We’ve been positive and long energy stocks since October 2020 and notwithstanding the recession worry fueled pullback recently, we remain so, especially after reading the Dallas Fed’s Q1 Energy Survey out yesterday. Here are some notable quotes from a variety of energy industry participants that point to continued strains on supply for not just the short term but for years to come.
“Oil price correction is adding pressure on the continuation of drilling and fracking activities. We expect the activity level to be flat to down in 2023 vs 2022’s exit.”
“The dramatic increase in 2022 inflation has severely negatively impact project economics.”
“Uncertainty of the depth and duration of a bank crisis is causing us to be nervous about capital spending plans in 2023.”
“Regulatory uncertainty continues to be a headwind. Inflation pressures appear to be moderating slightly, but we still have a long way to go.”
“Permitting delays by the administration’s policies have caused us not to drill two wells we had hoped to drill this year. The Bureau of Land Management is holding them hostage.”
“The current low oil prices, coupled with the banking scare, will be hard on smaller, undercapitalized companies to conduct business as usual. There will be tougher credit and lower reserve values because of new price decks.”
“An estimated 30-40% cost increase in field operations, increased interest charges on borrowed money, a drastic collapse in natural gas prices combined with lower crude oil prices produced a noticeable lower cash flow. Service company capacity is quite limited in select basins. Outside investors seem to be losing interest in hydrocarbons. The worldwide macroeconomic and political outlook is cloudy. The road ahead looks difficult but passable. We expect another ‘muddle through’ period in a cyclical business where more players will be winnowed out.”
“The uncertainty in oil and gas prices is making it difficult to plan for the future. Between government regulations and oil and gas prices, it is becoming more and more difficult to remain in the oil and gas business.”
“We expect oil and gas production to decline in 2023 due to higher drilling and completion costs. The significant factor is the lack of qualified employees. The second factor is the negative impact of environmental, social and governance initiatives.”
“The low oil and gas prices are impacting investment. Talk by government officials regarding the oil and gas industry makes one wonder why the industry should risk dollars.”
“The biggest threat to our business is the federal government. The public narrative, directed by Washington, that the world is moving away from oil and gas is a very big problem. It directly affects our ability to raise capital. This must stop. It’s easier to finance a vape shop or a tattoo shop than it is to finance oil and gas. There is something seriously wrong here.”
If you want to read more, including quotes from service firms, //www.dallasfed.org/research/surveys/des/2023/2301#tab-comments
By the way, on refilling the SPR, a few days ago Energy Secretary Jennifer Granholm said they won’t start buying until the end of the fourth quarter. Complicating the decision is that two of the four SPR sites are down for maintenance. My money is on the refill taking place at much higher prices than currently seen. A good trade will be at risk of becoming not so much.
Four of the more entertaining days of the year come when RH has its quarterly conference call and CEO Gary Friedman tells us what he thinks. Here are some things he said last night:
“As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis and the cycling of record Covid driven sales and backlog reductions.”
“I think based on the times we’re in and the uncertainty we’re facing whether it’s the continued rise of interest rates or the next bank or two. It’s hard to be anything but conservative right now and I think it would be foolish to be not just from the perspective of disappointing investors but disappointing ourselves and possibly making decisions and investments before we can see around the next corner.”
“So we think there will be an inflection in the second half. What we don’t know is what will be the economic environment in the second half. What would be the condition of the banking industry in the second half? Where will interest rates be in the second half? Where will inflation be in the second half?”
“Look, do we think things are going to get significantly worse? I don’t think so. I’ve never seen a luxury home market down 45% a quarter ever (which it was this past quarter), not even in 2008 and ’09. So I think we’re near the bottom but could get a little worse.”
When looking at the interest rate history of the 1970’s and 1980’s, “There’s not many people on the planet in levels of authority and responsibility that were old enough to experience those times and I think that having a conservative view and being prepared, have a strong balance sheet and trying to see the whole board and all the moves.”
“We believe there are those with taste and no scale, and those with scale and no taste, and the idea of scaling taste is large and far reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative, as we continue our quest to build the most admired brand in the world.”
“Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermes, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim.”
We finally saw a high yield debt deal on Tuesday from Multi-Color Corp who raised $300mm but at a steep cost of 9.5% with a 5 yr maturity. That’s almost 600 bps over the 5 yr Treasury yield. For the broader high yield universe, the spread to Treasuries as of yesterday was 480 bps vs over 500 bps last week. The one yr high was 584 bps last July. Access to credit and the cost of it will only get more expensive from here.
Thanks for the heads up from Quill Intelligence, in the Conference Board’s consumer confidence report from Tuesday, they had a special question and “asked about consumers’ spending plans on services (not goods) over the next six months. “The results reveal that consumers plan to spend less on highly discretionary categories such as playing the lottery, visiting amusement parks, going to the movies, personal lodging, and dining. However, they say they will spend more on less discretionary categories such as health care, home or auto maintenance and repair, and economical entertainment options such as streaming. Spending on personal care, pet care, and financial services such as tax preparation is also likely to be maintained.”
Overseas, the March Eurozone Economic Confidence index fell to 99.3 from 99.6. The estimate was for a modest rise to 100. All five components fell m/o/m in manufacturing, services, consumer, retail and construction. This figure was 105 in February 2020. We know Europe has benefited from a mild winter and the China reopening in fits and starts but the flow of credit is now slowing while lending standards rise at the same time about 80% of the credit comes from banks.
Spain saw an almost halving of its March inflation rate to 3.3% y/o/y from 6% but it was all energy. The core rate held little changed at a still very high pace of 7.5%. Spanish bond yields are down a touch but are also so for the whole region. Germany’s headline CPI at 8am estimate is expected to rise by 7.5% y/o/y vs 9.3% in February. Energy too is the big influence as well as energy subsidies. The euro is quietly rising to near a 2 month high vs the US dollar. While the Fed is likely done hiking, the ECB has more catching up to do and ECB members seem to quite comfortable with the balance sheet condition of its banks. After all, they went thru NIRP and QE hell for almost 10 years.