COM - U.S. Oil & Gas Is A Good Bet - Jennifer Warren

2023-10-26 08:30:00 ET

Summary

• U.S. oil and gas production is seen as a safe bet and a positive amid geopolitical conflicts and market volatility.
• Energy production globally is a source of economic development.
• Consolidation in the oil and gas industry expected to continue as companies aim for scale, efficiency, and innovation.

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Energy expert Jennifer Warren on why U.S. oil and gas looks like a safe bet (1:30) recent industry M&A, sensible consolidation and correcting false narrative (12:40). This is an excerpt from U.S. Oil And Gas Echoes Macro And Geopolitical Environment (Video)

Transcript

Michael Hopkins: Hello, Michael Hopkins with Seeking Alpha, with Jennifer Warren from Concept Elemental.

You just had a trip up to Montana, and you presented a keynote about energy and geopolitics at the University of Montana and the World Affairs Council. Maybe talk a little bit about that and what were some of the takeaways?

Jennifer Warren: Yeah, so this was a conference, it was hosted by the Central and Southwest Asian Studies Center. And that part of the world is connected to, Russia, China, the Middle East, Europe by definition. So, it's in the middle of so many regions that are in the news, so to speak, of late.

And so it was very timely to be there. And there were absolutely foremost experts on the Middle East and the region. And so that was really educational. And I talked about energy and geopolitics, largely from the point of view of having chronicled all the shale booms and busts and what it means in terms of geopolitics. And then it was also notable that at this time, what's happening, there's a lot of obviously geopolitical conflict right now, which is really, really ramping up markets.

One takeaway from my presentation was just that U.S. oil and gas production is kind of looking like a bit of a safe harbor in some respects, it's a positive and I think that message came through.

And also just the idea that physics is also driving this energy transition a lot, a lot more than people would like to think, but it's kind of the truth. And that was, sort of also my other takeaway from the conference.

And just that energy production globally is really of net benefit to societies. It's a source of economic development, and it's a positive story. It's a good news story at a time when there's a lot of really tough challenges and hopefully, these conflicts can end cause there's going to be economies to rebuild and energy is going to be at the core of this as well. That's kind of some of my high level takeaways from the conference.

MH : So, before that you attended an economics conference with leaders from around the globe and the Fed, any highlights to share from that?

JW : Yeah, sure. So, yeah, it was a pretty intense, you know, 7 days. This conference, it was the National Association of Business Economists. And it was a gathering of economists from around the world and economists from all the major universities, and Bloomberg was there, and top economists. Actually, I sat next to one of the former top Chief Economists of the EIA, which is our energy watchdog. And there was somebody from the Embassy of Australia.

And yeah, it was really pretty amazing. And, you know, a few Fed presidents, as well as one fed Board of Governors presentation that I found, I was really struck by his presentation. The message that he delivered was just that, we're doing all this, we're trying to smooth this economy out, and they're having to do it with interest rate increases that have had to happen for all kinds of reasons that we know and we won't go into.

But the whole idea is shared prosperity. Again, that same message that this is the endgame of it all, you know, and it's a really complex task to get there.

And, you know, it's a tough job they have, and I know they're under constant criticism and scrutiny and analysis and I get it completely. You know, I used to do the same and I still watch quite a bit. The other thing that was, oh, and kind of one of the takeaways was just that, you know, this continued restrictive policy stance, but at the same time really trying to monitor current developments.

Of course there's backwards looking data and I know that there was kind of a criticism about their approach I read today by a leading thinker, you know that they're too backward looking, they need to be more forward looking and all that. But honestly, you know, from sitting there with them and listening to what they're looking at, too, they're about as forward-looking as anyone could be, you know. I mean, who has the crystal ball, right? So, I mean, so that was sort of my takeaway.

I would say I left that feeling confident, you know, confident in the leadership. And then the other thing, as I sat in on two panels, one was on this, you know, supply chains and all this idea of reindustrialization, things that you and I have been talking about, we talked about it at the end of 2022, my after the Fed work.

And then we talked about it at the beginning, the first quarter in videos and articles on supply chains and chips and all this change that's happening. And it's also, of course, driving a lot in tech, as we know. But with the supply chains, one quick takeaway is just that there are these changing trading blocks happening that we're starting to see.

And we see this with investment, even like Intel ( INTC ), investing in Germany and what is it, Taiwan Manufacturing ( TSM ), you know, the chip maker, you know, here in, in Arizona, you know, just all of it is happening and it's going to take time.

And then the other thing is, this is just one of my thoughts, even though there are these sort of shifts in trading blocks, we're still trading with China, not much less. It's just happening through other proxies.

So, it's a still very interdependent globalized context. And I think that's really apparent when you see even what's happening with the conflict going on in the Middle East. No matter how you skin that cat, we're interconnected and our markets are interconnected and everyone's invested in everyone else, that sort of thing. And there are all these legacy relationships.

And yeah, there's some shifts and some new relationships. And some of it we're seeing in energy with our energy trade, even with LNG and all that, and so it's just, t's going to be something to continue to watch. This is not going to move fast, no matter what we hear, announcements and things like that.

It's just going to take – it's all going to take time to see what shakes ultimately. But I can say that the North American trading block is quite robust and it's positive. I even heard that from some economists' comments and that's all, it's kind of obvious. If you look at it through the energy lens, it's absolutely obvious.

And we've been talking about that. You know, I've been talking about that since the last quarter of last year, just this really national treasure that we have.

But now I want to talk about, so this is just looking at oil futures. And I was looking at this from a one month view. October 5th to 7th, you see oil prices go up like 4%. They stay up, they come down, because we're not sure what's happening, they go back up. And now, as you can see, they're ratcheted, they've come up and, everything's been kind of dragged down by what's happening.

Oil prices have come down a little bit, S&P as well. And some of that's driven by just the idea that, you know, all this conflict, all this volatility, all this uncertainty could start dinging global demand. And that remains to be seen, jury’s out.

This is just showing what's going on with oil supply, which is also a big driver of, and we can't see the tightness. Hang on, let me just try to do this a little bit smaller, maybe in a different view.

Tightness is a big driver. And now something I would say too is just that with this tightness between supply and demand that starts changing a little bit after the first, because you know it takes a while for oil production to catch up, right? And prices are higher, so there is some incentive to produce as well. But it's just sort of looking a bit tight for a little bit, and then we'll see how that all shakes out.

And also geopolitics are going to have something to do with this. One thing I would say is, these other countries that are kind of involved in a lot of the geopolitical conflicts at the moment are also energy producers. So I think there's that to also consider.

This summer, we have had the hottest, most summer load demand ever. And it was like 80, 85 megawatts. And remember I'd been talking about the grid and the stress of the grid. But I can also say with Texas, you know, it's a grand experiment in energy, trying to become energy efficient.

Like I said, we're well diversified with our energy mix. We have a lot of renewables. We have the transmission problems that everybody has. And I've discussed that in that kind of Texas million dollar mile story. We have the connectivity issues that everybody has.

So, what it all means is, in spite of the IRA legislation, it's all still going to move slow. But there are a lot of new ideas happening. I actually listened to an energy conference on Friday and there's some really innovative things happening in Texas and that's a story for another day.

And this is just speaking to the yield issue, you know with the Fed and one thing I will say too, I know there's been this focus about the term premium, and what that's just really about is the addition to long-term yields that is not just attributed to interest rate rises.

And sort of what they were talking about at the economist conference was that – of the long-term yield, one half of it right now is comprised of this term premium. And that has to do with actors and behavior expectations.

And something that is driving that, it is thought, is our national debt. The idea that with interest rates being higher and then the national debt going up, it's going to get more expensive to fund that. And that's a headwind, that can crowd out investment, it can do all sorts of things. So, if anything, the idea of fiscal restraint is ever more important.

And then this is something else from the Economist Conference. China has a lot of debt that is not apparent and is not, you know, just discussed. And that by 2025, this debt, this hidden debt could be 5x as large as what is recognized by officially recognized counterparts. So that is something and we're in the same boat.

There's been this movement towards oil and gas as an investment, just because everything that's going on geopolitically , which started last year is kind of a recipe for these hard assets. Oil prices have been up, it's just kind of like a safe harbor in some respects.

U.S. oil exports reached a high in the first half of 2023. And we're just going to continue to export oil. And that's a positive thing that we're on the global stage with our oil and gas production.

In 2023, natural gas production per well, they've just become more efficient. And that is partly why we see natural gas prices on the lower side, just production is up because we're producing roughly 13 million barrels a day of oil. And with that, as we've discussed, comes a lot of associated gas in the Permian. And there's a lot of oil production in the Permian .

There's gas production everywhere, Haynesville and Appalachia, and a lot of this is also going for LNG exports. So, it's just showing though that the producers are getting more efficient with production compared to years past.

MH : In the past, you've written extensively about Pioneer ( PXD ), the Permian, and now there's the Exxon ( XOM ) acquisition . The general M&A activity , what color do you have about this?

What does this mean for the market for investors when they're looking at these deals?

JW : Yes, so, you know, we talked about this consolidation happening, you know, potential happening in the industry at the end of last year. You know, in our -- after the Fed conversation we had – there are slides on this - we talked about, you know, the cash on the balance sheets of large oil and gas firms. And that deals were getting bigger, going to be, and by default, they are bigger. So, we kind of nailed that back then.

And it's playing out because also I think, we've had to figure out where are oil prices going to be? What's the narrative? You know, is it this green transition, or is it oil and gas, what is happening in between?

Really, right now with returns, and with what's happening around the world, this consolidation makes even more sense. And then as oil prices are up, again, what are you going to do with that cash? Are you just going to return it all to the shareholder, or are you going to invest for tomorrow?

Well, they've decided to invest for tomorrow. And the idea that, you know, okay, some are saying, oh, this just means oil and gas is around a lot longer. Well, that's true. And that was always true. You know, if you just look at the numbers, the demand, how much primary energy demand is met by fossil fuel usage.

And the affordability and all the things we have talked about in the past. And of course, absolutely, you know, this is also a way actually to produce these resources more cleanly when you have scale, when you have efficiency, you know, so I don't think that speaks to it being done, you know, with less decarbonization in mind, not at all. That's a false narrative.

And so, I would just say that the idea that Exxon and Chevron ( CVX ) are now making these major, let's just call it $60 billion acquisitions respectively, because that's what they are. Pioneer was 60 and Hess is just a notch under $60 billion.

It just speaks to the assets that make sense for those two players, you know, Exxon has a certain culture, certain operations, the Permian is a big deal for them. This completes that part of their portfolio and their intentions, their goal, their stated goals that they've had for a long time anyway. So this kind of just fits right into that.

And then with Chevron , because they're a little bit different, they have a little bit different strategic outlook. And one thing that's been noted is the Guyana assets were a big deal for them. And that's absolutely true. And also they're going to be in, you know, the basins there in the Rockies a little bit more with some of the assets they bought.

So I just think it speaks to these large majors working with their competencies, and so I think from an investment point of view is just a positive, I have, Exxon, Pioneer, I don't have much CVX, I have it represented in other ways. I'd always wished I had CVX. Dang it. I was just doing other things, but I do have some Hess ( HES ), so that's good.

So I just think it's the ideas, what we've talked about, even at the beginning of the year, remember I was talking about scale, efficiency, consolidation, all these things. And it makes sense in this environment where inflation is higher. You've got to get those costs down. And this is one way to do it. So, I think it makes a lot of sense.

And the other thing I'll note is just that, you know, we've talked about this U.S. majors versus European majors point of view. I think investors in the market are voting with their feet, and with their pocketbooks. And so that is my big, big takeaway. And geopolitics supports it. Long-term economic growth and development supports it.

MH : So, do we see more deals coming down the pipeline then?

JW : Probably. I imagine it's going to be happening all in the underbrush.

Everything that has happened in the last year on the geopolitical front, which absolutely intersects with energy, I think it really speaks to the environment that we're in and the outlook ahead. And that, just the U.S. oil and gas , it's a good bet, right?

It's a positive development. And it makes sense that there's consolidation because we are going to produce more efficiently in the future hydrocarbons, we are going to produce them more cleanly. And in fact, in these tie-ups, I think it's going to actually bode well for innovation in the future as well. So, I think it's a positive all around.

MH : Exports, I mean, this is becoming like an important story, it sounds like, or it's already an important story, but does this become the story then for energy markets, not only through the end of the year, but maybe 2024 as well?

JW : Yeah, I think it's a part of the story, right? It's not the whole story. It's an important part of the story in looking at specific companies.

You know, what are they able to export that has a decent growth trajectory ahead? And we know energy is positive, right? It's needed, but okay, well, will there be more shifts to energy trade routes? I mean, we've already had a huge shift once, what happened with Russia invading Ukraine. We know that Europe, stopped using, has been weaning off Russian pipeline gas, there's still LNG floating around, you know, but we have been exporting a lot more.

I think the projection is, and I think we talked about this a couple of videos ago, just that I think we were exporting like – in the summers like 13 BCF a day, and it's projected in the next number of years to go up to maybe 30. So that's growth, that's consistent growth. It's a projection. It's a scenario.

Same with natural gas liquids, ethane, propane, you know, all that. Crude, yes. But, there's a lot of different players in that space, right? And in different assets. So, there's a lot of nuance to the various firms as to who can do what, you know, not everybody can do it. So that's one thing.

And so, I'd say be nuanced about it. It is a theme, you know, but you better understand your numbers and how things are moving around.

Look at the production, look at who different players like Fang and the Permian, really great Permian player, you know. Who's solid, who's got solid production, that's got room to run in the future, that kind of thing as well?

I mean, think about AI. I mean, oh, you know, when we had the AI day, you know, right before Memorial Day, everyone was like, huh, AI, every tech company involved is going to benefit from AI. Woo, let's watch the ( QQQ ) go way up. And it did, but now it's coming back down to earth, like, okay, who can really leverage enterprise AI? What aspect of AI?

Everyone's hitched their wagon to the marketing idea of AI, but certain firms can pull it off better than others. You know, it's the same thinking, same in energy, same dynamic .

MH : Again, I appreciate the time. Very insightful. I'm looking forward to what happens next.

JW : Thanks for having me, Michael.

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