Analyst Takes

Analyst takes: August’s key energy sector developments to watch

byChris Griggs

As we usher in the month of August, it’s an ideal moment for retrospection on the past month’s shifts and trends in the energy sector. Our proficient Enverus Intelligence® | Research (EIR) team has delved into critical trends and innovations, offering clear, insightful analyst perspectives that act as a compass for your informed business choices. Being informed means being prepared to poise yourself to leverage impending energy opportunities in 2023. Continue reading to uncover the latest revelations and stay abreast of the progress in the energy market.

Tracking the increasing cost of north american oil and gas supply (Aug. 29, 2023)

EIR sees the cost of supply continuing to increase for North American shale producers over the next five years as the industry moves from Tier 1 to Tier 2-4 locations. Ample Tier 2-4 inventory should alleviate fears of a structural decline in North American production or activity levels over the next 15 years.

ETL achieves first lithium (Aug. 24, 2023)

E3 Lithium (ETL), a Canadian direct lithium extraction darling, has announced its first successful production of lithium carbonate from brine water. The production from ETL’s Clearwater Project Area, located in Alberta, Canada, taps into the vast Leduc reef which can flow as much as 14,000 bbl/d, helping to reduce project capital costs. EIR estimates that ETL has delineated more than 50% of its 520,000 acres, with ~30% of its acreage estimated to be above 75 ppm lithium concentration, greater than its peers High Wood Asset Management and Lithium Bank. ETL traded up as high as 8% on the announcement but closed even on the day, with its stock up 45% in the last month.

PR’s ESTE buy highlights the value advantage of corporate M&A (Aug. 23, 2023)

Relative to recent buyouts of private equity sponsored E&Ps, PR’s corporate acquisition of ESTE presents a more attractive value proposition for buying quality inventory. Despite having around 500 locations between the Delaware and Midland basins that break even at $50/bbl or less, ESTE was trading below the value of its existing production before the deal. Even after factoring in the premium – 15% on the prior day closing price – offered by PR, the company is paying just one-third the cost of what comparable quality inventory has traded at in private seller deals. The deal is financially accretive to PR and improves inventory quality without materially diluting inventory life. Other buyers are likely to take a close look at the remaining SMID-cap E&Ps with Permian exposure to find financially accretive deals that add quality inventory at a minimal cost. Meanwhile smaller public E&Ps will likely continue to target private opportunities that extend inventory to make themselves more attractive to both investors and strategic buyers.

OXY boosts bet on emerging carbon capture tech with latest buy (Aug. 22, 2023)

With its $1.1 billion purchase of Canada-based Carbon Engineering, OXY is increasing its investment in direct air capture (DAC) of CO2 to meet its own aggressive emission reduction targets and build a revenue generating business. Unlike point source capture, DAC pulls CO2 from the air, which requires more power and is therefore more expensive. Modeling based on smaller operational projects, EIR calculates a cost of capture of $240 per tCO2 for DAC or about 10x the most economic point source capture projects. DAC does garner a higher credit at $180 per tCO2 permanently sequestered versus $85 per tCO2 for point source capture. OXY, which had already partnered with Carbon Engineering to build two of the world’s largest DAC plants, is a recipient of a DOE grant aiming to drive DAC cost below $100 tCO2. Besides lower costs from economies of scale, OXY should have synergies with its prior Net Power investment to supply carbon neutral energy to the plants. However, we will likely have to wait until 2025 when the first project comes online to determine whether this was a well-placed bet.

2Q23 SMID earnings | Rewarding positive revisions (Aug. 9, 2023)

Similar to large-cap peers, positive revisions were needed to outperform the market during earnings for SMID companies. Early sentiment from the SMID’s alluded to 5%-10% capital savings Y/Y in 2024, driven by alleviation in steel and moderating service costs. VTLE, MGY and NOG were notable outperformers during earnings season, all guiding to positive capital efficiency revisions for the remainder of the year. PR and CPE underperformed the XOP as 2023 production capital guidance was left unchanged. Continuing to look for efficiency gains, operators are driving lateral lengths longer. CHRD, one of EIR’s long picks, reported a slight oil beat, showing early signs of success with its 3-mile drilling program. At the same time, CIVI also highlighted early 3-mile drilling success with Watkins results coming in above expectations and beating oil production by 10%.

2Q23 Large-cap oil earnings | Capital beats baked in (Aug. 9, 2023)

Meeting consensus estimates for 2Q23 and holding FY23 guidance intact has led to underperformance among large-cap oil operators, including DVN, EOG and MRO, suggesting the market anticipated downward revisions to capex as inflationary pressure subsides. 2Q23 capital efficiency beats and/or improved annual guidance were required to outperform, with OVV, HES, APA and PXD meeting the mark. The largest gainers post-release were OVV (+3% versus the XOP), driven in part by a rebound in Midland oil productivity, and PXD (+3%) on improved oil capital efficiency and APA (+5%) on a partial resolution to its Egypt receivables build, positive Suriname appraisal commentary and downward revisions to FY23 capex and opex. DVN lagged peers (-6%) on declining Q/Q Delaware oil volumes, weaker than expected 3Q22 volume guidance (EIR is bullish on DVN’s 2H23 Delaware oil productivity), poorly timed buybacks and its continued focus on Eagle Ford infills and refracs.

GOM infrastructure: Mapping connectivity (Aug. 3, 2023)

EIR estimate total oil takeaway capacity of 3 MMbbl/d from nine main lines in the GOM, implying ~1 MMbbl/d spare capacity relative to GOM’s current supply of ~1.9 Mbbl/d. The Hoover Offshore Oil Pipeline System faces a bottleneck, but EIR expects XOM will expand the capacity by at least 50% to accommodate SHEL’s Whale startup in late 2024 and additional growth in the Alaminos Canyon area. GEL’s Cameron highway oil pipeline and Poseidon systems have the most exposure to near-term growth. The Rocky Mountain asset brings the remaining carbon storage site, 21,300 boe/d of EOR production and almost 400 miles of additional CO2 pipeline. XOM adds 46 miles of pipeline infrastructure to its 160-mile Shute Creek CO2 pipeline in Wyoming via the DEN Beavercreek system. Northeast of this operation, XOM will also absorb 340 miles of pipe between the Greencore and CCA in-service CO2 pipeline systems, adding Cedar Creek Anticline EOR production to their portfolio. Within a 30-mile buffer of the Rocky Mountain pipeline system, XOM is increasing their producing well count from 200 to more than 1200 wells, while adding more than 600 DEN injector wells.

At EIR, we recognize the importance of staying on top of the latest trends to make informed business choices in the fast-paced energy industry. We encourage you to follow us on LinkedIn, where we share valuable foresight into the energy outlook not only for August but also for the future. Rely on EIR for the leadership necessary to adeptly maneuver the consistently changing terrain of the energy sector.

*About Enverus Intelligence®| Research

Enverus Intelligence® | Research, Inc. (EIR) is a subsidiary of Enverus that publishes energy-sector research focused on the oil, natural gas, power and renewable industries. EIR publishes reports including asset and company valuations, resource assessments, technical evaluations, and macro-economic forecasts and helps make intelligent connections for energy industry participants, service companies, and capital providers worldwide. EIR is registered with the U.S. Securities and Exchange Commission as a foreign investment adviser. See additional disclosures here.

Chris Griggs

Chris Griggs

Chris Griggs is the product marketing manager for Enverus Intelligence® | Research (EIR) and Trading & Risk at Enverus, where he leads the development and communication of the value these products provide various industries, including oilfield services, investment funds, wealth management departments, banks, E&P oil and gas departments, and midstream operators. Chris helps provide customers across the energy ecosystem with the intelligent connections and actionable insights that allow them to uncover new opportunities and thrive. 

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