Things I Learned This Week Around Our Nation's Capital

Post Easter.?The family met in Charlotte, North Carolina for Easter.?Daughter Tory goes to Wake Forest and Henry is at the Hill School in Pottstown, PA., so this was in the neighborhood.?The Wicklund Event was actually in Boone, North Carolina, named after Daniel Boone and home to the Appalachian State University, home to the mascot Yosefs.?Lots of hiking and catching up.?Henry has decided to spend three weeks touring Vietnam for his senior trip.?Came out of nowhere.?Sunday, I went with Tory back to Wake Forest, took four of her friends to dinner (the famous Parent is Buying Dinner event).?The started the drive up to DC for the NOIA meeting.?From Wake Forest to Richmond, Virginia a 4 1/2?hour drive along nothing but 2-lane roads.?Beautiful drive, I was never out of sight of a mailbox so populated, I went 20 minutes, and 3 stop-sign turns without seeing another car.?Amazing.?Richmond to DC was all freeway.?Ouch.?Weather in DC is perfect spring with dogwoods blooming everywhere.?

?Yosef

Stand Out.?One speaker at the NOIA meeting was zero interesting and education al.?Kristen Solti Anderson, Founding Partner, Echelon Insights.?Data pollster.?Incredibly smart woman and an excellent speaker.?Highlights - Media has become based on “Clickable”. All the algorithms supercharge that message, making it go viral.?The goal seems to be back to eyeballs. Trying to wring out the most emotional reaction is the goal of media today.?Republicans are likely to take the house.?Senate is a bigger question.?Different focus.?Republicans are trying to hold on even if a democratic seat goes red.?Senate is a coin toss with lots of swing potential.?“Effective polarization”.?Each side thinks the other side is out to get them, not just political disagreement.?Current polling shows many people think the polarization is the worst it’s ever been, but historians don’t really agree.?Energy independent and energy security will be big topics but longer term, energy diversification will become more important, and how can we become less dependent on any one type of energy source.

?Insights.?Jim Messina was named “The Obama White House’s Fixer” by the media and is perhaps the world’s most successful political and corporate advisor.?He too spoke at NOIA.?First, you would never think that he worked for Obama.?I listened to him and really thought he was conservative.?But that defines how much freedom he has to voice an opinion or outlook.?One very interesting point was that the US is trying to look strong in the Russia/Ukraine issue primarily to show China what would happen to them if they invaded Taiwan.??The Russia economy is not really consequential to global finance, but this shows China what they should expect and since then are not energy independent, they have to pay attention.?China is the real threat.?In fact, he said there were only two issues today that have bipartisan support – going after Big Tech and going after China.?I asked who would run in the next presidential election.?He said Biden and Trump, and that Trump would win, but Biden is the only one he can beat.?And if you don’t think he will run, you don’t understand how hard it is to give up power, he said.?

?Q1 Results.?Earnings for OFS have started last week.?We no longer model the companies (applause in the background) but we pay attention.???

• ?BKR - EBITDA miss, orders beat. BKR was down -3.8% yesterday, underperforming the OIH by 275bp following a 3% EBITDA miss to consensus and slightly lower guidance owing to Russia, supply chain and inflation. Total orders, however, were 11% above consensus as all four reporting segments were better than expected.?GE should be out of the stock by July and the "plumbing" to split the company should be in place by early-2023. In 1Q22, Russia was 4% of total revenue.?For 2022, BKR expects North America activity increases of more than 40%, up from 25-30% previously, and international activity growth in the low-to-mid double digits, seemingly down slightly from the low-to-mid teens previously.
• ?HAL – Beat estimates and raised Ebitda guidance by about 5%.?The WSJ had a headline that summed it up well.?“Halliburton Holds All the Pricing Power- “With shortages driving up the price of oil and oil-field equipment, companies like Halliburton are in a sweet spot. But that might already be baked into the stock price.?While estimates and price targets moved up, the stock is trading at ~14x LTM Ebitda and comes down to 9.6x for 2023, or an Ebitda run-rate 2x that of 2021.
• ?SLB - “The confluence of elevated commodity prices, demand-led activity growth, and energy security are resulting in one of the strongest outlooks for the energy services industry in recent times,” Schlumberger CEO Olivier Le Peuch said.?Schlumberger reported a one penny beat on Q1 earnings, announced a 40% increase in the dividend and the stock went up over 4%.?“(The) industry likely will experience growth of a "higher magnitude" than originally anticipated”, Le Peuch said.
• ?LBRT beat and is changing the name of the company to Liberty Energy

?Relentless.?I remember when the IRS said they wanted to get reporting on any transaction over some dollar level.?They settled on $600.?I shrugged it off since I don’t have any or many transactions over $600 and especially don’t care if it gets reported.?Then I read that the IRS is introducing new reporting laws that will affect people who receive payments via mobile apps like PayPal, Venmo, and Zelle.?Aha!?We are going after the small “moms and daughter” Spotify sites.?They couldn’t track cash, the underground economy, but now with digital money movements, “cash” finally gets its tax due!??“What they want to do is what they couldn’t do with individuals, that’s to try to access all of our transaction data, $600 or greater, so they’re going to force it onto small companies…Again, more invasion of our privacy…”– Senator Bill Hagerty (R-TN)

?Debt.?The selloff in higher-rated U.S. corporate debt has been unprecedented. Yields on the debt have surpassed 4%, rising to the highest levels since March 2020 & getting close to post-2011 highs.?The trajectory is alarming.?

Masks.?The Justice Department yesterday appealed the federal ruling that struck down the mask mandate on airlines and other mass transportation, following a recommendation by the CDC. “An order requiring masking in the indoor transportation corridor remains necessary for the public health," the CDC said in a statement Wednesday -- despite airlines and public transit systems already deciding to make masks optional following the ruling earlier this week. If the conservative-leaning appeals court upholds the order, the case could then be appealed to the Supreme Court, where conservative justices have been ruling against Covid-19 measures since the start of the pandemic.

?Market Summary.?US equities were down last week, with the S&P ending near the lows on Friday. The S&P and Nasdaq had their third straight weekly decline. Growth was a distinct underperformer to value, continuing the recent trend. The dollar had another strong week with the DXY gaining 0.9% and remaining on track for its best month since November 2016. The dollar was particularly strong vs the yen and sterling. Gold was weaker, declining by 2.1%. WTI crude was down 4.6%, with continued worries about Covid-depressed China demand playing into the narrative.

?Moving parts.?China heading for biggest oil demand shock since the start of the pandemic: Bloomberg reported that Chinese demand has fallen to the lowest levels since the early days of the pandemic, with demand for fuels in April expected to fall 20% y/y, or the equivalent of a 1.2M bpd drop in oil consumption. The decline is about 9% of China's daily oil demand and is driven by the country's Covid Zero strategy that has restricted mobility and industrial output. However, the article noted that Chinese authorities have pledged to keep industrial and supply chains stable by removing obstacles in the logistics sector, while road fuel demand is expected to recover in May with some high-frequency data already showing improvements.?Just a little more volatility.

Tunnel Vision??Okay, you don’t have to care about the rest of the world when we have $100 oil and $6 gas, it impacts the financial markets in which we play.?I heard a speaker today say that there only two bipartisan issues - both sides are after tech companies, and we need to contain China.?With that thought as a backdrop, next week, the following companies report Q1 results and give their outlook for their businesses for the rest of the year.?It can be impactful. -Google, Amazon, Apple, Microsoft, Facebook, Visa, Intel, Mastercard, Comcast, Qualcomm, PayPal, Activision, GE, Gilead Sciences, Charter Communications, Merck, Twitter, Boeing, McDonalds, Caterpillar, Coke, UPS, Chipotle, General Motors and Ford.?Lots going on.

?Who Gets It??President Biden is tapping the SPR to the tune of 1mmbopd for six months.?Who gets it??The contracts were awarded to 12 companies. They included 6.85 million barrels to Valero Marketing and Supply Co., 4.05 million barrels to Motiva Enterprises, 3.6 million barrels to Exxon Mobil, 2.75 million barrels to Shell, 2.6 million barrels to Glencore Ltd., 2.4 million barrels to Marathon Petroleum and 2.5 million barrels to Phillips 66.

?Headlines.?

• Every 24 hours, 27,000 trees are cut down for toilet paper.?The average person uses 100 rolls of toilet paper per year.
• Russia tests new ICBM; Putin says it should provide "food for thought" for potential adversaries (Reuters)
• Exxon Sees Carbon Capture Market at $4 Trillion By 2050
• US exports most oil in history last week in effort to replace Russian supplies (10.6mmbbls)
• Halliburton: “The Sand Shortage Is Over, We Sent More NWS Trains To The Permian, & We Are Raising Frac Pricing”
• More Losses of Supply than Demand, that Remains the Better Mantra
• Morgan Stanley Raises Q3 Brent Forecast on Oil Supply Concerns

?Makes No Sense.?First, the government chooses more polluting and less energy efficient ethanol to try and tame oil prices, raising the cost of corn, food, along the way.?But the over-reliance on renewables in the near term has resulted in a spike in both oil and natural gas prices, but many utilities switch, on an economic basis, back to coal.?So. the emissions from the highest coal use in 10 years in the era of “clean energy” is okay.?It reminds me of the ban on using natural gas for heating and cooking in California and other areas.?Rather than you burning natural gas to cook your food, your utility is going to buy the gas, turn it into electricity and then send it by wired distribution to your house so your electric stove can cook food,?And that is efficiency????

?Snippets.

• Wimbledon organizers, announcing yesterday that Russian and Belarusian players will not be allowed to compete at this year's grand slam following Russia's invasion of Ukraine. The ban on Russian players will prevent several high ranked players from competing at the iconic grass court, including world No. 2 and reigning US Open Champion Daniil Medvedev.
• Monitoring Methane to Execute an Effective ESG Strategy.?Successful ESG strategy often depends on how effectively an operator can monitor its methane emissions and put the real-time data to good use.?- Hart

?Lest You Forget.?Massive LNG export terminals and shipments to Europe get all the attention these days, and for good reason. But there’s a lot more going on with U.S. LNG below the radar and on a much smaller scale. Peak-shaving liquefaction plants to help gas-distribution utilities up north keep the lights on during high winter demand periods. Plants that make LNG for a wide variety of industrial, mining and oil-and-gas-production customers, and for LNG-powered trucks and ships — often to help reduce emissions and help meet ESG goals. And there are a number of small liquefaction plants in the U.S. that export LNG to power-generation and industrial customers in the Caribbean and Mexico. - RBN Energy

?Production Grows.?EIA Drilling Productivity Report/US shale oil production.?Total April 8.517M bpd, May 8.649M bpd, +132K bpd

• Anadarko: April 398K bpd, May 401K bpd, +3K bpd
• Appalachia: April 111K bpd, May 114K bpd, +3K bpd
• Bakken: April 1.169M bpd, May 1.186M bpd, +17K bpd
• Eagle Ford: April 1.140M bpd, May 1.166M bpd, +26K bpd
• Haynesville: April 34K bpd, May 34K bpd, unchanged
• Niobrara: April 610K bpd, May 611K bpd, +1K bpd
• Permian: April 5.055M bpd, May 5.137M bpd, +82K bpd

?Paid for What??I did not like the title of the article, ‘Drill, Baby, Drill’ to Make a Permian Basin Comeback, since the implies an emotional rather than a fiscal motivation and remembering the tens and hundreds of billions lost from the last time this was the industry’s saying.?But the underlying reality remains in force and this was reinforced to me this week in several conversations.?It is increasingly noted that the CEO’s of these E&P companies have virtually no personal economic benefit from oil or gas production growth.?Their compensation is now based on FCF, returns on capital and return of capital to shareholders.?How you get compensated greatly impacts how you act and are motivated in your job.?Any job.?I don’t know Steve but I agree with a key point he makes.??“The potential for an additional output of 500,000 barrels of oil per day could represent as much as approximately 4% of total U.S. daily production, hopefully flattening both oil and gasoline prices,” Steve Reese, CEO of Reese Energy Consulting Co., told Hart Energy.?Although the Permian Basin is buzzing with activity to pump more for the oil-thirsty world, Reese believes that the producers will not lose sight of shareholder returns and drilling costs.?“The increased activity and capital spend forming in the Permian now will be much more well thought out this time as producers are more cognizant of shareholder returns and drilling economics,” he said.

?Performance Anxiety.?For the last year, we have been completing Drilling but UnCompleteld wells, not needing a rig but needing a frac spread to complete the well.?According to the EIA, the number of DUCs in the seven key shale basin is down over 40% from the beginning of 2021 with the Permian Basin DUC inventory is down over 70% from 14 months ago.?As a result, recent drilling has not boosted production at the level expected from the rig count.?The DUC inventory in the Permian, which is over 50% of all US activity, is at the lowest level since 2017.?The economic hurdle is greater for newly drilled wells than completing DUCs and while most everything is economic at the current oil price, the relative economics still matter.?

?Weather.?NOAA's 6-10 day forecast shows near- to above-normal temps across much of the southwestern and Southeastern US, and central High Plains. Below-normal temps are seen for the Northwest, much of the Great Plains, Great Lakes and Northeast.?For the 8-14 day outlook, below-normal temps are expected across most of the eastern half of the mainland, excluding the southern FL Peninsula, as well over the Northwest and the Great Plains. Above-normal temps are seen across the Southwest, Central and Southern High Plains.

?ESG and the OFS Sector.?“Services firms face similar pressures on ESG and climate-risk concerns from investors as their upstream partners and customers, but they are slightly differently positioned,” Alex Martinos, Energy Intelligence’s director of energy transition research, told Hart Energy. “We see oilfield service firms as arguably being more exposed to transition pressures than other industry segments. Being acutely exposed to front-loaded, capex-intensive industry spending, OFS firms are likely to feel the squeeze from an evolution in industry priorities well before upstream/downstream segments, which could continue to profitably ‘harvest’ existing assets for decades to come, even if new project spending dries up.”

?Masks Appear Over.?Information, charts, correlations relative to emotional arguments.?Ergo, the chart below. ?

Short Supply.?Petroleum distillates are hydrocarbon solvents produced from crude oil.??Mineral oil, naphtha, heavy fuel oil, waxes, and benzene are examples of petroleum distillates.??

Costly.?U.S. mortgage interest rates reach a 12-year high, demand falters.?The average interest rate on the most popular U.S. home loan climbed to a 12-year high last week and fewer homebuyers sought properties in a sign that the Federal Reserve's aim of cooling the housing market may be beginning to have an impact, data from the Mortgage Bankers Association (MBA) showed on Wednesday.?I have no doubt that everyone knows mortgage rates were up but 12-year highs??And on purpose.?It has effectively chilled the house-buying boom that has been driving home price inflation to unsustainable levels for the past couple of years.?There is really not that much government can do to tamp down inflation in many products, but it can raise interest rates to the point that refinance applications are down over 60% year over year.?

?Moving parts.?China is heading for biggest oil demand shock since the start of the pandemic: Bloomberg reported that Chinese demand has fallen to the lowest levels since the early days of the pandemic, with demand for fuels in April expected to fall 20% y/y, or the equivalent of a 1.2M bpd drop in oil consumption. The decline is about 9% of China's daily oil demand and is driven by the country's Covid Zero strategy that has restricted mobility and industrial output. However, the article noted that Chinese authorities have pledged to keep industrial and supply chains stable by removing obstacles in the logistics sector, while road fuel demand is expected to recover in May with some high-frequency data already showing improvements.

?Retirement.?So far it has been as busy as working but that is somewhat self-inflicted in organizing the family accounts.?I met with my good friend Osmar Abib and stayed with him and his lovely wife Kathy last week.?His last title was something like Chairman of Investment Banking for Global Oil and Power for Credit Suisse.?Smart and great guy.?We are trying to figure out how to work together advising companies on banking issues and decisions.?I am doing some research and strategic advising as well.?If I can help in any way…..

?Jim

?James K. Wicklund

[email protected]

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