Drilling Deeper: 1Q Earnings & the Future of Big Oil
[Music] good morning good afternoon everyone this is Rob Barnett I’d like to welcome you to today’s bi energy exchange where we talk about our research and the latest developments in energy Market on today’s call we’ve got uh several members of the team that I think you all know well at this point but starting over from his perch in Madrid we’ve got Patricio Alvarez senior gas and utilities analyst looking after uh that part of the energy complex in Europe coming across the pond we’ve got Vince pza dialing in from Wilmington today he’s our senior oil and gas analyst covering Exxon Chevron and so on and then over to uh Scott LaVine at our New York City headquarters 731 Lexington who covers uh many things for us including some of the uh Energy service and drilling name so I think we’ll do a quick kickoff with how the earning cycle is going uh for anyone who’s unaware this is we’ve had a number of the big energy names report out already we still got more to come but uh Vince we’re going to come to you first because I know Exon and Chevron have just uh just reported out so tell us what we heard and how you’re thinking about those uh names after getting the one Q results yeah you know it was very interesting um so you know Exxon was really weak off the earnings uh despite the pre-announcement um you know I I think the market was really focused around the uh the refining results uh the um the timing effects maintenance and so forth so lot of pieces a lot of moving pieces but you know we were laser focused on the 10 billion of free cash flow generated um in q1 and that was more than sufficient to um uh to cover the divies and uh also the BuyBacks um which numbered around totaled around 7 billion um the balance sheet is is really healthy over 33 billion of cash on the balance sheet uh net debt to cap roughly 3% so we were pretty excited about um you know despite the the timing issues we’re pretty excited about the quarter and uh we didn’t hear anything about the Pioneer deal that would lead us to believe that the um decision would be extended um uh too far uh post the expected closing date you know Chevron um the shares did better than Exxon but I looked at the the underlying numbers and you know I saw free cash flow below three billion I saw distributions somewhere in somewhere around the $6 billion range that that the cap wasn’t as um as impressive as Exxon and you also have the uh um the overhang of uh the arbitration with uh with h and um Exxon o over Guana so lot of lot more questions there but you know overall I thought um exxon’s uh results were very strong um Chev talked about uh getting to their production Target at uh for for the peran at the end of 2024 it’s somewhere around 900,000 barrels a day and that seems to be on target so lots to like about both um I have to give you know xon a little bit of uh the the upper uh the upper hand the edge here um just given uh what they reported on free cash flow and that bulletproof balance sheet um so you know I felt pretty good coming out of that those Friday earnings um you know in general Rob we talked about this from time to time you know I’m looking here and you know this morning that gas is training below two bucks um I still think that’s unsustainable we can get in more on that later on but uh you know I think that’s uh where a lot of folks are um that’s where a lot of folks are where a lot of folks are thinking about at this point um what happens with NE as we go into the shoulder season and uh head into uh the summer cooling season okay thanks Evin uh let’s swing over to you Scott I know you had uh Trans Ocean report yesterday uh when you look at the service names is is it a similar good news story or something a little different um I think it’s a little different um you know starting with with rig rig was down over 10% yesterday uh and it was a similar story to what we’ve seen the last couple quarters from them think you know uh the offshore Drillers did very well last year and then toward the end of last year there uh concerns grew that we were starting to see an a pocket or a Slowdown in uh contract Awards and so um what we saw to trans oan which is really the first uh major offshore driller report is that that continues uh they took the guidance down for the year a little bit uh not just bookings you know the backdrop Still Remains health but um uh backlog edged a little bit lower and we’re seeing delays in terms of the contract startups uh and uh and that’s what’s driving the numbers down so they beat the quarter but they uh guided down for the year uh they uh echoed the recent commentary that um you know this recent slowdown in floater Awards is really more a function of timing than anything else uh we’re still seeing uh an Elation of the contract terms uh it’s just taking a little bit longer to strike contracts and then then folks are striking them further in advance so from an offshore perspective we have Noble and valis Reporting uh valeris tomorrow and then Noble next Tuesday uh and uh we’ll see if uh they’re saying similar things but uh uh by and large uh the fundamental backdrop remains healthy but the near-term earning story uh not as rosy as in investors were hoping for okay thanks for that Scott uh Patricio let’s swing around to you I know you’ve had uh forom eerola report tell us what you heard there is frame it relative to what Scott and Vince just told us what what kind of one Q did uh some some of the names that have already gone have for you so um yeah I think well the main difference is that these um well these companies are have a higher share of contracted earnings tend to be more stable but um overall in that context um yeah both companies reported better than expected results um through both operationally and also on the on the net income level um and on ia’s case um that that came with um with a special income or special gain from at disposal in Mexico uh but we do highlight that underlying um earnings growth is still very strong and and it’s because the company has been pivoting um to a higher spend in US electricity grits and also UK transmission grids and and that’s sort of where the the sector is um is Shifting towards given that Renewable Power um generation has become a bit more challenging Investments there have been dialed down once again for the next three years uh with almost 70% of the budget going to grits which is something that that is worth highlighting um and then on the other front you have Forum which is an independent power producer in in Finland which means that it um it has to compete compete with uh with very low prices and very high hydro hydro electricity volumes there um and still the company also beat expectations um meaning that the company was able to um to optimize um storage um better than than most people expected um and and that I think shines a bit of light on the sector in general because um the whole index the the European utilities index has has been uh very much punished on evaluation standpoint both by higher for longer rates and also because of this rapid decline in both gas and power prices in Europe um and I think this uh this one qu is shedding a bit of light um on utilities ability to sort of offset these uh these rapid declines in power prices um and should be or should have um supportive re across I think through through the end of the year Patricia I want to follow up on that uh La last idea you were just talking about because in the US we have seen retail rates for power uh really headed higher uh to set aside what’s going on in the wholesale power markets consumers have been paying more I think this has been inflationary and in some places like California you know you you’re paying 2X the national average or even a little more you know California is approaching like the German uh price level that at at at least to what the retail residential consumers pay so it is that idea that you just talked about where power prices pulling back is that just the wholesale power Market or are consumers seeing that as well um so yeah that’s that’s an interesting question but um so in in Europe um there’s you always have two markets um in most most jurisdictions you talk about the regulated market which tends to be tariffs that that are pegged to wholesale electricity prices so that’s like the UK’s standard variable tariff which gets updated every six months um to reflect the changes in wholesale power prices so people who are exposed to that tariff they are already seeing power prices and gas prices come down on their bills um so that that is roughly I I’d say somewhere somewhere between 35 to 40% um on average of of customers are are ped to the wholesale power Market um and then the rest of them the 60-ish per um arep to to bilateral contracts um and these are the contracts where utilities tend to make uh their profit on um these um companies during the energy crisis uh saw holer rates push up very high to to extreme levels which incentivized customers to um to Pivot from the wholesale Market to this bilateral contracts which are usually two to three years long um so that’s why integrated Utilities in Europe are still doing okay because they managed to hedge um hedge prices at higher levels and the energy sourcing costs which are usually wholesale Power and Gas costs those have come down qu quite abruptly so they’re still enjoying I’d say a good um a good year and a half or so of um of decent margins uh but after that yeah I think um eventually um tariffs for for those customers will have to come down it just takes a bit longer okay very interesting so one of the things that is very preent preent in power markets is what’s going on in the gas market so gas often is the marginal electron in both Europe and the us so I think let’s bring Vince back on Vince uh we’ve got us gas Henry Hub sub $2 European gas uh over $9 per mm BTU no it’s not priced in dollars but uh give us a sense as we look into the summer here what’s your view on the US gas market are we going to stay sub2 and what’s your view on kind of the demand picture uh looking like at that price point yeah thanks uh Rob um we’ve been talking about this for a while um uh the winter was really really difficult uh we’ve had a warm winter uh we had storage um over the year uh really build out um and now we’re sitting here in the US 2.4 TCF in the ground that’s 37% above the 5year norn so we are well well suppli here um if you look at European storage um Patricia will tell you um it’s well supplied as well so you know um the the impact that we made uh in sending spot caros uh in light of uh Russia Ukraine conflict that really helped to build out um European storage um here in the US you know we’re heading into a a a a low in demand that’s the shoulder season between winter and summer the good news here is that you know gas volumes have come off we were averaging somewhere around 102 BCS a day uh during the winter time um and now we’re well below 100 billion so the capacity that the uh um emps have taken off because of low prices that’s actually working um April closed flat with last April so we’re under 100 BCF a day The Operators are doing what they need to do to help balance the market you’re just not seeing it on the demand side um you know power gen is roughly 2 BCF a day below where it was last year uh LNG feed gas is another two 2.1 BCF below where it was last year you’ve had maintenance you have capacity come offline because you know quite frankly uh EUR Europe doesn’t need the molecules right now they’re pretty well pretty they’re pretty well stored um the economics suggest flows out to Asia are more profitable than uh Flows In to Europe so um the market right now will likely remain um loose balances are loose we still have an over Supply situation because of where we are on storage and we really do need to get a little bit of a heat wave going um we have some heat this week on the East Coast uh but for the most part um we need the sever time to kick in the summer is not as demand heavy as the winter but it does does help dilute the injections uh but we could be looking at a pretty robust uh storage picture even through uh the prime or Peak uh summer demand side Patricio let’s swing back over to you uh tell us how Europe looks for the summer I get the sense that we’ve got a similar overs Supply situation perhaps in Europe and if that’s the case try to explain that big disconnect between Henry Hub and ttf if you don’t mind yeah sure I think the big disconnect in prices is just because we are a net importer of um of gas uh we are not able to be self-sufficient on the production front um and we have to compete uh with spot cargo um with Asia throughout the year uh so that’s an interesting point to start I think um by now considering that demand uh in Europe has come down almost 20% since um 2021 has remained at those levels since the end of 2023 uh on that basis now um LG has fully replaced Russia’s share of of Supply here in Europe LG roughly represents 40% of um of of demand here in in Europe um but that said demand levels are still very low still very anemic at minus 18 to 20% below the norm both because of mild weather and also because um the let’s say the The Rebound in industrial activity has very um has been very weak uh so far industrial demand has picked up by low single digit year-over-year from a very low base in 2023 um so so the prospects of underlying demand are still very weak I’d say um and um well that that’s obviously mentioning the fact that that Europe is kind of coming out of of a mild recession um in late last year so things may look better on the second half half but but still um I think the overarching story is still storage uh we built a significant storage buffer um and though injections have slowed down over the past two or three weeks um storage levels are still very close to a record high for this time um the the storage refill Gap has been reduced by about 6% versus last year so even though we have stopped injecting because we really don’t need to at the moment um there’s still very good visibility to refill um they use storage Caverns up to 100% by August which is more than two months um earlier than than their the policy makers Target so um I think that gives you the picture we still we’ve already gone and um and and done our forecast for for the um for the storage levels for the exit of of next winter so winter 2025 uh we see storage levels um also above the the history or above the norm at about 47% full um so other um let’s say geopolitical surprises aside um the outlook for um for for gas here in Europe is very much for for loosening balances um I I would say that if if there is no geopolitical risks U materializing over the next uh four or five months like during the shoulder season like like Vince was mentioning um yeah there’s very low um low probability for for these prices to even hold we are at about n dollars per mbtu or 28 um Euros per megawatt uh we think the floor is is more like 20 EUR per megawatt um if we don’t see any more um sort of geopolitical tensions um rise up or or threaten the LG um trade just a quick followup following Russia’s invasion of Ukraine the European policy makers were very determined to completely cut off European use of Russian gas how close are they to that goal does that 20% drop in demand you know get you close to that and what do you make of that objective is it is it still even a priority um so it is um I would say it’s been achieved achieved on paper but but at the detri to the detriment of of European industry um so you can call it a success because we’ve wean weaned weaned ourselves off Russian gas materially by uh We’ve reduced Reliance by about 80% on their supplies but but also um this means that our our gas prices are sort of structurally higher like like mentioned the beginning of our conversation um so it that that that’s what H that’s what that’s what’s hurting um German industry and European industry in general so yes and no would be the answer like the repower EU plan is sort of on track uh but I think it hasn’t resolved um some other issues especially in IND industrial demand um and in terms of the the gas flows that that we’re still receiving from from Russia um there is there is a very I think um real risk of um or at least half of those residual flows to be halted by the end of this year because um there’s a Transit agreement that goes through that Russian gas flows through Ukraine that Transit agreement is coming to an end by the end of this year um and Ukrainian politicians have been very um outspoken in and saying they will not renew this Transit agreement um so that means that the the supply base for for the EU will be um like 3% um smaller in 2025 um but that said there’s another uh sort of something that that the region doesn’t speak too much about is that we still receive about 20 20 BCM of um of Russian LG um and there has been talks of potentially sanctioning uh those uh but but I don’t think EU politicians will be in a hurry to do that because that could um increase pressure on balances significantly because that’s 20 BCM you’re talking about about six to 7% of Supply on top of those other maybe 15 vcm of of pipeline flows like things add up that you you would make things uncomfortable for on the on the price point at least for for EU Imports so um I don’t think there’s appetite for that immedately but um the the flows via Ukraine I think those are there’s a very high probability that those will seize in 2025 I’m struggling for the right word perhaps irony or ironic that Russian LNG is okay versus Russian pipe gas not okay I think once you add LG into the mix you’re talking about a much higher cost basis as well but uh Scott let’s come back over to you with all this discussion about industrial activity and I’m curious It’s particularly when you think about your Drillers uh with the gas price where it’s at is there much interest in uh drilling specifically for G are they all chasing oil molecules right now and what do you make of the general landscape in the US where’s uh Shale drilling going when you look out through the remainder of the year yeah so um uh the expectation I think is is is for weaker Trends than what we expected at the uh start of the year I think flat is about right in terms of expectations for Upstream spending on us land Drilling uh you know you have two negatives really that have emerged this year uh versus uh you know where we were thinking at the start of the year one is the extreme weakness in gas uh certainly has surpassed our expectation uh now gas rigs account for maybe 20% of the total us rig count give or take oil is the much bigger factor in terms of uh us land Drilling in general but certainly the Outlook there has been weaker than what was anticipated and uh gas uh basins like the at hanesville and uh to a lesser extent the ones in the Northeast the marcelis uh and uh and uh udic uh have uh have seen declines in rig count we’re sitting at about 619 rigs uh active in the US right now we were uh a shade over that at the start of the year so we’re down a little bit and we’re currently looking for 650 at the end of the year uh I think there’s probably downside risk to that the other uh driver of that downside is the consolidation that we’ve seen uh in the customer base uh you know uh a lot of Vin’s names we’ve seen a continuation of that Trend uh with the additional mergers pending closure and that is another downside uh driver year to expectations for the rig count in the US now that said we did get a earnings out of uh h&p and neighbors last week h&p is the largest in the US and neighbors is the third largest and um the guidance for the upcoming quarter calendar second quarter is for additional releases not a huge way but but down certainly from the March quarter the guidance uh uh from the fourth quarter earnings call was that we would probably be flat the up in the second quarter so that guidance is downside versus prior expectations uh for the reasons I just mentioned and so uh I think that we’re probably looking at about a flat year give or take on the US rig count uh and um uh the the good news I would say is that um the pricing is holding steady generally speaking Leading Edge day rates are at about $35,000 uh per rig we relative stability within competitive landscape uh and increased demand for um uh complimentary drilling services like directional drilling measure uh while drilling uh and uh and increased service intensities B well for the land Drillers generally but I think we’re looking at a flat uh environment for us land drilling this year and the last thing I’d say uh before handing it back is that I think investors were encouraged by that the uh investor response uh to that news I think was generally more favorable uh coming off a year like last year which was so poor uh for the land Drillers uh that flat you know earnings with a stable competitive backdrop uh would be uh perceived favorably by the investment Community as opposed to offshore drilling as I mentioned earlier where the expectations were higher coming off a year like last year so that’s I think a good summation of where we are uh and uh you know we’ll see if the second quarter proves to be disappointing or not a quick followup just in terms of translating the flat spined Outlook to how you might want to think about it on the production side if you have flat spending are we going to see greater efficiencies this year and so production maybe actually Rises or where does production land how do you translate that yeah so last year that’s a good point so last year production was up over 10% in the US despite a 20% drop in the rig count um I don’t think we get anything like that in terms of efficiencies this year but I do think we could see production growth on a flat rig count yes maybe it’s 5% Vince might have uh something additional to offer on that subject but um clearly we’re seeing longer laterals uh the efficiencies are not just on the drilling side but also on the fracking side uh with the increased stages all the metrics that you’re used to seeing that uh determine uh productivity are still moving higher and so uh I think that indeed we could see production growth in a flat rig environment uh coming off what we saw last year and the metrics say that that is continuing but it’s continuing at a slower pace so the second derivative is maybe declining a little bit here but I think yes is the answer question Rob maybe to lesser extent than what we saw in 23 Vince let’s hear your thoughts on this so I think what we are seeing is companies decreasing spending uh but also looking to rebuild looking to the uh backlog of uncompleted Wells or deferring uh bringing production on so in the case of uh Chesapeake for example uh significant producer uh in both the marcelis and the hanesville uh producing combined you know well over 3.1 BCF a day um they are looking to rebuild that backlog hoping for better prices coming into 2025 and by the end of this year they’re they’re going to have roughly a BCF a day of deferred capacity that could come back if prices improve uh in 2025 so while while we’re here in the month of starting may but when we closed April we closed April flat at below 100 BCF similar to uh last April uh and that trend is actually helping help helping the market balance some while that’s off roughly 2 BCF a day from the winter average you know a lot of these companies aren’t exactly um uh making this production disappear it’s just being deferred to when prices improve so you still have a great degree of productive capacity that can come on once prices improve at below $2 that’s well below break even and even in some of the um uh better plays in the US you know so you’re going to need to see prices in that you know $3 range to get that growth back but when it does come back it’s going to come back um uh uh pretty effectively just given the deferrals and uh the backlog of uncompleted Wells that can come online in 2025 if the market does improve Vince I want to ask you a followup that I was thinking about while Patricio was chatting about European gas and I think when you think about Chevron and Exon the gas waiting in their production mix I believe it’s been sort of generally going up in time and this has been part of their energy transition story and that sort of thing so how would you frame gas within the within the overall business of the uh us oil majors at the current moment right so it’s not just about um the oil Majors it’s also about consolidation Among The Independents and you have productive capacity in stronger hands uh if you take a look at the Chesapeake and uh Southwestern um they’ve agreed to merge uh they will jump eqt as uh the largest independent natural gas producer in the US between those two uh you roughly will have and including eqt in the mix as well have roughly 7 eight BCS the day in the hands of two very large um operators add Chevron and Exxon to the mix so you almost have uh I don’t want to say an olop but uh you have start elevated exposure to Natural Gas among these players so you’re going to have a more rational Market I believe um you’re going to have probably a little less volatility than in the past because you have that productive capacity in stronger hands okay I love the idea let’s keep an eye on that I think we’ve reached the end of our time but just a quick bit of advertising so next week on this call we’re going to have a guest speaker uh Elizabeth alfano she is the CEO of a company called veg Tech invest which is a a company that run helps run an ETF that’s focused on uh I guess a vegan ETF vegan and climate Focus ETF and there actually are some intersections with the energy world and that world and I I met Elizabeth at our uh Farm food and fuel Summit back in Kansas City last month and I think it would be fun to hear some of her perspective on the intersection of energy and agriculture uh the second thing that I would highlight the following week so not next week but the one after our colleague s ilmaz is going to be at the Qatar economic Forum there’s going to be a lot of discussion about energy there and he’s going to be joining us live and kind of distilling some of the conversation that’ll be taking place there so we’ve got two good upcoming calls make sure you uh join for those and if you have any followup questions we’re all green dots on the terminal right now so shoot us an IB or an email if you want to follow up on anything that we’ve discussed here today and I hope everyone has a great rest of their week take care
Drilling Deeper: 1Q Earnings & the Future of Big Oil
BI Energy Exchange (April 24) — Featuring research and analysis from Bloomberg Intelligence energy analysts Vince Piazza, Scott Levine, Patricio Alvarez and Rob Barnett.
Key themes from the discussion include: The call reviewed first-quarter earnings from major companies like Exxon and Chevron, with a focus on financial results such as free cash flow and debt levels, and also touched on operational issues like maintenance and production strategies. Additionally, the analysts discussed broader market dynamics including the impact of natural gas prices and the outlook for energy services and drilling sectors. There was a particular emphasis on the robustness of the offshore drilling sector despite a slow down in contract awards, and discussions around the European energy market’s response to declining natural gas prices and regulatory changes.
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