Energy Sector

[Dinar]

https://www.wsj.com/articles/high-natural-gas-prices-push-european-manufacturers-to-shift-to-the-u-s-11663707594?mod=hp_lead_pos3

[Viking]

48 minutes ago, Dinar said:

https://www.wsj.com/articles/high-natural-gas-prices-push-european-manufacturers-to-shift-to-the-u-s-11663707594?mod=hp_lead_pos3

What the West is learning the hard way is our quality of life is tied at the hip to cheap energy. The crazy part is much of society in the West is still in the denial stage of this crisis. North America will be a big winner in the near term (we have cheaper energy). Industrial production shifting from Europe. Re-shoring production from China. This will likely be inflationary. Supports higher rates for longer that some guy named Powell was talking about today…

Edited September 22, 2022 by Viking

[SharperDingaan]

Proposals like this, are a good indication of just how screwed up EU energy currently is - and this in addition to the expropriation and nationalization (Germany/Rosneft) if you choose to argue it. The good news is that all these companies go on sale in a big way, they will still be on sale late winter, and USD/CAD will have appreciated against the EU. https://oilprice.com/Energy/Energy-General/The-Single-Largest-Energy-Market-Intervention-In-EU-History.html

 

SD

1. Exceptional electricity demand reductions

A mandatory 5% cut in electricity consumption during peak hours is proposed. This would require member states to identify the 10% of hours with the highest expected price, and take appropriate action to reduce demand during those hours. The overall target is a 10% cut in total electricity demand until 31 March 2023.

2.     Temporary revenue cap on “inframarginal” electricity producers

Power generation technologies with lower generation costs than natural gas – including renewables, nuclear, and lignite – would get their revenues capped. The commission wants to set this cap at €180 per megawatt-hour (MWh), arguing that a high cap will allow operators to cover their operating costs and investments. The surplus revenue will be collected by member states and used to help energy consumers reduce their bills.

The measure seeks to target the majority of inframarginal generators, regardless of electricity market timeframe (spot market, forward market, PPAs, feed-in-tariffs, or other bilateral agreements). The targeted revenue will be collected when transactions are settled or thereafter. The commission estimates that €117 billion could be redistributed through this measure.

3.     Temporary solidarity contribution on excess profits generated from activities in the oil, gas, coal, and refinery sectors

These sectors are not covered by the inframarginal price cap. The time-limited contribution would take the form of an additional 33% tax rate to be levied by member states on 2022 profits that are more than 20% higher than the average profit over the previous three years. This measure is estimated to collect €25 billion.

Edited September 22, 2022 by SharperDingaan

[Castanza]

42 minutes ago, SharperDingaan said:

The good news is that all these companies go on sale in a big way, they will still be on sale late winter, and USD/CAD will have appreciated against the EU.

 

Could be on sale permanently 

[Investor20]

"From Sept. 1, public buildings - with the exception of social institutions like hospitals -

are to be heated to a maximum 19 degrees Celsius, and the heating could be turned off entirely in corridors and foyers."

Emphasis in bold added

https://www.reuters.com/business/energy/german-government-approves-energy-saving-measures-rein-gas-usage-2022-08-24/

[Sweet]

6 hours ago, Castanza said:

 

Could be on sale permanently 

agree.  Really these stocks should be higher.  Everything takes time of course but the energy index is still at near historic lows.

[james22]

 

[backtothebeach]

1 hour ago, james22 said:

 

Here is the whole exchange. She also says “1.5 degrees Celisus” without correcting herself around the 2:40 minute mark…some congresswoman…:

 

[Spekulatius]

Rhasida Tlaib does deserve a refund for her college education but wikipedia says she went to private law school.

Edited September 23, 2022 by Spekulatius

[Sweet]

Not nice out there.  USD is a wrecking ball.  Global macro overshadowing everything.  Risk off moves.

[Spekulatius]

Energy bulls and bears this year:

 

I am tempted to dumpster dive into some SU if this continues. Problem is that superspikes in energy like we had this year are followed by a recession EVERY SINGLE TIME.

We also know what recessions do to oil and energy prices.

[Sweet]

It’s not really the oil.  It is mostly gas prices, and refined products to a lesser degree.  The oil spike was very very temporary.  

There is something seriously wrong with supply chains, or too much money printed, maybe both that has kicked the fed into gear.

 

Don’t think this current mess has been driven by oil, gas maybe yes.

 

Also curious about what is going on in China, something not right.  Tempting to just blame it all on covid but don’t think that’s the full story.

[Spekulatius]

16 minutes ago, Sweet said:

It’s not really the oil.  It is mostly gas prices, and refined products to a lesser degree.  The oil spike was very very temporary.  

There is something seriously wrong with supply chains, or too much money printed, maybe both that has kicked the fed into gear.

 

Don’t think this current mess has been driven by oil, gas maybe yes.

 

Also curious about what is going on in China, something not right.  Tempting to just blame it all on covid but don’t think that’s the full story.

I think the Chinese economy is in for a long period of lower growth and in particular less consumption of energy and raw materials (like iron ore, copper aluminum, cement etc) as they retool their economy from real estate/ Capex driven to more consumer driven. There are only so many houses they are going to need with a shrinking population.

 

I do agree that NG is the fulcrum energy commodity, not oil.

[lnofeisone]

I don't have a lot of respect for Tlaib but in this case I think she was just reading from her second screen without doing much thinking. 

 

@Spekulatius - I agree that superspikes causes recession every time and this one will be no different. Europe is going to get/getting clobbered. The case for energy companies now is energy companies have near pristine balance sheets, low fixed dividends, and most have their projections around oil being $60 and nat gas $5. 

[SharperDingaan]

1 hour ago, Sweet said:

It’s not really the oil.  It is mostly gas prices, and refined products to a lesser degree.  The oil spike was very very temporary.  

There is something seriously wrong with supply chains, or too much money printed, maybe both that has kicked the fed into gear.

 

Don’t think this current mess has been driven by oil, gas maybe yes.

 

Also curious about what is going on in China, something not right.  Tempting to just blame it all on covid but don’t think that’s the full story.

 

The reality is that until Europe/Winter energy use is over, there is minimal incentive to reinvest in capex expansion. The solution to 'solidarity' and 'windfall' taxes is to simply cut higher cost production to the minimum - and book the resultant large write-downs. 'Manufacture' (via write-down's) accounting income to the average of the last 3 years, and avoid the taxes altogether. Earnings drop, EPS drops, share price drops. However, cashflow remains unaffected (rises if capex reduced), debt continues to be repaid, and buybacks/special dividends become more widespread.

 

Price rises simply because net supply continues to shrink. Over time, supply slowly getting replaced from written-down existing fields that go back on-line as price permanently rises. Minimal new drilling, as the industry progressively asset strips. Higher prices accelerating main stream integration of renewables - but until production and delivery platforms take up the slack ... o/g prices rise, and remain high. Recessions reduce demand, and lower inflation, until eventually there are real returns on hard assets again. Smart.

 

Of course, it doesn't have to be this way ... as OPEC/SA/UAE point out.

Renewables are highly desirable, but until users actually have the upgraded energy infrastructure to support EV and the related green industries, o/g is the practical transitional fuel of choice. And it will remain so, until users have a credible long term energy policy that is fully integrated with global supply/demand. No political leadership.

 

History repeatedly demonstrates that political leadership is transitory. It breaks down, conflicts result because political solutions could not be obtained, winners eventually impose it; it works for a while ... then the process repeats. Remarkably similar to what we have today.

 

Lots of opportunities, but until there is demonstrable credible stability again, Euro energy is largely un-investable. A while back, we used to say the same thing about Greek and Irish banks!

 

SD

 

  

[Spekulatius]

1 hour ago, lnofeisone said:

I don't have a lot of respect for Tlaib but in this case I think she was just reading from her second screen without doing much thinking. 

 

@Spekulatius - I agree that superspikes causes recession every time and this one will be no different. Europe is going to get/getting clobbered. The case for energy companies now is energy companies have near pristine balance sheets, low fixed dividends, and most have their projections around oil being $60 and nat gas $5. 

Agreed. To be honest, I am not even sure that the "superspikes" are causing the recession or if they are an indication of imbalances that area leading to it (more of a symptom than the disease). For example, we had a "superspike" in crude and even NG prices in mid 2008 when the economy was already on the ropes so to speak and after bear Stearns already was sold off to JPM. This was later followed by a GFC which was caused by leverage in the financial system not energy.

 

Coincidence? I do think that the fact that prices got that high was tell for issues yet to come.

 

As for the current situation, i am more interest in old economy spread based business like $WRK (which i added to today) and maybe $WLK (chemical with a pretty good management, don't own it yet) but I did buy a little $SU in my IRA just to keep me interested. SU has the potential to become a good dividend stock, imo.

Edited September 23, 2022 by Spekulatius

[lnofeisone]

Agreed. WLK is one of my favorites (along with OLN). I'll consider getting a HELOC to buy those two if they go 50% below today's price. Wishful thinking, I know.

[Spekulatius]

4 hours ago, lnofeisone said:

Agreed. WLK is one of my favorites (along with OLN). I'll consider getting a HELOC to buy those two if they go 50% below today's price. Wishful thinking, I know.

Everything can happen. WLK hit book value today, so if you believe that WLK can earn more than its cost of capital over a cycle, then WLK is cheap. I think the US based chemical industry should win market shareholder European ones and maybe even Chinese ones due to lower input costs (NG). That should create some floor to margins even in a recession.

[SharperDingaan]

"There is something seriously wrong with supply chains, or too much money printed, maybe both that has kicked the fed into gear."

 

Under globalization, China/Asia was North America's workshop. The result was a robust, reliable supply line delivering high volumes of cheap goods into North America. For the most part, as long as money supply grew at about the same rate as the flow of goods - expansion could go ahead with little long-term impact on inflation. (Growth in goods demand/growth in goods supply equals roughly 1). But .. the long term cost of this was massive deficits, and a permanent raise in the living standards of suppliers.

 

China's economy now internally consumes a much larger piece of what was being exported, and supply chains are no longer robust or reliable. Relative to recent history, that ongoing Asian growth in goods supply essentially became negative, while money supply remained strongly positive - inflation. While the goods sold in both markets look different (packaging, design, etc.) - the reality is that they consume the same resources (labor, materials, etc.); so the more Asian markets grow/consume ... the less for North America. 

 

When a CB is largely just rolling its total QE stimulus year to year, the correcting mechanism is immediate and aggressive QT. Raise the cost of money via higher base rates and reductions in system liquidity, and collapse the basket cases to release the resources they are consuming. The Fed 'put' ended a long time ago, the shape/magnitude of the yield curve is being restored to historic 'norms', and 'moral hazard' is back on the table.

 

Add to it that a great many analysts have no experience with anything but the put, and it is only a matter of time now until we start seeing the big BK's. Most would expect the BK's to start occurring Q12023, should 2022 Thanksgiving-New Year's sales not deliver on its promises.

 

The return of 'moral hazard' also has to be seen - for it to be believed.

Poster child opportunities.

 

SD

 

 

Edited September 25, 2022 by SharperDingaan

[Dalal.Holdings]

On 9/23/2022 at 12:02 PM, Spekulatius said:

I am tempted to dumpster dive into some SU if this continues. Problem is that superspikes in energy like we had this year are followed by a recession EVERY SINGLE TIME.

We also know what recessions do to oil and energy prices.

 

The 1970's beg to differ.

 

I think inflation is the wildcard here and makes comparisons to more recent downturns (like '08) less relevant. Hard to see how consumers cut back on NG consumption.

 

Heating and electricity use seem highly inelastic to me.

[Spekulatius]

10 hours ago, Dalal.Holdings said:

 

The 1970's beg to differ.

 

I think inflation is the wildcard here and makes comparisons to more recent downturns (like '08) less relevant. Hard to see how consumers cut back on NG consumption.

 

Heating and electricity use seem highly inelastic to me.

I wouldn’t count on the 70’s to return. I do agree on NG likely being a better bet than crude, but it’s hard to invest in. The producers have short lived reserves and that spells trouble dying any short term downturns.

 

I have been looking into SHEL which could be a long term beneficiary due to their large integrated gas business but they have been so terrible in terms of capital allocation that I would need a larger discount to fair value to invest and even then, I would need to hold my nose.

Edited September 26, 2022 by Spekulatius

[Dalal.Holdings]

There are several parallels to the 1970s occurring today that I think are driving inflationary winds:

 

-- Geopolitical conflict leading to energy supply shock (Arab Oil Embargo then, Russia-Ukraine now)

-- Large bulge population entering home buying/child rearing age (Baby Boomers then, Millennials now)

-- Devaluation of Currencies (Nixon Gold Shock then, Covid Fiscal Stimmies/negative sovereign yields now)

 

I'm not ruling out the possibility that we are living through some form of the 1970s.

 

I think the Fed will be more aggressive now due to lessons learned that decade (no one wants to be Arthur Burns), but I wonder if the above 3 things continue to pressure prices how the Fed can mitigate inflation barring demand destruction.

 

[CorpRaider]

Would be interesting.  Instead of everyone buying Japanese cars like the 70's everyone would switch their 90's+ huge off road vehicles to hybrids and EVs.  I've been thinking 70's for a while with the rise/return of populism and the wall/labor trade constraints all of that pre-regan/pre-clinton stuff coming back bigly.  Took a long time to maybe play out.  

Edited September 25, 2022 by CorpRaider

[Dalal.Holdings]

1 hour ago, CorpRaider said:

Would be interesting.  Instead of everyone buying Japanese cars like the 70's everyone would switch their 90's+ huge off road vehicles to hybrids and EVs.  I've been thinking 70's for a while with the rise/return of populism and the wall/labor trade constraints all of that pre-regan/pre-clinton stuff coming back bigly.  Took a long time to maybe play out.  

 

That's the thing. I think this time it's Nat Gas and not Oil that becomes the bigger issue as opposed to the '70s when it was Oil due to Arab Embargo. Now we have a Russian embargo of nat gas which is a big deal (not so much oil).

 

Oil is still available from major producers (Opec and USA) and readily transferrable over wide geographical distances compared to NG which takes a lot more effort to liquefy, transport at -160C on specialized ships, and then regasification on import. Then you need the pipes to get it to end users...

[Viking]

Well energy investors were given a gift yesterday. One of many examples: MEG.TO fell from $18 to $14 in a week. Nuts.

—————

The Saudi Aramco CEO spoke at recently at the Schlumberger Digital Forum and succinctly laid out the reality of energy markets today. Bottom line, Western governments are in denial; their transition plan “was just a chain of sandcastles that waves of reality have washed away.” Ouch!
—————

Remarks by CEO Amin H. Nasser at Schlumberger Digital Forum 2022

- https://www.aramco.com/en/news-media/speeches/2022/remarks-by-amin-h-nasser-at-schlumberger-digital-forum

…This week, however, autumn begins, and the global energy crisis promises a colder, harder winter, particularly in Europe. 
 

Unfortunately, the response so far betrays a deep misunderstanding of how we got here in the first place, and therefore little hope of ending the crisis anytime soon. So this morning I would like to focus on the real causes as they shine a bright light on a much more credible way forward. 

When historians reflect on this crisis, they will see that the warning signs in global energy policies were flashing red for almost a decade. Many of us have been insisting for years that if investments in oil and gas continued to fall, global supply growth would lag behind demand, impacting markets, the global economy, and people’s lives.

 

In fact, oil and gas investments crashed by more than 50% between 2014 and last year, from $700 billion to a little over $300 billion. The increases this year are too little, too late, too short-term. 

 

Meanwhile, the energy transition plan has been undermined by unrealistic scenarios and flawed assumptions because they have been mistakenly perceived as facts. For example, one scenario led many to assume that major oil use sectors would switch to alternatives almost overnight, and therefore oil demand would never return to pre-Covid levels. 
 

In reality, once the global economy started to emerge from lockdowns, oil demand came surging back, and so did gas. 

 

By contrast, solar and wind still only account for 10% of global power generation, and less than 2% of global primary energy supply. Even electric vehicles comprise less than 2% of the total vehicle population and now face high electricity prices. 
 

Perhaps most damaging of all was the idea that contingency planning could be safely ignored.

 

Because when you shame oil and gas investors, dismantle oil- and coal-fired power plants, fail to diversify energy supplies (especially gas), oppose LNG receiving terminals, and reject nuclear power, your transition plan had better be right.

 

Instead, as this crisis has shown, the plan was just a chain of sandcastles that waves of reality have washed away. And billions around the world now face the energy access and cost of living consequences that are likely to be severe and prolonged.

 

These are the real causes of this state of energy insecurity: under-investment in oil and gas; alternatives not ready; and no back-up plan. But you would not know that from the response so far. 

 

For example, the conflict in Ukraine has certainly intensified the effects of the energy crisis, but it is not the root cause. Sadly, even if the conflict stopped today (as we all wish), the crisis would not end. Moreover, freezing or capping energy bills might help consumers in the short-term, but it does not address the real causes and is not the long-term solution. And taxing companies when you want them to increase production is clearly not helpful.

 

Meanwhile, as Europe aggressively promotes alternatives and renewables technologies to reduce one set of dependencies it may simply be replacing them with new ones. As for conventional energy buyers, who expect producers to make huge investments just to satisfy their short-term needs, they should lose those expectations fast. And diverting attention from the real causes by questioning our industry’s morality does nothing to solve the problem.

 

That is why the world must be clear about the real causes and face up to their consequences. For example, as investments in less carbon intensive gas have been ignored, and contingency planning disregarded, global consumption of coal is expected to rise this year to about 8 billion tonnes. 

This would take it back to the record level of nearly a decade ago. Meanwhile, oil inventories are low, and effective global spare capacity is now about one and a half percent of global demand.

 

Equally concerning is that oil fields around the world are declining on average at about 6% each year, and more than 20% in some older fields last year. At these levels, simply keeping production steady needs a lot of capital in its own right, while increasing capacity requires a lot more.

Yet, incredibly, a fear factor is still causing the critical oil and gas investments in large, long-term projects to shrink. And this situation is not being helped by overly short-term demand factors dominating the debate. Even with strong economic headwinds, global oil demand is still fairly healthy today. 

 

But when the global economy recovers, we can expect demand to rebound further, eliminating the little spare oil production capacity out there. And by the time the world wakes up to these blind spots, it may be too late to change course. 

 

That is why I am seriously concerned….

Edited September 27, 2022 by Viking