Macro/Headlines/Events
BKR U.S. Land Rig Count. Down one rig w/w to 759 rigs. This marks the third weekly decline, albeit the declines thus far are minor. That said, the E&P commentary noted above, again from a small sample, is consistent with leading edge rig counts (at least per BKR). We are still not running for the hills, but one would think this leveling-off, if sustained, coupled with E&P cautionary comments, might be the right cocktail for OFS companies to take a momentary pause on any expansionary capex.
WSJ- U.S. Scores $4 Billion Windfall on Oil-Reserve Sales- Link
WSJ- European Energy Ministers Push for Natural-Gas Price Cap Link
WSJ-Italy Found a Fix For Its Gas Crisis, but Locals Are Resisting- Link
DEP Update: Brief note this weekend as we are presently in Vegas, about to head back downstairs to the sportsbook. Important reminder: what happens in Vegas doesn’t necessarily stay in Vegas, particularly when couples have online banking. That said, we are grateful to all the DEP subscribers who renewed in 2023. You have provided a lifeline once again.
This coming week we’ll be heading up to OKC on Monday/Tuesday for meetings and site tours. Got a couple of seats at the dinner table on Monday night – let us know if you are free. Next Sunday, we expect a brief note as it will be Christmas Day. We’ll publish any interesting Mid-Con observations as well as summarize the DEP year-in-review. Lastly, registration for the Thrive conference is expected to go live late this week. We will start a rolling process, sending the registration link to subscribers and sponsors. If you are not in either of those camps, but would like to attend the event, give us a call.
Research
E&P Observations: Earlier this week we conducted several company updates. No parting-of-the-sea revelations. OFS friends generally claim white space has not been that significant this month. That’s good news. On the other hand, a few E&P companies shared plans to potentially drop rigs in 1H’23. Here’s some color. All are private and most are oil exposed. All participated in our September rig count survey at which time two of the contacts shared an expectation for flat activity in 2023 while the other had plans to drop a rig in 2023. Small sample for sure, so don’t extrapolate. That said, fast-forward to December and two of the companies now plan to release rigs as they come off contract. One rig comes off contract in Q1 and the other company has a rig come off contract in early Q2. Why drop a rig? Combination of lower oil prices (#1), high OFS costs (#2) and deteriorating field efficiencies (#3). Worth noting, however, when asked what would these operators do if oil prices rallied to $90/bbl? The answer changes – “we would likely keep the rig”. The third E&P, meanwhile, is running low-single digit rigs today and still plans to drop one rig in 1H’23. However, if oil prices rallied to $90/bbl, it too would consider keeping the rig. Important to note, no firm decisions have been made, but the sentiment is guarded and that’s worth paying attention too.
DEN released its outlook for the company’s CCUS strategy. The company highlighted how changes in 45Q incentives in the Inflation Reduction Act will spur growth and anticipates initial CCUS volumes in 2025. DEN has 20 Mmtpa already contracted and anticipates 50-70 Mmtpa (vs a 45 MMtpa global market currently) in its system by 2030, generating $650-900mm in EBITDA, vs total-company estimates of ~$600mm for 2022. The plan will require cumulative investment of $1.6-$2B from 2023-2030 (with the heaviest investment in 2024 and 2025). Assuming WTI averages $60/Bbl, DEN can finance this growth organically and forecasts that the CCUS business will be self-funding beginning in 2026 or 2027.
EOG held its quarterly update with sell-siders, reiterating its production forecast for 2023, with low single-digit oil growth and double-digit natural-gas growth. The natural-gas portion will come from both the Dorado plays and deeper, gas-prone zones in the Delaware basin.
Lots of developments on the macro front:
- The Biden administration purchased 3 million Bbls of oil for February delivery to refill the SPR (nearly 200 MM Bbls were released post Russia’s invasion of Ukraine). If this becomes a larger commitment to replenish the reserve, it should be supportive for oil prices. The Department of Energy also entered an emergency exchange agreement with Exxon (1.2 MM Bbls) and Phillips 66 (0.6 MM Bbls) to prevent disruptions from the Keystone pipeline outage.
- OPEC released its Monthly Oil Market Report showing OPEC production declining by 744 MB/d from October to November. The report also highlighted surging tanker rates, caused by refiners stockpiling crude ahead of EU sanctions on Russian oil (see our chart below). Some folks we talked with suggest that the release of this on-the-water storage in the face of strong Russian exports may have contributed to recent weakness in crude prices. OPEC also believes that global demand in 2023 will grow by 2.2 MMB/d.
- The IEA also released its monthly report, suggesting 2023 demand growth of 1.7 MMB/d. The report also acknowledged that Russian exports have exceeded its forecasts but estimates they will have to shut in 400 MB/d of production in the face of sanctions.
BDTI Baltic Exchange Dirty Tanker Index (Worldscale)
Source: The Baltic Exchange, Bloomberg, L.P.
R&M Observations:
This was the week for buybacks. In an amazing reversal of fortunes over the past year, PBF announced that its board authorized $500mm of share repurchases. DINO also bought in 1 million shares (of 5 million total) offered by major shareholder REH Company (formerly The Sinclair Companies); however, this buyback was not part of its previously announced $1B share repurchase program.
A tough week for inventories, with large builds across the complex. Notably, the adjustment factor (missing barrels) this week was 2.3 MM Bbls, likely due to poor weather causing an overestimate of exports. Nevertheless, crack spreads increased for the week.
Product Inventory, Demand, and Margin Charts
(Shaded areas show the 5-year range)
Source for Margin Charts: Bloomberg, LP.
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