May 2, 2025
Things I Learned This Week Staying Home (Since I Won’t Be Next Week!)
Earnings have continued with most companies lowering their 2025 guidance. Basically, it looks like guidance is going from down 5% to 15% for North America, and flat to down 5% for international, with places like Mexico accounting for much of the drop. No slashing of wrists yet, and not likely, but the Dom Perignon has quit flowing. At a Merit Advisors board meeting, 2025 revenue projections came down a bit, but is still expected to be up as much as 20%. It seems paying less in taxes and optimizing cash is popular, even in tough markets. The stock market went on a tear, up 8 sessions in a row so far. I do think it is amazing, and not a disaster, that all this panic that just about “erased” 401-Ks is being hyped when the stock market is down to levels not seen since late September last year, almost 8 months ago. The world’s biggest trade war is happening, and it has cost 8 months of stock market gains. The tariffs, the hardships of drinking California wine, forgoing avacado toast and stockpiling Tequila all make us realize how spoiled we are. But everyone likes being spoiled. You know, things like electricity when we need it.
Next Week. OTC in Houston. Increasingly relevant after being an afterthought for 10 years.
Shining Example. I have owned American, English, Japanese and German cars, with Germany winning the race, in my humble opinion. So I have been paying attention to Germany, which is in a recession for a second year and is seeing its manufacturing base erode and cede share to China, primarily due to the significant difference in the cost of powering that manufacturing. The Ukraine war ended Germany’s cheap natural gas costs. And that was a couple of years ago. Nothing stays stagnant. So, Germany goes green, leading Europe with 47% of all power and electricity being generated from wind or solar with additional contributions from Hydro. But, as frequently happens, the sun didn’t shine, it didn’t rain and the wind didn’t blow. Even with more capacity, the total power generated was less. What to do? You build 20 gigawatts of natural gas-fired generation capacity to provide “stable base power,” which will most definitely aid German manufacturers from both a cost and certainty perspective. But in “never say die!” fashion, the political left wants to accelerate the green buildout. It is for ideology, not economics, and that always fails. Just not as quickly as you would like.
Recession!!! OMG, we are headed straight for a recession! The stock market is a disaster! The financial health of the country is a disaster! Your 401-Ks are gone! It is all over. I heard all of that and more from MSNBC this week. As I write this, the Dow Jones Industrial Index (DJI) has dropped down to levels not seen since September of last year. Wait. You mean that the worst crisis in economic history has knocked the metric used to define U.S. economic outlook and health back to levels not seen in 8 or 9 months. Months? And only 8 or 9? I don’t remember my 401K being at “disaster levels” less than a year ago. There is uncertainty in the markets and that makes reinvestment more difficult, but did anyone think revamping global trade would only be painless and easy? But the worst is coming. Again. The experts said so.
2021. Some economists and financial institutions predicted a recession was probable, with some models suggesting a 60% chance. Others were less pessimistic, with some reports indicating a 34% chance of a recession, according to a survey of 226 economists. Factors like the ongoing trade war with China and the impact of tariffs were cited as contributing to these concerns. In 2021, the U.S. stock market experienced strong growth, marking the third consecutive year of double-digit gains. The S&P 500 ended the year up around 27%.
2022. The expectation of a recession in the U.S. was mixed, but later in the year, the consensus shifted towards a higher probability of a recession. Multiple forecasts predicted a 100% chance within 12 months. Bloomberg’s economics model predicted a 100% probability of a recession within 12 months. Most economists expected a recession to start in early 2023, driven by rising inflation and the Federal Reserve’s responses. Due to inflation, some economists raised the probability of a recession, with the Consumer Price Index (CPI) reaching a 40-year high. 2022 was a terrible year, the S&P 500 dropped by over 19% while the Nasdaq, which is heavily weighted by tech stocks, declined by 33.1%.
2023. The majority of economists predicted a U.S. recession, with some surveys indicating a 63% chance or even a 100% probability. This was primarily due to an inverted yield curve and rising inflation. In 2023, the market experienced a significant rally with the S&P 500 gaining 24.2% for the year.
2024. The expectation of a U.S. recession increased throughout the year, with some economists estimating a 35% chance of recession by late 2024. Factors like weakening economic growth and a softer-than-expected labor market contributed to this increase. The Dow Jones Industrial Average (DJI) posted a positive return, closing up 15%, and the Nasdaq was up over 28%.
The reality is that it isn’t the end of the financial world as we know it. It isn’t the unmitigated disaster the media would like us to believe. One year of market gains to fix our global trade problem, a problem that everyone knows we have, but almost everyone differs on the implementation of a solution.
Geez. I didn’t realize this, and it probably doesn’t matter a great deal, but the Bank of Russia left its key rate at 21% for the fourth straight meeting as the country tries to battle inflation caused by the war in Ukraine. 21%! How can you tell a government is in trouble? That’s a good and easy one.
Wind Turbine Blades – Remember, It is Renewable, Not Recyclable
Win – Win. The U.S. and Ukraine have inked a deal over the country’s mineral resources. There isn’t much there, but it has several positives. First, increased access to any rare earth minerals, or most any mineral, is important. Secondly, is the security it provides Ukraine. We may not defend a regime that had a checkered history until three years ago, but we will most definitely defend our assets and businesses in foreign countries, especially when the need for their products is so great.
Shocked! The big blackout in Europe was amazing. Can you imagine if the power went down, completely, from Boston to New York City, to Philly and then DC? Not just neighborhoods, but complete cities. Oh, and your cell phone doesn’t work either. And it took more than a full day to get your lights back on? Okay, but what happened? Renewables, due to their remote location, get their generation bundled and tapped into the grid. There are occasional surges in frequency and voltage from any generator. A fixed power plant can have a surge, or drop, but it is attenuated through a system of several such power plants, so no interruption is seen when fed into the grid. Surges and drops in solar and wind feed directly into the grid, tripping safety features and causing a domino effect. We can refit the wind and solar industries with equipment to moderate those surges and drops, but it is expensive, and it is a world where the economics are already significantly challenged. Doomberg (Bloomberg) wrote an article noting their concern for this eventuality. “Modern electricity grids are classic non-linear systems susceptible to difficult-to-model interdependencies that can lead to unexpected challenges for operators.” Of course they are. “In an ideal world, enhanced fault ride-through requirements would have been imposed on renewable energy projects before they were allowed to reach critical mass on our grids.” The response from the governments involved? More wind and solar. And it turns out to be climate change after all and eventually it will be Trump’s fault, but for now – Portugal’s grid operator, REN, said that “extreme temperature variations” had produced a “rare atmospheric phenomenon” that caused the power cuts in Spain, Portugal and parts of France.
A Little Help. We have written before that the near term, ~18 months, will be rocky for the oil industry since the President of the United States wants oil to be $50. It’s currently sub-$60. And while it might seem difficult for one person to drop oil prices, if that person is the U.S. President, and his friendship with Saudi Arabia is growing, it might just happen. OPEC has already started to accelerate its shut in oil reserves coming back into the market, increasing the next three months capacity additions all at one time. But how much stroke does he have? Trump is visiting Saudi later this month to formally approve a $100 billion arms deal. What do you think? The U.S. is trying to offset the influence of the Chinese and Russians on Saudi, but the battle between the three is being fought every day somewhere in the world. Even top analysts claim to being puzzled by Saudi driving prices down and gave the possible reasons as; disciplining cheating producers, preparing for Iran’s return to the market and/or hedging against a potential split with Russia. But the discussion as to whether Trump will get his way, at least in the near-term, will continue.
PPHB U.S. Energy Market Highlights:
Commodity Prices: WTI crude oil is currently $58.21 per barrel (down ~7.3% week-over-week) and natural gas is $3.64 per MMBtu (up ~7.2% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.5 MM BOPD (up ~2.8% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by ~2.7 million barrels week-over-week vs. an estimated increase of ~0.4 million barrels.
Frac Spread Count: There are currently 205 frac spreads operating in the U.S. (an increase of 5 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 571 drilling rigs operating in the U.S. (an increase of 2 rigs week-over-week).
We Keep Finding It. Who knew? We are still drilling and finding in West Africa. It was the center of the world 10 years ago and then died when deepwater drilling died. But like deepwater drilling, finding oil and natural gas in West Africa is getting back on track. The latest:
“BW Energy confirms commercial oil find at Bourdon offshore Gabon.”
“Capricornus well delivers light oil find for Rhino Resources offshore Namibia.”
Canada Power. Distributed power has been a very hot sub-sector of the industry for the past year or so. Several pressure pumping companies have made acquisitions, and while ostensibly doing so to power their frac businesses, much of the use has been for other applications. And now the buying bug has bit Canada. Enterprise Group is a small company consolidator focusing on Western Canadian businesses that specialize in technologies that reduce or eliminate CO2, methane and other emissions. It has acquired FlexEnergy Solutions’ Canadian business, an on-demand power provider working for industrial and commercial businesses and leasing/servicing turbines, which the company says “are ideal for remote, extreme climates, and our customers rely on our ability to deliver the highest quality engineering, power and support 24/7, 365 days per year.” Sounds like where we work. Expect to see more turbine/power/leasing deals continue. PS – they did specifically call out using their power for data centers, as does everyone else it seems.
Too Many Boats, Not Enough Cargoes. “An oversupply of LNG carriers is putting downward pressure on charter rates, pushing them to historic lows. New-build LNG carrier deliveries have been outpacing the construction and permitting of new liquefaction facilities needed to support them.” – JPT
Ever Heard This One? “Recent weakness a buying opportunity.” I have read that several hundred times it seems in the last two weeks. And it may be right. I remember when oil was going much higher sooner and this was a great “buying opportunity.” An old Axiom I believe in? “No one ever lowers earnings estimates only once in a downcycle.”
And Again. Flotek Industries, a chemical company with a very interesting measurement technology, signed a joint business agreement a couple of years ago with ProFrac to provide completion chemicals in exchange for interest and equity. And now you have Flotek buying power generation assets from ProFrac. For $105 million in cash and stock, Flotek gets power generation turbines and a six-year lease of the assets. The assets include digitally enhanced mobile natural gas conditioning and distribution units providing real-time gas monitoring and dual fuel optimization for remote, behind-the-meter power generation. 22 “assets” will be placed into rental service immediately and eight additional units are expected to be added during H2 2025. Flotek CEO Ryan Ezell said, “We are pleased to announce these transformative agreements, providing us with an entry point to the rapidly growing mobile power generation sector. Our innovative, real-time measurement technologies are integrated into the acquired assets, safeguarding critical power generation fleets and measuring fuels for custody transfer.” This acquisition is expected to represent more segment income next year than the entire company did in 2024. Impressive.
End of an Era. DrilQuip came onto the scene with four Vetco veterans and some good ideas. Three co-CEOs. Founded in 1981, public in 1997, the company developed and built subsea equipment and boasted their crown jewel; one of the largest forges in the industry, and this was at a time when OFS forging was being sourced from China and Italy. When deepwater hit the skids in 2014, so did the fortunes of equipment providers to that market, of which DrilQuip was one. AFGlobal leased the forge until it was sold in 2022 for almost $19 million. Innovex International bought Dril-Quip last year and is now selling the entire 1.16 million square foot campus to an affiliate of Brennen Investment Group for $95 million.
DrilQuip Stock Price Over Time
Not Quite Landman, But… Sempra Energy is building its Port Arthur Phase 1 LNG project in Southeast Texas and plans for the first LNG to be produced in 2027. The construction contractor, Bechtel, said three workers died due to an issue with the concrete scaffolding used to build the big, and tall, vertical structures of the facility. We live in a very dangerous industry.
Snippets.
Think we are spending any money here? “Woodside Reaches $17.5B FID on Louisiana LNG Development, first shipment in 2029.”
Technology. I’m out with a couple of friends for after work libations this week. One of the guys is primarily in real estate, but he has dabbled in oil and gas in the past. He asked me, “how long are the laterals we are drilling these days?” I told him, “4 miles.” He chuckled and said, “no, really?” Can you imagine 5 or 10 years ago if you were making a presentation to management or investors, and you announced that you were going to drill a 4-mile lateral? How long would it take before the strait jacket was tightened? In the Bakken, Hess has landed several four-mile laterals. Chord Energy drilled a 30,400 foot well. The first 4-mile laterals landed so far are in the Bakken, but it sure looks like the new trend. Nabors Industries was the drilling contractor and was credited for their effort. Hess noted that the economic breakeven was significantly reduced relative to 2 and 3-mile laterals. No kidding. Doing more with less. Less cost, equipment and surface disruption. It’s old news in the Permian, where Civitas, Exxon and others have been drilling 4-mile laterals for some time. One 4-mile lateral well was drilled in a single run.
Stats. JPMorgan Shale Tracker.
There are 596 rigs operating in the U.S. with Private E&Ps operating 285 rigs (48%), Public E&Ps with 223 rigs (37%) and Majors with 88 rigs (15%).
There are currently 304 rigs drilling for oil/gas, with over half of the rigs drilling for oil and the rest drilling for gas.
Among major operators, the rig count has dropped by 5 rigs since the end of November, while privates have added 9 rigs and public E&Ps have added 7 rigs.
We think that 50 oil rigs could be dropped if WTI oil prices sustain at $60 per bbl.
Up to 100 rigs could be at risk if oil prices are sustained at $55 per bbl or lower.
Any and all comments, arguments and rebuttals are welcome!
In addition to my association with PPHB, I serve on three private company boards. Merit Advisors is a property valuation company and I have long been a fan of optimizing how a business is run, not just the tools we make. Merit is in the business of savings companies’ money, actual cash, by doing a much more in-depth and realistic view of equipment and reserve valuations and I am very impressed with their work. I am also on the advisory board of Preng & Associates, a leading executive search boutique that specializes in all things related to Energy & Power. Nova is a gas compression company run by a very dynamic CEO with a very strong board and ownership.
I serve on the Advisory board of the Energy Workforce & Technology Council (formerly PESA), the National Ocean Industries Association (NOIA), and the Maguire Energy Institute at SMU my alma mater.
jim
214-755-3914 | james.wicklund@pphb.com
Leveraging deep industry knowledge and experience, since its formation in 2003, PPHB has advised on more than 180 transactions exceeding $11 Billion in total value. PPHB advises in mergers & acquisitions, both sell-side and buy-side, raises institutional private equity and debt and offers debt and restructuring advisory services. The firm provides clients with proven investment banking partners, committed to the industry, and committed to success.
