Energy Sector

[thowed]

8 hours ago, Sweet said:

I find Josh quite irritating on Twitter, but he comes across well in the video.

 

Yes, these O&G/Commodity guys are pretty pleased with themselves right now - they're the new SaaS Tech bros, god help us....

[nwoodman]

12 hours ago, Sweet said:

I find Josh quite irritating on Twitter, but he comes across well in the video.

 

I’d be hesitant to predict oil prices, but for energy investors, a large spike higher would be destructive to demand, and be bad for equities.

 

Agree, especially the observation re talking book on Twitter.  Still I find the longer form interviews one Blockworks Macro are illuminating.  

 

There are lots of dislocations in the energy market at the moment that will be resolved in the usual way in that the high price of oil solves the issue of the high price of oil one way or the other.  Short term though, given the oil price feeding into most things, I am left wondering how interest rate increases will resolve the inflation issue.  Short term it would appear that the price of oil, prior to a more complete energy transition, is a better proxy of hurdle rate while the fed catches up.

Edited June 1, 2022 by nwoodman

[ICUMD]

18 minutes ago, nwoodman said:

 

Agree, especially the observation re talking book on Twitter.  Still I find the longer form interviews one Blockworks Macro are illuminating.  

 

There are lots of dislocations in the energy market at the moment that will be resolved in the usual way in that the high price of oil solves the issue of the high price of oil one way or the other.  Short term though, given the oil price feeding into most things, I am left wondering how interest rate increases will resolve the inflation issue.  Short term it would appear that the price of oil, prior to a more complete energy transition, is a better proxy of hurdle rate while the fed catches up.

My impression is that inflation has a slow and sluggish response rate to slowly rising  interest rates.  OTOH, a sudden crash in equities and housing could halt further rise in inflation through wide-spread demand destruction, though not necessarily.  

 

It seems to me that currently, people have too much paper worth and feel rich enough to absorb the oil and food inflationary pricing on the whole. 

 

Not yet seeing us be anywhere close to demand destruction.

[Spekulatius]

58 minutes ago, ICUMD said:

My impression is that inflation has a slow and sluggish response rate to slowly rising  interest rates.  OTOH, a sudden crash in equities and housing could halt further rise in inflation through wide-spread demand destruction, though not necessarily.  

 

It seems to me that currently, people have too much paper worth and feel rich enough to absorb the oil and food inflationary pricing on the whole. 

 

Not yet seeing us be anywhere close to demand destruction.

Demand destruction for energy will occur in emerging markets first. People living there have much less disposable income. Also, the US is somewhat insulated due to the strong USD, if you add weak EM currencies to the mix, the increase in energy prices quoted in USD become even more painful.

Edited June 1, 2022 by Spekulatius

[Sweet]

US administration is looking at a windfall tax on US oil companies.
 

https://www.reuters.com/article/us-usa-energy-tax/white-house-weighing-oil-profits-tax-to-fund-consumer-rebate-official-says-idUSKBN2NJ1IO

 

I think getting that through the House and Senate would be tough.  Can it be done via executive order?

[Gregmal]

If they do this crude goes to $200 easy. The idiots just cant help themselves. 

[lnofeisone]

Short answer - yes, and while historically this was deferred to Congress, in the last 10-20 years, the Executive branch reached deep into its powers and has done so without explicit Congressional approval. 

[lnofeisone]

4 minutes ago, Gregmal said:

If they do this crude goes to $200 easy. The idiots just cant help themselves. 

I think this sounds about right. This is gonna get very complicated and between TCJA and CARES act tax updates, O&G companies can milk deductions and not pay tax while earning even more $. 

[Gregmal]

Its structurally really simple. These guys have gotten by using windfall profits from a few quarters or years to fund many years of the down cycle. And thats still been shitty for the most of them. Now you have greeseball liberals taking a chunk of their windfall. It will 1) force better allocation throughout the cycle, 2) reduce investment in the space, 3) quickly BK those who dont get 1+2 have/are occurring. Higher prices, way higher, would be inevitable. Forget the fact that as prices go higher the pols will give people stimulus and subsidies too make it look like theyre tackling the issue, which just further fuel demand. 

[Sweet]

There was no support for O&G when it was getting hammered and companies  were going bankrupt.  The same people who are calling for a windfall tax and claiming price gouging were just last year saying we don’t need any more oil and gas investments.  Infuriating.

Edited June 2, 2022 by Sweet

[james22]

41 minutes ago, Sweet said:

Infuriating.

 

Deliberate.

[LearningMachine]

I think the probability of oil windfall taxes is different between U.S. and Canada.  If someone has thoughts, please share at:

 

[Gregmal]

There’s no windfall tax on individual investors buying call options on the futures contracts….

[CorpRaider]

I wonder if the industry has changed is going to benefit bigly from regulatory capture (like elaborate carbon capture regs/requirements and structurally higher ROI requirements now due to ESG mandates and/or increased terminal risk) from now on basically like legit "sin" (or perhaps "anti-glamour") stocks.

[Spekulatius]

3 hours ago, CorpRaider said:

I wonder if the industry has changed is going to benefit bigly from regulatory capture (like elaborate carbon capture regs/requirements and structurally higher ROI requirements now due to ESG mandates and/or increased terminal risk) from now on basically like legit "sin" (or perhaps "anti-glamour") stocks.

How so?  Crude is still a world wide market with prices set at the margin. NG is still somewhat geographically bound because export via LNG is expensive and limited by infrastructure. For crude oil, that’s not the case.

[CorpRaider]

Well one example might be the lower availability of capital due to lending divestitures/pressures and equity ESG constraints or even just the policy statements of governments seeking to terminate/reduce the use dissuading investments/introducing perceived terminal risk, much like tobacco, resulting in higher cost of capital/expected return resulting in fewer capital projects ergo a higher spot price, but seems like other capture could come about (via carbon credit/tax/regulation regimes or provenance preferences for "lower impact" sources).  

Edited June 3, 2022 by CorpRaider

[Spekulatius]

7 hours ago, CorpRaider said:

Well one example might be the lower availability of capital due to lending divestitures/pressures and equity ESG constraints or even just the policy statements of governments seeking to terminate/reduce the use dissuading investments/introducing perceived terminal risk, much like tobacco, resulting in higher cost of capital/expected return resulting in fewer capital projects ergo a higher spot price, but seems like other capture could come about (via carbon credit/tax/regulation regimes or provenance preferences for "lower impact" sources).  

Just because there are fewer projects in the US  does not mean spot price goes higher in a world wide market. Also, aren’t all the operators swimming in cash now? Why do they need lending?

 

 

 

 

 

[CorpRaider]

The cost of capital potentially could rise for the entire industry if ESG is impacting the capital allocation in developed countries globally.  Maybe they are awash in cash at the moment, but if they have to fund a project 100% with equity going forward the required IRR/hurdle (for majors projects around the world including jvs with gov't operators in EM) should be higher (probably the better argument would be that the impact was felt more acutely over like the last 5 years and is manifesting now).  We could theorize that maybe the Saudis and the like don't desire any outside capital but seems hard to square with IPO.

[Spekulatius]

20 minutes ago, CorpRaider said:

The cost of capital potentially could rise for the entire industry if ESG is impacting the capital allocation in developed countries globally.  Maybe they are awash in cash at the moment, but if they have to fund a project 100% with equity going forward the required IRR/hurdle (for majors projects around the world including jvs with gov't operators in EM) should be higher (probably the better argument would be that the impact was felt more acutely over like the last 5 years and is manifesting now).  We could theorize that maybe the Saudis and the like don't desire any outside capital but seems hard to square with IPO.

Yes that's possible, but most other countries don't have the same ESG constraints that the US or Europe has. US is only ~10% of the total supply which matters, but it isn't really determining the outcome here.

 

The oil majors also become more tilted towards ESG, so that could matter as well, but then there is always green washing. I think the bigger impact may be that interest rates rise overall.

 

Edit - I looked up the cost of debt for Shell, which is a very typical Major and they only pay 4.4%, if this website is correct. This is very low - i don't see a problem here:

https://valueinvesting.io/RDSA.AS/valuation/wacc

Edited June 3, 2022 by Spekulatius

[SharperDingaan]

Most o/g companies are currently only paying royalties, and will not be paying income tax for quite some time. All those stranded asset write-downs, and accumulated losses over the last few years - have created $ multi-billion tax pools. Even at USD 120 oil, it is going take a good 6+ quarters before most companies pay income taxes.

 

O/G companies are generating obscene cashflows, and are now starting to return it to shareholders via dividends and buy-backs. The cashflows were politically OK, so long as debt was being paid down, and new P&E was being built - it employed lots of people. But today? it is just seen as obscene, and the more so - when a good portion of that USD 120 has little to do with their efforts (Ukraine/Russia war premium)

 

Think of the windfall tax, as a tax prepayment, to be collected upon later.

Give up a $ 1.00 today, and take $1.50 2-3 yeas from now.

 

Different POV

 

SD

 

[CorpRaider]

1 hour ago, Spekulatius said:

Yes that's possible, but most other countries don't have the same ESG constraints that the US or Europe has. US is only ~10% of the total supply which matters, but it isn't really determining the outcome here.

 

The oil majors also become more tilted towards ESG, so that could matter as well, but then there is always green washing. I think the bigger impact may be that interest rates rise overall.

 

Edit - I looked up the cost of debt for Shell, which is a very typical Major and they only pay 4.4%, if this website is correct. This is very low - i don't see a problem here:

https://valueinvesting.io/RDSA.AS/valuation/wacc

Under at least that part of the theory, I think the percentage of capital that eliminated O&G as an option would probably be relevant not the physical location of the extraction plant. 

 

That's interesting.  I guess the delta between shell's debt stack and a comp that is ESG approved would be a relevant yardstick.

 

Shell might also be an example of some of the benefits of the regulatory impact/risks; capital constraints could be more obvious if you're a smaller wildcatter and Wells Fargo just told you to move your loan because congress is up their ass. 

 

Also wonder if efforts to determine provenance of oil (russian via india sham, or iranian) will favor large players who can navigate those challenges.  Probably just narrative following price, but I have been thinking about Munger's "I basically love Standard Oil" comment.

Edited June 3, 2022 by CorpRaider

[Spekulatius]

@CorpRaider All the factors you mention could matter at the margin, but I don't think they are the red X, as we used to say when trying to do root cause analysis.

 

I think the red X is that we have seen extraordinary supply reduction in 2020 (production down 7%) and now finding it hard to get the production back. In the meantime, demand keeps rising after falling off the cliff in 2020 and then swiftly coming back. A production cut of 7% has never happened before and now we are dealing with the consequences. the OPEC has raised quotas but they can't meet them (in the past they have often produced more than official quotas). Russia is partly of the map (they funnel their crude through India and China at a discount, but their production is falling due to sanctions). I think the gap will eventually close, but it could take years - in the mean time we just will have rationing via higher prices, which I expect to affect emerging market economies the most.

 

Edited June 3, 2022 by Spekulatius

[Gregmal]

Production is only part of the equation. When governments do dumb stuff, it encourages people to call bullshit. As speculators bid up energy, there’s only one way to beat them, and that’s more production. If you can’t, then the animal spirits take over and you get a crisis. That’s what’s happening. 
 

Folks talked forever about the Fed put. In energy today, provided you don’t get stung by a turdco, it’s super low risk with high reward because of the ESG put. Low energy prices these dumb fucks shun investment and say “transition”, higher prices they suggest everything BUT the solution, which is more drilling. 
 

The US and Canada particularly it’s inexcusable. I think I’ve used the analogy before but what we are doing with energy is the equivalent of starving yourself despite having a pantry full of food.

[JRM]

It's amazing how naive people are and how ignorant our leaders seem to be.  More oil production in the US does not necessarily mean lower gas prices at the pump.  That is what Biden wants, after all.  If the windfall profit tax goes through (it won't) then people will likely view it as a good thing (pay for vote).

 

Taxing the oil producers will have the obvious impact of discouraging US production and we'll be left importing oil at whatever price OPEC decides.  Meanwhile we'll ship our SPR and natural gas oversea so Europe can pretend to be energy independent from Russia.

[sfbm21]

agree. Energy is the way to go for next few years if you could pick winners. You have ESG on one side and war on the other side and banks not lending to fossil fuel projects and stupid policies. if the hedges roll off for those that hedged, await bumper crop of cash flows.