The threats of ERCOT power blackouts are emerging again this spring, just two months after millions of Texans survived freezing temperatures without heat or power during extended blackouts in February 2021.
On Tuesday, April 13, Texas’ power grid again faced failure as extended maintenance work and unseasonable weather patterns brought typical supply levels lower. ERCOT called for power conservation, and averted crisis by the evening, rescinding the request.
By Wednesday, April 14, Texas was again at risk for blackouts due to power supply issues. ERCOT declared it would be “capacity insufficient” from 1-8 p.m CDT. This means ERCOT does not have enough reserves and will ask people in Texas to conserve power again.
This is being caused by a weather pattern that is unusually warm for this time of year in South Texas. The results: strong demand and on-peak wind generation that is 6.5 gigawatts, compared with average April wind generation of 11 gigawatts. Solar generation was also lower. It hit only 38% during peak load on April 14, while the average is 72%.
The weather isn’t totally to blame for the power supply issues, of course. The large number of units that are offline for maintenance following the winter storm is also driving this shortage. The reported telemetered outages on April 14 is 21.1 gigawatts, where normally ERCOT would be measuring around 14.5 gigawatts of outages in ERCOT for the third week of April.
Austin, TX (April 13, 2021) — Enverus, the leading global energy data analytics and SaaS technology company, today announced an agreement for Hellman & Friedman (H&F), a premier global private equity firm, to acquire majority ownership of Enverus. Genstar Capital (Genstar), which has been Enverus’ majority owner since 2018, will remain a significant shareholder following the transaction.
Enverus is the leading SaaS company solely dedicated to the world’s largest market — energy. Enverus empowers companies to transform traditional decision making by accessing innovative cloud technology, machine learning/AI and industry-leading intellectual capital. With more than 1,400 professionals and 6,000 customers across the entire energy mix, Enverus supercharges the industry to deliver reliable, cleaner and more cost-effective energy to the globe. Our customers include 21 of the Top 25 Global Energy Companies, from E&P and midstream companies to power and utilities.
The investment marks a significant milestone for Enverus, enabling continued leadership, global growth and innovation.
“The investment from H&F and continued partnership with Genstar will enable Enverus to accelerate our development of market-leading software and analytics solutions for companies that serve the energy industry. H&F brings a wealth of experience in the software sector, and they are eager to support our vision of providing customers with the most accurate and actionable intelligence available so they can deliver energy to the world,” said Jeff Hughes, chief executive officer of Enverus.
Hughes added, “The investment is a strong signal in support of Enverus’ growth in predictive analytics, artificial intelligence and machine learning capabilities. We will continue helping our oil and gas customers break new ground with these technologies while also aggressively expanding them into renewable energy, power and ESG Analytics.”
“We are seeing a technology revolution in the energy sector and Enverus is the clear leader providing world-class SaaS solutions and innovation,” said Ben Farkas, partner at H&F. “The company’s state-of-the-art platform offers robust technology and powerful analytics delivering mission-critical insights to the world’s largest industry. This investment is an example of H&F’s strategy to invest in high-quality, market-leading businesses with an impressive runway for growth. We are excited to partner with Jeff Hughes, the Enverus leadership team and Genstar, as the company continues to help customers leverage the full potential of this digital transformation.”
“We have been extremely gratified by our partnership with the Enverus management team and their success combining a suite of product offerings and sophisticated data analytics platform for energy providers. Through organic growth and accretive acquisitions, Enverus has established itself as the technology leader in the energy market and we are excited to continue to support Enverus’ growth trajectory in collaboration with H&F,” added Eli Weiss, managing director at Genstar.
Goldman Sachs & Co. LLC served as financial advisor to Enverus and Simpson Thacher & Bartlett LLP acted as legal advisor to Enverus. Credit Suisse acted as financial advisor and Kirkland & Ellis LLP acted as legal advisor to H&F.
Enverus is the leading energy SaaS company delivering highly-technical insights and predictive/prescriptive analytics that empower customers to make decisions that increase profit. Enverus’ innovative technologies drive production and investment strategies, enable best practices for energy and commodity trading and risk management, and reduce costs through automated processes across critical business functions. Enverus is a strategic partner to more than 6,000 customers in 50 countries. Learn more at Enverus.com.
About Hellman & Friedman
Hellman & Friedman is a preeminent global private equity firm with a distinctive approach focused on investments in high-quality growth businesses. H&F seeks to partner with world-class management teams where its deep sector expertise, long-term orientation and collaborative partnership approach enable companies to flourish. Since its founding in 1984, H&F has raised over $50 billion of committed capital, invested in over 90 companies and is currently investing its ninth fund, with $16.5 billion of committed capital. Learn more about H&F’s defining investment philosophy and approach to sustainable outcomes at www.hf.com.
About Genstar Capital
Genstar Capital (www.gencap.com) is a leading private equity firm that has been actively investing in high quality companies for over 30 years. Based in San Francisco, Genstar works in partnership with its management teams and its network of strategic advisors to transform its portfolio companies into industry-leading businesses. Together with Genstar X and all active funds, Genstar currently has approximately $33 billion of assets under management and targets investments focused on targeted segments of the financial services, healthcare, industrials and software industries.
Enverus: Jon Haubert | 303.396.5996
H&F: Winnie Lerner | 917.375.5652
Genstar: Chris Tofalli | 914.834.4334
When it comes to growth strategy, oilfield service companies can take a lesson from operators. Even before the market took a nosedive in 2020, E&P companies had to turn their focus inward to find sources of free cash flow to fund growth. One area of focus is digitalization of processes with cloud technology solutions. Digitalization enables faster, more collaborative workflows — like invoice submission and ticket approvals — between different stakeholders, increasing operating efficiency. It also provides valuable operations data to guide your decisions for your business.
With the pressure of reduced activity and price cuts, oilfield services must reduce expenses to align with revenue and optimize cash flow. Long payment cycles from customers mean you pay expenses faster than revenue is received. Below are ways you can optimize cash flow and minimize the impact of price cuts and less revenue.
What can I do to protect cash flow?
You can protect your cash flow in two ways. Minimize DSO and look for opportunities to increase efficiency in your billing processes. We cover how to do this below.
What is DSO?
A way to measure how long it takes you to get paid is days sales outstanding (DSO). This metric is the number of days from when you submit the invoice to your customer until you receive payment. There is an additional part called invisible DSO, the time between when you provide the product or service and when the invoice is created. Invisible DSO can be days or weeks, and it costs your business money. The combination of invisible DSO and “traditional” DSO is known as effective DSO.
Why is minimizing effective DSO important?
If you focus on minimizing DSO, you get access to cash quicker. Access to cash allows more opportunity for reinvestment. Successful management of effective DSO also gives investors confidence, indicating a well-run enterprise. Think about creative ways to invoice and get paid faster. Why? Because billing terms begin the date of the invoice. But expenses, like payroll, vendor bills and credit card bills, occur in real-time. You won’t receive payment for the services you provide until weeks after you submit an invoice to your customer depending on your billing terms. That is why it is critical to invoice as soon as possible after the work is completed.
How can I reduce invisible DSO?
Invest in a digital field ticket solution. Most people do not think about adding a software solution to their operations during lean times; however, it will pay for itself very quickly by reducing your billing time. Slow times can be the best opportunity to introduce new solutions, since the training and processes will be in place once activity expands again. Customers using the Enverus Oilfield Services Suite FieldTicket application reduced their DSO from months to days.
Watch the video to see how Elite Production Services streamlines its operations with the Oilfield Services Suite.
How can I reduce DSO?
Early pay discounts give a percentage discount for customers that pay early. You do this because cash is so important you are willing to give up a few percentage points to get paid faster. Several OFS companies are increasing their early pay discount percentage to as much as 10% to get paid faster. The discount you give depends on your specific business, profit margins and any debt payments you must make. This tool can drive faster payment, especially if your customer asks for a price reduction anyway. You should always get something of value if you are giving something. In this case, you give up percentages of your revenue through price cuts, so if you turn that into an early pay discount, you have now gotten something of value in return.
Invoice factoring. Another way to minimize DSO is to finance your invoices from a third party. Commonly called invoice factoring, this simply means that once work is complete, you submit your invoice to a factoring company and receive payment on the invoice from them less a small fee. The company then collects payment from your customer. a trusted partner of the OpenInvoice network, helps service companies transacting on OpenInvoice bridge cash flow gaps by advancing payments for outstanding invoices within one business day.
How can we become more efficient in our billing processes?
To remain competitive, service companies need to operate and function more efficiently than in the past. While market activity is picking back up, you should still focus on how to do more with less — fewer resources, less cash and maybe less overhead support. The only way to accomplish this is by being efficient. Here’s what we recommend.
Streamline repetitive tasks. Look for repetitive tasks. Are you sorting through stacks of paper or big, complex Excel spreadsheets to get information? These simple things cause delays in processes that eat up hours or days. All of these are opportunities to become more efficient. If you find yourself entering the same information in two or three different places, this can be very time consuming and expensive. Many service companies use QuickBooks as their accounting system, but also must enter ticket or invoice data into a billing portal for their customer. You essentially enter the same information twice for every single invoice. There are apps, like Enverus Supplier Link, that will send the data from QuickBooks to OpenInvoice and other billing platforms automatically. That saves you tons of time by only needing to enter the data once into QuickBooks.
Invest in software. Digitalization of back-office processes with technology is a proven way to increase efficiency and save money. Maybe you could use a dispatch app to manage jobs, a payroll app to capture hours for payroll or an electronic field ticket solution. Again, most people do not think about adding a software solution to their operations during times like this, but if you can reduce your invisible DSO from days to just hours, the investment will pay for itself very quickly.
We’ve all had to adjust to these market events. By focusing on increasing efficiency in your billing and operations processes, you can reduce DSO, protect your cash flow and do more with less. Your business will benefit by these improvements in the long-term and set you up for future growth.
About Enverus OFS solutions
Enverus OFS solutions empower OFS companies to find deals faster and optimize operations so you can grow your business, reduce DSO and get paid faster. To learn more or request a free demo, fill out the form below.
Austin, Texas (April 8, 2021) — Enverus, the leading energy SaaS and data analytics company, has released its summary of 1Q21 U.S. upstream M&A activity. The report shows $3.4 billion in deal value was transacted during the quarter — an 88% decline from 4Q20. This is the third year in a row U.S. activity has started slow. Deals rallied in 2019 and 2020, and in 2Q21, activity has picked up with Pioneer Natural Resources’ $6.4 billion buyout of privately held DoublePoint Energy.
Q1 deal activity largely focused on production-heavy assets in legacy oil plays. Combined, the Bakken and Eagle Ford accounted for two-thirds of total deal value despite having only three significant deals across the two plays (two in the Bakken and one in the Eagle Ford). A strong rally in crude oil prices improving cash flow from these more developed areas likely helped spur the additional buyer interest.
Another distinguishing factor of Q1 activity was involvement by private equity firms. The top two deals of the quarter were both acquisitions by private equity-sponsored E&Ps: Grayson Mill Energy’s $900 million buy in the Bakken and Validus Energy’s $880 million Eagle Ford purchase. The next two largest deals were sales by Bruin E&P (formerly private equity-backed and then owned by creditors following a bankruptcy reorganization) and Grenadier Energy Partners II, which was sponsored by private capital providers EnCap and Kayne Anderson. Then, the first day of Q2 opened with a large sale by Permian-focused DoublePoint Energy, which has at least four private sponsors, to Pioneer in the largest acquisition of a private E&P in a decade.
“After most of 2020’s activity was dominated by mergers between public companies, we are seeing private equity play a more prominent role in M&A markets in 2021,” said Andrew Dittmar, M&A analyst at Enverus. “Following years of heavy investment in unconventional resources, private E&Ps were having a challenging time finding exits either through sales or IPOs and had consequently tamped back spending on new deals. Now, in December 2020 and continuing into 2021, we have seen several prominent exits plus new investments from the private side of the industry.”
Along with the sales by private equity companies, Q1 also saw the first notable IPO of a traditional upstream production company since 2017, when Haynesville operator and private equity-sponsored Vine Energy successfully made its debut on public markets.
“Going forward, private equity should continue to play an important role in upstream M&A both on the acquisition side targeting legacy areas that are being sold as public companies narrow their focus and as potential targets for public companies to buy using their now higher-priced stock as payment like Pioneer did to buy DoublePoint,” added Dittmar. “Consolidating additional private companies will also help address concerns that a ramp up in rigs on the private side might again send crude markets into oversupplied territory. Pioneer already announced plans to reduce DoublePoint’s seven rigs to five by the end of the year.”
That is not to say that all public company consolidation is completed, though. While many of the marquee names in the public E&P space in the Permian found deals in 2020, there is additional room to combine operations among small and mid-size Permian names as well as in areas like the Appalachian Basin and Bakken that have yet to see anyone play a dominant role as a consolidator.
Members of the media can contact Jon Haubert to request a copy of the full report or to schedule an interview with one of Enverus’ expert analysts.
Through its SaaS platform, Enverus is the leading data, software and insights company providing innovative technologies and predictive/prescriptive analytics, empowering customers to navigate the future. Enverus’ solutions deliver value to more than 6,000 customers in 50 countries across the upstream, midstream and downstream sectors, enabling the industry to be more collaborative, efficient and competitive. Enverus is a portfolio company of Genstar Capital. Creating the future of energy together. Learn more at www.enverus.com.
In this blog series, we discuss why digitalization and analytics for M&A are key to uncovering best practices and how to use data-driven decision-making to find these best practices, maximizing cost savings within a newly formed organization.
In article one, we discuss why digitalization of the back office lays the groundwork for the opportunity for economies of scale before, during and after an M&A situation.
A unified platform is critical for more collaborative, efficient processes, as discussed in article one. To realize economies of scale, you also need more structured spend management and a better understanding of your supply chain. Spend analytics are key to this formula. In this article, we dive deeper into why spend analytics are critical for an optimized supply chain and discuss specific examples of uncovering pricing best practices through spend analysis to maximize cost savings.
How do you achieve holistic spend understanding across two different organizations?
Apples-to-apples price analysis and price benchmarking has traditionally been impossible because companies report the same transactions in completely different ways.
In this example, the level of granularity captured in the GL process by Company A (left) is much more detailed than Company B (right). Company A has the type of commodity being used and provides the level of detail of how it’s being used.
Recognizing this as an industry-wide issue, Enverus normalized, categorized and attributed the $200 billion of spend data that flows through OpenInvoice to create OpenInsights.
Categorized and attributed data
Categories — Using machine learning and algorithmic approaches and working with a team of about 150 analysts across our organization, Enverus divided goods and services into categories. These include, for example, proppant, pipes, valves, and fittings and OCTG.
Attributes — Products and services can’t simply be placed into single categories because there are several different characteristics within these categories. In OpenInsights, the categories are divided based on 40 million different attributes. This creates a much more usable and reliable data set. Here is an example of categorized and attributed pipe data.
Let’s take a look at some examples of how you can use spend analysis to find cost-saving opportunities for a powerful Shale 3.0 growth strategy.
Use Case 1: Vendor consolidation
When two companies merge, the vendor network grows. Companies can use price analysis between suppliers to define preferred vendors. In the example below, the left graphic shows Company A had a fairly integrated supply chain. But Company B is even more integrated. When you bring these companies together, it results in a relatively consolidated market.
The bigger issue that operators see with this analysis was caused by market shifts over the last couple of years. As service companies went out of business or shifted markets, operators had to diversify their supplier networks. This led to more suppliers and more one-off transactions. Many transactions were project-to-project based, creating a decentralized supply chain strategy.
Use Case 2: Preparing for an integrated RFQ
Vendor consolidation isn’t just about choosing the lowest-cost provider. It’s important to understand that the cost you pay to a vendor for a product or service is a combination of the quality of the product and the services provided. Some companies are willing to pay more than the price of the product because a supplier works seamlessly with them.
In this example, we developed the distribution for intermediate casing prices across these four suppliers. There are so many different properties that define a pipe — grade, weight, range, end connection, material and coating.
To evaluate a more specific type of casing, we developed a taxonomy, a combination of attributes. Taxonomies are powerful tools for evaluating price discrepancies. Examining the price differential and the increasing volume of the merged company can lead to significant cost savings. Below is a concentration of price points for intermediate casing transactions across the same four suppliers using three variables. This allows for an apple-to-apples comparison.
For intermediate casing, note that Supplier A and D sell at three different prices, Supplier C sells at two different prices, and Supplier B has the most consistent pricing. This demonstrates the power of a digitalized supply chain. Supplier B has full implementation of price books, resulting in consistent pricing that has really helped the company.
Use Case 3: Determine pricing practices from a regional price index
Trying to reduce costs as a blanket effort is time consuming and inefficient. Enverus also offers regional market price indices for every category — chemicals, proppant types, mesh sizes or OCTG. Leveraging market indices and benchmarking allows you to find the key areas of concern and triage efforts. In a merger, you can use these market indexes to gain an understanding of how the two companies have performed in different categories compared to the market and identify specific areas for improvement.
In the example below, the market price is consistent for Category A (left). The gray zone, which is the variability zone, is shrinking for this particular product. But while pricing — Company A is the red line and Company B is the yellow line — starts low, Company A’s pricing starts to steadily increase. You might assume that Company B has better best pricing practices and adopt this strategy across the board. But when we did the same analysis with Category B, we found that Company A is more consistent. This showed that both companies have room to save money in these different categories.
As this low-price environment picks up, the industry will reorient itself with M&A to consolidate operations. Identifying and realizing economies of scale is almost impossible without a much more structured, individualized supply chain process in place.
Digitalization across your supply chain ecosystem allows for leveraging spend analytics to compare your spend to the rest of the market, driving decision-making processes and identifying cost savings and strategies moving forward. Successful digitalization of processes across the spend team to serve their needs provides more successful M&A analysis and best practice evaluation.
To learn more about how Enverus Business Automation solutions can help your company fast-track your M&A growth strategy, fill out the form below to speak to an expert.
The content for this article was sourced from our Cost Savings in M&A webinar hosted by Akash Sharma, director of OpenInsights, and Dave Savelle, director of Field Ticket Operations.
Every business wants to grow and growth needs strategy. In energy, one strategy for continued growth is M&A, especially when the market goes into increased volatility.
Acreage deals, when an operator wants to develop a major new area, focus on growth through acquiring new positions that don’t require significant DNC spending. These are more common and ongoing in the industry as operators move in and out of basins and regions.
The second half of 2020 was interesting as we saw more corporate deals than acreage deals — Anadarko and Oxy, Pioneer Resources and Parsley, Concho Resources and ConocoPhillips, Southwestern Energy and Montage Resources. Corporate deals are the merging of two independent companies. These are much more complex to manage.
The driver of these corporate deals is the potential of economies of scale, where the new company identifies the best practices from each company and then implements these best practices across the entire new organization.
I highlight the word “potential,” because to actually benefit from economies of scale, you have to be able to figure out which company has the best practices and then determine how to implement these practices across a new, larger organization comprised of two companies with independent, fully functional teams.
To start this process, you need to figure out which company has the best practice. If you don’t handle this properly, you can actually hinder potential growth.
The question is: How do you figure out which is the best practice between company A and B?
In this two-part blog series, we’ll discuss why digitalization and analytics are key to uncovering best practices and how to use data-driven decision-making to uncover these best practices to maximize cost savings within a new organization.
Digitalization of back-office processes — the foundation for economies of scale
Processes are linked closely to the back office. Digitalization of the back office lays the groundwork that creates the opportunity for economies of scale before, during and after an M&A situation. Why?
Because digitalization of processes does two things:
It enables faster, more collaborative workflows between different stakeholders within a company, increasing operating efficiency. A few examples include faster invoice cycles, faster spend visibility, reduced manual touchpoints with automatic invoice approvals.
It captures spend data that, when attributed and categorized properly, enables two companies to rationalize spend analysis across both organizations.
Choose the right solution to digitalize the right way
You need a single unified digital platform to support the needs of these different stakeholders, including your suppliers. With a unified platform, you capture spend data and can rationalize spend across two companies that are involved in a merger or acquisition.
Let’s look at an example to understand why.
In an M&A scenario, you begin with two different spend teams with many of the same responsibilities, but with different workflows, processes and allocation of dollars. A spend team comprises different arms of an organization, including procurement or supply chain operations, finance and audit.
They all evaluate the same spend, but view it from different perspectives to deliver their respective value propositions to their business.
Below are the groups that make up the spend team:
Procurement focuses on optimizing spend with suppliers. They manage and analyze supplier contracts and negotiate pricing.
Operations focuses on optimizing spend on a per project basis. Their perspective focuses wholly on the project and how and when to execute for the greatest business benefit.
Accounts payable and finance optimize spend based on a general ledger (GL), as well as tracking actual spend against estimates, using the GL to capture different levels of granularity in spend.
Audit optimizes company spend by overseeing supplier adherence to contracts and their execution. There are also recovery operations that take their findings and feed those back into supply chain and procurement to further optimize the supply chain. These operations are traditionally slow and expensive.
Here is a breakdown of the spend team:
Even within a single organization, the silos that naturally arise from the different departments can make it seem like members of the same spend team are speaking entirely different languages. But these different perspectives are equally important for maximum business efficiency.
This is why a unified platform is critical. It breaks down these silos, allowing faster collaboration on workflows between these stakeholders, including suppliers, and providing a single source of accurate spend data so individual stakeholders can analyze and manage this data according to their role.
Here’s an example of process optimization and workflow where the Enverus platform provides auto-approval of financial documents. This brings efficiencies to both finance and operations.
Here is an example of a spend understanding integrated workflow. Spend understanding is where the information provided in the spend data allows different groups to do their respective analysis.
This demonstrates cost management via strategic sourcing. Procurement has visibility into supplier pricing, an understanding of vendor rationalization, and workflow modeling. Process efficiencies across finance/AP, operations and supply chain allows for early-pay discounts that also contribute positive cash flow for the suppliers.
When evaluating process efficiency best practices between two merging companies,
if either uses a digital platform to manage its source-to-settle process, you can select performance metrics to identify bottlenecks and efficiencies in each company’s process and compare the two. For example, you can compare invoice processes by company to find the bottlenecks. You can also use industry benchmarks to measure progress. For example, our best-in-class OpenInvoice PriceBook customers have close to 90% price book rate validation. These metrics will help you make an informed decision about which best practices to implement company-wide to drive economies of scale.
This article is part one of a two-part series. To continue learning about best practices to accelerate your M&A growth strategy, read article two here.
To learn more about how Enverus Business Automation solutions can help your company fast-track your M&A growth strategy, fill out the form below to speak to an expert.
The content for this article was sourced from our Cost Savings in M&A webinar hosted by Akash Sharma, director of OpenInsights, and Dave Savelle, director of Field Ticket Operations.
So, what really happened last year? Our title really begs the question: Why do we need a survivor’s guide to 2020 if it’s over? It is important to review last year and analyze how we can adjust moving forward. We want to demonstrate that last year was tumultuous and we are still experiencing its consequences.
In early March 2020, two major events generated significant volatility in the industry: the COVID-19 pandemic and the price war between Russia and Saudi Arabia. These events demonstrated how volatile a place the oilfield is and reinforced the idea that the industry needs to be in a healthier state to handle these situations, as it will not be the last time we experience this type of volatility.
Enverus, as well as others, have covered extensively the reasons for the drastic volatility swings, so we won’t go over all these pieces individually.The graphic below provides a timeline of last year’s volatility. You see it beginin January, ramp up in February, and then we saw that the rest of 2020 had the steepest completion activity in two years as companies looked to unload capex.
A year in review
What’s not in the timeline above, but added to the volatility, is a tumultuous administration change that led to a lot of questions regarding the future of federal lands. Adding it all together, it was really a lot to take in!
First, let’s look at how the industry responded and what’s going to happen next. Then we can find out how we, as an industry, can be in a healthier place moving forward.
We’ll also discuss some of Enverus’ tools that can help you make faster and smarter decisions. The first piece comes from a general index for the oilfield service sector that the Dallas Fed puts together.
This is realized pricing throughout the sector based on survey responses throughout the year. We saw pricing and pricing support for oilfield services continue to fall throughout the year. To follow up on the general index, see below for an overview of a report written in April by Enverus’ analysts Mark Chapman and Jonathan Godwin.
Above compares data compiled in April — where we projected and predicted revenue reductions of about 50%, based on how much capex was going to be cut and where we saw activity levels headed — versus what actually happened in the industry and how the industry responded to those different pieces. It compares 3Q19 to 3Q20, with the green and pink dots representing revenue, tied to the left axis, and the bars representing revenue reductions, tied to the right axis.
What our analysis revealed was that revenue reductions in 2020 ranged between 25-65%, leading to a 50% overall reduction. Certainly, pressure pumpers saw, on average, a 65% reduction in revenue across the board due to frac holidays and other unforeseen events. The land drillers did a little better with about a 50% reduction in revenue, as we brought rigs down throughout the year; this drop tailed the frac activity drop. Other sectors varied between that same 25-65% range.
So, as we looked at a scenario where if nothing was done and the industry lost 50% of revenue, what was going to happen to Selling, General, and Administrative (SG&A) expenses? What was going to happen to Cost of Goods Sold (COGS)? And then what was going to happen to EBITDA margins?
We predicted that OFS companies would have to drop about 25% to stay profitable. What we saw was a range between 18 to 35%, in line with our prediction. A great example of the OFS industry’s uniqueness is its ability to flex up and down to survive. This comes from quick responses to downturns and upturns. However, this “quickness” can be costly as over or underestimating can lead to layoffs when activity decreases versus the need to hire back when activity increases.
We projected COGS would be relatively in line with the revenue reductions. If we were to overlay the chart above with the revenue reductions for pressure pumpers, we see that a 65% revenue reduction mapped in line with the 65% COGS reduction. Now, if companies can have COGS reduction greater than revenue reduction, they will have a better ability to scale costs with the market. In this case, digital technologies have helped the industry be more efficient with time, people and money spent on location.
We will now evaluate EBITDA. We use it as a measure of earnings in order to level all debt and to look at what is pure profitability from how these companies operate from an SG&A and COGS standpoint.
Here we see that many companies experienced an astounding EBITDA drop — greater than 100%. As an industry, we were already on the cusp of profitability considering price reductions. EBITDA was impacted when price reductions combined with the SG&A level.
Similarly, EBITDA margins show a lot of the same characteristics. We see margins remaining relatively flat for some of the major integrators; but pressure pumpers struggled through that time, while land drillers were able to maintain a fair amount of profitability. The biggest difference being the punitive clauses that land drillers included in their contracts to maintain a rig on standby, versus a frac crew being fully dropped. This shows there is a lot more volatility in that pressure pumper space, and an extra supply in that space that needs to be consolidated and rationalized. This creates the volatility we currently see in the OFS community.
Now, to answer our questions: What has happened? And how has the industry responded?
We need to understand what’s next in order to survive and thrive through another similar time period. So, let’s focus on capex and completion activity.
We expect 2021 capex and revenue to remain relatively flat year-over-year compared to 2020. We do, however, expect that capex spend will be more evenly distributed this year. In fact, we see an opportunity for capex spend to increase in the second half of 2021, a change from the past, especially in 2019, where capital expenditure efficiencies forced capex spend to be reduced in 2H2019 to the detriment of the OFS industry as activity fell off.
We are also expecting completion activity to be flat. Being one of the closest proxies to understand production, we expect companies will try to hold production flat. That means that 2021 completions will look similar to the 8,300 to 8,400 we had in 2020. This leads us to the idea that we are currently burning DUCs. From that standpoint, we are certainly outpacing the level of supply coming from rigs now, and with continued price support, rigs will continue to pick up throughout the year. Completion activity should respond quickly without a commensurate response, so we could be looking at a situation where we burn down our DUC inventory to the point where we will have to drop completion crews quickly in late 3Q and early 4Q. We should see drilling activity picking up as operators realize they will not be able to keep pace with the completions.
So, what could we have done differently and how can we now look at the market to help make decisions that would change the way businesses operate? The answer, it is essential to look at today’s market from different perspectives. A macro point of view with unique local markets and AOI perspective, that includes ESG, gives OFS companies a particular perspective to how they can partner with operators and be in the right place to find new business opportunities.
To learn more about how Enverus can help you get a unique perspective that can give you a competitive edge, fill out the form below or email us at [email protected].
Are we seeing the first little clawbacks of price creep back in drilling and completing new wells? We don’t have a lot of evidence yet, but a few signs of increasing prices for oilfield services (OFS) are appearing on the horizon. For example, Devon Energy said that per unit expenses are up by ~5% in the quarter as a result of severe winter weather in Texas. We know the February freeze generated some supply scarcity after temporary shutdowns across the state of sand mining, chemical blending and even chemical feedstock from the refineries. This capacity was not down for long, days to a week in most cases, but this lack of production caused a drawdown on supplies of consumables.
The temporary shortages will work themselves out, but let’s consider recent tough times for OFS companies. Last year they had to turn inventory into cash to survive a sharp drop in drilling and completion activity after oil prices crashed; now they are expected to turn cash back into inventory when service prices are at all-time lows but those for raw materials (steel, diesel and chemical feedstock) costs are increasing. It is difficult for OFS firms to sink even more cash into restarting facilities and refurbishing equipment in storage without a guarantee of stronger pricing. Additionally, staff shortages could also push up prices. While some oilfield hands that will always be oilfield hands, a truck driver can change industries to one that is less cyclical, meaning OFS companies may have to pay up to attract back workers.
The OFS sector gained new efficiencies and new abilities to work lean throughout the 2020 downturn, lessons that will stick around for a while. We will be looking at our OpenInsights Market Indices (Figure 1) for data on how the various factors play out. What do you think will happen?
Austin, Texas (March 31, 2021) — Enverus, the leading energy SaaS company, announced today that it has acquired Energy Acuity, the leading provider of power generation and power delivery market data with specific expertise in renewable energy. For more than a decade, Energy Acuity’s large team of domain experts has tracked and catalogued thousands of renewables projects leveraging hundreds of unique data sources across North America.
“As energy markets rapidly evolve and investments in renewable generation increase, the need for analytical solutions to capitalize on this opportunity will also grow,” said Manuj Nikhanj, president of Enverus. “Over the past five years, our company has made significant investments through targeted acquisitions and organic development. The addition of Energy Acuity will allow us to create the most comprehensive end-to-end energy offering in the industry.”
“The market for renewables-focused data, insight and predictive analytics is clearly growing and our customers continue to signal that more advanced solutions are critical to maintaining a competitive edge,” said Brian Graff, founder of Energy Acuity. “As part of Enverus, we will be able to incorporate multiple new data sets and leverage the 200-person analyst and data science teams to create full forecasting capabilities, satellite tracking and valuation models of existing and proposed projects.”
Enverus will integrate Energy Acuity’s data into Prism™, the company’s hallmark single technology platform. The combination with Enverus’ existing power and renewables data and analytics will allow Enverus to produce unique content and insights for existing and prospective developers, institutional investors, and corporate and government clients.
Energy Acuity has more than 30 employees in Denver, Colorado. Bernadette Johnson, who was recently promoted to senior vice president of Power and Renewables at Enverus, will oversee the integration.
About Enverus Enverus is the leading energy SaaS company delivering highly-technical insights and predictive/prescriptive analytics that empower customers to make decisions that increase profit. Enverus’ innovative technologies drive production and investment strategies, enable best practices for energy and commodity trading and risk management, and reduce costs through automated processes across critical business functions. Enverus is a strategic partner to more than 6,000 customers in 50 countries. Enverus is a portfolio company of Genstar Capital. Learn more at Enverus.com.
About Energy Acuity
Energy Acuity is a leading provider of information and intelligence on renewable power and clean energy markets. Founded in 2008 with a keen focus on delivering best-in-class market insights to accelerate the clean energy transition, the company’s product suite provides comprehensive and high-quality datasets covering power generation and grid infrastructure. Energy Acuity provides clients with the analytics and awareness necessary to identify forward-looking market trends and create and execute market strategies throughout the industry. Learn more at EnergyAcuity.com.
The U.S. leads the world for per capita consumption of primary energy harvested directly from natural resources (Figure 1). While oil, solar and hydro are examples of primary fuels, electricity isn’t. Rather, different types of primary energy are transformed into power that turns on lights at the flick of a switch. The maturing of the U.S. economy and the push to decarbonize because of climate change mean the mix of suppliers of primary energy in the future will be different from today’s.
We expect total U.S. consumption of oil, natural gas, coal, renewables and nuclear to decline ~10% over the next 20 years. Tighter CO2 emissions standards and increased penetration of electric vehicles will shave gasoline demand over the next decade by more than 1 million barrels of oil a day, according to our estimates. But it’s not all bad news for the petroleum industry as we expect natural gas will maintain its share of the U.S. fuel mix over this time frame.
President Joe Biden is preparing a $3 trillion infrastructure plan that will include large sums to modernize the country’s the electrical grid. We think the emphasis should be on building infrastructure to give regions with better renewable resources access to demand centers. Delays in building U.S. transmission infrastructure are already resulting in an uneconomic allocation of capital investment in renewables-fired generation. Regions with higher potential to displace coal-fired generation/carbon-heavy generation are being passed over in favor of those, such as California, where current renewables-based generation is being curtailed due to oversupply.
FIGURE 1 | Primary Energy Demand per Capita vs. GDP/Capita (Log Scale)
Economic logic dictates that lowest-cost oil producers will survive longest once oil demand peaks, plateaus and starts to decline. In a shrinking market, OPEC low-cost oil producers, mostly operated by state-held national oil companies, should be able to maintain their market share and even expand it as higher-cost competitors falter.
But if the volume outlook is broadly positive, OPEC producers’ oil price hawkishness comes at a price. OPEC’s readiness to extend an oil rally that has lifted Brent $15/bbl so far this year (Figure 1) is creating tensions with some of its key strategic customers. Indian government complaints about high oil prices drew a somewhat undiplomatic response this month from Saudi officials, who proposed Indian refiners draw down cheap oil stocks purchased when crude prices were at their 2020 lows. Saudi officials justified its hawkish price stance by pointing out that producers were only now recouping revenue losses incurred last year.
Saudi Arabia primed Brent’s rally through its slow and cautious return of output cuts, conservatism it justified by pointing to a raft of uncertainties besetting the global economy. But Riyadh has been less quick to acknowledge that a building headwind to economic recovery post-COVID-19 has been the sharp run-up in commodity prices themselves, particularly energy. For oil, it has been unilateral Saudi cuts this year and Saudi pressure to slow the return of OPEC+ cuts that has driven oil prices higher and roiled consumers.
Unsurprisingly, Indian government officials were unimpressed. Delhi has now injected fresh momentum into efforts to diversify its sources of crude away from Middle East producers. February import data suggests this policy is beginning to bear fruit with Indian refiners taking more U.S. and Nigerian oil at the expense of Saudi and U.A.E. barrels, where import levels were at multi-year lows. Further reductions to Saudi imports are evident in nominations for May deliveries.
Changes to Indian refiners’ import slates will not reduce oil prices, so diversification of imports is more symbolic than meaningful. But it does highlight growing tensions between the Gulf’s largest oil exporter and one of the remaining growth markets for exported oil. In this price cycle, OPEC producers might be advised to pay close attention: the removal of domestic fuel subsidies in recent years means Indian consumers’ capacity to absorb oil price rises is reduced.
At the same time, Iran, whose oil exports have been constrained by U.S. sanctions since the Trump administration withdrew from the 2015 nuclear deal, is playing a very different game. With prospects for a diplomatic breakthrough improving, Iran has started re-engaging with Chinese buyers, particularly Shandong independent “teapot” refiners as well as Indian state and private buyers.
Iran has a long history of sweetening terms for its crude by allowing buyers to pay in local currencies, take advantage of deferred payment terms, use barter arrangements and offer price discounts. Whether such a flexible approach reflects Iran’s immediate need to carve out its market again or whether it will endure longer term remains an open question. Iran is unlikely to miss out on the opportunity to undercut competing Arab Gulf barrels, even if temporarily, in what is likely to become a febrile oil market for producers in the years ahead as demand shrinks.
From the Saudi perspective, the continued recovery in demand means extra Iranian barrels will be absorbed and that short-term discounting presents less of a challenge. As annual oil demand shrinks and flatlines, these kinds of behaviors will raise tensions both between petrostates and their customers; and also between producers themselves, increasingly chasing the same customers.
The cold snap that hit the central U.S. in mid-February not only crippled Texas, but also supported price spikes from neighboring states all the way to California.
The Southwest Power Pool (SPP) and Midcontinent Independent System Operator (MISO) manage the electricity grid for Oklahoma (SPP) and Louisiana (MISO). In addition, the California ISO (CAISO), which manages SP-15’s southern California area, was impacted by high natural gas prices that sent wholesale power prices soaring.
During the cold snap, MISO and SPP sent out emergency alerts on February 14, 2020, for February 16-17 as load shedding, or demand reduction, was expected. Record load of over 42 GW was measured Monday and Tuesday in SPP. Blackouts were experienced in Oklahoma and Louisiana with 75,000 of Entergy’s MISO south residential clients losing power and SPP shedding load Tuesday morning. Prices in MISO south moved as high as $3,000 on the evening of February 16 and nearly $20,000 the evening of February 15 in SPP.
In California, where temperatures were mild, gas prices were ~$128/MMBtu from Feb 12-15. Power prices were nearly $1,000 the morning and the evening of February 17.
Several natural gas facilities had to shut operations because electric power was cut off from the Electricity Reliability Council of Texas (ERCOT), but currently public available data are not available to measure exactly which plants lost power supply.
What we can see in currently available data is by how much and when gas flowing on interstate transmission pipelines declined. The observable interstate system in Texas currently represents 25-30% of activity. Therefore, it is not a complete picture, but it does provide some leading indicators about what the final data may eventually show.
For example, the following table shows gas flows by category from the pipeline sample in Bcf/d for various time periods leading into and during the event:
Gas Flows by Meter Type, in Bcf/day
From this we can see that no part of the ‘upstream’ sector was immune to the event and we can start to infer that perhaps the Processing stage of the supply chain was disproportionately affected. However, it is important to re-emphasize this is merely early indication and by no means conclusive.
We can reasonably conclude that operations continued generally as normal ahead of the weekend that began on Feb 13. By February 15, the declines were in full effect and following Feb 18 the system rapidly returned to normal as the weather warmed.
How Closely Related Was ERCOT’s Outage to Price Spikes Beyond Texas?
Since the natural gas transmission grid is nationally connected, there were coincident effects on other regions.
It is not accurate to imply that Texas alone was responsible for all of the neighboring regions price spikes. However, the largest population demand centers will often have the most significant effects on the entire network.
This weather system affected the entire mid-continent region from the Canadian provinces all the way to southern Texas. Natural gas processors in Oklahoma struggled equally because it was simply dealing with the same weather issues as Texas.
Another way to look at this is to consider market action on the west coast in California. Here the region was not affected by the cold weather, but price action was also significantly higher than normal. This region relies on Texas and the Rocky Mountain regions for a large portion of its gas supply, both of which were underperforming due to the weather-related issues.
Therefore, California had to turn to rely on above average withdrawals from local storage facilities to fill the gap. As a result, prices soared above $110/ MMBtu but not as high as the West Texas prices that were north of $200.
California normally prices at a premium to Texas to keep the pipeline supply flowing west. As you can see, that premium disappeared, but California still had to set extremely high prices to incent larger storage withdrawals than the relatively normal weather experienced there.
An underrated part of the Alberta gas story has been the steady increase in provincial gas demand over the past decade. Daily demand in the province reached an all-time high in February of 7.69 Bcf/d, passing the previous record of 7.52 Bcf/d set in January 2020 (Figure 1). While last month’s weather was undoubtedly frigid in Alberta, annual gas demand rose ~50% since 2011. Said another way, cold weather is only part of the story.
The primary driver of this demand growth has come from the oil sands, particularly from the ramp-up in production from steam-assisted gravity drainage projects (where gas is burned as part of the extraction processing). Gas consumption from the oil sands jumped ~70% over the past decade while residential, commercial and industrial (RCI) demand grew 40% over the period (Figure 2). While Albertan gas prices have been challenged over the past five years, albeit with some reprieve in the last two, it’s hard to imagine where some producers might be without this acceleration in local gas demand.
So, you think you know risk management? Have a seat. The World For Sale wants to show you a thing or two.
Javier Blas and Jack Farchy’s debut book, The World For Sale, isn’t about the types of traders who are typically glamorized by Hollywood in movies like The Wolf of Wall Street or The Big Short. (Although after this book, they will be.) They don’t trade stocks or bonds. They trade physical commodities, sometimes exchanging hundreds of thousands of barrels of crude in a single day. And their appetite for risk is insatiable.
Commodity traders play one of the most fascinating roles in the global economy. They’re pulling puppet strings from dozens of angles and wielding an outsize influence on geopolitics, all behind the scenes of the public eye and sometimes world governments. Traders create shell companies and work with fixers to cover their tracks, often bending the rules or skirting regulations to make the most lucrative deals work.
Some traders live quiet lives. Some fail. And some take on Evel Knievel-level risk in deals that turn traders into legends – and billionaires.
A beginner’s guide to commodity trading… and then some
The authors of The World For Sale are two seasoned business journalists who spent decades uncovering the secrets of the commodity traders who rule the markets for oil, metals and grains. Blas and Farchy masterfully tell the history of all the key trading shops that shaped the transformation and development of commodity trading.
The trading companies that dominate global commodity commerce are massive global operations that few have heard of outside of the industry. Vitol, Glencore and Cargill are not names you’d typically see at the top of industry conference headlines, or executing splashy marketing campaigns like Exxon or Chevron. Still, in the decade to 2011, the world’s largest oil, metals and agricultural traders made a combined net income of $76.3 billion. For context, that’s more than Apple or Coca-Cola made in the same period, according to the book.
From Andy Hall’s innovation in crude oil futures trading that made it rain profits, to Glencore’s control of Congo’s extraordinarily high-grade copper ore, commodity traders are the gutsy SOBs who get their hands dirty in the financial world. They jetset across the globe seeking out fresh opportunities from so-called emerging markets, and their stories are both inspiring and twisted.
Since Enverus’ technology delivers market data and analysis not only on the traders, but the risk managers that make commodity trading run our worlds, I couldn’t help but pause at some of the dodgiest trades that were detailed in The World For Sale. I’d rather encourage you to go get your hands on a copy than detail the juiciest stories here. Tea was spilled.
Without giving away any spoilers, I can say that this book reminded me that in the opaque markets of the world’s last swashbucklers, as Blas and Farchy call the commodity traders, risk managers can only do so much to save them. And all the technology in the world couldn’t save a devious trader’s risk manager from the fallout of, say, buying a cargo that contains toxic, untreated chemicals with the hopes of making a profit.
That’s not to say that all traders are outlaws, or that risk managers in the commodity space can’t use technology to reign them in. Overall, this book beautifully pulls into perspective the massive size and scope of this wild little niche industry in which we find ourselves.
Austin, Texas (March 10, 2021) — Enverus, the leading energy SaaS company, has released its latest FundamentalEdge report, Winter Reaches Texas, an objective, unbiased look back at Texas’ exceptionally cold weather beginning on Feb. 10 and the power story that left millions in the freezing dark and resulted in numerous deaths.
“The finger pointing resulting in four million without power and 70 deaths really needs to stop. There is plenty of blame to go around,” says Bernadette Johnson, senior vice president of power and renewables at Enverus.
“Texas was not prepared for this cold snap. And that’s truly unfortunate because this event looks eerily similar to what happened the first week of February 2011. During that period, an extreme cold spike led to a sharp increase in demand, several thermal generators tripped offline due to the extreme temperatures, and wind capacity was reduced due to icy conditions.
“The Electric Reliability Council of Texas (ERCOT) is getting a lot of heat for their role, but the fact that it wasn’t worse is because of those grid operators, and they deserve credit for that. If the whole grid had gone totally offline, the physical damage to power infrastructure from overwhelming the system could have taken months to repair. As chaotic as it was, the whole state was minutes away from full blackout. Restoring Texas’ grid back to full use is a delicate process. Each part of the puzzle — the generators producing power, the transmission lines that move the power, and the customers that use it — must be carefully managed. It has to balance constantly. If you bring on too many customers, then you experience another outage.
“Looking forward, no solution is perfect and likely to have costs that vary wildly. Ultimately, those costs will be borne by consumers, whether it’s homeowners, commercial businesses or industrial facilities.
“Despite what some wish, renewables will continue to be part of the electric grid. But flexibility is needed, and natural gas is the ideal fuel to back up renewables because a power generation plant can turn it on quickly and start generating power quickly. While it’s easy to blame frozen wind turbines on those who promote renewable energy, or elected officials or transmission companies or ERCOT, this is a record event. No system in the country is immune to this. Some systems are more fragile, but no system is without risk and that’s an important lesson not only for Texas but the nation.”
Due to the nature of this important event, Enverus is making its full report and analysis available to the press for download.
Key takeaways from the report:
Exceptionally cold weather roiled U.S. gas and power markets in mid-February, sending gas prices across the central U.S. skyrocketing to all-time highs in the hundreds per MMBtu and many power prices to market caps. Gas production fell precipitously due to freeze-offs just as demand ramped up for both gas heat and electric heat, which at the margin overwhelmingly comes from gas-fired plants. Texas faced the most acute challenge, with its upstream gathering and processing facilities, as well as power plants largely not weatherized to the extent that those in colder climates are. Significant capacity from traditional resources was also offline within ERCOT, causing the ISO’s demand to top out in the ~47 GW range rather than the ~74 GW expected, leading to widespread blackouts and more than 4 million customers losing power.
Based on natural gas pipeline nominations, Texas natural gas production decreased by as much as 5 Bcf/d while demand increased by about 4 Bcf/d on average during the peak of the storm. Storage withdrawals also increased; however, some facilities faced power outages and were not able to operate at optimal levels. This caused exports via LNG and pipelines to Mexico to drop significantly, extending the power outages to the neighbor country. Additionally, the supply/demand imbalance pushed gas prices in the state to record high levels reaching three digits when on-average prices trade within cents of the Henry Hub benchmark.
Gas is the most economic dispatchable power source and provides a plurality of generation in the U.S. as well as in Texas. But wellhead, pipeline and plant reliability challenges point to questions about how big its long-term role can be in domestic power generation.
This crisis likely will have lasting impacts. At this point it is not clear to what extent gas-fired generators had infrastructure damage preventing them from running versus a broader shortage of gas in the south-central U.S. If the former, ERCOT may face pressure to add a capacity market (as exists in PJM, ISONE and other markets), which pays operators for availability rather than just for generation, as the energy-only ERCOT market does. Solutions to the latter are more complicated and difficult, entailing broader re-regulation of upstream activity and/or top-down allocation of supplies on extreme days (such as cutting off LNG feedgas and/or industrial consumers).
Members of the media should contact Jon Haubert to schedule an interview with one of Enverus’ expert analysts.
Enverus is the leading energy SaaS company delivering highly-technical insights and predictive/prescriptive analytics that empower customers to make decisions that increase profit. Enverus’ innovative technologies drive production and investment strategies, enable best practices for energy and commodity trading and risk management, and reduce costs through automated processes across critical business functions. Enverus is a strategic partner to more than 6,000 customers in 50 countries. Enverus is a portfolio company of Genstar Capital. Learn more at Enverus.com.
Wells costs in the Permian dropped in recent years as operators applied lessons learned to improve capital efficiency. In response to the plummeting commodity prices in mid-2020, activity across all shale plays hit the brakes, resulting in a substantial decline in service costs.
This demand-driven service cost deflation occurred concurrently with continued operational innovation in the Permian. While public operators continue to highlight their shift in priority from production growth to cash flow generation, the recent rally in commodity prices spurred a rebound in activity in the basin. The increase will reveal the degree to which well cost declines of the past year have been driven by structural changes relative to deflationary forces.
Our analysis of operator-guided 2021 well costs demonstrates divergent trends in the Permian between the Midland and Delaware basins. Drilling and completion costs are coming in 8% higher in the Midland but 4.8% lower in the Delaware compared to 2H20 values. The contrast indicates operators are anticipating further efficiency gains in the Delaware that more than offset service cost reflation; however, service cost increases in the Midland are expected to outpace operational improvements.
The average per-foot cost to drill, complete and equip a well in the Delaware, among the operators sampled, is expected to be 41% greater than in the Midland in 2021, a narrower gap than the 59% higher costs seen in 2H20. We believe the Delaware Basin has more upside for efficiency improvements as the play is still in its transition to full-field development and has fewer multi-bench, large-scale developments than the Midland.
FIGURE 1 | Estimated 2021 Permian Well Costs Versus Actual 2H20
We’re launching a new series, My Career in Energy, where we’re featuring different people in our industry to learn how they got to where they are today and some of their thoughts and ideas.
Interview with Robert Hefner V, Hefner Energy LLC
Robert Hefner is an energy entrepreneur and Forbes U30 Lister; his insights have been published from The Wall Street Journal to Oil & Gas Investor. At his core, Robert’s insightful work is driven by adventure. He leads passionately under the assumption that people would rather follow a leader who is always real than a leader who is always right.
Robert proudly calls Oklahoma City home, where he serves on the Board of Directors for the Children’s Hospital Foundation and as President of the ADAM-OKC Energy Network, which he co-founded in 2014. Robert is also a Guest Lecturer at his alma mater, where Hefner Energy is also a partner with the Irani Center for Energy Solutions, providing real-world projects to the students of OU’s Mewbourne College of Earth & Energy. Robert is passionate about Energy, Climate, Oklahoma, and making the world a better place. His life love is to travel, embracing adventures across the globe with his wife and kids.
Let’s dive into Robert’s career.
What was your first job? I was a ranch foreman during the summer in high school.
What was your favorite subject at school and why? Math; I love that it is not relative; there are right and wrong answers (absolute truth exists).
What was your first job in Energy, and how did you get it? I graduated in December 2008 into the Great Recession. My last name also didn’t do me any favors. So, I wasn’t able to land a job. Instead, I put my Entrepreneurship & Venture Management degree to work earlier than I had envisioned and started Hefner Energy LLC in 2009. Thankfully, I had a smart wife who kept getting promoted at Chesapeake Energy in their Environmental Health & Safety department.
What advice would you give someone entering the energy industry today? Consider going into renewables; don’t fight the virtue-signaling headwinds of the markets; embrace them instead. However, if you’ve got grit, consider oil and gas. For the adventurous, the future is Hydrogen. Also, learn Python and stay relevant with technology trends.
What is the first thing you do when you start work in the morning? I start my day reading the Bible and reviewing my daily and weekly goals that support my broader quarterly and annual goals – my Achievement Management System. I do this so that I can begin my day in the right mindset and achieve consistent, high-performance results.
How do you relax? Adventure drives me, and people give me energy. I relax by skiing blues instead of blacks, traveling with my wife and kids, and reading white papers.
Who is your inspiration at work? As a Founder & CEO, I find my inspiration from external sources. Some of the most inspirational people I can name off the top of my head are Craig Groeschel, Harold Hamm, Don Burdick, Mike McConnell, Dr. Scott Tinker, Michael Schellenberger, Mark Mills, Mike Ming, and Hans Rosling, to name a few.
What excites you about your job? I am really enjoying my launch into energy advocacy right now. In just a couple of weeks people have spent nearly 70 hours watching my first three videos on YouTube – that’s mind-boggling to me. The resulting inbound messages from Washington to London have been invigorating, and I’m excited to continue exporting my energy literacy to other markets. It’s the first time I’ve felt like I’m doing what I’m built to do.
What book has helped you most at work? Never Split the Difference by Chris Voss taught me how to better influence and persuade people through communication. The mind is a powerful drug!
Fooled by Randomness by Nassim Nicholas Taleb (a fellow Leb) taught me how to see the world differently. You need to be sure to sample the entire distribution in order to have perspective on any matter. Those quick to find success generally don’t sustain it over longer periods. I am happy to be the tortoise.
If you could travel back in time 10 years, would you do anything differently?
Yes. I had a lot of self-doubt early in my career. It took me over a decade to realize that I can’t just turn it off like a light-switch. I wish I would have been more assertive. I would have put myself out there sooner, publishing original content and doing what I do best – advocating for others.
I also wish I would have pursued a STEM-related degree at Stanford, or something more apt to put my mind to work and open more doors outside of Oklahoma.
What do you think the energy industry will look like in 10 years’ time? The energy industry will look remarkably similar. Although I suspect the E&P labor force will be dramatically smaller, those who remain will enjoy record-profits as the world realizes natural gas’ nobility as a fuel and to combat climate change. The only two viable options right now are nuclear and natural gas. Hydrogen is the future. Pick one!
Onshore U.S. drilling activity cratered in summer 2020 as the number of active horizontal rigs dropped 70% from pre-pandemic levels to ~200 rigs. Given Saudi Arabia’s unexpected cut earlier this year of 1 Mbbl/d of oil and pent-up economic activity signaling increased liquids demand for 2H21 and 2022, we are cautiously optimistic that prices can sustain low-to-mid-$50s/bbl WTI over this period. As a rise in oil prices can signal a return to business-as-usual, with a resurgence in oil production, our clients often ask whether there’s potential for low-cost associated gas, a byproduct of many oil wells, to flood the market and how likely we are to return to the days of $2.50/MMBtu gas.
COVID-19 undoubtedly crippled the U.S. supply machine, but a more persistent, albeit less abrasive, force remains in motion. Investor demand pushing towards increased environmental sustainability and a focus on free cash flow generation – sometimes called shale 3.0 – suggest the landscape for future growth coming out of oil-leveraged plays looks very different in the next five years relative to the past five. We believe U.S. oil production will decline through 2021, signaling a nearly 1 Bcf/d decline in associated gas production. While we expect growth to return in 2022, we think there is downside risk as the oil price outlook remains a delicate balance against the backdrop of competing global factors.
At the play level, we expect Permian and Eagle Ford operators to exercise capital discipline and reinvest within 70% of free cash flow, enabling them to keep a measured pace of growth. While a similar story holds in the Rockies region, the prevailing thesis is underpinned by dwindling core inventory, a challenging political climate and bankruptcies combining to lower activity levels. Lastly, in the SCOOP | STACK, we believe marginal economics suggests a sustained commodity price recovery in the mid- to high-$50s range for 2022 and beyond is required before a material return of capital allocation from those multi-basin operators that were historically the most active in the play.
Texas’ energy infrastructure, despite being warned after the 2011 freeze about the critical vulnerability of our fuel supplies and power supply system, found itself frozen from a cold weather event that no one thought likely … or even possible.
Our natural gas producing infrastructure was not weatherized. Our power plant and transmission infrastructure were not weatherized.
As a result, millions of Texans were plunged into a nightmare of no heat, bursting water pipes, and in some cases, lack of access to water. As of today, at least 31 deaths have been directly attributed to the failure of Texas’ energy system.
On Feb. 22, our power analytics team gave an excellent presentation on what went wrong during the historic freeze that led to ERCOT’s power failures. The chart above compares the coldest low temperatures during Texas’ biggest cold snaps. The 2011 storm temperatures were clearly outliers. 2011 wasn’t that cold at all in comparison to storms in the 20th century.
Ten years ago, no one in our industry would have:
Predicated a negative price for oil or the rapidity with which private equity and Wall Street pivoted from shale investors to ESG adopters.
Learned from the lessons of the Super Bowl cold snap freeze and saw the need to weatherize our critical infrastructure.
We have all paid the price by assuming that our systems will always work the way they have in the past. We need to check our assumptions at the door as we move forward through this energy transition, and really test what we think we know.
A review of technology and the future of (endless) energy demand
I was lucky enough to have power during our EVOLVE Conference and listened to Mark Mills’, senior fellow at the Manhattan Institute, presentation.
One of the slides he presented contrasted the CO2 benefits of EVs manufactured in various countries versus internal combustion engines (ICE).
Once the CO2 emissions inherent in the mining of materials, manufacturing car frames and components, and burning of fossil fuels to power each of these processes are accounted for, only electric vehicles manufactured in France and Norway — and perhaps the U.K., offer clear CO2 emission benefits.
The reason that France and Norway lead is that their power sources — nuclear in the case of France and hydro in Norway — rely on technologies or natural benefits that are unlikely to be replicated in other parts of the world.
Mr. Mills also called our attention to the fact that for every average (about 1,000 pounds in weight) car battery created, 250 tons of material will need to be mined. For an EV fleet of 30,000,000 vehicles about 7.5 billion tons of material will need to be mined, and of the materials need to create those batteries, only about 50% of the total is readily accessible and available in the U.S. Those 7.5 billion tons of material that are mined, depending on the material being removed, represent somewhere between 6 (granite)-1,000 (topsoil) cubic miles scars on the earth. And this is just for the batteries.
And for those who have total faith in innovation and technology to continually improve the efficiency and deliverability of power and transportation options, he points out that our current innovation cycles are approaching asymptotic limits on improvements.
Moving forward, an energy evolution
Managing our transition to and through a new energy and transportation paradigm will require us to think deeply, in complex ways, to ensure that we end up with a world that is better than we have now.
And this doesn’t address the social disruptions — loss of jobs in the fossil fuel industry, impacts of increased mining in third-world countries — and the economic upheaval — from changes in equity valuations and the massive amounts of capex required — to go down this road to a brave new world.
This evolution is going to require honest, clear thinking leadership across all spectra of all societies.