Energy Sector

[Spekulatius]

Looks like the first LNG train will be operational in January 2023. Also, the NG storage is currently more than 100% full. I guess they can fill them at above nominal pressure.

 

https://www.reuters.com/business/energy/germany-completes-construction-wilhelmshaven-floating-lng-terminal-2022-11-15/

 

Second LNG train in Brunsbuettel starts at around the same time. Both together are good for a bit more than 10% of the German NG consumption. Those go a long way towards replacing the 40-45% NG supply that is now missing from Russia.

[Stuart D]

The November iea report just came out, always an interesting read.

 

https://www.iea.org/reports/oil-market-report-november-2022

 

 

• Global observed inventories fell by 14.2 mb in September as OECD and non-OECD stocks plunged by 45.5 mb and 19.3 mb, respectively, but were partially offset by a surge in oil on the water of 50.6 mb. OECD industry oil stocks declined by 8 mb, while government stocks drew by 37.4 mb. OECD total oil stocks fell below 4 000 mb for the first time since 2004.

 

[bizaro86]

9 hours ago, Spekulatius said:

Looks like the first LNG train will be operational in January 2023. Also, the NG storage is currently more than 100% full. I guess they can fill them at above nominal pressure.

 

https://www.reuters.com/business/energy/germany-completes-construction-wilhelmshaven-floating-lng-terminal-2022-11-15/

 

Second LNG train in Brunsbuettel starts at around the same time. Both together are good for a bit more than 10% of the German NG consumption. Those go a long way towards replacing the 40-45% NG supply that is now missing from Russia.

 

In fact, you can keep filling them to any pressure you want. Of course, eventually something would fracture under the stress...  if that happens the storage would be wrecked forever.

 

My engineer brain explodes when people use the safety factor on purpose for economic reasons.

[Parsad]

Well I'm pretty sure Saudi Arabia will find ways to increase output now and the price of oil should drop further:

 

https://www.cnn.com/2022/11/17/politics/saudi-crown-prince-immunity-state-department-jamal-khashoggi

 

Cheers!

[Sweet]

2 hours ago, Parsad said:

Well I'm pretty sure Saudi Arabia will find ways to increase output now and the price of oil should drop further:

 

https://www.cnn.com/2022/11/17/politics/saudi-crown-prince-immunity-state-department-jamal-khashoggi

 

Cheers!

Why?

 

I’d say it makes very little if any difference at all, both to oil production, and oil prices.

[Sweet]

Oil flat for the year despite everything that has went on in the oil markets in the last 11 months.

[UK]

https://www.wsj.com/articles/saudi-arabia-eyes-opec-production-increase-ahead-of-embargo-price-cap-on-russian-oil-11669040336

[Sweet]

 

7 minutes ago, UK said:

https://www.wsj.com/articles/saudi-arabia-eyes-opec-production-increase-ahead-of-embargo-price-cap-on-russian-oil-11669040336

saudis said it wasn’t true 

[Pelagic]

EU politicians have been accused of not understanding energy and yet this proposal almost seems like they do understand it and aren't interested in touching it. They've crafted a policy that gives the appearance of legislating without actually doing much if anything. I doubt we'll see the same frenzied buying at any price we saw earlier this year as countries outbidded each other to fill reserves before winter.

 

 

[Sweet]

Saw quite an amusing comment that Russia might demand buyers pay the price cap.  Currently Urals is trading below the cap being proposed by the EU.

 

Oil volatile as ever this morning, much talk about it being related to OPEC, but I think weakness in the price is being driven once again by China and their covid.  It’s been the dominant factor in prices the entire year.

 

The investment banks predicting oil prices to average $100+ are looking quite foolish.

Edited November 23, 2022 by Sweet

[kab60]

On 11/23/2022 at 1:47 PM, Sweet said:

Saw quite an amusing comment that Russia might demand buyers pay the price cap.  Currently Urals is trading below the cap being proposed by the EU.

 

Oil volatile as ever this morning, much talk about it being related to OPEC, but I think weakness in the price is being driven once again by China and their covid.  It’s been the dominant factor in prices the entire year.

 

The investment banks predicting oil prices to average $100+ are looking quite foolish.

What's interesting is how well oil equities are holding up. IIRC energy is up like 60% this year, while oil prices are generally flat. I think it goes a way to show how undervalued and hated the sector was at the beginning of 2022. I have just as little idea as anyone as to where oil goes short term, but I do think Currie from GS has a credible case as to why the medium to LT looks good (for oil stocks). Structural lack of supply, and with the massive oil price volatility we've seen I don't think that's about to change despite a murky demand outlook (China, recession, SPR releases).

 

Sector has been massively de-levered during the last two years and most companies are now very close to their (very low) leverage targets and returning massive amounts of cash to shareholders. I've come across a lot of (sensible) capital returns targets from O&G companies this time around (they're all mostly buying back stock), not those dumb volume targets a lot of them chased up to 2014. When you layer in a lack of investments for close to 10 years, a lack of training in skilled engineers/flight of labor in the downturn and raising interest rates (all increasing costs/inflationary), select oil equities are still the best risk-rewards I come across at the moment. And that's without even layering ESG on top.

 

Lots of O&G companies are pursuing CCS projects, which seems like BS to me, but it looks quiet certain they'll get a lot of subsidies, and I wonder if you'll see all these dumb ESG folks piling in five years out when they get online. That'll probably be a good time to leave for greener pastures elsewhere, but so far the sector isn't getting much love despite how well equities have held up. I've been buying some Harbour Energy PLC in London lately (lots of legacy North Sea assets), which should do 2,1B FCF this year on a 2,6B market cap. Net debt was 1,1B end of September, but they could pay that off in a couple of months, if they so wanted (they've returned 500m in cash so far this year). Now as all investments it comes with some specific risks, and I don't want to make this about one particular equity, but despite the selloff in growth and tech this year, I still don't think a lot of that stuff looks reasonably priced yet (perhaps except for some big tech).

Edited November 25, 2022 by kab60

[Sweet]

If oil and gas companies can put shareholders first, and maintain production roughly where it is right now -maybe even growing slightly without swamping the market in oil - then oil companies will be sending back a lot of cash flow to shareholders.  Long term shareholders have been wrecked since 2014.

 

Second big change is narrative, no longer does the investment community think oil and gas is dead by 2025 or 2030.  There is still a multi decade runway of oil production and shareholder returns.

 

Plenty of wildcards too, largest amongst them is government windfall taxes, which I find quite despicable.  Javier Blas said that in the UK the government are now taking 70% of O&G income.  If you don’t want then operating as private companies buy them out.

[Viking]

12 hours ago, kab60 said:

What's interesting is how well oil equities are holding up. IIRC energy is up like 60% this year, while oil prices are generally flat. I think it goes a way to show how undervalued and hated the sector was at the beginning of 2022. I have just as little idea as anyone as to where oil goes short term, but I do think Currie from GS has a credible case as to why the medium to LT looks good (for oil stocks). Structural lack of supply, and with the massive oil price volatility we've seen I don't think that's about to change despite a murky demand outlook (China, recession, SPR releases).

 

Sector has been massively de-levered during the last two years and most companies are now very close to their (very low) leverage targets and returning massive amounts of cash to shareholders. I've come across a lot of (sensible) capital returns targets from O&G companies this time around (they're all mostly buying back stock), not those dumb volume targets a lot of them chased up to 2014. When you layer in a lack of investments for close to 10 years, a lack of training in skilled engineers/flight of labor in the downturn and raising interest rates (all increasing costs/inflationary), select oil equities are still the best risk-rewards I come across at the moment. And that's without even layering ESG on top.

 

Lots of O&G companies are pursuing CCS projects, which seems like BS to me, but it looks quiet certain they'll get a lot of subsidies, and I wonder if you'll see all these dumb ESG folks piling in five years out when they get online. That'll probably be a good time to leave for greener pastures elsewhere, but so far the sector isn't getting much love despite how well equities have held up. I've been buying some Harbour Energy PLC in London lately (lots of legacy North Sea assets), which should do 2,1B FCF this year on a 2,6B market cap. Net debt was 1,1B end of September, but they could pay that off in a couple of months, if they so wanted (they've returned 500m in cash so far this year). Now as all investments it comes with some specific risks, and I don't want to make this about one particular equity, but despite the selloff in growth and tech this year, I still don't think a lot of that stuff looks reasonably priced yet (perhaps except for some big tech).

Great summary. Oil is setting up to be the mother of all ‘reopening’ trades. (When we get through the current ‘gully’ that the global economy is experiencing.) Demand will spike, driven by China/emerging markets. And supply will remain constrained - those SPR barrels will be coming off the market some time in 2023.
 

The energy complex is hated and it will only get worse every year looking forward. Climate change is real. I expect global natural disasters to continue too get worse every year; reinsurance pricing is the canary in the coal mine (Jan 1 renewals are expected to materially increase +30%?). And the energy complex is going to be blamed after every catastrophe hits. The drumbeat will only be getting louder. And then energy companies will report massive profits quarter after quarter… And that is not going to sit well with lots and lots of people (most of whom vote).

 

Energy investors will do well, and perhaps very well (primarily because energy stocks continue to be hated by investors). Governments will be coming after a portion of their record profits, which is a clear negative. But this will then force energy companies to return capital to shareholders as fast as possible (meaning limited investment in future production growth). This will pretty much ensure supply does not increase much in the coming years (supply will be chronically short of demand), and this will be a big positive for investors. And will extend the bull market in energy prices and stocks for years into the future. (The geopolitical set-up, and OPEC back in control, also favours higher prices in the coming years.)

 

And the ride for investors will be like a 6-Flags roller coaster trip. The more governments demonize and come after the energy complex the more money the energy complex will make. It will infuriate many.

—————

Where will the next mania be? Unsophisticated ‘investors’ need something big to gamble on. I wonder if commodities investing does not grow into the next big thing (over the next decade)… 

 

 

Edited November 25, 2022 by Viking

[Viking]

The whole climate change debate today sounds like something written by Joseph Heller in Catch-22. ‘Circular reasoning’… and my favourite: ‘logical irrationality’. 
—————

So oil companies are making too much money today profiteering from climate change (the bastards). So governments introduce wind-fall profit taxes because that is not right/fair/moral (Yay!). And this then results in oil companies making even more money (WTF?). Simply delicious… (see my previous post for how this happens). 
—————

“Much of Heller's prose in Catch-22 is circular and repetitive, exemplifying in its form the structure of a Catch-22. Circular reasoning is widely used by some characters to justify their actions and opinions. Heller revels in paradox. For example: "The Texan turned out to be good-natured, generous and likable. In three days no one could stand him"; and "The case against Clevinger was open and shut. The only thing missing was something to charge him with." This atmosphere of apparently logical irrationality pervades the book.

 

- https://en.wikipedia.org/wiki/Catch-22

 

A "Catch-22" is "a problem for which the only solution is denied by a circumstance inherent in the problem or by a rule."[14] For example, losing something is typically a conventional problem; to solve it, one looks for the lost item until one finds it. But if the thing lost is one's glasses, one cannot see to look for them – a Catch-22. The term "Catch-22" is also used more broadly to mean a tricky problem or a no-win or absurd situation.

 

In the book, Catch-22 is a military rule typifying bureaucratic operation and reasoning. The rule is not stated in a precise form, but the principal example in the book fits the definition above: If one is crazy, one does not have to fly missions; and one must be crazy to fly. But one has to apply to be excused, and applying demonstrates that one is not crazy. As a result, one must continue flying, either not applying to be excused, or applying and being refused. The narrator explains:

There was only one catch and that was Catch-22, which specified that a concern for one's safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he were sane he had to fly them. If he flew them he was crazy and didn't have to, but if he didn't want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle. (p. 56, ch. 5)

 

Other forms of Catch-22 are invoked throughout the novel to justify various bureaucratic actions. At one point, victims of harassment by military police quote the MPs' explanation of one of Catch-22's provisions: "Catch-22 states that agents enforcing Catch-22 need not prove that Catch-22 actually contains whatever provision the accused violator is accused of violating." Another character explains: "Catch-22 says they have a right to do anything we can't stop them from doing."

 

Yossarian comes to realize that Catch-22 does not actually exist, but because the powers that be claim it does, and the world believes it does, it nevertheless has potent effects. Indeed, because it does not exist, there is no way it can be repealed, undone, overthrown, or denounced. The combination of force with specious and spurious legalistic justification is one of the book's primary motifs.

 

 

Edited November 25, 2022 by Viking

[SharperDingaan]

O/G has a long way to go still, but there is a need to think much more strategically.

 

In the WCSB, new pipeline egress comes onstream in 2H 2023. Most would expect current differential levels to permanently drop like a brick, and stay there indefinitely - adding an instant USD 10-15/bbl to the margin of every heavy oil producer in the WCSB, for ZERO additional capex. While the CVE, SU, MEG, etc., are first to mind .... the real beneficiaries will be those in the Peace River/Clear Water heavy oil plays. No mining required, 90%+ oil production, collection facilities already in place, cheap/easy to drill, payback periods in 4-5 months, versus the current 11-14. Then add M&A field consolidation as well.

 

Capital discipline is also clearly visible in O/G servicing. When every company in basin X can drill at the local requirements, at about the same rate, and has the same retirement/labor issues, the value-add is in ability to both offer ongoing availability and consolidation within the supply chain. There is a reason why marketing has been moving under one roof, and there have been so many small acquisitions. It also reflects that we are not going back to the days when everyone, and their mothers, was drilling shale. Manufacturing vs boom/bust approach.

 

Disclosure: We own well known companies in both these areas, and continue to do very well by them. May those unsophisticated ‘investors’ who need something big to gamble on, pay us all a visit  

 

SD

 

    

Edited November 25, 2022 by SharperDingaan

[Ulti]

13 hours ago, kab60 said:

but I do think Currie from GS 

I might have said this before but continually listening and reading Currie Kuppy Andurand Blas etc… I feel like I’m in an echo chamber and can’t help wondering what if we are all wrong.. what can go wrong etc…..And how does that affect oh in general and companies in particular..

[Ulti]

3 minutes ago, Ulti said:

I might have said this before but continually listening and reading Currie Kuppy Andurand Blas etc… I feel like I’m in an echo chamber and can’t help wondering what if we are all wrong.. what can go wrong etc…..And how does that affect oh in general and companies in particular..

https://podcasts.apple.com/us/podcast/rose-bros-podcast/id1493491566?i=1000587391332
 

case in point… Tamarack Energy interviews 

[Ulti]

6 minutes ago, SharperDingaan said:

r/Clear Water heavy oil plays

Sorry the interview addresses clear water

https://podcasts.apple.com/us/podcast/rose-bros-podcast/id1493491566?i=1000587391332

[kab60]

28 minutes ago, Ulti said:

I might have said this before but continually listening and reading Currie Kuppy Andurand Blas etc… I feel like I’m in an echo chamber and can’t help wondering what if we are all wrong.. what can go wrong etc…..And how does that affect oh in general and companies in particular..

Position sizing and stop listening to uber bulls twisting every fact to support their narrative.

 

I have around 15% exposure so I get to fight another day, even if I'm wrong. I hate commodity investing, but I think the setup looks pretty good. It's like all the companies got the same memo on capital allocation, while all the policians are making the same mistakes.

[SharperDingaan]

2 hours ago, kab60 said:

Position sizing and stop listening to uber bulls twisting every fact to support their narrative.

 

I have around 15% exposure so I get to fight another day, even if I'm wrong. I hate commodity investing, but I think the setup looks pretty good. It's like all the companies got the same memo on capital allocation, while all the policians are making the same mistakes.

 

Also keep in mind that the more heavy oil in a company production, the more volatility in the FCF, that even stela risk management will not save you from. Heavy oil netbacks can routinely change 25%+ in a single quarter, and all of it outside of management control. Not many years ago tar sand producers lost money on every barrel produced - when WTI at USD 40 couldn't cover the differential, transportation, and cash production costs.

 

Ideally you are buying a heavy oil producer with a solid BS that has ability to absorb risk, and well < 50% of production hedged. Simply because you hold the stock to benefit BOTH from higher WTI prices (net), AND the operating leverage that the company has. Can't do that if the company has pissed that WTI exposure away!

 

If you are a smaller company, the better option is to dilute the % heavy oil production via light oil or ngl/gas production. Or put the money into rigs diluting heavy oil exposure, versus spending it on heavy oil hedges.

 

SD

 

 

Edited November 25, 2022 by SharperDingaan

[Ulti]

7 hours ago, kab60 said:

8 hours ago, Ulti said:

 

Position sizing and stop listening to uber bulls twisting every fact to support their narrative.

I’ve been position sizing for over 40 years… currently a similar 15%
 Stop listening to the Uber bulls?… I have to disagree with… I like to listen

and try to invert their arguments 

For example:

windfall and share buyback taxes

linger China shutdown

a continued disconnection between physical and paper markets

continued lack of capital flow into energy names

Russianstill cranking out the o/g and its ability to move product

And I’m sure many more

 

And I haven’t even touched on individual companies….I do like SD’ s

affinity towards Clearwater.. low overhead and high production…… I’m just looking to gain more knowledge of the downside both generally and in the 2 companies I’ve invested in.

[SharperDingaan]

Downside knowledge ...

 

Circle of competence. The more in-depth your technical competence, the more industry experience you have, and the more sophisticated your financial expertise; the higher your portfolio weighting can be: 80% vs 15%. However that 80% is spread over 2-4 names, NOT one name.

 

Water/gas flood. Hated by many as it isn't sexy and costs a lot to initiate; however, typically the more the better, and the more emphasis on ESG the higher the payoff. Significantly reduces maintenance capex by lowering the decline rate, extends reservoir life by getting more out of the reservoir, but very field specific - and you get paid to inject the well waste water and CO2 driving the flood. The end of a CCS pipeline is a spent reservoir being gas flooded.

 

Hedging. Sadly a great many o/g companies use hedging to 'take a position', versus protect a critical drilling budget or M&A financing; so ... they end up over-hedged in price runups and unable to participate until their excess hedge runs off - screwing shareholders. You typically get to buy quality cheap, and the offending hedges mature in 1-2 quarters.

 

Psychology. Recognize that human nature is to over-enthuse over a string of positive news, under-enthuse over a string of negative news, and that o/g is a cyclical industry. When everyone is expecting a buyback, or a special dividend, and the decision was to reinvest in production versus pay out - what typically happens? 

 

Risk Management: HF's hate commodities, largely because commodities have put so many of them in the graveyard. Most advisors/retail investors hate commodities because it is a risky recommendation, it is not a 'easy' sell, and to be successful - largely a WEB anti 'buy & hold' strategy. Yet .... commodity investment has been the well-worn path to many a great fortune.

 

Casino Management. Consistently take your money off the table, and put it where everyone else is not - “Please God, give me one more oil boom. I promise not to piss it all away next time.” Stay rich when everyone else is visiting the food bank.

 

Now had you known all this when you were in your 30's ... how wealthy do you think you would be by your 60's ?

Even if there had been a few separations along the way.

 

Obviously o/g is not for everyone; but those who choose to put the time into it can expect to do well.

Good  luck!

 

SD 

Edited November 26, 2022 by SharperDingaan

[Spekulatius]

11 hours ago, Ulti said:

I’ve been position sizing for over 40 years… currently a similar 15%
 Stop listening to the Uber bulls?… I have to disagree with… I like to listen

and try to invert their arguments 

For example:

windfall and share buyback taxes

linger China shutdown

a continued disconnection between physical and paper markets

continued lack of capital flow into energy names

Russianstill cranking out the o/g and its ability to move product

And I’m sure many more

 

And I haven’t even touched on individual companies….I do like SD’ s

affinity towards Clearwater.. low overhead and high production…… I’m just looking to gain more knowledge of the downside both generally and in the 2 companies I’ve invested in.

Other wildcards:

Venezuela or Iran cranking up again

Demand lower over time due to China transition to other energy sources (nuclear power, EV’s for cars)

Shale getting traction in more geographies

Some whacko political moves which could go either way.

 

[Ulti]

1 hour ago, SharperDingaan said:

Now had you known all this when you were in your 30's ... how wealthy do you think you would be by your 60'

So true… I barely survived 2000….. and wish I knew all this….but fortunately after a severe beating… what doesn’t kill you makes you stronger….and finding Buffett back then sure helped

[Viking]

1 hour ago, Spekulatius said:

Other wildcards:

Venezuela or Iran cranking up again

Demand lower over time due to China transition to other energy sources (nuclear power, EV’s for cars)

Shale getting traction in more geographies

Some whacko political moves which could go either way.

@Spekulatius , yes, there are risks to the bull oil/commodity thesis. However, when the world gets to the next global expansion i think we are screwed. Demand is going to spike and there will not be enough supply (for most commodities). Now in the short term we could see:

1.) a severe global recession
2.) China could experience a hard landing (zero covid, property melt down, deglobalization, common prosperity etc).

 

And yes, the world will transition to more green energy sources like nuclear. But it will take a minimum of 5 years or more of hard work to see an impact. Yes, Venezuela has lots of oil, but who is going to invest the significant money needed while the current government remains in power?

 

So i continue to think investors still do not appreciated the bull case for oil/gas looking out 2-3 years:

1.) Strategic petroleum reserve in US: is currently supplying about 1 million barrels per day and has been for much of 2022. This cannot continue indefinitely. And at some point these barrels will need to be replaced: a big source of supply will swing to a big source of demand. 
2.) The energy complex is hated: we have seen peak capital flowing to the fossil fuel energy complex. Banks can’t lend (no debt). Pension funds (big money) can’t buy equity. The energy complex is being starved of capital and it will only get worse every year moving forward (energy is the new tobacco). This simply suggests future investment will likely struggle to stay flat and that is a problem with a resource that has a significant decline rate. 

3.) underinvestment past 7 years was real and historic. As current wells deplete, companies will have a more difficult time replacing production. Higher investment will be needed just to keep production flat. This will be a problem (see 2.)

4.) the energy complex is hated (part 2): Western governments hate big oil/gas. This is not hyperbole. Look at Biden and his relationship with big oil. Big oil in Europe is running from oil as fast as they can (to renewables). Policy coming from Western governments is going to hit the energy complex hard and only get worse moving forward. Investors have learned over the past decade: don’t fight the Fed. Energy companies/investors KNOW you can’t fight the government. The energy complex is effectively in run-off. You DO NOT invest significant new money in businesses that are in run-off mode. Investors in these types of investments understand you get your capital out as fast as possible. (I expect dividend payouts to increase in importance moving forward as this reality sinks in more fully).

5.) Russia: the energy complex in Russia is permanently impaired. The exiting of Western capital and know how is real. Sanctions are a negative. Hard to see how Russia keeps production flat. More likely we see Russia start to decline. Given its size (#2 producer) this will be a problem that will get worse each year. 
6.) OPEC+ is back in control of the price. And it looks like Saudi Arabia and Russia are working together. And they want oil to stay above $80, ideally closer to $100. I think they have a good chance of succeeding.

7.) Shale in US: will continue to grow but It will be more modest. The best (most economic) wells are gone. Capital is in short supply. Investors want to get paid. Bottom line, US shale will not be coming to the rescue of global oil markets. 

8.) production growth for companies will happen via acquisitions not new production. (If you can buy existing oil/gas wells at fire sale prices why would you instead spend on new production?) This will not result in higher total production. European big oil is desperate to sell off assets and pivot to green energy. All non-Canadian oil/gas producers are aggressively exiting Canada ASAP. Even Tech, a Canadian based mining company, just sold its Fort Hills oil stake to Suncor at a fire sale price. BP recently unloaded both oil and refining assets to CVE. XTO (Exxon) made a big sale to Whitecap Resources.

9.) shortages are everywhere: labour and materials. This is driving costs on existing production through the roof. 

This is not just an oil/gas thing. Pretty much every commodity is in a similar boat. Underinvestment for a decade. Hated by Western governments. Hated from an environmental perspective, making development of new sources of supply very challenging. Lead times are +5 years. Geopolitical competition for the best assets. Growing demand (driven by energy transition, deglobalization etc). 

Edited November 26, 2022 by Viking