are US drillers willing to drill more