Shorting Oil, Hedging Tesla

[jhm]

Big Money Still Loves Oil & Gas | OilPrice.com

This kinda deals with our discussion around HASI and green assets generally. But seriously? Meh.

There is this recognition that O&G companies need to be part of the solution. But it still feels like same old greenwashing. I'm not sure how energy investors are supposed to be reassured by this. Owning a couple of wind and solar farm bought on the coins found in the O&G couch is pretty much meaningless financially. They want to posture like their experience poking holes in the earth gives them some sort of deep knowledge they can bestow upon renewable energy industry to help bring it upto speed. This is condescending BS. The RE industries are brutally competitive already. But "project management skills" give me a break. The best most oil majors do is buy a few assets and hold in portfolio.

BUT that brings me right back to HASI. They are a nice pure play that simply buys up sustainable assets and passes the earning through to investors. Investors that want exposure to this don't need to invest in the oil companies with all their baggage and liabilities. Also companies that are deeply invested in gas or even coal are strategically compromised when it comes to storage and RE. The tendency is to manage portfolio value, not to maximize the value of storage and RE. Particularly when it comes to storage there can be conflict with thermal generators, especially gas peakers. If you owned a peaker, why would you want to operate your storage assets to undermine the power prices your peaker can fetch? Answer is, you don't. So I would not want to invest in any owner or operator of battery storage that is potentially conflicted with their thermal assets. Thus, a pure play is the best way to know that the value of RE and storage will be maximized.

You have to ask, will an O&G company dabbling in clean tech ever pursue green tech in ways that cannibalize the value of their fossil assets? This is the same conflict that ICE makers have when approaching EVs, but I suspect the conflict is even worse for fossil fuel producers.

The best thing fossil companies can do is divest and merge, returning capital to investors, while fossil production declines. I used to think that some of them could branch into renewables, but I don't see that anymore. Fossil companies are done.

 

[replicant]

Laurie van der Burg on Twitter

 

[TheTalkingMule]

Um.....while all the talking heads and are yammering about a fracking slowdown in production, we pumped 13M barrels a day the last few weeks. Up 1Mb/d from last year, which was up 1+Mb/d from the year before. We are now firmly in the "net exporter" category to the tune of 500kb/d.

With China demand cratering, the mass extinction of frackers and certain oil semi-majors may be upon us. Consolidation time!

 

[adiggs]

Laurie van der Burg on Twitter

I love that graph of how wrong the IEA is about solar adoption.

They're so wrong, they're actually useful. If I had a model that wrong for a problem I was solving as a data scientist, I could just flip the result from the model / forecast, and get a good indication of where the right answer is.

 

[adiggs]

Um.....while all the talking heads and are yammering about a fracking slowdown in production, we pumped 13M barrels a day the last few weeks. Up 1Mb/d from last year, which was up 1+Mb/d from the year before. We are now firmly in the "net exporter" category to the tune of 500kb/d.

With China demand cratering, the mass extinction of frackers and certain oil semi-majors may be upon us. Consolidation time!

H'mm - yay Coronavirus - for "helping" us wean ourselves from oil?


My check of the moment shows WTI priced at just under $50. I don't know if it is or not, but for me at least, being under $50/barrel is an important psychological barrier. Another $3 or $4, and Brent crude will also be under $50.

I wonder if OPEC can shut down production enough to sustain $50/barrel oil? heh

 

[jhm]

U.S. shale oil output growth to slow in 2020 - Schlumberger CEO

Here's some interesting yammering. Schlumberger is cutting 1400 jobs. They see US shale production growth declining in next few years.

Olivier Le Peuch told Reuters on the sidelines of a conference in Riyadh he expects growth to slow to 600,000 to 700,000 barrels per day in 2020 and to 200,000 bpd in 2021, down substantially from roughly 1 million bpd in 2019.

So the basic problem is a low price on oil coupled with investors wanting to get paid for use of capital.

The article then pivots to how Saudi Aramco is interested in fracking tech for its own shale reserves.

Oddly enough the article doesn't include the usual banter about how slowing production growth down will drive prices up and reverse the trend. So maybe there is a bit more realism here about how demand can't be relied on to sustain higher oil prices?

So here's a good open question for us to debate: When US shale production goes into decline, are we post production peak globally? Put another way, if US shale is not delivering growth in production, who is?

I'm getting the impression that oil could reach a production peak by 2022.

 

[TheTalkingMule]

On a related note....I see Peabody's market cap is down to $550M today, from their post-bankruptcy levels of $3-6B just a year ago. I can remember consulting for Peabody on the procurement side back in 2014 and their attitude being one of pure denial. They just needed to "tight up" on expenses to weather the storm.

These guys had a market cap of $20B in 2011, were walking dead in 2014, tried to reboot, and now have gone from $60 to nothing.....again.

Oil is getting near that place. I still believe there is a market tipping point coming where everyone capitulates and all NOCs pump as much as they can. We have been in a perma-glut for 2.5 years, crude pricing just hasn't caught on yet.

 

[adiggs]

I don't plan to start posting oil prices to this thread. That being said, I get current oil prices here:
Crude Oil Prices Today | OilPrice.com

And Brent crude is getting close enough to $50 to think it's going under that threshold. Brent is usually around $5/bbl higher than WTI. Also my opinion, but I think there's at least a non-zero chance that if (when?) we go under $50/bbl we're going to stay there for a long time. And 'long time' might turn into forever, or at least long enough for today's investors in O&G to go find something new to invest in.


I definitely subscribe to the capitalism, or supply/demand solution to use of oil, and I tend to think that lower oil prices is going to be better for driving oil from being our primary energy source.

That logic being - the energy users might like lower oil prices and eager to keep using oil at these lower and lower prices, but the suppliers are going to see their financing dry up more aggressively as prices go down, their profits (they have some!?!) shrink, and for the business to generally be worse and worse.

I see this as the path that coal has been walking, and using coal as our mental model, we can be confident that even if oil gets onto the same path that we'll still have a few decades of decline where oil is still a huge industry

 

[jhm]

Oil prices dive to lowest in over a year on coronavirus fears

Consultants Facts Global Energy forecast oil demand would grow by 60,000 barrels per day in 2020, a level it called “practically zero,” due to the outbreak.


U.S. gasoline futures RBc1 tumbled as much as 5.5% to $1.3742 a gallon, the lowest since late January 2019. Heating oil futures HOc1 dropped about 0.7% to settle at $1.4892 a gallon, after hitting the lowest since July 2017.

“It makes me think that the downside here now moves from crude to products should the virus continue to grow outside of China,” said Scott Shelton, energy broker with ICAP in Durham, North Carolina.

Margins for producing distillates HOc1-CLc1 - heating oil, diesel fuel and jet fuel - have hit their lowest levels since 2017 due to fears of reduced demand.

For both Brent and WTI, the spread between December 2020 futures and December 2021, a popular trade used as a barometer for supply expectations, fell firmly into negative territory. Both spreads CLZ0-Z1 LCOZ0-Z1 hit the widest levels since January 2019, signaling that erosion in demand could lead to a glut through the end of this year.

To recap,

Zero demand growth
Gasoline and heating oil futures down
Refining margins for distillates down
Slope on crude future curve is upward, contango

It looks like refiners will need to cut production soon to avoid losses. So crude demand has further to fall in the short run. It does not seem like the market knows where the bottom is.

On the plus side for fighting climate change, this holds consumption level for a year and and punishes investors for their fossil fuel folly. This gives Tesla and any other serious EV maker another year to ramp up. Demand for ICE vehicles continues to fall about 5%. So the threshold for the number of EVs needed to reduce motor fuel consumption is a little lower than what we've been thinking upto this point. Thus, it is getting easier for EVs to push oil demand into decline sooner.

While coronavirus is a big deal, I do suspect that it also serves as a convenient cover story for downward trends in oil demand growth. Investors can continue to believe that if it weren't for coronavirus, everything would be okay in the demand department. It's not true. We saw last year strong indications that oil was headed into a glut this year without a virus to explain it. No doubt coronavirus will dominate the narrative around oil demand for 2019. But the longterm story is that demand has been eroding enough that a mere virus can push it into decline. The closer we get to zero demand growth, the more these sorts of shocks will tip growth from positive to negative.

I think the more durable impact here on the oil market is that investors will get a taste for just how fragile demand growth is and learn to pull back on investment levels.

 

[jhm]

Major Bank Sees Abysmal Demand Growth For Oil | OilPrice.com

This is interesting. Analysts at Bank of America Merrill Lynch are starting to piece together the elements of peak oil. (Caveat, there is a wall of separation be between me and BAML. My opinions are my own and not my employer.) They are seeing that capital is drying up for shale producers and other fossil producers. Prices will remain too low. And demand is eroding. Specifically they recognize that EV will drive a reduction in demand. Their modeling suggest a slower EV adoption ramp than mine. Specifically, they see EVs reaching 35% of new vehicle sales by 2030, whereas I see crossing that line 4 years earlier by 2026. This puts my peak near 2025 and BAML near 2030.

Though I think their ramp is too slow, what matters is that they are starting to track and model it. Each year as new data comes in, the can update their projections. And my bet is that each year they will have to move the peak about a year earlier.

At any rate it is good that banks are connecting the dots here and recognizing the potential for impairment.

 

[abasile]

Yesterday and today, I closed out my small positions in XOM puts. It seemed like a good idea to take money off the table, since I was able to sell the puts for a little more than double what I paid for them only weeks ago. My thinking is to wait for the overall market to be trending in a positive direction, then consider buying more puts in oil and/or legacy auto. For now, I used the majority of the proceeds from selling the XOM puts to buy more TSLA shares, and am leaving the remainder in cash.

 

[TheTalkingMule]

Yesterday and today, I closed out my small positions in XOM puts. It seemed like a good idea to take money off the table, since I was able to sell the puts for a little more than double what I paid for them only weeks ago. My thinking is to wait for the overall market to be trending in a positive direction, then consider buying more puts in oil and/or legacy auto. For now, I used the majority of the proceeds from selling the XOM puts to buy more TSLA shares, and am leaving the remainder in cash.

That's the move. I missed the boat on puts 10 days ago that are now up 50%, but I'm confident XOM/CVX share prices will return to pre-corona levels in a month or two. Then I'l jumping into deep puts.

 

[Erleichda]

I agree re: XOM puts. Also, back to JHM's original thesis on SCO moving in contrast to TSLA...I don't think we are quite there yet but over the next 12 to 24 months watch it closely!! Especially if the DOW and SCO move discordantly. I'd buy at <$10-15 over the next few years waiting on the big move.

 

[mblakele]

Canadian tar sands offer lessons for American shalemen

[...]

Tapping new wells of thick Canadian bitumen and processing it into crude is expensive, but the break-even oil price for operating an existing one can be as low as $25. Large reserves and low depletion rates mean that companies can offer measured growth and attractive dividends. Instead of lubricating profits, however, Canada’s tar sands are bunged-up with protests against new pipelines. Most international oil firms have fled. The latest firm to retreat is Teck Resources. On February 23rd the Canadian company scrapped plans for a C$20bn ($15bn) oil-sands mine.

[...]

Fracking a virgin shale bed is simpler—and cheaper—than mining a new tar pit. American crude production surged by 94% from 2011 to 2018, hitting Canada twice over: by pushing down the oil price and sucking away investment. Canadian oil output rose only two-thirds as fast. Chevron and ExxonMobil are among the global energy giants to pump capital into America’s vast Permian basin in Texas and New Mexico; the pair will present spending plans to investors in March.

But frackers, too, have headaches. Many have grown fast but spent faster. Returns tend to be meagre, as the quick decline in a well’s output has led firms to drill new ones. Low gas prices have hurt firms specialising in fracked gas most, though oilier producers have also struggled. An analysis of the top 39 public shale oil companies by Rystad, an energy-data firm, found that cashflow from operations exceeded capital spending at just one in four firms in the third quarter of 2019.


Now American companies may begin to behave more like Canadian ones, says Benny Wong of Morgan Stanley. Investors have urged frackers to grow more slowly and return more cash to shareholders. Top shale firms are listening. In November Pioneer Natural Resources raised its dividend and said it would pursue more modest growth. On February 18th Concho Resources and Devon Energy, two companies with assets in the Permian, told investors that capital spending would be lower this year. The companies raised their dividends by 60% and 22%, respectively.


Shale firms’ slowing growth may reflect geological and technical limits, too. Bob Brackett of Bernstein, a research firm, points out that productivity per square foot declined in all but one of America’s main shale basins last year.

[...]​

 

[TheTalkingMule]

Even the US govt is divesting.

DOE Announces Notice of Sale of Crude Oil from the Strategic Petroleum Reserve

 

[bruce4000]

Bad time to be selling oil to raise money ie buy low, sell high. Will just make oil glut worse.

 

[TheTalkingMule]

Bad time to be selling oil to raise money ie buy low, sell high. Will just make oil glut worse.

This is like when crackheads run out of money and the credit cards are all maxed out. They're not thinking about logic, just selling the TV and silverware.

Apparently they can take this money and bundle it into a coal bailout of sorts. Unreal.

 

[TheTalkingMule]

10 year treasuries dipped to 1.04% this morning. Are all the ultra-low or negative yields just a function of all traditional "energy investments" needing a new home?

 

[jhm]

10 year treasuries dipped to 1.04% this morning. Are all the ultra-low or negative yields just a function of all traditional "energy investments" needing a new home?

I've bought a modest position in HASI. Demand for this REIT is strong. It's up 6.8% today. There seems to be a lot of people like me just looking for a dip. Income from energy investment is the name of the game. Fossils suck and bonds suck to as you point out. So go buy up solar and wind farms!

 

[jhm]

Are Oil Majors Facing A Terminal Decline? | OilPrice.com

Nice read from Nick Cunningham.

“In 2019, the five largest integrated oil and gas companies—ExxonMobil, Shell, Chevron, Total and BP—spent a total of $88.7 billion on capital projects, down nearly 50 percent from the $165.9 billion they spent in 2013,” a report from the Institute for Energy Economics and Financial Analysis said. “Not since 2007 have the capital expenditures, or capex, among the five companies been so low.”

The majors have slashed spending in order to limit the damage to their balance sheets, but low capex is a “warning to a mature industry with declining prospects in its traditional businesses – oil and gas exploration and production, refining and petrochemicals,” the report said.

These trends include weaker growth prospects, including the “elusive” belief that petrochemicals offer the next big growth sector. They have less cash than they used to, due to lower oil and gas prices.

Replacing reserves is no longer the preferred metric by Wall Street. Instead, investors want cash flow, something that the majors are also struggling with.

Meanwhile, the majors collectively rewarded shareholders with $536 billion in dividends and share buybacks over the past decade, while only generating $329 billion in free cash flow. They have had to sell assets and take on debt to make up for the shortfall.

This last quote is the punchline. Oil majors have nothing meaningful to invest in so they are monetizing their balance sheets to return cash to investors. They sell off assets and raise debt to transfer $207B cash to investors.

This is one match short of a fire sale.