Gas is back.
Worked energy (banks / hedge funds / corporate) since '10. I work for Tourmaline. These comments are my comments and view, not my firms. I ♥ O&G.
A friendly reminder to invest in your natural gas supply and infrastructure this decade. California (PG&E) just traded $75/mcf in the 'balance of month' (Balmo) contract and is shattering all time records daily in cash. Most expensive gas on the planet.
Fresh off the Goldman energy conference with a couple of impressions.
Everyone getting their homework done on gas. Nobody wants to miss the upward lurch to 2025 fundamentals but when to be fully invested is a debate. My sense is hedge funds have covered but new longs are yet to
A generalist investment memo in Energy. My take. 🧵
Opener - which energy source holds the best forward return outlook?
Selecting from renewable (wind / solar / hydro), oil, gas, nuclear & coal
Which subset has the best S&D set up to provide for outsized investment returns?⬇️
Most common thematic natural gas question today is what will data center energy consumption mean for domestic natural gas power burn consumption.
Some thoughts 🧵👇
Just finished what might be the most bearish O&G commodity outlook I've ever read. Premise is
1) Asia not growing like it used to and OECD stagnent
2) Coal satisfying much of the marginal primary energy growth needed and is the energy security form of choice in Asia
3) Coal will
Not investment advice, do you own due diligence.
This morning TC trades at a 8.3% dividend, and is in a 15% 5 day down draft.
Someone big is out and they are willing to be splashy about it.
You don't get that many opportunities to ride a 8% investment grade coupon + growth
On the back of two weeks of talking with investors and energy companies I'm struck with a couple of themes in Energy this fall.
1) Some trepedation on the 'path' for gas in the next 12 months, but a lot of confidence in the bullish fundamentals for 2025-2028; equites are
Natural gas just crossed below $2/mcf. In basin pricing is closer to $1.50 (threshold for economic curtailment for older / tier 2 assets on variable cost)
Every time natural gas has dropped below $2, it, and gas equites have had a rally higher in the following 12 months.
Gas market fundamentals are giving us exactly what we need to see for a firm fall.
Chart🧵
2024 demand is power led. 2025 Demand will be LNG led. 26-30 will be both.
The moves in the back are massive. I'm a broken drum on this but it matters. Move front month up $1 and you get a quarterly beat. Move the whole curve up $1 and you've just changed decades of return on capital & a stock 2x.
The front moves the multiple. The back moves the NAV.
Alberta is forecasted to get a historic inflow of royalty income. This time let's not do Ralf bucks. Let's take a page from Norway and do a wealth fund. Compound $200bn (a 10 year look at the *excess* income) and we can dividend $10bn to society yearly without hitting principle.
Averaged up my $8 CVE cost basis for the first time in two years with some $19's today. Quality is still king, no reason to dig in lost-and-found (yet)
Remember the Canadian oilman gets to pay capital and expenses in Canadian peso's and sell crude in U. S. D.
WTI C$105 WCS C$75
The solar duck curve (net load) + the 24 price curve (nearly valueless power sold mid day) lead to a simple economic conclusion. Solar installation in increasingly solar saturated ISO's is an increasingly valueless energy addition. Batteries are now essential, adding cost, modest
$6 gas in April. Strong to very strong. Couple of reasons why:
1. Production has been super weak. Not only are we not making new highs, in some areas (marcellus) we are struggling against the 2020 comp
Excellent illustration of why backwardation (down sloping) is generally a signal for improving prompt crude prices and contango (upward sloping) usually results in worsening prices. It’s not an intuitive concept and underscores that strips are not forecasts but storage spreads.
How indicative is the WTI strip as it relates to future oil prices? We show the past 10 years and how often the strip fails to foresee future demand strength and/or future supply challenges - something to consider with oil up 17% alone this week
#oilandgas
#oott
#alberta
#OPEC
In a parallel universe...
Canada's PM just got off the plane from COP26, where he recommitted Canada's role in providing the globe the cleanest and least expensive oil and gas in order to get the world economy moving amid supply shortages that could cost lives this winter.
We are about 1 year into buybacks being a theme and meaningfully executed on in North American E&P.
1 year returns don't correlate with buybacks or yield.
Valuation has a literal 0.00 R2 with buyback intensity, while dividend yield is a loose 0.34 R2.
Strong fundamental
Power Thought
GS dropped 3 AI / Power reports this morning (my cup overfloweth!) and over the past 3 weeks we've seen over a dozen estimates from research houses and industry participants alike.
If you want to take a law of large numbers approach the median expectation is for ~5
Today I have 5 thoughts on Gas / Energy.
1) On gas, weather has been pathetic and there is a spooky ammount of gas growth M/M. I have a theory for each basin, but in aggregate, and in persistence, this is more supply growth than I thought we'd see at this time of year.
2)
We likely about to hit our first freeze off in Natural Gas this winter
Freeze off variables
- Effects wells that produce water (Bakken, Permian, STACK/SCOOP, DJ, SW Marc / Utica) vs dry basins (Haynesville, NE Marcy)
- Hits harder in unhardened basins (TX)
- Intensity > duration
I’ll admit. Sometimes I struggle to see a sustainable bullish path for crude with 6 mmbbls of spare capacity, squeeky wheels in the group, and Petrobras slamming the capex hammer down. Lots of different ways for a contrived run to $100/bbl crude to get supplied.
Range bound
I think we are entering an era in Energy where the greatest performance will be had in owning the largest company's. Some qualitative thoughts and some quantitative thoughts.
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2022 Energy Investment Theme Ideas: 🧵⬇️
#1
: Quality vs Beta
Beta had "a year" last year with a big re-rate in commodity prices. Unless you are in the $150 WTI camp; 2022 is probably a "good but flat" price deck so rate of change is all about FCF capture.
Example 1: $CNQ ("Quality") vs $MEG ("Beta").
A) Quality typically outperforms beta long term (positive intercept)
B) Beta O/P on real run ups (30%+ 6mo moves)
C) Quality wins on dips
D) Stasis favors quality (slightly)
It was great to sit down with
@trevor_rose_
. Thank you very much for having me. We recorded only a week ago and already we're getting some of the catalysts we were looking for!
The hayensville curtailment is getting really meaningful. 1.5 Bcfpd from peak.
While gas in plays like appalachia have a history of curtailement this is brand new behaviour from the Hayensville folk; wiping out all of the YTD growth in 3 weeks.
Perryville $1.97/mcf.
Fun slide and call commentary from EQT.
The thickness of the returns bar tells you a lot about the time to payback on incremental growth investment.
If you break even at $2.50, but need $3.50 to squeak out a 10% return on EV, your response function to a change in natural gas
Natural gas is at $2.85/mcf this morning at HHUB.
Adjusting for the inflation experienced over the last 5 years, in real $'s it is $2.35/mcf.
Historically we see a meaningful supply response in the $2.25-$2.50 range, and outright curtailments below $2.00 - $2.25.
I liked RRC's spin on storage in their Q and deck, thinking about it in terms of days supply.
Bears would flag that days does not equal capacity and you can hit max storage (4.1 Tcf - tho that is a debate as well) and puke on price with a days chart that looks fine
But the
$PXD for $RRC rumour on the tape. Would make a ~3 bcfpd gas business proforma. $6.5bn deal.
Every oil company needs a second chapter, and for many of them its going to be to become a gas company.
EOG is doing it organically.
PXD is replacing the EF they sold with Marcy.
The other reading this could be that solar is saturated to the point any additional install is useless and after decades of battery install, in one of the lowest demand periods of the year (spring) and the highest solar periods (months around June) the call on gas is still 10 GWh
The California grid in spring, now featuring:
- negative midday power prices and net loads
- clean energy meeting more than 100% of afternoon electricity demand
- gigawatts of curtailed solar
- gas plants pummeled by negative spark spreads
- batteries arbitraging power prices
All good things!
*ALBERTA PREMIER DANIELLE SMITH SPEAKS IN CALGARY
*ALBERTA SHOULD ASPIRE TO DOUBLE OIL AND GAS OUTPUT: SMITH
*ALBERTA WORKING GROUP IS LOOKING TO ATTRACT DATA CENTERS:SMITH
*DECISION ON LNG CANADA PHASE 2 IS EXPECTED SOON: SMITH
Gas basin modeling thought.
We know a part of the decline since March is curtailment, not native declines. Given activity has not inflected (in fact its rolled further over the last three months) it might be a reasonable estimate to project the pre-curtailment decline forward as
CHK
"Chesapeake is currently operating nine rigs (five in the Haynesville and four in the Marcellus) and four frac crews (two in each basin). Given current market dynamics, the company plans to defer placing wells on production while reducing rig and completion activity. The
Lot's of AECO basis Q's floating around.
A short thread on my interpretation of the last 60 days and what it can tell us about the dynamics at play.
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Natural gas catalyst path 🐂 and 🐻
March: Freeport "we barely know ya!" reramp🐂, Production curtailment and activity degrades🐂, salts filling 🐻
April/May/June: Start of LNG maintenance season 🐻, Salts full 🐻, OFS pricing softens (does that mean E&P re-ramp!? (no))🐻,
Gas Bull Bear
Bear
- Golden Pass 1H25 vs 2H24 prior
- Winter, what winter!
- Production outperformance in L48 Oct/Nov; how sticky?
- Major's Permian activity ramp in '24... unhelpful
Bull
- Haynesville production 50 day moving average rolls to a negative slope for first time
I petition that because many E&P companies are now taxable, we drop EV/EBITDA as a reference multiple in the comp sheets and transition to EV/DACF multiples, FCF/EV yields, and years of inventory studies as the ABC's of referenced valuation figures.
#endEBITDA
2024 gas prices could close above $3/mcf for the first time in years today. The headlines and focus has been on the front - rightly so! But the market is starting to change its tune on the long term supply cost for natural gas...
Reasons 2025 gas prices could bottom this week.
1) Plaquemines start up
2) Freeport not as broken as feared
3) Haynesville declines resume
4) Heat returns
5) Technically we've bottomed here before; and who is excited to hedge a $3.30 CAL25? Selling pressure should be thin; after
HAL Conference Call Gas Highlights
Gas Demand / AI
In the U.S., after stable electricity demand for nearly two decades, we now expect it to grow more than 15% by 2030. Today, over 40% of United States electricity is supplied by natural gas, and we expect strong demand for
In basin Haynesville pricing slipped below $2 today, to $1.86/mcf.
In 2019 "real terms" that's closer to $1.25/mcf.
TPH 'proactively' cut their CRK model to maintenance to "keep close to FCF neutral"
CRK Q4 - Feb 14
CHK & SWN Q4 - Feb 23
All eyes on activity.
The inventory depletion theme is not a down the road theme. It's a right now theme. "10-15 years of inventory" will prompt action today. COG sold a year ago and now reserves written down >32%.
CTRA today
Re NGL's, Mr Alan Engberg enters the chat on the RRC Call.
"Yeah. Thanks, Roger. This is Alan Engberg. I'm -- I manage our Liquids Marketing Business. I'll give it a shot, give you some background on what the -- what's been behind some of the recent strength that we've seen in
Alright NGL twitter. Make us all smarter.
I think I get some of this cross product move (sympathy to WTI, Shell PA cracker, less deep cut runs vs shallow cut, gas rewarding heat rate in June creates July tightness) but would enjoy community commentary on this NGL move.
Dislocation Opportunity
Front month AECO and AECO cash have been weak as local storage injections portend potential brimming of local storage later this summer and fall (price is hunting for some curtailment from high cost players). This makes sense. It also cleans up with heat
Top story to follow Omicron will be Euro energy crisis
The long term investment implications are which geopolitically stable regions house the next decade of nat gas supply (Russia can't be trusted theme)
NAM has Euro's back. $TOU $EQT $CHK $ARX $SWN are the core names of scale
2 LNG Takes Today
(1) GS dropped a 50 page LNG report which included lots of great analysis but in general has one out of consensus theme from my interpretation. GS believes in order to balance LNG over the next 5 years we will need LNG prices "well below $10". Their main point
One way to interprate the XOM / PXD deal (if it occurs) is what it implies for resource value.
PXD is a $60bn EV and trades at 6x CF and a 8% FCF yield on 2024 estimates. The free cash flow generation of the business last year, this year and next year is anticipated to be $7.3
US power demand going from strong to very strong
This year was supposed to be "a tough comp" for gas burn as last year was quite hot and this year had a lot of renewable capacity coming on stream. Instead we are averaging >1 Bcfpd in power adds through May and June and weather
Biggest RRC/EQT/AR takeaway is consensus that Golden Pass is going to be taking feedgas early. RRC said mid year, EQT said Q1, AR "accelerated".
This is a big deal vs prior Q4/YE expectations.
6 months more Golden Pass (2.3 bcfpd) is 420 Bcf less carryout YE 24 (10%).
Baker Hughes Q2 Conference Call
"As you look at '24 and '25, you've got a number of extensions on brownfield projects activities and coming out of the LNG 2023 meetings last week in Vancouver, a lot of dialogue on the continued need for LNG. And we stay very much with the view
"India firmly believes that equity and climate justice must be the basis of global climate action. This can be ensured only when the developed countries take the lead in ambitious climate action." COP28 Declaration
AKA
"You can blow up your cost of living over there, I'm still
It's hot again in California and the great state continues to enjoy more power from natural gas than any other source to satisfy peak demand.
Solar works great in the spring. Many hands make light work in the summer and winter.
Spent a week in Costa Rica’s coasts (Potrero, Nosara) and capital San Jose and have learned a couple things.
Electricity is mostly hydro power but propane is a prime fuel source in industrial kitchens. The average local leans pretty far left on the environmental file. Having
Getting increasingly harder to see a substantial ammount of natural gas supply growth out of the Haynesville next year. Associated out of the permian also poised to slip as rigs continue to bleed out on M&A related post close slow downs.
We could be entering a period where nat gas businesses and oil businesses have divergent outlooks for a period. We've been here before; associated supply was a "oil good, gas bad" cycle. Recession could be "gas good, oil bad". And then we have pre LNG dynamics + LT dynamics. 🧵⬇️
I'm a big fan of visuals to think through changes in markets.
The traditional Supply / Demand graph is still useful to think about who's who in the zoo, and who is getting paid and how.
Some thoughts. 🧵⬇️
Some tectonic shifts in the back of the LNG curve. 5yr+ contracts used to backwardate to US$6/Mcf; (we also spent some time at that price in the front back in 2019).
Some thoughts. 🧵
Gas. High energy density + cheap provides a natural physics cost win. Same S&D set up as oil, but with long term demand tail winds not headwinds. "Electrify everything" + "Grid Firming" = Gas, Hydro, Nuclear. Clean enough to be "green" in taxonomy, cheap enough to work at scale
If you're running a NAV on a natural gas business your strip value has improved ~15-20% over the last month as the market has absorbed a new view on the need for 1-2 Bcfpd of new power generation gas demand in the US Long Term
Gas stocks are only up 5-11% M/M.
Effectively all E&P's look great right now. It's worth reflecting on how they looked when commodity prices were not so hot, to help gauge what kind of 'margin of safety' you have if strips aren't always $80/$5.
2020 vs 2022 FCF margin a good snapshot.
Rare to see this many energy co's with an RSI 14D under 30.
The pump is primed for quite the bounce on the next bullish datapoint. For gas that's weather or shut ins. For oil you'd be looking for conflict headlines, OPEC talk, draws.
Both will benefit from conservative
Spidey senses up on L48 natural gas production struggling to come back out of the cold snap. If we leveled off at 101-102 bcfpd we'd be ~4 Bcfpd lower than the peak in Nov/Dec and poised to be lower YoY by April. That's not that loose.
Will be very interesting to see the demand response to 'reasonable' LNG prices as Europe has solved yet another winter through demand shedding (they are still well below pre covid consumption) and relatively 'kind' winter weather.
We've gotten back to LNG prices (~$10/mcf) that
Thinking about natural gas basis 101.
(a) basis is the difference in price between one market and another
Introducing the imperfect but highly visual bucket analogy.
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What does the last decade of E&P returns tell us about which E&P's should be owned at which part of the cycle.
Since 2011 E&P's have returned an average of 14% total return, but the spread is huge (-90% to +180%). Stock picking matters. What does a look back tell us. 🧵⬇️
Awesome chart from Jamie at CIBC.
When in E&P history could you +30% to capex (unch prod) and have only a minor change to FCF, net debt, or ability to pay a great dividend.
I'd say never.
These very wide FCF margins are what makes E&P a great inflation insulating investment.
A thread on screening for quality in Energy🧵
I'm a big fan of thinking and searching for easy screens a investor can quickly do to discern the quality and value creation of a business / management team.
In a sector like energy this can be really hard, especially if you are
News today
- California Battery (Storage) Operators ask to be freed from 75% renewable restriction (Utility Drive)
- India running out of coal (Reuters)
- Poorer SE Asia nations can no longer afford LNG (BBRG)
- Gasprom says "Nyet" to EU plea for more gas (TPH)
Energy Crisis T-1
Three interesting comments from the XOM call.
Why do the deal now. Stock was hot! "I think we trade on the day of October 5th about, I don't know, 9% off of our high. So we felt like the market was reflecting, one, the commodity environment we're in; but two, some of the
CHK
"Chesapeake is currently operating nine rigs (five in the Haynesville and four in the Marcellus) and four frac crews (two in each basin). Given current market dynamics, the company plans to defer placing wells on production while reducing rig and completion activity. The
We are ~ 1 yr out from the beginning of large capital returns to shareholders. What's the data say so far
With low correlation, large buyback programs have underperformed over the last yr
Buyback intensity has no correl to valuation
Trailing yield has some correl to valuation
US gas production hasn't grown in 12 months and is about to dip under the prior year vintage.
Might have something to do with all full cycle breakevens being underwater in the US (credit Arun Jayram - JPM)