Thank you! Will read this religiously as I'm sure >90% of the energy investment community will. Is there a valid counter-argument that the Fed and most big bank CEOs are correct that in fact the economy is strong enough to support/necessitate this hiking cycle, unlike 2018? Oil prices are typically correlated to rates bc of economic growth torque, as you point out...maybe this hiking cycle is actually well timed? (fwiw I agree the oil complex is tied up in EU nat gas, which is also driving distillate strength via heating switch and refinery fuel issues).
You raise a good point and it's a heated point of debate in the market. How many hikes can the market withstand? On one hand, growth is still above trend and employment looks great. On the other, growth is slowing alongside inflation. I don't think we'll know the answer for a couple quarters, but the combination of rate hikes coming out of such a bizarre slowdown introduces up/down-side risks we're all struggling to navigate.
great article except the one thing I didnt see is the comparison of shale DUCs, shale production growth (lack thereof), as well as capital expenditures during this cycle vs the previous 2016-2020 cycle. The restraint of shale in this new cycle is quite bullish for energy prices
Also, what's another NEW factor that is completely ignored is ESG investing and shifting of capital away from "dirty" energy to "clean" energy, which has the intended consequence of 1) reducing production (related to shale discipline) and 2) raising the cost of capital and therefore the cost of oil production.
All fair questions/observations. In reverse order: weighted avg cost of capital is not inordinately/unusually high today (as a result of ESG flows) as far as I can see in the numbers. Cost of debt is quite low versus history (continued depression of rates and HY spreads). Equity cost is a tad higher, but on the WACC blend, I show the group trading above the '15-'19 levels, but below '05-'09. For cost of capital being higher today than history, I think it's more thematic narrative than manifest in the numbers. Your point is not missed though, that the NAM producers have certainly exercised more capital restraint coming out of this downturn than they did the last. Repairing balance sheets with FCF is a lot more appealing than issuing equity. Thumbs up for that strategic evolution.
A good segue to the DUC commentary. This one is admittedly harder to quantify, not unlike the hot stove that is OPEC "spare capacity." In 2021 the group clearly leaned heavily upon DUCs to stem decline and start stabilizing/growing production. The rig count today is 30% higher than the 2021 average, the frac spread count about 20% higher. The group is spending more capital and drilling more wells this year than last. Will the longer turnaround time incurred in drilling/completing new wells in '22 vs disproportionately completing wells in '21 have a material impact on production trajectory, in light of higher overall activity y/y? It's genuinely hard to quantify. It's a risk in either direction IMO.
Thank you! Will read this religiously as I'm sure >90% of the energy investment community will. Is there a valid counter-argument that the Fed and most big bank CEOs are correct that in fact the economy is strong enough to support/necessitate this hiking cycle, unlike 2018? Oil prices are typically correlated to rates bc of economic growth torque, as you point out...maybe this hiking cycle is actually well timed? (fwiw I agree the oil complex is tied up in EU nat gas, which is also driving distillate strength via heating switch and refinery fuel issues).
You raise a good point and it's a heated point of debate in the market. How many hikes can the market withstand? On one hand, growth is still above trend and employment looks great. On the other, growth is slowing alongside inflation. I don't think we'll know the answer for a couple quarters, but the combination of rate hikes coming out of such a bizarre slowdown introduces up/down-side risks we're all struggling to navigate.
great article except the one thing I didnt see is the comparison of shale DUCs, shale production growth (lack thereof), as well as capital expenditures during this cycle vs the previous 2016-2020 cycle. The restraint of shale in this new cycle is quite bullish for energy prices
Also, what's another NEW factor that is completely ignored is ESG investing and shifting of capital away from "dirty" energy to "clean" energy, which has the intended consequence of 1) reducing production (related to shale discipline) and 2) raising the cost of capital and therefore the cost of oil production.
Comments?
All fair questions/observations. In reverse order: weighted avg cost of capital is not inordinately/unusually high today (as a result of ESG flows) as far as I can see in the numbers. Cost of debt is quite low versus history (continued depression of rates and HY spreads). Equity cost is a tad higher, but on the WACC blend, I show the group trading above the '15-'19 levels, but below '05-'09. For cost of capital being higher today than history, I think it's more thematic narrative than manifest in the numbers. Your point is not missed though, that the NAM producers have certainly exercised more capital restraint coming out of this downturn than they did the last. Repairing balance sheets with FCF is a lot more appealing than issuing equity. Thumbs up for that strategic evolution.
A good segue to the DUC commentary. This one is admittedly harder to quantify, not unlike the hot stove that is OPEC "spare capacity." In 2021 the group clearly leaned heavily upon DUCs to stem decline and start stabilizing/growing production. The rig count today is 30% higher than the 2021 average, the frac spread count about 20% higher. The group is spending more capital and drilling more wells this year than last. Will the longer turnaround time incurred in drilling/completing new wells in '22 vs disproportionately completing wells in '21 have a material impact on production trajectory, in light of higher overall activity y/y? It's genuinely hard to quantify. It's a risk in either direction IMO.