Energy Sector

[lnofeisone]

4 hours ago, Sweet said:

So many pundits predicting economic catastrophe in Europe this Winter and in 2023.  We are only a month in to be fair, but those predictions are already looking sour.

I, too, thought that Europe would have a more challenging time this winter. The odds were indeed in Russia's favor. 

 

As far as Russia's gas being stranded, there is a fair amount of Russian gas in Europe still. Russia is still importing LNG to France, the Netherlands, etc. (the UK is the only country that no longer takes Russian LNG). 

[UK]

https://www.wsj.com/articles/russias-energy-clout-is-waning-weakening-its-global-influence-11673863787

 

 

[Viking]

January IEA oil report: rising global demand, slowing supply. Pretty bullish set up.

 

https://www.iea.org/reports/oil-market-report-january-2023

 

- Global oil demand is set to rise by 1.9 mb/d in 2023, to a record 101.7 mb/d, with nearly half the gain from China following the lifting of its Covid restrictions. Jet fuel remains the largest source of growth, up 840 kb/d. OECD oil demand slumped by 900 kb/d in 4Q22 as weak industrial activity and weather effects lowered use, while non-OECD demand was 500 kb/d higher.

 

- World oil supply growth in 2023 is set to slow to 1 mb/d following last year’s OPEC+ led growth of 4.7 mb/d. An overall non-OPEC+ rise of 1.9 mb/d will be tempered by an OPEC+ drop of 870 kb/d due to expected declines in Russia. The US ranks as the world’s leading source of supply growth and, along with Canada, Brazil and Guyana, hits an annual production record for a second straight year.

Edited January 19, 2023 by Viking

[Ulti]

https://podcasts.apple.com/us/podcast/top-traders-unplugged/id888420325?i=1000595128967
 

 

excellent interview with Jeff Currie on commodities energy inflation etc

[Viking]

Great up-to-date summary of why commodities are in a secular bull market. John Polomny is very well spoken (and now part of YouTube channel listings).
 

 

Edited January 19, 2023 by Viking

[lessthaniv]

On 1/19/2023 at 2:15 AM, Ulti said:

https://podcasts.apple.com/us/podcast/top-traders-unplugged/id888420325?i=1000595128967
 

 

excellent interview with Jeff Currie on commodities energy inflation etc

 
I like Jeff Currie. Opinions always seem well researched. This might be of interest to you. 
 

https://www.goldmansachs.com/insights/pages/gs-research/2023-commodity-outlook-an-underinvested-supercycle/report.pdf

 

Thanks for the podcast link. 

[Viking]

Well it appears this time it is different. Oil companies have been told for years by the government, environmentalists, institutional investors, banks, insurance companies etc… that they are evil and that they are no longer wanted or needed by society. Climate change is real and oil is the problem. Tell people/companies the same thing over and over… and they just might start to believe you…

 

So in such an environment, what is an oil company to do? Governments hate you. Banks can’t lend to you. Institutional investors don’t want your equity. Insurance companies don’t want to do business with you. Young people don’t want to work for you. 
 

Chevron provided an answer today. You put yourself in run-off. You make as much money as you can and you return it to shareholders as fast as you can. Chevron just announced a historically large $75 billion stock buyback. Chevron’s market cap is $360 billion. The buyback is for +20% of its market cap.
 

What surprises me is the audacity of Chevron’s move. Their management team is smart. They have to understand announcing this is going to cause their many haters to freak out. So what’s up? It looks to me like Chevron’s management team is reading the writing on the wall. They are listening to their haters. And deciding the appropriate thing to do is to return cash to shareholders. Lots of it. And quickly.

 

All oil stocks screamed higher today on the news. Investors are (ever so slowly) beginning to understand a few things:

1.) ‘drill baby drill’ is dead

2.) ‘high prices are the solution for high prices’ is dead

Energy markets have entered a new paradigm - one driven by ESG and climate change and government policy that is driven by fantasy. Chevron announced today that rational, well managed energy companies (and Chevron is one of the best) will return large amounts of cash to shareholders. Expect more announcements from other oil companies like the one we got from Chevron today.

 

Oil companies will no longer be known for gushing oil… rather, they will be known in the coming years for gushing cash and returning it to shareholders.

—————

Capex is increasing but it is not spiking higher (the increases we are seeing is largely driven by inflation). That means oil supply growth will remain muted. That means prices will remain high.

 

Because we know world oil demand will continue to grow every year by 1-2 million barrels per year moving forward. 
 

And that is a delicious set up for a forward looking investor (its dinner time where i live).

—————

- https://finance.yahoo.com/news/chevron-buyback-boosts-stock-rebuke-180906354.html

Edited January 27, 2023 by Viking

[FCharlie]

Chevron's $75 billion buyback is a massive wake up call to anyone who's sitting on the fence undecided about whether these oil companies are serious about returning cash. I expect 10%-20% buyback announcements across much of the sector.

 

Specific to Chevron, however, I did a little looking in 10Qs and Ks after the announcement and found that Chevron's shares outstanding between June 2021 and Sept 2022 were unchanged. This is in spite of them repurchasing 61 million shares during that time!! They do have a note in their 10Q that they don't expect that level of stock option issuance going forward but wow that's some serious stock compensation.

 

 

[Spekulatius]

CVX dilutes shareholders when shares are cheap and buys back shares when they are expensive. This is the way.

[Viking]

59 minutes ago, Spekulatius said:

CVX dilutes shareholders when shares are cheap and buys back shares when they are expensive. This is the way.

I think CVX has been better than most on this front. A quick google search says CVX had 2.001 billion shares in 2011 and the current share count is 1.93 billion. Clearly, their business has increased significantly since 2011. 

Edited January 27, 2023 by Viking

[Stuart D]

Imagine a $75b buyback at PBR

A similar cash flow statement to CVX, but a sub $100b market cap.

 

I know, I know. We should be grateful for the monster dividend. One mustn’t be too greedy, lol.

[FCharlie]

29 minutes ago, Stuart D said:

Imagine a $75b buyback at PBR

A similar cash flow statement to CVX, but a sub $100b market cap.

 

I know, I know. We should be grateful for the monster dividend. One mustn’t be too greedy, lol.

A lot of the Canadian oil producers are planning massive buybacks as a percentage of their market caps. Athabasca Oil is projecting $1.1 billion of free cash flow in the next three years with just a $1.4 billion market cap. They have more cash than debt on the balance sheet, and plan to allocate 75% of their free cash flow to buybacks. So, doing the math, they could buy over half their shares in the next few years.

[Stuart D]

That sounds good too!

[Warner]

CVX has the Tengiz FGP coming online in 2024/2025, so they are expecting a large uptick in cash flow, and along with high NG prices they will do well.

 

I believe you will see Canadian companies are buying back at a great rates. Ie. IMO bought back 21% of their stock in the past 18 months. That is far and away better then CVX will every do, and there is more to come this year!

[dealraker]

10 hours ago, Viking said:

Well it appears this time it is different. Oil companies have been told for years by the government, environmentalists, institutional investors, banks, insurance companies etc… that they are evil and that they are no longer wanted or needed by society. Climate change is real and oil is the problem. Tell people/companies the same thing over and over… and they just might start to believe you…

 

So in such an environment, what is an oil company to do? Governments hate you. Banks can’t lend to you. Institutional investors don’t want your equity. Insurance companies don’t want to do business with you. Young people don’t want to work for you. 
 

Chevron provided an answer today. You put yourself in run-off. You make as much money as you can and you return it to shareholders as fast as you can. Chevron just announced a historically large $75 billion stock buyback. Chevron’s market cap is $360 billion. The buyback is for +20% of its market cap.
 

What surprises me is the audacity of Chevron’s move. Their management team is smart. They have to understand announcing this is going to cause their many haters to freak out. So what’s up? It looks to me like Chevron’s management team is reading the writing on the wall. They are listening to their haters. And deciding the appropriate thing to do is to return cash to shareholders. Lots of it. And quickly.

 

All oil stocks screamed higher today on the news. Investors are (ever so slowly) beginning to understand a few things:

1.) ‘drill baby drill’ is dead

2.) ‘high prices are the solution for high prices’ is dead

Energy markets have entered a new paradigm - one driven by ESG and climate change and government policy that is driven by fantasy. Chevron announced today that rational, well managed energy companies (and Chevron is one of the best) will return large amounts of cash to shareholders. Expect more announcements from other oil companies like the one we got from Chevron today.

 

Oil companies will no longer be known for gushing oil… rather, they will be known in the coming years for gushing cash and returning it to shareholders.

—————

Capex is increasing but it is not spiking higher (the increases we are seeing is largely driven by inflation). That means oil supply growth will remain muted. That means prices will remain high.

 

Because we know world oil demand will continue to grow every year by 1-2 million barrels per year moving forward. 
 

And that is a delicious set up for a forward looking investor (its dinner time where i live).

—————

- https://finance.yahoo.com/news/chevron-buyback-boosts-stock-rebuke-180906354.html

A tad more than three years ago I made energy 5% of my stuff and it is more now of course.  But I posted about it on a former Berkshire forum, that it seemed to me that Berkshire was heading that direction.  A few posts, pleasant debate, and next thing I new my posts were removed and I was no longer on the forum.  Yep, kicked to the curb for energy posts.

 

What was allowed on that forum?  That Buffett should be buying tech stocks of course and how out of it he was for not doing so.  I was right back at the 1999 Berkshire annual meeting where endless "Why aren't you in Cisco?" questions...one year out from  the 1998 annual meeting when all we got was questions of "Why aren't you in drug stocks?"

 

Energy to me seems reasonably priced today still.  Lots of earnings that don't appear to be headed for inceneration.

 

 

[Spekulatius]

8 hours ago, Viking said:

I think CVX has been better than most on this front. A quick google search says CVX had 2.001 billion shares in 2011 and the current share count is 1.93 billion. Clearly, their business has increased significantly since 2011. 

I do agree that CVX has done better than most on capital allocation and that’s why Buffett bought the stock, imo.

However, buying back <5% of the shares over more than a decade isn’t exactly a cannibal. If you want to look at cannibals look at something like COF which reduced shares from 510M shares in 2016 to 383M shares now. That’s a 25% reduction in shares.

 

I do have a cannibal screen looking for companies that reduce their share count at a rapid pace and there are no commodity companies in it.

Edited January 27, 2023 by Spekulatius

[SharperDingaan]

12 hours ago, Viking said:

What surprises me is the audacity of Chevron’s move. Their management team is smart. They have to understand announcing this is going to cause their many haters to freak out. So what’s up? It looks to me like Chevron’s management team is reading the writing on the wall. They are listening to their haters. And deciding the appropriate thing to do is to return cash to shareholders. Lots of it. And quickly.

 

 

 

Lot more to it than this ....

 

A o/g company has incentive to run its inventory down to roughly 7 years at current extraction. So long as EV displaces o/g as expected, annual extraction will progressively decline ... and the remaining inventory will seem to rise - and all with minimal/no ongoing capex - hail the new hero's!

 

But if there is ever a temporary sustained spike in extraction ... the remaining years of inventory drop like a brick. To get inventory back up, the next least expensive mothballed field is re-activated; a very expensive solution (if it can even be done), that requires an additional spike in energy prices to fund it. Lots of blame, in a panic environment, raising the probability of nationalization. Nationalization that the inventory stub can be sold into at an inflated price 

 

Very smart, but it isn't going to end well.

 

SD

 

[FCharlie]

1 hour ago, Spekulatius said:

I do have a cannibal screen looking for companies that reduce their share count at a rapid pace and there are no commodity companies in it.

I'm curious who the top 5 cannibals are? I would guess AutoZone would be up there somewhere. Maybe Apple?

[gfp]

29 minutes ago, FCharlie said:

I'm curious who the top 5 cannibals are? I would guess AutoZone would be up there somewhere. Maybe Apple?

 

Apple would be high (probably absolute highest) in terms of dollars spent repurchasing shares, but not in percentage reduction in outstanding shares.  AZO has been at it for a long time at high annual percentages. DaVita for a shorter period of time but high annual percentages.  You sort of have to define your terms, percentage reduction in shares outstanding over 10 years?  5 years? etc..  Curious what Spek's list spits out and what the parameters of the screen are.

 

This site is free and fun to play around with.  They will chart shares outstanding over time for a company if they have the data.  The data isn't Bloomberg quality (Q4 figures are usually off since the 10K data is presented a bit different from the 10Qs, but it gets the gist with a slight delay).  You can try other tickers and select "Shares Outstanding."

https://www.macrotrends.net/stocks/charts/AZO/autozone/shares-outstanding

 

Ebay, HPQ, etc..  There are some companies that have ramped up the percentages recently (ALLY comes to mind) - but jury is definitely out on if they can continue at this pace sustainably.  

Edited January 27, 2023 by gfp

[thepupil]

11 hours ago, Spekulatius said:

CVX dilutes shareholders when shares are cheap and buys back shares when they are expensive. This is the way.

 

I don't know if I agree with this (well i agree with it, but don't really see any other way/don't fault mgt for it). The bigs (CVX and XOM) do tend to ramp up buybacks when times are good / stocks are high, but that's really the only time they can. Simply too capital intensive of a business to invest heavily in megaprojects AND buy back loads of stock and pay a consistent and substantial divvy, all concurrently.

 

It puts it on the shareholder to choose when to monetize the buyback, which is when times are good. 

 

It's not like they're hoarding. They've paid out 130%+ of FCF over the last decade. they just smooth the capital return w/ the divvy and then buy back more when the money gushes (at least from the cheap seats)

 

2012-2022

$305B of OCF

$222B of Capex

$82B of Free cash flow

 

$94B of divvies

$18B of buybaks 

$112B of capital return 

 

136% of FCF returned to shareholders

 

Net debt went from about -$10B to +$10B. It doesn' all match up perfectly, but kind of ties.

 

I mean they could be more countercyclical w/ buybacks if they got rid of the dividend, but there's decades of shareholder culture/expectation to fight with that path / would probably derate the stock/increase cost of capital.

 

 

https://twitter.com/thepupil11/status/1601700941887328256?s=20&t=R5-yUabl16638PZJpW1iWw

Edited January 27, 2023 by thepupil

[Gregmal]

36 minutes ago, FCharlie said:

I'm curious who the top 5 cannibals are? I would guess AutoZone would be up there somewhere. Maybe Apple?

Off the top of my head I dont know of many that can rival the trio of AZO, DDS, and NVR. 

[gfp]

3 minutes ago, Gregmal said:

Off the top of my head I dont know of many that can rival the trio of AZO, DDS, and NVR. 

 

Oh yeah I forgot Dillard's.  Unfortunately you will also usually see bad outcomes on this list like BBBY and GME.  Jack in the Box shows up over 10 year periods but recently stopped.  Maybe they will start again with the large re-franchising effort.

[formthirteen]

6 minutes ago, Gregmal said:

Off the top of my head I dont know of many that can rival the trio of AZO, DDS, and NVR. 

 

DPZ is eating itself. DVA, ELF.TO, lots of cannibals out there.

[Spekulatius]

1 hour ago, FCharlie said:

I'm curious who the top 5 cannibals are? I would guess AutoZone would be up there somewhere. Maybe Apple?

SYF, ORCL, HPE, DDS, CASH are a few that pop up in my screen.

 

AZO doesn't make the cut because they are valued too highly so the speed of their buyback the last couple of years is too low.

 

PFSI is another interesting one that has recently started to buy back a boatload of shares.

[Viking]

The price of oil is driven by demand and supply factors. On the supply side, it appears US SPR releases have effectively ended. That is a significant amount of oil supply that will need to come from somewhere else moving forward. 
 

And of course, if the US hopes to re-fill the SPR (the goal eventually), that will become a significant new source of demand for oil.

 

Good thing we are not getting any large increases to demand in the coming months (something like China reopening). Oh, wait…

 

Bottom line, a tight oil market is getting tighter.
 

Edited January 30, 2023 by Viking