April 2024 - Commentary from Dan Pickering

Choppy with energy generally outperforming. The industry continues to grind forward with free cash generation, cash returns to shareholders and capital discipline as the mantras.

Choppy with energy generally outperforming. For April, the S&P500 dropped -4.1%, the Nasdaq declined -4.4% and Diversified Energy fell -0.9% (S&P 1500Energy, S15ENRS). Energy subsector performance was as follows: Midstream -1.2% (AMZ), Upstream -2.3% (XOP), Oilfield Services -6.9% (OIH) and Clean Energy -5.4% (ICLN). Front month WTI oil gave back -1.5% (~$81.95/bbl), while front month NYMEX natural gas bounced +12.9%(~$2/mmbtu).(1) 

Although crude finished relatively flat for the month, there was plenty of volatility. In early April, Israel struck the Iranian embassy in Syria, killing senior Iranian officials. Iran promised retaliation. Reflecting tense and uncertain conditions, WTI crude rallied from ~$83/bbl to ~$87/bbl. The Iranian response on April 14th was well telegraphed and easily contained (if anything associated with a missile strike can be considered easy). Widely interpreted to be non-escalatory and with US President Biden urging Israel to “take the win”, tensions eased. WTI was flattish for a few days before drifting lower to end the month at ~$82/bbl. While the baseline level of geopolitical risk is now probably higher, crude markets are skeptical of supply-altering tightness. A justified position so far. 

April was relatively quiet for natural gas. Price rallied but remains painfully soft. Energy companies extended production shut-ins and drilling activity softened marginally. Waiting for weather and LNG. The back end of the future curve strengthened…with Calendar 2026 gas moving from $3.80 to$4/mmbtu. There was no obvious catalyst - perhaps confidence in LNG project timing, perhaps AI data center demand enthusiasm, perhaps animal spirits or perhaps just trading noise. We know prices are unsustainably soft at current levels. The mystery is when they get back to equilibrium.

The industry continues to grind forward with free cash generation, cash returns to shareholders and capital discipline as the mantras. Blocking-and-tackling execution is being augmented with asset optimization and consolidation. For example, EQT swapped a portion of its non-operated Appalachia assets to Equinor in return for cash and operated properties. 

On the public company merger front, SLB (the company formerly known as Schlumberger) acquired Champion X (CHX) in a $8B transaction focused on growing in production chemicals and artificial lift. In the industrial minerals and frac sand space, Apollo spearheaded a take private of US Silica (SLCA). In small cap E&P, Kimmeridge Energy (private) sparred with SilverBow Resources (SBOW) regarding an unsolicited combination. As we say every month, there will be more. 2024 is (another) Year of The Deal.

In early May, the massive Exxon/Pioneer deal closed, but not without fireworks. The only concession required by the FTC was that Pioneer Chairman Scott Sheffield not be allowed to serve on the Exxon board. This drew massive media attention as the FTC claimed Sheffield’s public and private commentary over past years was collusive and designed to drive up the cost of energy for American consumers…and could/would continue at Exxon (we’re paraphrasing). An easy give for Exxon; a high profile move for the FTC.   

Lost in the shuffle (which was perhaps an unspoken goal of the FTC) was the fact that the FTC did not require any production/property divestitures or stipulate any restrictions on the legacy assets of either company. This is appropriate- there is no way Exxon’s post-deal production has the ability to influence fragmented crude markets. But it was still a relief to see tacit acknowledgement of this from the FTC. Other, smaller deals now seem to have a much more certain path to completion. These include Occidental/CrownRock and Diamondback/Endeavor which both have materially lower absolute levels of production.

Energy stocks basically chopped sideways during April. They outperformed early in the month on the Israel/Iran tensions and underperformed later in April as the market sold off. Technical levels have held and earnings have been generally OK, but not inspirational. One notable pocket of strength included gassy E&Ps which rallied strongly on the setup of so-bad-it-is-good. Clean energy continued to struggle with stickily high interest rates, diminishing cash runaway and slow pathways to profitability. 

On the clean energy front, for those desiring big, quick CO2 reductions and fast hydrocarbon phaseouts, lower your expectations. This is not an advocacy statement, but simply the reality of very long cycle times. We spent some time in April in North Dakota, testifying at the North Dakota Public Service Commission’s permit hearing regarding the Summit Carbon pipeline. This CCUS-focused pipeline permit was originally denied and is now making a second attempt at approval. The angst of those opposing this project was a good reminder that big infrastructure projects are universally challenging. Even when a project is for something generally considered to be doing good (sequestering carbon), opposition is fierce. Which is why everything takes a very long time and costs more than it should.

(1) Source: Bloomberg