Energy Sector

[UK]

https://www.bloomberg.com/news/articles/2023-01-30/russia-s-war-in-ukraine-is-accelerating-the-shift-away-from-oil-and-gas-bp-says?srnd=premium-europe

[gfp]

Who wants some $2.5 US natural gas?  Surprised this hasn't been discussed on the board

[CorpRaider]

BSM or DMLP?

[Viking]

The energy story continues to improve. 
1.) china re-opening: likely to add 1 to 1.5 million barrels per day to demand

2.) US pretty much ending SPR releases: removing 800,000 barrels per day from supply 

3.) And as oil companies report Q4 earnings, we are learning we will see limited production growth from US shale. If true, that is a big deal.
4.) Russia remains a wild card… with the risk skewed 90% to the down side (meaning they will supply less oil moving forward). 
 

If US shale does not ramp production in 2023 (more than forecast) then global oil supply is going to come up short. While demand keeps increasing. The question is not IF the oil price is going higher. The question is HOW HIGH will the oil price go? (Patience will be required… it will could take until Q3 for the supply - demand imbalance to really start to bite.)

—————

Occidental’s CEO Says Stock Buybacks Take Priority Over Oil Growth
- https://finance.yahoo.com/news/occidental-ceo-says-stock-buybacks-184029344.html

 

Occidental Petroleum Corp. may redeem Berkshire Hathaway Inc.’s preferred stock this year as the oil giant prioritizes share buybacks over production growth, said Chief Executive Officer Vicki Hollub.

 

”There won’t be significant growth from us because there’s still a lot more value to be gained for us by continuing to focus on delivering value to shareholders through share repurchases,” Hollub said during an interview with Bloomberg TV at the Smead Investor Oasis conference in Scottsdale, Arizona. “A big focus for us in 2023 is repurchasing our common and potentially the preferred.”

 

Warren Buffett’s Berkshire bought $10 billion of preferred stock in Occidental during the driller’s 2019 takeover of Anadarko Petroleum. Berkshire is also the biggest owner of Occidental common stock with a 21% stake, according to data compiled by Bloomberg.

 

Occidental climbed 0.5% to $61.53 a share at 1:31 p.m. in New York even as the S&P 500 Energy Index dropped 0.6%.

 

The decision by Occidental, one of the biggest shale oil producers, to focus on buybacks rather than production growth is another sign that US output is unlikely to accelerate much this year, despite companies being flush with cash. In recent days, Exxon Mobil Corp. and Chevron Corp. have both said shale growth will slow this year. Most publicly traded producers, who have indicated growth will likely stand below 5% annually, are due to report earnings and announce their capital spending plans later this month.

 

 

Edited February 7, 2023 by Viking

[SharperDingaan]

Shush 

 

SD

[Viking]

Below is an interesting presentation regarding the energy transition. I am starting to wonder if ‘energy transition’ is not similar to the US housing bubble around 2005 or 2006. In terms of how completely wrong/unrealistic the dominant narrative is/was. And as reality sets in both will have/had enormous impacts on the global economy.

The housing bubble bursting almost took down the global economy in 2008. The ‘energy transition’ is going to result in prices for metals/energy to spike to unheard of levels and that will have an equally enormous impact on the global economy.
 

The energy transition (as its currently constructed) looks to me like a slow motion train wreck. Using basic logic, it is pretty much an impossibility when you look out just 2 or 3 years. What should an investor do?

 

1.) buy oil stocks. Oil is going to be needed in INCREASING quantities for decades. But we are massively underinvesting in it. The ‘energy transition’ is going to happen much slower than people currently think (due to shortages of raw materials). 

2.) buy metal stocks. Prices are going higher than people can imagine. Bringing new metal supply on stream is even more difficult than oil (takes 5-7 years). The ‘energy transition’ is going to be much, much more expensive that people currently think. 
3.) elevated inflation will be the new norm (with lots of volatility). Unheard of prices for metals and oil will drive global inflation.

4.) geopolitical strife will increase. China has enormous leverage, especially in processing of metals. At some point they will play that card.
 

Bottom line, the world over the next 10 years will be very different than the world of the past 20 or 30 years. Not worse. But very different. 
—————

Humanity is going to continue to invent. Machines need to eat too…

—————

If anyone comes across a video/presentation that provides a counter argument (to the thesis Mark lays out in his video below) please attach it. I remain inquisitive and open minded  

 

 

Edited February 8, 2023 by Viking

[Stuart D]

The oil bull thesis is attractive. Buffett made a similar thesis in 2008 at the BRK AGM. After his statements oil declined for a year, during the GFC but then bounced and stayed north of $100/bbl for almost 5-years straight.

 

He was talking in May 2008, with Oil north of $150/bbl.

 

2008 Morning session

 

WARREN BUFFETT:

"...we’re producing in the world, 86 or 87 million barrels a day of oil, which is more than we’ve ever produced before. We are closer — by at least my calculations — we are very much closer to producing almost as much as our productive ability is in the world, with fields in their current stage of development, than we’ve ever been.

 

I mean, our surplus capacity, I think, is less than, well, any time I can remember. And it’s quite a bit less than most periods. So we don’t have the ability to crank up, in any short period of time, the 86 or 7 to a hundred million barrels a day.

 

But whatever that peak will be, and whether we hit it five years from now or 50 years from now, and then it will just gradually taper down, and the world will adjust to it, and hopefully we’ll be thinking about it, you know, well before it happens, and various adjustments will be made in the world that will cause the demand to somewhat taper down as the available supply. But we will be producing oil far beyond this century. It’s just — the question is whether we’re producing 50 million barrels a day, or 75 million, or 25 million barrels a day. I don’t know the answer to that.

 

WARREN BUFFETT: [Charlie] What’s your over-under figure for 25 years from now, world production oil per day?

 

CHARLIE MUNGER: Down.

 

WARREN BUFFETT: Yeah. (Laughter).That’s not an insignificant prediction. I mean, it — believe me. If oil production is down 25 years from now [2033], it will be a different world. I mean, you — China’s going to sell over 10 million cars this year. I mean, the demand is going to keep [going up]— even at these prices [$150/bbl] — it’s hard for me to imagine demand falling off a lot. So if production falls off, you’ll have some interesting consequences."

 

 

However.....

 

He expressed this view by buying ConocoPhillips, which didn't work out so well (article below). This is a tough game!

 

https://www.cnbc.com/2009/05/08/berkshire-hathaway-reports-15b-net-loss-for-q1-as-it-sells-conocophillips-shares.html

Edited February 9, 2023 by Stuart D

[Viking]

On 2/7/2023 at 5:24 AM, SharperDingaan said:

Shush 

 

SD

@SharperDingaan i do not follow the drillers at all. Precision Drilling (PD.TO) got killed today (expensing stock based compensation can be a bitch). Do you (or other posters) have any thoughts on current valuation? Oil/gas services companies look very well positioned to grow profitability in coming years.

Edited February 9, 2023 by Viking

[SharperDingaan]

As we routinely ‘round-trip’ a portion of our holding across reporting dates, the fall has been beneficial. As we also stay JUST within the WCSB, our view may also be a little biased.

 

PD has a dominant position but is not particularly well run; many others are better. Revenues are also about as high as they are going to go, as the industry wide 30% rise in average day rates is causing cutbacks. Lower WTI, and high differentials, are forcing many to cut back budgets and MAINTAIN production – NOT grow it. PD revenue vs EBITDA growth also leaves a lot to be desired.

 

WCSB o/g servicing is bought in November and sold in May; the 6-month period typically capturing 70%+ of a year’s total activity. Buying now to flip in 3 months, is to really show up too late.

 

The story changes late 2023 as/when the TMP expansion completes and begins line-fill. Permanently reduce differentials by USD 10+/bbl and capital budgets will materially increase; what doesn’t go into M&A goes into drilling instead. Drilling upticks, but many WCSB producers should uptick more.

 

The servicing companies may be good for a fun spin around the dancefloor, but don’t fall in love with them. Disappointment is inevitable.

 

SD 

 

[Libs]

On 2/8/2023 at 2:27 PM, Viking said:

Below is an interesting presentation regarding the energy transition. I am starting to wonder if ‘energy transition’ is not similar to the US housing bubble around 2005 or 2006. In terms of how completely wrong/unrealistic the dominant narrative is/was. And as reality sets in both will have/had enormous impacts on the global economy.

The housing bubble bursting almost took down the global economy in 2008. The ‘energy transition’ is going to result in prices for metals/energy to spike to unheard of levels and that will have an equally enormous impact on the global economy.
 

The energy transition (as its currently constructed) looks to me like a slow motion train wreck. Using basic logic, it is pretty much an impossibility when you look out just 2 or 3 years. What should an investor do?

 

1.) buy oil stocks. Oil is going to be needed in INCREASING quantities for decades. But we are massively underinvesting in it. The ‘energy transition’ is going to happen much slower than people currently think (due to shortages of raw materials). 

2.) buy metal stocks. Prices are going higher than people can imagine. Bringing new metal supply on stream is even more difficult than oil (takes 5-7 years). The ‘energy transition’ is going to be much, much more expensive that people currently think. 
3.) elevated inflation will be the new norm (with lots of volatility). Unheard of prices for metals and oil will drive global inflation.

4.) geopolitical strife will increase. China has enormous leverage, especially in processing of metals. At some point they will play that card.
 

Bottom line, the world over the next 10 years will be very different than the world of the past 20 or 30 years. Not worse. But very different. 
—————

Humanity is going to continue to invent. Machines need to eat too…

—————

If anyone comes across a video/presentation that provides a counter argument (to the thesis Mark lays out in his video below) please attach it. I remain inquisitive and open minded  

 

 

Thanks for posting this, Viking. Do you have ideas on how to play the metals side of this thesis?

[Paarslaars]

Battery recycling companies is one option.

[Stuart D]

Going long Glencore would be another. 

[Xerxes]

I posted this on the War thread. Perhaps it belongs here. 
 

———

Jeff Curie talks also about the Russian sea-bound crude embargo that went up in Dec as well as the one refined products that went up in Feb. 

 

Unrelated to Russia, Jeff has been talking the same line for the past year that energy prices today have the same setup they had in 2006-07 during the Fed hiking cycle (that pushed USD all time high) which in turn kept oil prices in check (notwithstanding its bullish setup) but when the rate plateau and ultimately dropped in 2007-08 or so it uncorked one the biggest rally in crude. 
 

The difference of course is that 2008 we ended up with a banking crisis. If 2023 will indeed have a soft landing (as oppose to hard) the rally may just sustain.

 

[Xerxes]

On 2/8/2023 at 5:27 PM, Viking said:

Below is an interesting presentation regarding the energy transition. I am starting to wonder if ‘energy transition’ is not similar to the US housing bubble around 2005 or 2006. In terms of how completely wrong/unrealistic the dominant narrative is/was. And as reality sets in both will have/had enormous impacts on the global economy.

The housing bubble bursting almost took down the global economy in 2008. The ‘energy transition’ is going to result in prices for metals/energy to spike to unheard of levels and that will have an equally enormous impact on the global economy.
 

The energy transition (as its currently constructed) looks to me like a slow motion train wreck. Using basic logic, it is pretty much an impossibility when you look out just 2 or 3 years. What should an investor do?

 

1.) buy oil stocks. Oil is going to be needed in INCREASING quantities for decades. But we are massively underinvesting in it. The ‘energy transition’ is going to happen much slower than people currently think (due to shortages of raw materials). 

2.) buy metal stocks. Prices are going higher than people can imagine. Bringing new metal supply on stream is even more difficult than oil (takes 5-7 years). The ‘energy transition’ is going to be much, much more expensive that people currently think. 
3.) elevated inflation will be the new norm (with lots of volatility). Unheard of prices for metals and oil will drive global inflation.

4.) geopolitical strife will increase. China has enormous leverage, especially in processing of metals. At some point they will play that card.
 

Bottom line, the world over the next 10 years will be very different than the world of the past 20 or 30 years. Not worse. But very different. 
—————

Humanity is going to continue to invent. Machines need to eat too…

—————

If anyone comes across a video/presentation that provides a counter argument (to the thesis Mark lays out in his video below) please attach it. I remain inquisitive and open minded  

 

 

you could have made the same arguments in 2006-07. 
 

Don’t look and ask for the actual counter arguments as you won’t find them. 
 

what could de-rail the thesis is precisely something that you won’t see coming in 2023 and you won’t know what it will be. knowing that you don’t know, the only thing you can do is to stay humble. 
 

in 2018-19, there was nothing stopping the aerospace industry. Absolutely nothing. Firing on all cylinders with projection being fuelled by massive expansion

of middle class in Asia. And then …

 

 

Edited February 11, 2023 by Xerxes

[Ulti]

https://podcasts.apple.com/ca/podcast/113-bob-geddes-ensign-energy-services-a-glimpse/id1493491566?i=1000598951629

Excellent interview with head of energy company that is a current Fairfax holding I believe

[SharperDingaan]

You might want to keep in mind that energy is quite a bit different ....

 

Anywhere in the world, any kind of economic activity requires energy to make it happen. The only question is the total quantity required, the energy 'mix' supplying it, and where those 'mix' components come from. 'Asia' is the 2nd largest economy in the world, and the energy mix has been rapidly changing to more renewables and nukes, versus coal and oil. Gas/LNG being the transition fuel to cover interim energy shortfalls. 

 

No different to anywhere else Asia would prefer to use oil over coal, but so long as coal is cheaper and there is no charge for pollution, use of coal will persist. However for the foreseeable future, discount Russian oil would be expected to lower Asian energy costs, and what Asia will in turn pay for coal net of transport costs.

 

Asia is coming out of Covid, activity is rising, and so is energy demand - but net of renewables, the flood of Russian crude, continuation of coal, and Asia's own o/g supplies; incremental Asian demand for western o/g may well be more subdued that many hope for. OPEC+ is cutting supply for a reason.

 

The mystery is the Ukraine. Shut down Russian loading/transportation facilities in any significant way, and China is aggressively forced into the paper market. Volatility.

 

SD  

 

 

 

 

[Stuart D]

Russia to cut oil output by 500,000 bpd in March
 

https://www.reuters.com/business/energy/russia-cut-oil-output-by-500000-bpd-march-2023-02-10/

[Gamecock-YT]

11 hours ago, Stuart D said:

Russia to cut oil output by 500,000 bpd in March
 

https://www.reuters.com/business/energy/russia-cut-oil-output-by-500000-bpd-march-2023-02-10/

 

(Reuters) - The Biden administration said on Monday it is selling 26 million barrels of crude oil from the Strategic Petroleum Reserve, a release that had been mandated by Congress in previous years.

 

https://www.reuters.com/article/usa-oil-reserve/update-2-u-s-to-sell-26-mln-bbls-of-oil-reserves-as-mandated-by-congress-idINL1N34T23T

 

purely coincidence, i'm sure.....

 

Might make a nice buying opportunity if WTI gets low enough.

 

Also, energy related Ineos  announced they having funding secure to build a new cracker 3.5 billion euros. Guess those crack spreads were just too hard to resist. 

 

https://www.ineos.com/news/ineos-group/ineos-secures-3.5-billion-financing-for-project-one---the-greenest-cracker-in-europe/

Edited February 14, 2023 by Gamecock-YT

[treasurehunt]

On 2/8/2023 at 2:27 PM, Viking said:

Below is an interesting presentation regarding the energy transition. I am starting to wonder if ‘energy transition’ is not similar to the US housing bubble around 2005 or 2006. In terms of how completely wrong/unrealistic the dominant narrative is/was. And as reality sets in both will have/had enormous impacts on the global economy.

The housing bubble bursting almost took down the global economy in 2008. The ‘energy transition’ is going to result in prices for metals/energy to spike to unheard of levels and that will have an equally enormous impact on the global economy.
 

The energy transition (as its currently constructed) looks to me like a slow motion train wreck. Using basic logic, it is pretty much an impossibility when you look out just 2 or 3 years. What should an investor do?

 

1.) buy oil stocks. Oil is going to be needed in INCREASING quantities for decades. But we are massively underinvesting in it. The ‘energy transition’ is going to happen much slower than people currently think (due to shortages of raw materials). 

2.) buy metal stocks. Prices are going higher than people can imagine. Bringing new metal supply on stream is even more difficult than oil (takes 5-7 years). The ‘energy transition’ is going to be much, much more expensive that people currently think. 
3.) elevated inflation will be the new norm (with lots of volatility). Unheard of prices for metals and oil will drive global inflation.

4.) geopolitical strife will increase. China has enormous leverage, especially in processing of metals. At some point they will play that card.
 

Bottom line, the world over the next 10 years will be very different than the world of the past 20 or 30 years. Not worse. But very different. 
—————

Humanity is going to continue to invent. Machines need to eat too…

—————

If anyone comes across a video/presentation that provides a counter argument (to the thesis Mark lays out in his video below) please attach it. I remain inquisitive and open minded  

 

 

 

I agree with you that the energy transition will be a slow affair and that it makes sense to be bullish on oil. I am not so sure about metal prices going higher than people can imagine; maybe lithium, but I have a hard time seeing any other metal being in extreme undersupply. I think Mark Mills overstates the case for minerals.

 

Here's the Economist on Cobalt (might be behind paywall): https://www.economist.com/finance-and-economics/2023/02/16/cobalt-a-crucial-battery-material-is-suddenly-superabundant

 

Even the case for extreme shortages in lithium depends on sodium ion batteries taking a long time to ramp up, I feel. CATL is planning to start mass production of sodium ion this year, so this is not a slam dunk.

https://www.nextbigfuture.com/2022/10/catl-will-mass-produce-sodium-ion-batteries-in-2023.html

 

[LearningMachine]

4 hours ago, treasurehunt said:

 

I agree with you that the energy transition will be a slow affair and that it makes sense to be bullish on oil.  ... I think Mark Mills overstates the case for minerals.

 

I agree. In the video above, I found it odd when he made the logical leap from some specific metals needing a lot more supply to saying the total amount of all metals that will be needed per year will be 10X in mass compared to oil, etc. needed today.

 

Anyone else surprised by how he made such a big logical leap?  Do folks think that was just a mistake, or he actually has data backing that up that he just didn't share in the video? 

 

I'm thinking it was a probably a mistake, but how could a person so involved in this make such a big mistake. 

 

 

Edited February 18, 2023 by LearningMachine

[Xerxes]

Munger had a few things to say on Chevron and Occidental on Daily Journal AGM. 
 

I recommend folks listening to it. They are into the Permian for the long haul 

[LearningMachine]

5 minutes ago, Xerxes said:

Munger had a few things to say on Chevron and Occidental on Daily Journal AGM. 
 

I recommend folks listening to it. They are into the Permian for the long haul 

 

Thanks @Xerxes for pointing that too.  I've always thought the same that Permian was for the long haul (protection against inflation currently and any future inflation due to calamities).   I wonder though why Permian over oil sands when Permian depletes so much faster than oil sands. 

 

 

 

Quote

 

Charles Munger

Well, that is a very good question. And I think having a big position in the Permian Basin through those 2 companies, it's likely to be a pretty good long-term hold. So I like that aspect of that position.

And Ben Graham used to say, "If it's a good investment, it may be a good speculation." And I think that's generally true. But I don't do those short-term speculations, at least not very often. And -- but I like the big position that Berkshire has in the Permian through those 2.

I kind of admire both places a lot. Both Occidental and Chevron are very admirable places. And by the way, Oxy didn't start like that. If you go back 30, 40 years, Oxy was owned by a crook. And now it's evolved in a wonderful place, but it started as a sleazebag.

 

 

Edited February 18, 2023 by LearningMachine

[Spekulatius]

That’s sleazebag was Armand Hammer.

 

I don’t think having a position in the Permian protects you from inflation though- again because depletion is relatively fast, which means you are exposed to rising input costs.

 

The Permian is just the best reservoir in the US, close to existing infrastructure and in one of the most business friendly states in the US (at least the part in Texas).

 

Oil sands are better in that regard because once build, they require only maintenance capital for about 20 years, but even those are subject to rising costs to some extend.

[Xerxes]

10 hours ago, LearningMachine said:

 

Thanks @Xerxes for pointing that too.  I've always thought the same that Permian was for the long haul (protection against inflation currently and any future inflation due to calamities).   I wonder though why Permian over oil sands when Permian depletes so much faster than oil sands. 

 

 

 

 

you are welcome. 
 

for clarity the answer came in the context question being asked previous Berkshire energy investments (like Exxon) which were rather “trade”

[SharperDingaan]

Oilsands production is almost all oil and no gas, has a higher crack spread, and a ESG footprint that is a work in progress. It's the 3rd largest oilfield in the world, now primarily just maintenance capex and consolidation, and over time both the differential and 'dirty-oil' discounts will fall materially as egress and C02 sequester improve. We aren't getting rid of the virgin chemicals produced any time soon, and it's hard to find a better 20-30 year asset.

 

The Permian are primarily GAS fields that produce light oil in their early stages of production. The light oil depletes quickly and pays back the infrastructure costs, thereafter the paid-off pipe is repurposed to gas collection and distribution for the next 20-30 years. One of the biggest (and cheapest to produce) gas fields in the world, the transition fuel of the next 20-30 years, but a fuel with material quantities of substitute (methyl hydrate) around the globe.

 

Different business models for different fuels.

 

SD