U.S. Shale Faces Another Year Of Contraction In 2021

1. DVN and EOG exposed to federal lands drilling ban

- With Joe Biden leading in the polls, the odds of access to federal lands for U.S oil and gas producers getting curtailed now looks reasonably high.

- Devon Energy (NYSE: DVN) and EOG Resources (NYSE: EOG) hold about half of their Permian acreage on federal land, making them the most exposed. ConocoPhillips (NYSE: COP) also has high federal land exposure, plus large holdings in Alaska, which is also facing heightened scrutiny.

- The prospect of more limited access to federal lands has these stocks "out of favor," according to Goldman Sachs. An end to new leasing would be the least impactful move by a potential Biden administration, as it would not stop new drilling on already-leased lands. An end to drilling permits would be much more impactful.

- The vast majority of the land in question is located in New Mexico and to a lesser extent in Alaska.

2. U.S. shale to contract in 2021, but by less than 2020

- The U.S. is now the marginal oil producer, which makes production growth extremely challenged at $40 prices.

- OPEC may reprioritize market share, and that, combined with the long-term energy transition away from fossil fuels, "leaves little room for US shale growth," according to a note from Morgan Stanley. The bank sees shale output falling by 3 percent next year.

- The investment bank says that WTI at $40 is "here to stay." That has shale executives shifting from growth strategies to a focus on their highest return assets, free cash flow, and de-leveraging.

- These are "all signs of a maturing industry," Morgan Stanley said.

- The bank sees output collapsing by 15 percent this year, and then falling by a more modest 3 percent next year.

3. Natural gas bulls see upside

- Lower-than-expected natural gas production has led to a much weaker injection season than predicted, according to Goldman Sachs.

- Goldman says that gas storage in September came in 50 Bcf below expectations. Pipeline maintenance at the Canadian border, mild temperatures, and temporary disruptions to production from a hurricane led to weakness on the supply side. Production has also contracted in Appalachia due to low prices, including temporary shut-ins. EQT (NYSE: EQT), for example, shut in 425 mmcf/d in September.

- The investment bank sees the end of injection season transitioning into a "much tighter sequential balance and, accordingly, sustaining much higher price levels than what we have seen this summer," Goldman analysts wrote.

- The report comes the same week that Morgan Stanley published a note saying mostly the same thing. Morgan Stanley painted a bullish picture with Henry Hub prices in 2021 at $3.25, while also leaving open the possibility of prices spiking to $5/MMBtu if cold weather arrives.

4. Clean Tech outperforms other sectors

- It's been a wild year for stocks - plunging in March, but roaring back thereafter. But not all sectors have done well. In fact, the clean tech sector has been one of the strongest of all. The ECO Index is up 78 percent year-to-date.

- That came after a 58 percent gain in 2019 for the index.

- According to Raymond James, there are two "megatrends" behind the success of the sector: climate mitigation and climate adaptation, both of which encompass a variety of technologies that are set for blistering growth.

- Raymond James has a "Strong Buy" recommendation for Algonquin Power & Utilities (NYSE: AQN), Enviva Partners (NYSE: EVA), Evoqua Water Technologies (NYSE: AQUA), Green Plains Partners (NYSE: GPP), Itron (NASDAQ: ITRI), Livent (NYSE: LTHM), and TPI Composites (NASDAQ: TPIC).

5. Can OPEC+ really move forward with tapering?

- On January 1, OPEC+ is scheduled to taper the current production cuts, resulting in another 2 mb/d back onto the market. (The 8 mb/d in combined cuts will drop to 6 mb/d).

- But that is increasingly looking like a perilous move. The demand recovery is stagnating.

- "We do not need the extra oil," said Marco Dunand, co-founder of Mercuria Energy Group, told Bloomberg.

- Bloomberg reports that some OPEC+ delegates are now privately considering a several-month delay in the production increase. The delay is a "realistic" possibility, one delegate said.

6. Wind cheapest electricity option

- Onshore wind is one of the cheapest forms of electricity generation for new builds in the U.S., according to Raymond James and U.S. DOE data.

- The levelized cost of electricity (LCOE) for onshore wind ranges from $0.041 to $0.077 per kWh, and that excludes federal tax incentives. The cost range for new natural gas plants is generally higher, but because of cost variability, wind doesn't necessarily beat out gas in every instance.

- The top three wind states as a share of electricity generation are Kansas (36 percent), Iowa (34 percent) and Oklahoma (32 percent).

- Costs for wind have been declining for years, and wind turbine size and capacity factors have increased. New wind capacity factors can reach 40 to 50 percent.

7. Frac sand bust

- The drilling bust has led to a bust for the frac sand market.

- With a severe reduction in fracking activity, sand consumption has collapsed. Over 20 billion pounds of sand were used in June 2019, which turned out the be the high-water mark.

- In August 2020, the most recent month for which data is available, sand use was down to 3.65 billion pounds.

- Investors have lost more than $10 billion on sand-mining stocks, according to a Wall Street Journal analysis.

- Many of the high-profile miners - such as Hi-Crush Inc. - went bankrupt. The combined value of those companies remaining is worth less than $300 million, down from more than $10 billion at its peak.