Why A Real Fracking Ban Won’t Happen

Friday January 31, 2020

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy and metals sectors. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Fracking ban of little consequence

• Several candidates for president have called for a ban on fracking. In practice, the president can only try to ban fracking on federal lands, and even that might be subject to litigation.

• Even if a ban succeeded, capital would flow from federal to private lands. “Even in the long-term, the impact might be quite negligible as seen from the greater industry perspective,” says Artem Abramov, Head of Shale Research at Rystad Energy. “However, the effects of such a ban could have stronger negative effects on one key shale producing region in particular – the New Mexico portion of the prolific Permian Delaware Basin.”

• New Mexico and North Dakota would be most affected by the ban, each producing several hundred thousand barrels of oil per day from federal lands. As for gas, Wyoming is the largest contributor from federal lands, followed by New Mexico.

• Some of the companies most affected in the Delaware basin would be Occidental (NYSE: OXY), Devon Energy (NYSE: DVN) and Concho Resources (NYSE: CXO), with their Delaware holdings on federal lands between 63 and 82 percent of their totals, according to Rystad.

• Still, the ban might not be consequential. “A majority of significant Delaware New Mexico operators can maintain activity levels at the current pace (average of 2018-2019) for more than 20 years,” Rystad said. “If federal acreage is no longer accessible, the inventory size would decrease, but we would still see 10+ years’ inventory at the current pace for most operators, and as much as 19+ years for about half of the group.”

2. The case for Hess

• Morgan Stanley put out an investment note for Hess (NYSE: HES), going Overweight with a price target of $82 per share. Hess currently trades at around $58, after a steep drop this week.

• Hess fell 7 percent after it reported its fourth quarter earnings. “We view yesterday’s sell-off as overdone and our thesis remains the same,” Morgan Stanley wrote.

• The bank says that Hess’ breakeven price will fall from $70 per barrel in 2019 to $40 per barrel by 2025 as it becomes increasingly concentrated in offshore Guyana. “This change will structurally shift the company toward the lower end of the cost curve, supporting free cash flow that is resilient through the cycle,” Morgan Stanley said.

• The bank says that excluding Hess’ midstream and Guyana units, it trades at 1.2 times EV/EBITDAX for 2020, “implying minimal value for the remaining business.” As Guyana ramps up, Hess will increasingly reflect the strongest part of its portfolio.

3. Natural gas squeezed by rising renewables

• Warm weather this winter brought on a “gasmaggedon,” Bank of America Merrill Lynch wrote in a note.

• U.S. LNG exports have climbed over the past four years from nothing to 8 billion cubic feet per day (Bcf/d). But drillers have added 22 Bcf/d of new supply over the same timeframe.

• “We believe domestic natural gas prices will have a difficult time sustaining higher prices until the risk of US LNG curtailments has passed,” Bank of America said. “Unfortunately, we estimate the global gas glut will persist through at least 2021.” Production must decline in order for the market to balance, the bank added.

• But the rise of renewables complicates the demand equation. Solar peaks in the summer, but wind peaks in spring and fall. The base of renewables grows with each passing year.

• “High renewable output combined with high [gas inventories] would be a difficult problem for the market to solve this spring,” the bank said.

4. Oil demand peaks in 2030

• The decline in oil prices over the past few years has led to ongoing increases in emissions. “The shale revolution in America has further exacerbated the problem, as global Green House Gas (GHG) emissions growth has partly accelerated on the back of the rising US oil supplies and falling global energy prices,” Bank of America Merrill Lynch said in a note.

• Still, global oil demand could peak by 2030, the bank said.

• By that year, EVs will capture 40 percent of the global car market.

• EV sales will begin accelerating in the early 2020s as costs reach parity with the internal combustion engine.

5. Copper prices fall as supply rises and economy falters

• China’s “refined copper output stood at 930 thousand tonnes (kt) in December, an all-time high and marked a third successive month of fresh highs,” Standard Chartered wrote in a report.

• For 2019, China’s copper output stood at a record 9.8 million tonnes.

• But a Reuters poll finds that analysts see a rebound in prices this year on the back of supply problems. “A modest revival in global economic growth coupled with a less seamless return of supply than most expect following major disruptions last year should be positive for the price of copper,” Caroline Bain, chief commodities economist at Capital Economics in London, told Reuters.

• Nevertheless, copper prices fell to a five-month low this week, due to weaker demand in China and fears over the coronavirus slowing economic growth.

6. Gas glut is global

• The gas glut is not concentrated just in the U.S. Instead, the surplus is global. LNG prices in Asia – the Platts JKM price – fell below $4/MMBtu in recent days, a 10-year low.

• “Specifically, we estimate that warmer-than-average temperatures have reduced aggregate gas demand in Japan, China and South Korea by approximately 5mtpa and 8 mtpa in December and January, respectively, increasing excess LNG in the spot market,” Goldman Sachs said.

• Inventories in NW Europe – the TTF hub – are unusually high. If mild weather persists, the threat is that U.S. LNG exports could be curtailed, according to Goldman Sachs.

• “At current forward prices, we estimate testing such a process would require summer TTF and JKM to move $0.60/mmBtu and $0.80/mmBtu lower,” the investment bank concluded.

7. Water hauling a $20 billion business

• The Delaware Basin within the Permian has seen the most recent surge of shale activity. The basin has multiple layers stacked on top of it and tens of billions of barrels of estimated reserves.

• “However, these resource plays hold much higher water cuts than other U.S. plays,” Raymond James warned in a report. The ratio of water to oil runs at about 6x, the bank said.

• The bank said that the Delaware will reach peak production in the late 2020s at around 5 mb/d. But water production will reach 20 mb/d in that same timeframe.

• “If all of this water were to be transported by truck, water hauling in the Delaware alone would be a $20 billion dollar industry annually and require 150,000 trips per day to move these volumes,” Raymond James wrote [emphasis in original]. “At this rate, every man woman and child in Reeves County, Texas, would be behind the wheel of a truck 60 hours a week.”