Analyst Takes Energy Analytics

Analyst Takes: February energy trends

byChris Griggs

As we kick off March, let’s take a moment to reflect on the energy landscape of the past month. Our Enverus Intelligence® | Research (EIR) team has analyzed key trends and developments, supplying insightful analyst takes that can help you make informed business decisions. By staying informed, you’ll be well positioned to capitalize on upcoming energy opportunities in 2023. Read on to discover the latest insights and keep your finger on the pulse of the energy market.

OPEC+ keeps oil production targets unchanged amid uncertainty over Chinese demand and Russian exports (Feb. 2, 2023)

OPEC+ kept its oil production targets unchanged at a virtual meeting of its market monitoring committee Feb. 1. Delegates cited uncertainty about the strength of a rebound in Chinese oil demand as the country relaxes its COVID-19 restrictions, and a lack of clarity on the extent to which Russian crude oil exports have been reduced by the EU sanctions imposed in early December. The organization cut output in November and intends to maintain those new targets through the end of 2023. But it has also warned it will not hesitate to cut further if recession risks play out and oil demand weakens. Early evidence suggests Russian oil exports have remained robust in January. An EU ban on Russian oil product imports comes into effect Feb. 5, which is expected to keep European diesel balances tight.

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NYMEX gas prices hit new low of $2.56/MMBtu amid mild winter weather and high storage projections (Feb. 2, 2023)

NYMEX gas prices have continued softening in 2023 to $2.56/MMBtu, as of Feb. 2. Warm winter weather has supported small storage withdrawals and even a rare winter injection for the week ending Jan. 6. EIR forecasts end-of-winter storage to be 1.8 Tcf due to the mild conditions compounded with strong supply and further delays to the Freeport LNG restart. Our high storage projection has pushed our summer gas price forecast down to $2.50/MMBtu, close to levels which could prompt a reduction in rig activity in the Haynesville.

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ExxonMobil’s offtake agreements push Saguaro Energia’s LNG project toward FID, eyes on second phase deals (Feb. 8, 2023)

Quantum Energy Partners-backed Saguaro Energia’s LNG project inched closer toward final investment decision yesterday (Feb. 7) after it was announced ExxonMobil has signed two long-term offtake agreements. These deals have helped put the 1.2 Bcf/d first phase of the project past its commercialization threshold and the project is now focused on additional deals to support the second phase of the project. Saguaro plans to use ONEOK’s proposed 2.8 Bcf/d Saguaro Connector pipeline to source Permian gas for the project which will help alleviate the gas takeaway issues we have highlighted for the basin post-2026.

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New York’s 70×30 mandate fails to account for economic impact of clean power transition, cost could increase by 5.3% (Feb. 8, 2023)

We believe New York’s 70×30 mandate fails to consider the economic impacts of a transition to a clean power system. We found the most economic way to cover New York’s 2030 load is by supplying 37% of the power with gas-fired generation, 29% with onshore wind and 1% with solar. The remaining is supplied by imports, nuclear and hydro. To reach the 70% clean power goal by 2030 in an economic manner, the cost would increase from $20.9/MWh to $22/MWh or 5.3%. If the mandated generation mix is implemented to reach the 70% goal, the cost would deviate from the optimal by 50.7% to $31.5/MWh. For a 100% emission-free grid in New York, we estimate the cost of flexibility to reach ~$10 billion annually. We expect NYISO’s market design to be adjusted so flexibility is accounted for and compensated either in the capacity or the energy market.

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Russian crude oil loading programs plummet in February, exports to decline by 1-1.5 MMbbl/d by end of Q1 amid sanctions impact and shadow fleet operations (Feb. 9, 2023)

Russian crude oil loading programs have fallen sharply so far in February, according to Refinitiv shipping data. As of Feb. 9, loading departures equivalent to 2.3 MMbbl/d have been programmed, compared to 4.8 MMbbl/d in January, which was slightly higher than the pre-sanctions level of November 2022. Enverus expects Russian crude exports to decline from pre-sanctions levels by 1-1.5 MMbbl/d by the end of the first quarter, reducing production to 9 MMbbl/d as sanctions take effect. We assume it will not be possible for Moscow to divert all formerly European-bound oil to other markets, particularly China and India. The EU has not only sanctioned Russian crude but also imposed restrictions on insurance and other maritime services for ships carrying Russian oil. However, Russia has built up a shadow-fleet of more than 100 vessels that could operate outside of the sanctions and is selling its oil at a $35-40 discount to Brent, as well as paying higher freight rates. India has prioritized imports of Russian oil, taking 1.25 MMbbl/d of Russian crude in December, equivalent to 25% of total oil imports, compared to 1% in 2021.

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Entropy’s Glacier CCS project outperforms incumbent technology with 40% lower costs, boosts partnership with Brookfield Renewables (Feb. 10, 2023)

Entropy’s recent CO2 capture results from its Glacier post-combustion CCS project demonstrate material improvements over the incumbent technology. The company’s projected $71 million capital cost and $20/tonne opex at its 200,000 tpa facility trend roughly 40% lower than our estimates using legacy MEA solvent and assuming flat $70/MWh and $4 Henry Hub. Furthermore, Entropy is already starting to benefit from its partnership with Brookfield Renewables through its 400,000 tpa agreement with CRC. The operator’s stock traded 2% over the XOP on the news.

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VTLE’s purchase of Driftwood Energy’s Assets in Southern Midland Basin a step in right direction for inventory concerns (Feb. 15, 2023)

It may not solve all inventory concerns in one fell swoop, but VTLE’s recent purchase of Driftwood Energy’s assets in the Southern Midland Basin moves it incrementally in the right direction. After adjusting for production value at $36,000/boe/d (63% oil, ~50% next-12-month decline), we calculate VTLE paid about $1 million each for 21 net locations breaking even at $42/bbl, a reasonable price versus larger core Permian deals that have traded north of $2 million per location. The new inventory slots into the top quartile of VTLE’s opportunity set and improves its sub-$50/bbl inventory life by ~0.4 years to 3.8 years assuming no change in drilling cadence. However, more work remains to be done as we view inventory life (cash flow duration) as one of the chief drivers of oil equity valuations. VTLE’s light inventory life is a key reason they trade at ~2.0x 2023E EBITDA versus a peer group average of 3.1x for SMIDs and 5.1x for large-caps. Continued bolt-on deals of this type at modest prices appear the best current route forward for SMID-caps to address their inventory needs as the remaining core strategic opportunities are picked up by large operators that can afford higher pricing.

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Oil and gas operators brace for decline in capital efficiency in 2023 due to OFS cost inflation (Feb. 16, 2023)

Capital efficiency is expected to decline in 2023 compared to 2022 for most operators, largely driven by OFS cost inflation. Consensus estimates imply oil capital efficiencies for shale-focused SMID- and large-cap operators will remain flat and degrade by 12%, while gas operators are expected to worsen by 3%. We suspect large-caps’ higher year-over-year degradation in capital efficiency is due to longer-dated OFS contracts partially delaying exposure to cost inflation felt by most SMID-caps in 2022. The inflationary impact can be mitigated by improving productivity (e.g., through geological high-grading) or development strategies (e.g., increasing DUC draws). As seen with DVN and MRO, we expect that rates of change in capital efficiency will drive market reactions this quarter as investors remain focused on cash return potential.

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ARX achieves increased well performance through wider spacing at Kakwa asset (Feb. 16, 2023)

ARX reported earnings last week indicating that wider spacing at its Kakwa asset has resulted in increased well performance. Our data suggests ARX has achieved 7% wider inter-well spacing compared to 2021, with early 2022 well results implying oil EURs of 48 Mbbl/1,000’, 11% more than 2021 and 20% greater than 2020. We estimate that ARX’s recent wells in the Kakwa region have breakevens in the $1.90 range, ranking as a top-tier asset in the Montney play.

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Brazil’s pre-salt offshore plans offer major growth for NOCAR supply, but policy and regulation risks could delay progress (Feb. 21, 2023)

Brazil’s pre-salt offshore development plans should add a risked 1.9 MMbbl/d of oil supply by the end of the decade according to Enverus forecasts, making the country the major focus of growth for our NOCAR (non-OPEC, Canada, U.S. and Russia) supply wedge in the medium term. Around half of that growth will come by mid-decade. But with pressure on to deliver, we think the risks of shifting government policy and energy sector regulation alongside uncertain management and strategy at Petrobras could push timelines back beyond operator guidance. Brazil President Luiz Inácio Lula da Silva has demanded adherence for local content requirements by increasing fines, which risks backing up already hard-pressed Brazilian ship-building yards. Brazil’s oil sector is running to stand still as new projects are critical to making up for declines at mature oil fields. However, there are some silver linings. If the government allows Petrobras to shed some of its producing assets, supply prospects could benefit from the entry of new operators.

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Investors shift focus to capital efficiency and longevity amid twilight of North American shale (Feb. 27, 2023)

What is now abundantly clear from this earnings season is investors are focused on capital efficiency and the longevity of their companies. Yield is important but almost secondary as our discussions turn to the twilight of North American shale. If companies increase capex without commensurate production growth, then capital efficiency is degrading and investors are noticing. We are receiving lots of inventory and type curve questions again which means there is an increasing focus on the parent/child challenge. I expect some big inventory revisions this year and the A&D market will be hot with those looking to show inventory life beyond seven years.

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Make better business decisions with EIR’s energy expertise

At EIR, we understand that staying ahead of the curve is key to making informed business decisions in the dynamic energy sector. To help you stay informed about the latest developments, we invite you to follow us on LinkedIn, where you’ll find valuable insights on the energy outlook for February and beyond. Trust EIR to provide the guidance you need to navigate the ever-evolving energy landscape.

About Enverus Intelligence Research
Enverus Intelligence Research, Inc. is a subsidiary of Enverus and publishes energy-sector research that focuses on the oil and natural gas industries and broader energy topics including publicly traded and privately held oil, gas, midstream and other energy industry companies, basin studies (including characteristics, activity, infrastructure, etc.), commodity pricing forecasts, global macroeconomics and geopolitical matters. Enverus Intelligence Research, Inc. is registered with the U.S. Securities and Exchange Commission as a foreign investment adviser.

Picture of 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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