Daily Energy Standup Episode #281 – Energy Buzz: Mergers, Mandates, and Market Dynamics

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Video Transcription edited for grammar. We disavow any errors unless they make us look better or smarter.

Michael Tanner: [00:00:14] What’s going on, everybody? It is. Monday, January 8th, 2024. Here are our top headlines for the day. A natural gas plant guarding US northeast from winter blackout is at risk. Consumers are at mortal risk. Next up India is an emerging energy supplier to the EU. Major factors Iran’s oil trade with China stalls as Tehran demands higher uh prices California electric trucks mandate reduces transportation productivity and has other challenges. I will then dive in and cover, um, some oil and gas, uh, finance, high level stuff. We also have Apache and Kalon officially announcing a merger of about $4.5 billion of all stock equity, and then finally Southwestern and Chesapeake near $17 billion merger. My man Stuart Turley, kick us off. Where do you want to begin? [00:01:05][50.2]

Stuart Turley: [00:01:05] Oh, hey, let’s start off with our buddies up there in the east. Uh, natural gas plant guarding us northwest from winter blackouts is at risk. Michael, this is actually sad. Um, this game from Bloomberg, this is actually the LNG import facility right out of Boston. And here’s where it gets really sad. They have had to use this. Everett is the LNG import facility and it has kept the North eastern folks alive. I am not kidding about that alive. They kept the power plants going and the facility shut down underscores the challenges facing the American grid transition to cleaner energy as it accelerates. Climate change triggers wilder weather. Here. [00:01:57][52.2]

Michael Tanner: [00:01:59] Let me some Bloomberg baby. Let me see Bloomberg. [00:02:01][1.8]

Stuart Turley: [00:02:02] Oh yeah. But he they bring up some great points. Everett was a key resource in providing additional gas supplies to New England during extreme cold, said Gary uh Cunningham, director of market research at risk for Traditional Energy. Um, here’s where it gets in with the FARC. Michael, they have been saying all along that our grid is near breaking point because of adding the renewables without the storage, which we can’t afford. I just threw that in. He didn’t say it. There are going to be facilities that are fossil based and climate damaging, that are going to go off line, and they’re going to be replaced with alternatives that public policy and markets now have chosen. Here’s where Governor Hochul, you have heard me laugh. I mean, talk about governor, uh, Hochul saying that she’s got a 20% increase in energy this year, which was 2023. They got another one coming up in 2024. And then in 2025, they’ve got gas. For how much. Oh 100. [00:03:08][66.6]

Michael Tanner: [00:03:09] So yeah it’s it’s pretty. Here’s what I think is is hilarious is Bloomberg’s trying to say really really without saying it. They’re trying to say oh this is not a great idea. Everybody else is in favor of it. I mean, they’re see you got one. Quoting here. Gas is often seen as the transition fuel. As the world moves to more environmentally friendly ways to generate heat and power. Everett sign is a Everett’s closure is a sign of that shift. But they’re shutting natural gas. So on one breath they’re trying to say, well, you know, really natural gas is the transition fuel, but closing it down is a shift away from that, which is not good, because we’re going to just jump from one iceberg to the other. Again, we have to transition into it. It is hilarious how, you know, I mean, good luck there. Good luck in New York. [00:03:54][45.4]

Stuart Turley: [00:03:55] Good luck. You know what, uh, one of the funniest lines that I got feedback, which is one of the rare times that I am funny, is, uh, we took a poll, and that was all those in favor of letting, uh, New York go with 100% no fossil fuels. That means anything delivered with diesel. Anything. You see where I’m going with it? You’d have no clues. No, uh, no clothes, no food. All those in favor of letting New York without fossil fuels 100% renewable. I’m in. Let’s try it. Okay, let’s go to the next one. Michael, this is kind of fun. Iran’s oil trade with China stalls as Tehran demands higher prices. Michael, this is from, uh, our buddies over there. Readers. Uh, China’s oil trade with Iran has stalled, and they are looking at trading in, uh, wine as opposed to the, uh, U.S. dollar. Here’s where it gets. And it goes 5 to $6 a barrel below. Uh, Brant. But they have now come out and said, uh, the China’s smaller independent refiners, called teapots, have become Tehran’s top client since the first of buying Iranian oil in 2019. There, they absorb 90% of Iran’s total exports. Uh, usually passed off. This is huge. But what is not in this article is that China has brought on almost another million barrels per day of refining capacity. So now they have outgrown the Iranian ability for them to say, hey. Yeah, you’re going to listen to us. [00:05:43][108.2]

Michael Tanner: [00:05:44] Yeah. And remember, China is buying. This is a pretty steep discount. Back in November when those agreements were originally struck. It was about $10 a barrel. Looks like it’s come down in the kind of the latest offer to somewhere between. Or last month, cargoes were bought between $5 and $0.50 and 650. Now it looks like the latest discount they’re trying to negotiate is for 50. But it’s interesting. I mean, the question is, does I read does it have that many people to sell to. So why are you poking the bear that it’s it’s it’s like the kid that complains to his mom. What’s his mom? I don’t like your dinner. Well, kid, you’re not getting dinner from anywhere, so don’t bite the hand that feeds. [00:06:20][35.7]

Stuart Turley: [00:06:20] You know, and you don’t want to poke the panda bear because everybody says they’re cute to poke. Stick your hand in there. Have you seen that? One of the grid, where the guy’s sitting there and he’s getting a picture and a panda comes rolling in our church? June on the guy. Hey, by the way, we’re at this point. Let’s fly in. Uh, I got a picture that I’m going to send to the, uh, the team. Let’s fly in bear country. I got up at three this morning, and I was leaving Bear Country, and I got a picture of me in front of the sign of the bear crossing. Anyway. Okay, let’s go on to the next one here. So California Electric, our buddy down there, Gavin Newsom, is really just. He’s entertainment. California electric truck mandate reduces transportation productivity and has other challenges. Unbelievable. You can’t buy this. There are six bullet points. And I only want to cover a couple of electric trucks. Cost 50% more than diesel trucks. But I have lower fuel costs in California, where diesel cost and taxes are among the highest in the nation. Here’s where this is a total misnomer on this one. Electricity in California is twice as high as it is in Texas. Then you have the amount of time. And where are you going to charge this thing? Uh, that is a false statement. Large trucking companies can afford the large investments, but they only make up 30% of all the trucking in California. So I can understand the electrical issue in that city, in a downtown city, trying to cut your smog in a city. I think electric has got a place there. I don’t I don’t want to go ahead and just say, hey, let’s rule them all down. But, uh, the port of area as an opportunity, the electric trucks on the market can travel from the ports of Los Angeles and Long Beach. There are 30,000 trucks registered with the port that could all be turned into an electric fleet. The grid in that area, Michael, would not be able to sustain the amount of generation that it would take. The numbers are not there. [00:08:32][132.0]

Michael Tanner: [00:08:34] Yeah. And what really this, this this doesn’t impact who you think about. This impacts long haul trucking. What it really impacts is the USPS Fedex UPS Amazon. That’s where it’s going to get hurt now in Amazon UPS Fedex afford that. Yeah the USPS well they’re already in debt. And guess who funds that. You. [00:08:54][19.9]

Stuart Turley: [00:08:55] And guess who gets it in the drive thrus. The consumers when Amazon starts you know that free shipping that you enjoy and you see those delivery trucks come up. [00:09:04][9.6]

Michael Tanner: [00:09:05] Um, yes. Exactly. The money is going somewhere. And whether or not you see it as a consumer with higher prices or, you know, however, however it works. So, you know, as always, you know, our favorite state, California know we never see it in the Drive-Thru. [00:09:20][15.7]

Stuart Turley: [00:09:21] Yeah. The second favorite state is, uh, New York. You gotta you can’t buy this kind of entertainment, dude. Okay, let’s go to, uh. You want to. Let’s cover the southwestern Chesapeake, uh, near the 17 and year section. How’s that sound? [00:09:34][12.4]

Michael Tanner: [00:09:34] Yeah, we’ll do that. [00:09:35][0.5]

Stuart Turley: [00:09:35] All right. After you did. [00:09:37][1.4]

Michael Tanner: [00:09:37] Well, we’ll go ahead and quickly cover. Um, before we get into that southwestern deal, I think it’s important to cover oil and natural gas prices. We did see overall indexes on Friday rise about 2/10 of a percentage point after really what was a week of of losing. We saw three straight days Monday through Wednesday. Um, to kind of start off the week which which really dragged markets down. Nasdaq tumbled uh, mostly throughout the week, but did see about a 10th of a percentage point increase. We did see the the dollar index stay fairly flat. Ten year yields uh, jumped uh jumped 1.2 percentage points as 30 year interest rate um declined Bitcoin still sitting at about a. 43 $44,000. Gold crossing all time highs just above $2,000. I’m at 2049. We did see crude oil rally on Friday. Very hard. Finishes up $2. Or excuse me. Finishes up $1.62. That’s 2.2 percentage points. Um, 7381. Looks to open somewhere up here shortly as we record this on Sunday afternoon. It will open shortly. Somewhere around 7395. That seems to be the opening spot price for the futures market on Brant Crude Oil, only up about 2/10 of a percent or 2/10 of a percentage point. Uh, 7940. It’s really interesting. You see, crude oil in the United States spike tremendously. Um, but you see, Brant, crude oil doesn’t spike that much. What does that mean? Well, it probably has a little bit to do with with this Iranian Chinese oil trade in the fact of if China’s going to stop buying Iranian crude due to the discounts they’re unable to receive. It could lead way for other OPEC members to fill that gap. And remember that Brant oil prices really what uh, OPEC and OPEC plus itself is trying to control. So as we close that spread between crude oil and and Brant it’s only going to be more interesting. Um well you know, as we know next next month, Stu, um, coming up here, I think at the end of January, we do have another OPEC, uh, meeting, which they’ll talk about more cuts. I mean, I’d be shocked at this point if we don’t see another attempted small cut. Maybe it’s just a signal to the marketplace to say, hey, we’re here to continue to support prices or whether or not they actually feel like they need to continue to cut. And we know that there’s rumblings that people aren’t happy with the cuts. We know, is it? Uh, we’ve had two we’ve seen two countries recently attempt to pull out of OPEC, if only because they are unhappy with those cuts. Now remember who controls OPEC Saudi in the UAE. They’re the two biggest players OPEC Russia. If you consider Russia if you consider OPEC plus. But speaking of OPEC, those two countries really set the standard for everything they can afford to cut. Everybody else can. It’s why you see Saudi come in and you know last September have the little sugar on top with the extra cuts because they’re the ones that can absorb it harder for other countries to do that. Um. [00:12:21][163.9]

Stuart Turley: [00:12:22] And so I think let me just add this real quick. Your new member, Brazil, who just joined BRICs plus, uh, said, oh, by the way, we’re joining, but we don’t give a rat’s, uh, Bahamas, uh, about the, uh, quotas. So they said in the head of Brazil’s oil company, Petrobras, basically said we’re producing everything. [00:12:42][20.2]

Michael Tanner: [00:12:44] So and I mean, that’s good for you, the consumer. So just for all intents and purposes, that’s great for you, the consumer, because that’s going to lower prices for you at the pump. Um, specifically natural gas. We saw a very nice rise over the week. We saw it, uh, close at $2.90. That is awesome. From, uh, from a natural gas standpoint, in terms of producers, um, you know, a lot of that, uh, East Texas natural gas production, uh, some of that Haynesville, uh, production starts becoming a lot more economical as we start pushing $3. A lot of this uprising is, again, just due to the cooler weathers as we move into the winter season. Um, we also did see rig counts drops. Do. Let me go ahead and pull that up here. Um. Rig counts. We dropped one rig week over week. Uh, current count down to 200 or 621. That’s down 151 from last January 2022. So, you know, Canada saw an increase of 39 rigs. Internationally we saw a drop of 23. So a net positive increase on rigs, if only because Canada keeps drilling. Hey, if there’s one thing Canada is doing right, Stu, they’re picking up rigs when they need it too. So we like to see that internationally. We’re up 55 rigs from where we were in December of 2022. So gonna be interesting to see what happens here. So it’s going to be uh, it’s going to be a long year. I think there’s two deals I want to cover. Stu. First off, um, we did see an actual M&A deal. Apache wires, Callon petroleum in an all stock transaction. Just to kind of read, you guys, the high levels here, this transaction was an all stock transaction in which Apache acquired count for approximately $4.5 billion, which is inclusive of Kalin’s net debt. Uh, this pure this new, pure play, um, Permian company has large amounts of inventory, specifically in the Delaware and Midland Basin. Um, I love one of the key highlights, too. Uh, they’re calling their new acreage oil prone. They say Apache’s oil prone acreage in Midland and Delaware Basin combined will increase by more than 50% following the transaction. For Apache’s hope, I really hope it is oil thrown. [00:14:49][125.0]

Stuart Turley: [00:14:49] Back at the, uh, hat tip to that I our guy of the week oil pro I oh prone. I’ve never heard that. [00:14:58][8.8]

Michael Tanner: [00:14:59] But for their sake, I hope so. [00:15:00][1.3]

Stuart Turley: [00:15:00] Oh, absolutely. [00:15:01][0.4]

Michael Tanner: [00:15:02] Estimated overhead. You know, I unfortunately fourth, uh, fourth bullet point, estimated overhead, operational cost of capital synergies to exceed $150 million annually or. Pour a little out and have a quick moment of silence for all the employees who will be involved in that. Wow. Okay. And unfortunately, that. And then I love this. Uh, you know, one of their other, uh, uh, bullet points. Additional scale anticipated to improve credit file. Pro forma balance sheet will remain strong with a leverage of 1.1 net debt to adjusted EBITDA. And remember, guys, that is just a completely made up metric that’s non-GAAP. So just I just love how they got to show that really. You know, if you if you do some fancy science with our net with our debt and call it net and you do some weird stuff with our balance sheet and only, you know, if you watch our deal spotlights, you kind of see how we can get to an EBITDA number multiple different ways, you know, what do you leave out? What do you not leave out? Um, but don’t worry, they’re in good shape, guys. According to their non-GAAP financials. [00:16:00][58.4]

Stuart Turley: [00:16:01] Hey, Michael, do you know, how do you really bury money in a financial statement from an oil company. Uh, you use EBITDA after exploration? [00:16:10][8.5]

Michael Tanner: [00:16:12] Yeah, exactly. Because you don’t include. Yeah. Great. So we’ve got we’ve got revenue of $10 million a year. Oh that’s cool. How much do you spend? Well, we spent $200 million. Yeah. It was like oh, oh, oh. [00:16:24][12.4]

Stuart Turley: [00:16:25] And we got we have 15 dry wells. [00:16:27][2.0]

Michael Tanner: [00:16:28] Exactly. It took us 15 dry holes to get here. Uh, yeah. I’ve never seen that still. Come on. [00:16:33][5.1]

Stuart Turley: [00:16:33] Oh, no. No, but that’s EBITDA. [00:16:35][1.3]

Michael Tanner: [00:16:36] That’s EBITDA. Speaking of dry holes, let’s move over to the next, um, proposed merger. Southwestern Chesapeake near $17 billion merger. I think, you know, just to give you guys an idea, this deal is roughly, uh, valued at $17 billion. This merger of equals, it would create one of the largest natural gas producers in the United States. That deal could come together as early as next week, according to people familiar with the situation. This is according again to our friends over at router’s. Southwestern had a market capitalization on Friday of roughly about $7 billion. Chesapeake was a little bit more than $10 billion. Um, southwestern stock rose about 7%. Chesapeake um, shares rose nearly three percentage points. You know, this would be about seven point 4,000,000,000 cubic feet of gas per day. This would basically, uh, leapfrog effect, making it probably the largest natural gas producer in the United States. You know, they their existing positions, both in the Haynesville and Louisiana, would allow it to kind of refocus on some liquefied natural gas, uh, exports on the Gulf Coast. Uh, you have to remember, guys, um, you know, Chesapeake was founded by Aubrey McLennan. You know, if you talk about spending money back, I love to spend money. Um, you know, millions of, uh, millions of acres across the country, you know, laden it with probably the most insane debt structure of all time. That finally led to the thing being, uh, filing for bankruptcy. Uh, in 2022, they were able to reduce their debt by more than $7 billion through that process and prioritize, quote unquote, returning cash, um, to shareholders through a bunch of divestitures and exiting its Haynesville position, which is down there in Louisiana, East Texas area. They also sold a bunch of oil assets in Texas. They bought a bunch of other stuff. One of the matter is, guys, they’ve been tinkering. Uh, they needed to do something. They’ve got an insane amount of debt load. Can we go ahead and throw this tweet up? This is from WTI. Realist. Um, it’s I think it says all you need to know about what this, uh, merger would look like. Staggering a pro forma Chesapeake would be at 2 billion or 2 million cubic or boe per day and still almost worthless. Uh, that goes to show you the you know, of course it’s a pro. We’re talking a boe. So what’s that? You know, to be about 7.4 BCF per day? Being natural gas business is hard. You gotta love to see these, uh, natural gas prices go above $3. That does make everything a lot more profitable. But, um, you know, this is a merger of equals. The interesting to see what happens to the names. Um, I saw a few tweets go out there about, you know, can’t really get can you really get rid of the Chesapeake name? It’s just so it’s just so legendary in the industry’s thinking about, you know, all of the history behind it. Southwestern has been around for a while, but I’m just gonna have to come up with a with a new, new name or something because, you know, I don’t, you know, or, you know, because this is definitely a merger. It’s going to be interesting to see how this all shakes out southwestern with, uh, a lot less than Chesapeake, but Chesapeake with a larger market cap. So I wonder what the concession will be. [00:19:43][186.9]

Stuart Turley: [00:19:43] This be like Hollywood dating? So it’d be South Cheek or oh, West West. Eek. Uh, West check. [00:19:51][8.0]

Michael Tanner: [00:19:52] Uh, my guess is they keep the Chesapeake name, but in in in I would think they would keep the Chesapeake name, but there’s going to be not a lot of concessions, but southwestern if you’re if you’re a shareholder, if you’re on that management team, you’re, you’re you’re coming in saying we’re equals here. And, you know, but I do think that my guess would be they keep the the Chesapeake name. We’re definitely going to. Cover. Apache. Callin on the deal. Spotlight. If this merger comes through with Southwestern and Chesapeake, we will definitely make sure to cover that as well. So this gives us two great deals, um, to outline. But what do we miss do? [00:20:24][32.7]

Stuart Turley: [00:20:25] Well, we’re going to, uh, this morning, uh, you’ll be able to go out to the deal spotlight. We’ve got the other one that we’re just released, uh, on Sunday. So, uh, that’ll be pretty groovy to go through. I’m having a lot of fun with these deal, uh, spotlights and, uh, really getting excited to see more of these. We got fantastic feedback on, though, so far. Michael. [00:20:45][20.5]

Michael Tanner: [00:20:46] Yeah, I know this is this is, uh, a minerals deal in 30 minutes or less. [00:20:49][3.1]

Stuart Turley: [00:20:50] Um. [00:20:50][0.0]

Michael Tanner: [00:20:51] That’s that’s the the brand on this one. But it’ll be good. We, we, we love our friends over and and well database combo curve and energy net. We got to include them um, in this next episode. Uh, as, as we checked out one of their lots. Um, as always, you can check out all of the information for the deal spotlight on the greatest website in the world. Energy news beat.com. We don’t got anything else, do we? Let them go. [00:21:13][22.3]

Stuart Turley: [00:21:14] Absolutely. It’s going to be a interesting week. We got some series coming up that are just hold your breath. [00:21:21][7.6]

Michael Tanner: [00:21:22] Absolutely guys. All right. For Stuart Turley I’m Michael Tanner. We’ll see you tomorrow folks. [00:21:22][0.0][1240.2]

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