reshaping global energy ?3

13:45 26-Mar-22

To wrap up this subject, my research leads me to believe the Euro-American energy deal is a stretch, but barely doable.  It means high natural gas prices throughout the west and big business for developers.  Even with Henry Hub gas at $5.57, and JKM and TTF in the low and mid thirties for deliveries through the rest of this year, I don't think the market's done pricing that in.  What the market doesn't seem to be grokking so far is that renewables will also have to expand aggressively to help bridge the gap, as monetary efforts are unsustainable for the long term.  Thus the drop in AMSC makes it a competitive value to KNTK or NFE in my eyes, albeit with different risk profiles.  The U.S. availability of Polestar's cheapest model also seems timed just right for the changing market.

Note that none of this necessarily signals a quick end to the expanding war.  Russia will still find buyers for its hydrocarbons, and not only in the east; Germany's first LNG terminal with Shell won't be operational until mid-decade.  It's also very debatable whether sanctions on ever more oligarchs puts any pressure on Putin at all, despite what you hear from so-called western leaders.  Contrasting various news sources proves very useful in guessing how lines will be redrawn.  I spent much of 2020 harping on global balkanization:

Over the decades to come relative debt levels will reshape global trade as we head toward the more balkanized world that I feared.  In that note, I cast doubt on the notion that the Federal Reserve will always be able to manage the market and economy simultaneously.  It has now clearly chosen the market, which means the short term gains we are seeing and, as I wrote then, real world pain by 2025.

and shifted to the inflation it would bring in 2021. 

It now looks like we'll have a sustained east-west split, with India hanging in the balance.  Pundits are beginning to realize that the G-20 format may not last the year and that wouldn't be an entirely bad thing.  I'll be starting to look beyond energy and natural gas next week, but that's the obviously dominant market force for the time being.

The White House statement on European energy is finally out.  Contrary to early leaks, it starts by specifying "additional LNG volumes for the EU market of at least" 15b cubic meters for this year, from international partners, rather than directly from America.  That should rise to about 50bcm of annual supply from America through 2030.  By my calculations that more than doubles the amount provided in 2021. 

The initial supply doesn't come close to eliminating Europe's dependence on Russian gas, but it's a start.  Both Europe and America will be working on expediting renewable development and reducing gas demand as well.  Clarification should come in throughout the day and ultimately we'll be waiting on joint European purchase details.  Still, I think it's obvious that LNG development like the deals that New Fortress has tipped, and American infrastructure for both gas and renewables will need to see big pushes in order to fulfill this framework. 

It will be interesting to see how NFE, KNTK and AMSC respond in the pre-market.  Regardless, I think my bullishness on each is justified.  I have a harder time getting excited about GLNG at the current price point well above $20, but this is obviously positive for Golar too.  As for Schlumberger, which kicked off this subject... I've heard pundits hawking investment in such traditional services companies and it will certainly have a part to play.  However, the timelines seem much more suited to the new LNG platforms with tolling agreements than the full-scale legacy development services.

On 3/24/22 07:48, Esekla wrote:

While we wait on a U.S.-E.U. energy agreement, I think the ECB's tapering statement this morning shows how it is between a rock and a hard place.  The 2-year plan is not only in contrast to the Fed, where expectations for a half point hike in May as well as a tapering plan are now firmly anchored, but most of the rest of the world.  The U.K. lead the western world, and Brazil is well into an aggressive hiking cycle.  The joint LNG purchases hinted at below probably represent the first steps toward the unified banking that I mentioned then, but that will be complicated efforts from pro-Western Asian nations to sort out their own supply.  Global rates are yet another factor supporting my view that India's hydrogen ambitions are unrealistic.  In the meantime, it's still piecemeal consumer-focused national relief efforts in Europe.  The single currency fell below €/$1.10 on the news, even as the Brent/WTI spread has widened to $7 with the former topping at $122.  I view it as entirely appropriate that reshaping global energy is likely to be the only subject for the week.

On 3/23/22 09:42, Esekla wrote:

Some details are leaking from the European side in advance of tomorrow's meeting, including proposals to force E.U. member states to fill gas storage to 80% by November of this year, and 90% in coming years.  Storage is currently at 26% according to the article.  Joint purchases are also being worked out, but the sources of supply is still the big question as Putin demands payment in rubles.  NFE continues to rise in an otherwise down market and Henry Hub gas is up to $5.27.  The Brent/WTI spread has also more than doubled to $6.50 as the former touches $120.

There's also another announcement from EbixCash saying it will peddle the Axis trading solution to its customers.  Axis was one of the lead managers when the IPO was initiated, but its trading platform has mediocre ratings and seems to mainly be used by its banking customers.

On 3/22/22 17:51, Esekla wrote:

When I began this note, I was hoping that details on Biden's European trip would dribble out ahead of time, but apparently we will have to wait until Thursday for further sanctions and

joint action on enhancing European energy security and reducing Europe's dependence on Russian gas.

I believe this is in reaction to Russia sort of threatening to curtail oil exports, but Henry Hub natural gas has risen steadily to $5.19 while Brent/WTI oil has dropped to to $114.45/$111.76.  Hopefully whatever we hear on Thursday makes more sense than Occidental selling "net-zero oil".  The headline may as well have read, "our business wipes out carbon capture benefits."  As far as I can see though, the administration seems to be grasping at straws when it comes to energy solutions.  Once again, I hope I'm wrong.

On 3/22/22 09:19, Esekla wrote:

To continue with the news trivia and mobility turn, EbixCash has another Indian bus system win, with a 5 year contract for almost 15K vehicles and deployment expected over the next few months.  Even fewer details on the revenue stream are offered than with the prior contract, and I didn't see that making a noticeable impact. 

Contrast that with Google's Waymo claiming it's ready to take the backup drivers out of its automated taxis in San Francisco after just 7 months on the road there.  I think (automated) transportation as a service will eventually be big business, and also reduce the overall number of cars owned and on the road.  That said, Waymo offers no clues as to when it might begin charging, despite gaining approval to do so at the end of February.

On 3/22/22 08:47, Esekla wrote:

I held the last two news items until morning to see if anything else would emerge as the market stares down a new wartime normal.  The only thing that came up was AES subsidiaries for Ohio and Indiana joining the National Electric Highway coalition, which supports deployment of fast charging stations.  I'll note the projection for almost 85% YoY growth in EVs through the end of the decade in America, but none of this merits its own update.

Shell has begun the multi-year process of planning 17GW of offshore wind spread across six farms in Brazilian waters.  It's over 3 times larger than initial plans for America, and a major undertaking by today's standards.  However, to put this in the perspective of this note, it's also only about 2.4% of the total offshore wind capacity envisioned by Brazil's roadmap.  Big oil names have been the on and off trend of late, but I'm not touching them.  Instead I'll point out that LUMN offers ten times the yield.

We'll also see how much attention the formal cessation of the New Fortress NJ/PA LNG plant gets.  It deserves none, as I've already written, since this hasn't been a part of the company's current plans for a long time.  NFE hasn't traded so far this morning.

On 3/21/22 14:05, Esekla wrote:

Schlumberger has also just scheduled its first quarter report for the morning of April 22nd.  Average analyst estimates call for 35 cents of EPS from $6.0b of revenue, increasing to $6.4b for the second quarter.  It will be interesting to see how those estimates evolve along with the war, but a just over 1% yield, I have even less interest in SLB as investment than I did before people started dying.  Thus my coverage will once again be limited to the numbers and macro insights.

However, this is a good excuse to amend the note below to mention that Kinetik is probably a beneficiary of the stagnation in DC, and KNTK has been seeing somewhat increased trading volume.  The latter probably needs at least a couple of months to get to a point where options are offered, but I'll take the dividends in the meantime.

Speaking of the meantime, I think it's worth recalling most projections for switching away from fossil fuels target 2050 for completion and even the most optimistic don't see a tipping point until the middle of the next decade.  Consider that in conjunction with the chart to the right, which compares average American natural gas and electricity prices over the last decade.  This is why I'm constantly referencing American Henry Hub gas prices as a baseline, and point out below how Biden is still rationing exports to Europe even now.  Something's gotta give, and when it does, the most expedient solution usually wins out.

On 3/21/22 09:56, Esekla wrote:

Over the weekend Schlumberger joined Halliburton and Baker Hughes in declaring a moratorium on new Russian business.  I see the moves as half-measures which are designed to mitigate the reputational and business hits.  The latter is estimated to be a mid to high single digit percentage of overall revenue in Schlumberger's case.  They also seem meaningless to the immediate situation in Ukraine, where the war is showing no signs of abatement.  Over the medium term, Schlumberger will is likely to mitigate the impact with new business in the Middle East.  However, these moves are indicative of the very real potential for accelerated restructuring of global energy. 

The IEA published a plan to cut Russian oil usage, following up on is original one for gas.  It highlights how oil is primarily a travel enabler, whereas gas is about heat and electricity.  Thus, the oil plan is mostly about inhibiting unnecessary travel, and even highlights electric vehicles, to the delight of Polestar and chagrin of Westport.  My take is that even though oil is a much bigger trade component between the Europe and Russia, countries there will be more willing to let oil be affected by market forces, whereas keeping the lights and heat is an imperative.  Thus even marginal gas projects like Shell's Jackdaw are getting renewed interest.  As ever, though, the European response will be country by country.  Germany has already committed to fast-tracking two new LNG terminals as part of its dealings with Qatar, but as I've already covered, it should certainly pivot toward the West African supplies from New Fortress and Golar as they become available. 

Thus far, France has resisted such moves and I think it will be culturally more amenable to Xebec's renewable solutions.  However, my direct conversation with Xebec IR indicates that the company will not be ready to meet immediate demand.  The Denver facility is only producing parts at present, but plans to ramp toward full Biostream production over the course of the year.  That means an American listing is probably still at least two to three years off, and that I can't justify the time needed to travel to Denver in person.  I will certainly attend the investor day remotely, though, and still see Xebec as a prime deal target that is ideally positioned for the energy transition.  I also got color on the new CarbonQuest purchase order, which is similar to the first at around $200K, but high margin at around 45%. 

In America, the House is set to hold even more hearings with energy CEOs who have untapped reserves on April 5th.  To my mind, this is just another dog and pony show that will wind up showing just how broken Congress and American politics are.  If it really wanted to produce positive change rather than secure lobbyist funds, it would recognize RNG from agricultural waste as carbon negative at the federal level, and implement the sort of cap-and-trade policies that have been so effective with acid rain, and in Europe.  As things stand, we will have to rely on states and corporations to lead the way, where Xebec indicates that there is pending progress.

Although India is capable of moving much more quickly, I predict that its plans to become a hydrogen powerhouse will wind up disappointing due to the country's penchant for unsustainable subsidies and horrible record on foreign direct investment.  Thus India's ties to Russia are looking ever more binding, but at least Sri Lanka is hedging its bets with an IMF bailout, which is more good news for New Fortress.

Brent and WTI are bracketing $110 as the Middle East continues to destabilize, but American natural gas is back down to $4.78 as the market attempts to balance the long and short term realities.  I favor the former; NFE continues recovering from its post-earnings volatility, and I regard it as quite attractive in the low thirties ahead of new announcements.  GLNG is at 3-year highs above $20, which I find less attractive despite its ideal positioning for the new shape of global markets.  Invest carefully.