Energy Sector

[james22]

ESG investing has had a profound effect on the financial activities of energy companies. By driving down equity prices and raising bond yields, ESG investors have sharply raised the cost of capital for these firms, making it difficult for them to operate.

 

The good news? This is being done by the private sector and is a reflection of market discipline, rather than by some top-down ukase by the federal government, although that may be coming soon.

The energy companies that survive will be well-positioned to take advantage of a bull market.

Add inflation to that bull market, and energy will be just one of the big beneficiaries.

 

https://www.mauldineconomics.com/the-10th-man/antisocial
 

I've been out for some time, but just got back in (VGELX). 

[lnofeisone]

2 hours ago, james22 said:

ESG investing has had a profound effect on the financial activities of energy companies. By driving down equity prices and raising bond yields, ESG investors have sharply raised the cost of capital for these firms, making it difficult for them to operate.

 

The good news? This is being done by the private sector and is a reflection of market discipline, rather than by some top-down ukase by the federal government, although that may be coming soon.

The energy companies that survive will be well-positioned to take advantage of a bull market.

Add inflation to that bull market, and energy will be just one of the big beneficiaries.

 

https://www.mauldineconomics.com/the-10th-man/antisocial
 

I've been out for some time, but just got back in (VGELX). 

ESG investors really catalyzed the impact of O&G debt binge, which was not sustainable, especially in light of SA/Russia oil fight. That's all it took for O&G to find new financial discipline (all but ET). 

 

I had some VGELX but sold it and rotated into few specific names as soon as they announced that they will be buying utilities. It was poor timing for them too as they were selling off beaten down energy names to buy less beaten down utilities.  Forward to today, VGELX is more of a utility fund (45% utilities now) with O&G kicker (25% oil majors and 15% E&P) that missed a monster rally in O&G. 

[james22]

Yeah, Vanguard has poor timing. They've done this before with VGPMX, selling at the bottom and missing the rally. So much for Bogle's advice to "stay the course."

 

But the Utility component is party what makes VGELX interesting to me. That much more diverse.

 

Vanguard's Energy Index ETF/Fund would probably make for a better Energy bet.

 

But active management might better take advantage of the ESG issue? 

[james22]

[Tepper] said that the day Exxon added activist investors to its board was the day to buy oil stocks. He said the addition signaled that drilling "will eventually decrease over time" and supply will follow.

 

https://www.zerohedge.com/markets/david-tepper-says-oil-stocks-are-cheapest-equities-every-measure

[james22]

Annual oil extraction CapEx is ~$600 million short.

https://wattsupwiththat.com/2021/06/20/the-looming-oil-shock/

[lnofeisone]

14 hours ago, james22 said:

Annual oil extraction CapEx is ~$600 million short.

https://wattsupwiththat.com/2021/06/20/the-looming-oil-shock/

tldr; there is plenty of oil and it may take few 6-12 months to open up shut in wells. I'd expect, any price increases to be transitory and would use that as an opportunity to further reduce my energy holdings. 

 

I think this is a stretch. Specifically " A lack of capital investment in finding new supplies of oil and gas." There is still a massive overhang of shut in wells, just in the US. The interesting part will be to learn how effective were different shut in strategies that companies used as there is no real data on long-term impact on shut ins across different types of wells (in a nutshell, when you close the well you risk damaging reservoir and you never know what you will find when you open it back up, especially if you close the well for a long time). 

 

For example, PXD went with "The Company continues to proactively curtail lower-margin, higher-cost vertical well production in the current commodity price environment, benefiting operating costs."  https://investors.pxd.com/news-releases/news-release-details/pioneer-natural-resources-company-reports-second-quarter-2020 

 

Exxon closed higher producing wells. 

 

Add Russia and Saudi capability to pump more, and I am not convinced there is shortage of oil to be had.

 

 

[SharperDingaan]

Hate to tell you this, but there is nowhere near the overhang that you might think.

Lot of existing DUCs will not get into production, as there has been too much ingress, and no majors are going to front the cash to restart a written down oil field. The oil is there, but it is 'shut-in' - and wil remain so for a very long time.

 

New money is going into EV's, national grids, and charging stations. Transport fleets are switching over from gasoline to electric, at an accelerating rate, as mass production further lowers prices. The majors have maybe 10 years to extract as much wealth as possible, with production coming from the cheapest wells first.

 

Producers, and producing nations, will be trying to asset strip as much as practicable, and at as high an average oil price as possible. A price kept there by NOT 'reinvesting' in new production, and running down existing production as rapidly as profitably possible. Blowdown mode, at profit maximization.

 

Big oil, like big tobacco, doesn't go away - it just gets smaller, and looks different.

 

SD

 

 

Edited June 22, 2021 by SharperDingaan

[lnofeisone]

You are right SD. Seems like the top 20 have restored their shut in wells around Sept of last year. Maybe there isn't whole lot of slack so the oil price is here to stay. 

 

100% agree that big oil will resemble big tobacco. Not going anywhere for a bit but will look different. 

[SharperDingaan]

Useful to keep in mind the 'end-of-life' differences between big tobacco and big oil. Smokers die, and their ongoing healthcare costs permanently die with them. Old oil wells have to be permanently sealed in, and the lands restored to previous state - a huge new business opportunity. Spent oil fields are CO2 sinks, the infrastructure is mostly already in place, and you get paid to extract and pump CO2 into them. Carbon credits, and ESG are your friends.

 

Not what the industry would like you to believe ...

 

SD

[Castanza]

5 minutes ago, SharperDingaan said:

Useful to keep in mind the 'end-of-life' differences between big tobacco and big oil. Smokers die, and their ongoing healthcare costs permanently die with them. Old oil wells have to be permanently sealed in, and the lands restored to previous state - a huge new business opportunity. Spent oil fields are CO2 sinks, the infrastructure is mostly already in place, and you get paid to extract and pump CO2 into them. Carbon credits, and ESG are your friends.

 

Not what the industry would like you to believe ...

 

SD

This is actually a pretty interesting business. Any companies you know that focus on this (not necessarily public)? As someone who spent a summer setting up gas powered lights and testing water at frac sites this seems likely a very profitable endeavor. Gas companies loved contracting out to independent third parties. 

[AngloZurich]

International Petroleum Corporation $IPCO. It will generate $300m in FCF at current oil prices and its mcap is currently just over $740m. It will be debt free by Q2 2022. 70% discount to current NAV based on todays oil and you get 1 billion 2C for free

Edited June 23, 2021 by Anglozurich

[DooDiligence]

Not to derail, but here's another alternative power generation source. that seems to be getting traction.

 

www.mainspringenergy.com/technology/

 

www.bloomberg.com/news/articles/2021-03-09/nextera-bets-on-new-power-generator-that-runs-without-combustion

[SharperDingaan]

4 hours ago, Castanza said:

This is actually a pretty interesting business. Any companies you know that focus on this (not necessarily public)? As someone who spent a summer setting up gas powered lights and testing water at frac sites this seems likely a very profitable endeavor. Gas companies loved contracting out to independent third parties. 

 

Talking our book here, but look at WCP-T. They will be using C02 injection to drive additional oil out of an existing reservoir, and getting paid in carbon credits for C02 extracted from the atmosphere. Albertas tarsands and cement producers (plus refineries) are combining to create a CO2 pipeline they can all jointly feed into; one outlet of which would be the WCP CO2 injection facility. All parties get C02 reductions, WCP gets additional oil, and the reservoir chemically locks up the C02. ESG as your friend.

 

SD 

[Castanza]

10 minutes ago, SharperDingaan said:

 

Talking our book here, but look at WCP-T. They will be using C02 injection to drive additional oil out of an existing reservoir, and getting paid in carbon credits for C02 extracted from the atmosphere. Albertas tarsands and cement producers (plus refineries) are combining to create a CO2 pipeline they can all jointly feed into; one outlet of which would be the WCP CO2 injection facility. All parties get C02 reductions, WCP gets additional oil, and the reservoir chemically locks up the C02. ESG as your friend.

 

SD 

Thanks I'll take a look

[jfan]

On 6/23/2021 at 1:48 PM, SharperDingaan said:

 

Talking our book here, but look at WCP-T. They will be using C02 injection to drive additional oil out of an existing reservoir, and getting paid in carbon credits for C02 extracted from the atmosphere. Albertas tarsands and cement producers (plus refineries) are combining to create a CO2 pipeline they can all jointly feed into; one outlet of which would be the WCP CO2 injection facility. All parties get C02 reductions, WCP gets additional oil, and the reservoir chemically locks up the C02. ESG as your friend.

 

SD 

 

Thanks SD.

 

Just curious about a few things:

1) does wcp.to already collect carbon credits and are they verified with a 3rd party agency? 

 

2) how long do these carbon credits last before expiration? I know they vary depending on the carbon capture method. With the co2 permanently placed into the ground, will they be indefinite?

 

3) is it very inexpensive to purchase dry c02 from heavy industry? 

 

Thanks for your insights

 

Jfan

[SharperDingaan]

At present, assume carbon credit details are only being collected, and third party verified. When Canada signs on to the agreed upon global standard, WCP makes a claim for the resultant carbon credits, and sells them. Thereafter WCP claims and sells credits monthly, as they sequesture C02.

 

Mechanically, a nations major C02 producers would 'register' with the granting body, and receive a 'level set'. If you produce more C02 than the 'level set', you need to buy X carbon credits until you are at the 'level set'. If you produce less C02 than the 'level set', you can sell X carbon credits until you rise to the 'level set'. Different industries, different 'level sets', depending upon the 'negotiated' national solution. Politicing.

 

The credit is granted 'forever', recorded on a publicly visible blockchain, and cancelled 'forever' when it is claimed. Ultimately, the CME trading the standardized CO2 credit as just another class of crypto options and futures. 

 

WCP will essentially be the same as a utility, primarily paid a fee to dispose of other peoples CO2. They just have the ability to ALSO use that gas as a C02 flood - to both drive more oil out of their formation, and create a new business. Smart.

 

https://www.theglobeandmail.com/business/commentary/article-canadas-accounting-sector-seeking-better-consistency-in-esg-reporting/

https://www.sasb.org/about/sasb-and-other-esg-frameworks/

 

 

SD

 

 

 

Edited June 26, 2021 by SharperDingaan

[jfan]

Thanks SD for the details. Much appreciated.

 

It will be very interesting to watch how things develop. Owning large areas of land servicing local carbon-producing industries creates the potential captive customers that may need long-term contracts for their carbon credits. 

 

They also mention hydrogen generation as a future opportunity both in terms of the commodity itself and the ability to generate CO2 for their oil operations. Do you have a sense of what stage they are at here?

 

Just curious about using blockchain for carbon credits. I came across a few very nascent tokens such as XELS, Universal Carbon (UPCO2), and Climatecoin. How legitimate are these platforms?

 

Found a couple interesting primers:

https://www.globalenergyinstitute.org/sites/default/files/020174_EI21_EnhancedOilRecovery_final.pdf

 

https://www.iea.org/commentaries/can-co2-eor-really-provide-carbon-negative-oil

 

https://www.netl.doe.gov/sites/default/files/netl-file/co2_eor_primer.pdf

 

Jfan

 

 

 

 

[SharperDingaan]

The long-term tar-sands solution is to burn hydrogen, vs natural gas. The burn still produces CO2, but you can produce hydrogen from o/g, and get X+ cubic meter of hydrogen for X cubic meter of gas used. Essentially, TWO pipelines - one for CO2, one for hydrogen. At this stage they are just selling the concept; carbon sequesture will be first, hydrogen production second. 

 

The existing blockchain based CO2 exchanges work, but are really proofs of concept. Most would expect the granting authority to create its own similar blockchain based exchange, and speculators to use exchange (CME) traded carbon credit futures/options.

 

The key to C02 sequesture, is that it requires TWO critical technologies. Physical collection and disposal of the C02 itself (well understood). Trusted, and public, digital tracking of collection and disposal of CO2 (blockchain). The trusted blockchain facilitating C02 trading, much as todays API and EIA reports drive US oil trading.

 

Evolution wise, this is just the NEXT technological step after horizontal drilling and fracking. All kinds of new opportunities, but it almost permanently strands high-cost offshore assets - hence the majors writing down assets. Extracting more from an existing field, vs drilling in the arctic, is not a bad thing. Even the environmentalists would agree. 

 

It is very new, and evolving - so expect bumps in the road. Nice thing with WCP is that you also get paid a rising dividend while the industry is developing. Becoming an ESG 'star' will not hurt the share price either.

 

Requires a different 'mindset', and easier to 'proof up' in a Canada than it would be in the US. It also keeps US egress open, as Canada is now exporting low-carbon oil. Smart, and at multiple levels.

 

SD 

Edited June 26, 2021 by SharperDingaan

[RadMan24]

Sure, transportation might be a declining source of oil demand, but not petrochemicals. 

[Gregmal]

Crude now well above $75.....money grows on tress. Its not stopping either. 

[nafregnum]

https://www.forbes.com/sites/woodmackenzie/2021/06/17/how-high-can-oil-prices-go-in-2021/

 

Interesting tidbits, if I understand the article correctly:

 

* The first half of the year used up 100 million barrels of the inventory buildup that happened in 2020.  By the end of the 2021 the inventory will be reduced another 100 million barrels, under pre-pandemic storage levels.  

 

* "OPEC+ is currently revelling in higher prices and recouping some of the US$335 billion of revenue the group ‘lost’ last year when the market collapsed. A Brent price in line with our 2021 forecast of US$69.30 would lift OPEC’s revenues close to 2019 levels on 10% less volume."

 

... So, as it appears to me, back in Nov 2014 OPEC flooded the market in order to try to kill North American shale, but it only partly worked. OPEC was willing to push prices down when they were swimming in money and could deal with some short term pain.  But now the incentives are different: after losing $335B in 2020 they actually NEED their oil to be more profitable in order to recuperate.  Having OPEC "aligned" at least in the near term seems like a nice environment for unhedged producers like Obsidian Energy.  

[jfan]

Can someone please point the error in my thinking? (I'm not an expert in anything)

 

If the historical relationship between Gold and the total Monetary base is ~ 0.001, and Gold to WTI fluctuates somewhere between 10-30, and Oil to Natural Gas is ~ 10:1.

 

IF we still believe in mean reversion of these relationships, the current Gold to Monetary base is 0.0031 with the price of Gold at $1800. Assuming the Monetary base doesn't contract and stays steady....are we talking about $5800 Gold, $290 WTI (assuming 20:1 ratio), and $29 Natural Gas prices in the future?

 

I know this is a very superficial understanding and ignores all the supply-demand dynamics and geopolitical posturing, but am I crazy that there is an alternate reality where commodity prices might be sky high?

Edited July 6, 2021 by jfan

[SharperDingaan]

WTI is not going to go over USD 100/bbl for any sustained period, although a spike is always possible. Producers are holding back millions bbl/day and are largely using recovery driven demand to draw down the excessive inventory. Most Opec+ nations rely on oil funded budgets, and most need an average price in the USD 80-90/bbl range.

 

As the shift to EV accelerates, NA shale producers have incentive to raise the gas cut, by accelerating the oil draw down. Over the near to medium term, much of the E for that incremental EV, will very likely have to come from new gas powered power stations. The sun don't always shine, and the wind don't always blow.

 

The industry is also asset stripping. So NO new elephants, NO cowboys, and consolidation wherever practical to extract scale advantages. Baring the odd break-out, discipline is highly likely to stay in place.

 

Not a lot to fear.

 

SD.   

Edited July 6, 2021 by SharperDingaan

[james22]

On 7/6/2021 at 1:03 PM, jfan said:

Can someone please point the error in my thinking? (I'm not an expert in anything)

 

If the historical relationship between Gold and the total Monetary base is ~ 0.001, and Gold to WTI fluctuates somewhere between 10-30, and Oil to Natural Gas is ~ 10:1.

 

IF we still believe in mean reversion of these relationships, the current Gold to Monetary base is 0.0031 with the price of Gold at $1800. Assuming the Monetary base doesn't contract and stays steady....are we talking about $5800 Gold, $290 WTI (assuming 20:1 ratio), and $29 Natural Gas prices in the future?

 

I know this is a very superficial understanding and ignores all the supply-demand dynamics and geopolitical posturing, but am I crazy that there is an alternate reality where commodity prices might be sky high?

 

Crypto makes pretty meaningless the historical relationship between Gold and anything, I believe.

[jfan]

On 7/6/2021 at 4:03 PM, SharperDingaan said:

WTI is not going to go over USD 100/bbl for any sustained period, although a spike is always possible. Producers are holding back millions bbl/day and are largely using recovery driven demand to draw down the excessive inventory. Most Opec+ nations rely on oil funded budgets, and most need an average price in the USD 80-90/bbl range.

 

As the shift to EV accelerates, NA shale producers have incentive to raise the gas cut, by accelerating the oil draw down. Over the near to medium term, much of the E for that incremental EV, will very likely have to come from new gas powered power stations. The sun don't always shine, and the wind don't always blow.

 

The industry is also asset stripping. So NO new elephants, NO cowboys, and consolidation wherever practical to extract scale advantages. Baring the odd break-out, discipline is highly likely to stay in place.

 

Not a lot to fear.

 

SD.   

Thanks SD. I was getting worried that I would have to get rid of my truck and switch to a Tesla.

 

So forecasting oil prices is a bit of a mug's game. If I could summarize: It ultimately depends on the supply:demand balance. The demand is fairly consistent over time (maybe declining over time) with Electric vehicle adoption. But the supply is driven by nation state politics, the ease to accessing capital, and difficulty finding new supply or squeezing out any extra from producing fields. 

 

Nations need $80-90 oil to fund their spend. Efficient producers need $40 oil to be cash flow break-even. 

 

I've read a bunch of white papers by Goehring and Rozencwajg. They do a fairly decent job explaining commodity concepts. Are there any other good sources to learn more?