A massive shift in rig count sentiment, an acquisition out of left field, and Chinese good deed for the day.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on May 22, 2023. Typically I try to bring up something interesting or pertinent at the start of the podcast to break the ice. That way we aren’t plunging straight into the cold waters of data and news stories right off the bat. I’m trying to think of such a transition right now, and don’t have much, so I will just tell you about the movie I watched last night. It was called Freaky and featured Vince Vaughn as a Michael Myers-esque villain who ends up body swapping with a teenage girl, much like the premise of Freaky Friday. This weird blend of already existing slasher and comedy tropes blended decently well as I felt myself laughing throughout the movie. Vince Vaughn does a decent job portraying the personality of a teenage girl, and the girl did well portraying a Vince Vaughn sized madman now occupying a much smaller girl’s body. The horror elements were kept fresh with frequent & elaborate killings and the movie got a couple of cheap laughs out of me. 4 out of 5 stars and recommended if you are a fan of the Halloween franchise and looking for a slapsticky slasher. But that is the conclusion of the first and hopefully only time I open with a movie review. This is the RARE PETRO podcast, so I think it is time we get into more statistics and news stories regarding the energy space.
Commodity prices are up first. I wish I had better news about WTI, but unfortunately it’s the same story of the $70 floor. Last week it climbed as high as $73 but was pulled back down to $71 by the end of the week. This morning’s open brings us as high as $72, but things still look pretty bleak as we have no major developments around energy at an international level. Brent still has an almost perfect $4 premium but otherwise moves the same exact way. Natural gas is currently at $2.40 where you might expect it, but we hit a little bit of a road bump last week, and by that I mean we saw some price movement that ended up looking like a symmetrical roadbump. Starting from $2.40 the price skyrocketed up to $2.60 – almost $2.70 – before coming right back down to $2.40 early this morning. The whole transition lasted from midday thursday to this morning and might suggest that gas is a bit more valuable than we thought, though not by much. That would be the most realistic best case. Worst case scenario, EIA data and a diminishing world supply scared some people into making trades meaning that we are back to $2.40 for the foreseeable future. You think that tightening supplies would be a larger mover in the space of energy at the moment, but it just isn’t the case for whatever reason. Speculation can only last so long before the realities of physics and energy needs start to dictate prices, so again I preach patience to confirm my own bias.
Next is the rig count. If you remember last week’s data, we saw the largest rig decline in over 150 weeks with a 17 rig decline. This week fares only a little bit better with another double digit downfall. 11 fewer rigs in the United States as the total falls to 720 rigs, or now 8 fewer rigs than we had last year. I’m going to say that last part again because that is a monumental transition for the present. 8 fewer rigs than we had this time last year. For 108 weeks that statistic has been read as “more rigs than this time last year” not ever “fewer.” After April of 2020 the rig count took a heavy hit but recovered by the end of April of the following year. From then the rig count grew again and we often saw a total of more than 200 rigs year over year which eventually diminished to 100, then 50, then a few dozen, and now -8. That is a pretty good teller of current industry sentiment in recent times. Producers are bailing on exploration and putting more effort into paying down debts or M&As if they are feeling really frisky (more on that later). As for the regular statistics, the Permian is taking the brunt of the blow as it lost 4 rigs. Then the Eagle Ford with a three rig decrease. The DJ and Ardmore Woodford bring up the rear with one lost each. Nobody else gained a rig. State by state you won’t be surprised to hear that Texas is down 9. Then Colorado is down 2 with Cali and Louisiana down 1 each. There is good news here as Wyoming and New Mexico each found a way to gain a rig each. The Gulf of Mexico wasn’t safe from the slaughter as they lost one rig as well. Virtually all downed rigs were horizontal and looking for oil. Not an excellent week in this regard, though this is a landmark to be remembered. The downtrend is real.
Finally we have the inventory report from Nick Bryan, rather than Nick Fernhout. As always, I recommend you check out the full piece on www.rarepetro.com as they pack them full of fantastic information and figures. Here is what Nick B had to write: The EIA forecasted a million-barrel drop in inventories for the period but was met with a surprise inventory build of considerable size (5 million barrels). The API also expected an even larger draw than the EIA but also reported a significant, though slightly lesser, inventory build at roughly 3.7 million barrels. This and last week’s surprise inventory builds could exert downward pressure on commodity prices. The last two reporting periods reverse the inventory depletion trend that the country has been seeing since March of this year. National average gasoline prices stayed nearly flat in the last period at $3.54. US gasoline stocks have once again turned downwards and remain beneath the five-year range of national gasoline inventories. Mississippi remains the only state in the Union to have sub-$3 gasoline on average, while California ends the other end of the price spectrum at $4.80. Diesel prices continue their inexorable downward march and diesel stocks continue to get slimmer, with inventories at the very bottom of the five-year range. Propane inventories, by contrast, continue to build and are on top of the five-year range. Net crude oil imports were down just over 100K bbl/d from the last reporting period, but remain about 1 MMbbl/d higher than most of April was. This seems to be dominated largely by a drop in exports–imports seem fairly stable. The overall trend of the last three months seems to be moving away from the zero net import/export mark, but the macrotrend towards oil independence still seems to continue.
Thanks again to Nick Bryan for putting that research together this week. That rounds out all of our statistics so now it is time for news starting with the most surprising merger of the year so far. Out of left field we receive news that Chevron plans to acquire PDC Energy for $6.3 billion. If you aren’t aware, PDC is pretty much a shale player with lots of acreage in the Wattenberg and some other stuff down in Texas. Both boards unanimously approved the deal, so at this point it has to make it past the shareholders. Of course Mike Wirth gave cookie cutter statements that basically said this is good for Chevron as they will make more money and less carbon. Chevron doesn’t plan to watch the grass grow either because they are already announcing plans to increase capex by $1 billion per year. Andrew Dittmar of the Enverus Intelligence team wrote about acquisitions last month saying, “All of this seems to point toward an industry that looks increasingly like it did before shale in the context of the biggest companies and majors holding the best, lowest-cost resource,” and I gotta agree with the guy. With the way the regulatory environment goes, it seems like fewer small and mid cap outfits (not the PDC was small or mid cap), are going to be able to operate in a way that makes them money. It seems like the economics of scale will be the single most useful tool as time progresses which suggests a future where 80% of Colorado extraction becomes split between either Oxy or Chevron. Don’t forget that Chevron gobbled up Noble and Oxy claimed Anadarko (though we try not to bring up that blunder too frequently). This is just another one of those big mergers that we have been lucky enough to witness in recent years when considering the likes of the previously mentioned along with Devon-WPX, Conoco-Concho, Chevron-Noble, Pioneer-Parsley, and Cabot-Cimarex. Lots of change to be seen, and all consolidation seems to be falling in the laps of the supermajors.
That last story is sort of the one dominating the energy space, but we have new developments from the Houthis, so we might as well check on them. The Houthis run Yemen’s government and they just signed a deal with Chinese officials and a company that will invest in oil exploration in Yemen. The memorandum of understanding very specifically mentioned investment in the upstream sector. If you’ve forgotten the timeline thus far, here’s a refresher. At the end of last year, the Houthis attacked some key infrastructure and warned companies in Saudi Arabia and the UAE to back off as the conflict between Yemen and Saudi failed to de-escalate. China then steps in early this year and convinces Iran to stop supplying weapons to the rebels, though it seems like legacy media now spin that as Iran taking initiative to do so itself. Then Saudi Arabia & Iran made peace and agreed to reopen embassies as China allowed them to meet and talk in Beijing. Now China is appeasing the Houthis because their whole problem in the first place was the overturning of an elected president they didn’t want and the lack of oil revenue when compared to Saudi Arabia. China is big brained for this one because the move will keep the Houthis not only happy, but distracted. I never thought I would say it, but China sure knows how to end a near decade long proxy war and make themselves look like angels in the process.
But folks, that is all we’ve got for the podcast. Massive merger and a rapidly changing arena of geopolitics. This only scratches the surface of what our organization likes to cover. We’ve got new content almost daily, so be sure to not only subscribe to this podcast, but also head over to www.rarepetro.com to find more than just auditory content. The information is free, we just hope that passionate people are out there listening to the things that fascinate us as we all grow together. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!