Ahh. I like, then, Raymond James approach to calculating which companies can return 100% of their enterprise value by 2030 - just in case there is an END.
Excellent way of putting it: "In a nutshell, the inherent decline rate of supply is almost certainly higher than any conceivable decline rate in structural (i.e., assuming future trend global GDP growth) oil demand." Eventually if/when they need to transition companies can just stop/reduce CAPEX and let the natural decline rates take care of themselves. But anything like this on a large scale is going to be decades away at least, wouldn't you say?
Thank you Investor. Yes, many decades away in my view. The point I am trying to make is that there are many saying oil companies should actively transition now...and that emphasis is usually on European, US, and Canadian companies. I would push back hard that it would somehow be a good thing for these companies to proactively transition when the world is clearly going to need crude oil and natural gas for many, many decades more. US + Canada produce 23 mn b/d out of a 100 mn b/d. We should be the last barrels produced, whenever that is. If demand does start to decline sooner or faster than what I expect, it is not that hard to stop spending and simply let production decline. I don't believe oil companies should invest in areas beyond where they have competitive advantage. If the oil demand trend changes, their production can naturally decline at least as fast.
I never understood the reasoning of companies who believe that because they have expertise in oil and gas production, they should get into entirely different businesses like wind, solar, etc. simply because those technologies also produce energy. It would be like a Michelin star French chef deciding that his kitchen will start cooking Thai cuisine because 'both are food, right?'. I always appreciate the blog Arjun, it's a masterclass.
Arjun, doesn't this "M&A is inevitable" idea depend on timeframe? In the long run (> 5 years), you're right, but in the medium term (< 5 years) many companies can continue to pursue "maintenance mode" where they drill enough to keep production flat then use the FCF to pay down debt, buyback stock, and pay out dividends. Obviously they need to continue to add acreage to maintain future drilling locations even in maintenance mode. This strategy might start to look like "blowdown mode" eventually, but that could be several years out. I'm not saying this is what they should do, rather what they could do. I'm a huge fan of M&A in the E&P sector. The R&M sector could be a good template for the E&P sector in that regard.
100% Jeff. No doubt there are some companies with running room for many years. I do think though that many companies effectively over-state (may not quite be the right term) their ability to sustain drilling of Tier 1 locations. I think companies need to always be actively thinking about this, as opportunities arise when they arise. The idea that "we don't need to engage in M&A because we have a large inventory" is really only true, I think, for a small # of companies. Even for those companies, opportunities arise when they arise. Worst thing is to do what the Super Majors did last cycle which was to start to invest in late 2000s after massive capital cost inflation.
Thanks for another excellent weekly column. I was not an oil and gas investor until March 2020. Occidental Petroleum got heavily punished in late March 2020. At the time, I thought OXY could be a good opportunity but I worried too much about its debt to take any position. This personal experience leads to my curiosity on your view about the acquisition of Anadarko by OXY 1999.. Given what you know now, how do you rate the acquisition : good, average or bad ? Would an absence of the Covid-19 pandemic change your rating ?
Thank you Tonyforever. I think OXY-APC deserves more of a follow up than is possible in this quick reply. Cleary, some mistakes were made on financing and price paid. That said, it is most likely too early to provide a definitive judgment. Even Altura didn't look good when we had 9/11, the tech bubble burst, and recessionary environment in 2002. But I would like to find a way to provide some commentary on the more recent deals like OXY-APC, so stay tuned....
I know you are a data driven guy. But would you consider Mr. Buffett's recent persistent accumulation of OXY share as a positive indication of OXY-APC deal? If I remember correctly, Mr. Buffett received some common shares of OXY in lieu of interest payment in late March or early April of 2020. He promptly sold them (probably between $9 and $10). Berkshire Energy is a player in power generation and distribution for many year. He presumably knew about the coming supply/demand of oil and gas better than many investors at the time. In your view, what is the primary reason for his 180 degree turn in OXY? Is it the invasion of Ukraine by Russia will result in a re-arrangement of oil/gas production and trading blocks and a big upward reprice of North American energy asset? I realize that I am asking you to speculate. But any subjective or objective views will be appreciated.
This is indeed pure speculation on my part as I am not a covering analyst of OXY and haven't spoken to the Buffet team on OXY, but as you note, they did provide financing for the deal (which I thought they still owned). Kind of puts them in a unique position to know OXY. Any time any one is investing in an oil & gas company, it at least partly has to be driven by a view of the cycle. Given Buffet is known to be a long-term investor, I would guess their growing investment in OXY is a sign of confidence in the long-term cycle. But again, I haven't spoken to them so this is pure speculation.
Ahh. I like, then, Raymond James approach to calculating which companies can return 100% of their enterprise value by 2030 - just in case there is an END.
Excellent way of putting it: "In a nutshell, the inherent decline rate of supply is almost certainly higher than any conceivable decline rate in structural (i.e., assuming future trend global GDP growth) oil demand." Eventually if/when they need to transition companies can just stop/reduce CAPEX and let the natural decline rates take care of themselves. But anything like this on a large scale is going to be decades away at least, wouldn't you say?
Thank you Investor. Yes, many decades away in my view. The point I am trying to make is that there are many saying oil companies should actively transition now...and that emphasis is usually on European, US, and Canadian companies. I would push back hard that it would somehow be a good thing for these companies to proactively transition when the world is clearly going to need crude oil and natural gas for many, many decades more. US + Canada produce 23 mn b/d out of a 100 mn b/d. We should be the last barrels produced, whenever that is. If demand does start to decline sooner or faster than what I expect, it is not that hard to stop spending and simply let production decline. I don't believe oil companies should invest in areas beyond where they have competitive advantage. If the oil demand trend changes, their production can naturally decline at least as fast.
I never understood the reasoning of companies who believe that because they have expertise in oil and gas production, they should get into entirely different businesses like wind, solar, etc. simply because those technologies also produce energy. It would be like a Michelin star French chef deciding that his kitchen will start cooking Thai cuisine because 'both are food, right?'. I always appreciate the blog Arjun, it's a masterclass.
Another great post. Must read for serious investors (energy or otherwise) and curious minds alike imo. Thank you sir!
thank you Deepak.
Arjun, doesn't this "M&A is inevitable" idea depend on timeframe? In the long run (> 5 years), you're right, but in the medium term (< 5 years) many companies can continue to pursue "maintenance mode" where they drill enough to keep production flat then use the FCF to pay down debt, buyback stock, and pay out dividends. Obviously they need to continue to add acreage to maintain future drilling locations even in maintenance mode. This strategy might start to look like "blowdown mode" eventually, but that could be several years out. I'm not saying this is what they should do, rather what they could do. I'm a huge fan of M&A in the E&P sector. The R&M sector could be a good template for the E&P sector in that regard.
100% Jeff. No doubt there are some companies with running room for many years. I do think though that many companies effectively over-state (may not quite be the right term) their ability to sustain drilling of Tier 1 locations. I think companies need to always be actively thinking about this, as opportunities arise when they arise. The idea that "we don't need to engage in M&A because we have a large inventory" is really only true, I think, for a small # of companies. Even for those companies, opportunities arise when they arise. Worst thing is to do what the Super Majors did last cycle which was to start to invest in late 2000s after massive capital cost inflation.
Hi Arjun:
Thanks for another excellent weekly column. I was not an oil and gas investor until March 2020. Occidental Petroleum got heavily punished in late March 2020. At the time, I thought OXY could be a good opportunity but I worried too much about its debt to take any position. This personal experience leads to my curiosity on your view about the acquisition of Anadarko by OXY 1999.. Given what you know now, how do you rate the acquisition : good, average or bad ? Would an absence of the Covid-19 pandemic change your rating ?
Thank you Tonyforever. I think OXY-APC deserves more of a follow up than is possible in this quick reply. Cleary, some mistakes were made on financing and price paid. That said, it is most likely too early to provide a definitive judgment. Even Altura didn't look good when we had 9/11, the tech bubble burst, and recessionary environment in 2002. But I would like to find a way to provide some commentary on the more recent deals like OXY-APC, so stay tuned....
I know you are a data driven guy. But would you consider Mr. Buffett's recent persistent accumulation of OXY share as a positive indication of OXY-APC deal? If I remember correctly, Mr. Buffett received some common shares of OXY in lieu of interest payment in late March or early April of 2020. He promptly sold them (probably between $9 and $10). Berkshire Energy is a player in power generation and distribution for many year. He presumably knew about the coming supply/demand of oil and gas better than many investors at the time. In your view, what is the primary reason for his 180 degree turn in OXY? Is it the invasion of Ukraine by Russia will result in a re-arrangement of oil/gas production and trading blocks and a big upward reprice of North American energy asset? I realize that I am asking you to speculate. But any subjective or objective views will be appreciated.
This is indeed pure speculation on my part as I am not a covering analyst of OXY and haven't spoken to the Buffet team on OXY, but as you note, they did provide financing for the deal (which I thought they still owned). Kind of puts them in a unique position to know OXY. Any time any one is investing in an oil & gas company, it at least partly has to be driven by a view of the cycle. Given Buffet is known to be a long-term investor, I would guess their growing investment in OXY is a sign of confidence in the long-term cycle. But again, I haven't spoken to them so this is pure speculation.
Appreciate your insight.