Safe Haven

Bloomberg: U.S. Shale Becomes Oil Industry’s Safe Haven as Prices Languish

The cost of shale production has fallen so much since then that it’s becoming a safe haven for major oil companies in times of volatile prices, providing rapid, reliable growth and quick returns even with crude trading for just over $50 a barrel, down by almost a third since the start of October.

ConocoPhillips said Monday it’s spending half its 2019 budget in the continental U.S., while Chevron Corp. is investing more at home than it’s done for more than a decade, with $3.6 billion going to the Permian Basin alone. Anadarko Petroleum Corp. and Hess Corp., both global operators, plan to increase spending on their American assets more than 40 percent.

Oil’s recent collapse caused “some different allocation going on within the budget,” Conoco Chief Executive Officer Ryan Lance said on Bloomberg TV. “We’re putting more toward our U.S. unconventional position,” he said, referring to shale.

Production growth “slows down at $50 but I don’t think it stops at $50, and it certainly continues if prices get back to $60,” Lance said. Skeptics thought shale “wouldn’t last long, but it’s here, it’s a huge resource and it’s going to be resilient and long lasting.”

 

Don’t Mess With Texas

Bloomberg: Texas Is About to Create OPEC’s Worst Nightmare

Fairly sensational headline but some good soundbites.  The pain trade that nobody/everybody expects is for Saudi to keep pumping.  Yes, I know it exhausts their fields and plays havoc with revenue for their massive social programs but it didn’t stop them in ’15/’16.

Now growth is speeding up. In Houston, the U.S. oil capital, shale executives are trying out different superlatives to describe what’s coming. “Tsunami,’’ they call it. A “flooding of Biblical proportions’’ and “onslaught of supply’’ are phrases that get tossed around. Take the hyperbolic industry talk with a pinch of salt, but certainly the American oil industry, particularly in the Permian, has raised a buzz loud enough to keep OPEC awake.

Only a few months ago, the consensus was that the Permian and U.S. oil production more widely was going to hit a plateau this past summer. It would flat-line through the rest of this year and 2019 due to pipeline constraints, only to start growing again — perhaps — in early 2020.

If that had happened, Saudi Arabia would’ve had an easier job, most likely avoiding output cuts next year because production losses in Venezuela and sanctions on Iran would have done the trick.

Instead, August saw the largest annual increase in U.S. oil production in 98 years, according to government data. The American energy industry added, in crude and other oil liquids, nearly 3 million barrels, roughly the equivalent of what Kuwait pumps, than it did in the same month last year. Total output of 15.9 million barrels a day was more than Russia or Saudi Arabia.

“The narrative has shifted significantly,’’ said John Coleman, a Houston-based oil consultant at Wood Mackenzie Ltd. “Six months ago, the market expected the bottleneck to ease in the first quarter of 2020. Now, it expects it in the second to third quarter of 2019.’’

 

 

 

 

Valuation Checkup

Trailing 12mo EPS stands at $21.79 as of 9/30/18.

12mo trailing eps

Since the quarter printed, we’ve seen the Trailing 12mo Earnings multiple contract from 39.6x to 26.3x.

26.3x is below the long term mean of 28.8x but comfortably inside one standard deviation from the mean (17.4x).

px and pe

It appears that TPL’s multiple had a bit of a regime shift in late 2005.  After that point, P/Es were generally higher with an average of 36.1x.  Though the P/E also appears more volatile, the standard deviation of the smaller sample is 10.9x vs 11.4x for the entire history displayed.

Fair value at long term P/E mean = $21.79 x 28.8x = $628

Fair value at 9/2005 through current P/E mean = $21.79 x 36.1x = $726

Source: Bloomberg

 

Link Roundup : 10/25/18

Bloomberg: What the Permian Oil Boom Looks Like

It was between Carlsbad and Loving, I think, that I saw my first natural gas flare. In the Permian, oil is usually the first priority, and while natural gas production in the region is large and rising, the infrastructure to capture and convey it has lagged, so lots gets burned off in the field. Farther south, there were times when I could see flare after flare after flare all the way to the horizon, until the land got so flat that I couldn’t see the horizon anymore.

Bloomberg: The Permian Oil Boom Is Showing Signs of Overheating

When U.S. shale emerged as a threat to OPEC in 2014, the cartel tried to kill it off by flooding the market with crude, sending oil prices below $30 a barrel. The move backfired: While some of the weaker U.S. players were swamped, others cut costs aggressively and invested in new technology. The American industry emerged leaner and stronger. Today, U.S. drillers are unshakably confident. “The Permian is huge,” says Vicki Hollub, chief executive officer of Occidental Petroleum Corp., the basin’s biggest producer, in an email. It “has the capability to sustain its position with respect to the rest of the world for another decade or two at least.”

The Permian, however, is also showing signs of overheating. Sand, which is used to prop open the fractures in rock that allow the oil to flow, has become a precious commodity that fetches about $60 a ton. Truck drivers command salaries of $150,000 a year. Getting a child into day care “is like you’re scalping tickets to a Rolling Stones concert,” says Jessica McCoy, a mother in Midland, Texas, the Permian’s unofficial capital. And the region’s roads, overwhelmed by the sheer volume of trucks barreling down thoroughfares designed for farm traffic, are among the deadliest in the country.

Meanwhile, a shortage of pipelines to transport crude from the Permian’s fields to refineries and tankers on the Gulf Coast threatens to cap production growth at least until next year, when new conduits come online. The basin’s total output has been growing by an estimated 31,000 barrels a day, down from the 134,000 barrels-a-day gains logged in October of last year.

Operators will have to spend more than $300 billion in the next five years to meet the industry’s goal of boosting the Permian’s production by half, according to Arthur D. Little, a Boston-based consulting firm.

On Blackouts

Both the WSJ and Bloomberg have run articles this year about the power (or lack thereof) of earnings blackouts.  Both suggest that stock prices can get weak when companies are prevented from purchasing their own stock due to prudence around the possibility (or perception) of trading on insider information.

An astute TPL investor would conclude that buyback blackouts are a big deal for TPL since, well, buybacks are its core competency.

I’m not a statistician, nor do I play one on TV but it does appear to me as if the lack of buybacks is a material driver in month to month price action.  Below is the simple average monthly return of all monthly periods since July 1980.  YTD October 2018 at -8.99% is included as a full month in this analysis.

Note that “blackout” months (my assumption) are highlighted in red and represent 2 of the 4 lowest monthly average returns and 4 of the 6 lowest average monthly returns.  If you consider December a throwaway month (tax planning), the blackout effect gets even stronger.

On the flipside, you really want to own TPL in Feb, May, Aug, and Nov which are the months TPL reports prior quarter earnings.  Reporting is typically very early in the month.  I assume TPL comes out guns blazing after that to do its buying.

monthly average pricing

Source: Bloomberg

Kevin Crowley of Bloomberg on TPL. May 2018

Bloomberg: The 130-Year-Old Bankruptcy That Created a $5 Billion Oil Giant

bloomberg map

I assume that most TPL-heads have seen this article but in the spirit of posting up all the resources / news / articles I find, here goes.

Kevin Crowley and David Wethe do a bang up job covering the the energy space for Bloomberg.  Kevin and David are particularly strong when it comes to writing about West Texas.  Be sure to give their stuff a look.

A couple notable takes from the article are below.  I worry/think about both:

Glover’s pay rose almost three times to $724,000 last year, while Packer got a similar increase to $753,000, according to the annual report.

Tyler Glover and Robert Packer (TPWR) are in the catbird seat and are going to want/deserve higher comp as some point in the future.  The Trust does not have a history of high pay though it seem like they are moving in that direction.

While it may have a unique history, Texas Pacific isn’t the only company making money from the Permian’s mineral leases. Diamondback Energy Inc. spun off its mineral rights into Viper Energy Partners LP in 2014. So far this year, Viper has climbed 28 percent.

Parsley Energy Inc.’s CEO last week said he’s “definitely looking into” doing something similar.

I think about bulk asset sales often.  TPL could hit a bid on the the mineral rights or the water biz (and its related land) and do a massive return of capital at any time.  The Trust, as designed (as far as I know) isn’t really a growth entity.

Maybe I’m way off?  Let me know.