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Daily Intelligence Briefing

Wednesday, February 23, 2022

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Relentless Rise in Energy Prices Spurs Global Demand for Stronger Spending on Oil and Gas Services

Summary: Global energy prices continue to rise with no end in sight. Geopolitical tensions in Eastern Europe are likely to be a major catalyst in keeping oil and gas futures elevated. Though the US has deployed a wave of SPR releases and hiked-up exports of gas capacity to record levels, the only answer for consistently elevated prices is going to be higher output. More production is going to require more spending on re-opening and drilling wells, as well as maintenance costs.

Rising energy spending can be seen kicking off around the world, with energy exporting nations like the United Arab Emirates (UAE) and Norway boosting spending for this year and beyond.

Related ETF: VanEck Vectors Oil Services ETF (OIH)

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European Energy Crunch Mobilizing US Energy Exports

As President Biden initiated new sanctions against Russia yesterday afternoon, which came alongside 
White House support for Germany’s decision to block the opening of the Nord Stream 2 (NS2) gas pipeline, he acknowledged already high energy prices resulting from heightened tensions between the two nations, stating “defending freedom will have costs, for us as well and here at home”.

Biden did suggest that he is working with oil and gas producers on a plan to “blunt gas prices”, but it remains to be seen how effective that will be. The US notified the markets back in November that it was prepared to release 50 million barrels of oil from the strategic petroleum reserve (SPR), but with nearly half of that total already dispersed, there has been little observable effect on crude oil prices. US benchmark WTI crude oil reached a new multi-year high just yesterday, touching the $96.00 per barrel marker for the first time since the Q3 2014.

Tensions in Eastern Europe have spurred a wave of triple-digit oil price forecasts. JPMorgan sees oil “easily” headed toward $120.00 per barrel if Russia’s crude exports are derailed.

MRP noted in December that delays to the certification of NS2 have already put upward pressure on natural gas prices across Europe, but its fate has now been thrown into total uncertainty. Russia’s Gazprom had previously said that it was possible to flow 5.6 billion cubic meters (bcm) of gas via NS2 in 2021, but that never came to fruition. Per S&P Global Platts, the eventual annual capacity of NS2 could be equivalent to 55 bcm.

As far back as September, we were ringing the alarm on slowing Russian gas exports and a potential European energy crisis come winter. MRP wrote at that time, “Without a clear consensus on the NS2 pipeline completion, as well as unpredictable clean energy hiccups moving into the fall and winter seasons, natural gas markets are likely to remain volatile amid tightening supplies… rising demand for a shockingly low amount of natural gas in Europe is keeping prices severely elevated.”

Russian LNG exports, which normally account for about 30% of Europe’s gas use, have continued to drop substantially, and with European gas prices about four times as high as normal, US exports have surged to fill the gap. According to IHS, an 80% YoY jump in European LNG imports from the US has meant that, for the first time, the country is providing more natural gas to Europe via ship than Russia is through its pipelines.

That rush for gas supplies has pushed the US back into first place among oil producers in recent months. The Wall Street Journal writes that new export capacity later this year will make the US the world’s largest LNG exporter as well, surpassing Australia and Qatar.

For the first time ever, Bloomberg reports tankers were docked or loading at all seven US LNG export terminals earlier this month, pushing demand from their loadings to a record 13.3 billion cubic feet (bcf) of natural gas flows to the terminals. The majority of the gas will be headed to Europe. With new sanctions in place, Europe’s reliance on U.S. liquefied natural gas (LNG) will likely increase even further.

Global Energy Spending Splurge May be Kicking Off

With signs of a resurgence in US oil and gas production are starting to become apparent.

First, the Baker Hughes North American rig count has been climbing rapidly over the last few weeks, capping what’s sure to be the 19th straight month of rising rigs data. The number of active oil and gas drilling rigs in the US rose by 22 in the week ended February 11, a 16th straight weekly increase and the largest single-week gain since February 2018.

Field production in the shale basins will need to ramp up significantly to replace inventories at the Cushing, Oklahoma storage hub and delivery point for US futures, as they dropped to their lowest level since September 2018 last week.

“Drilling economics today are better than they’ve ever been since the shale revolution started,” Chris Wright, chief executive officer of Liberty Oilfield Services, told Reuters earlier this month. Spending budgets among US independent producers are up 13% YoY, according to analysts at Cowen.

MRP has been highlighting this “under the radar” rise in spending in US shale basins among smaller, privately-held firms since last October. Of an expected 800,000 bpd increase in US oil production throughout 2022, privately held producers are to account for more than half, compared with about 20% in a typical year, according to Raoul LeBlanc, an analyst at IHS Markit. Additionally, LeBlanc told the Financial Times last year that spending on drilling and bringing new wells into production in shale patches onshore will rise from about $65 billion in 2021 to more than $80 billion.

Domestic production will rise to 12.6 million barrels daily in 2023, or 600,000 more barrels than in 2022, the U.S. Energy Information Administration (EIA) forecast this week. That would surpass the previous record production of 12.2 million barrels in 2019.

A similarly palpable rise in energy spending and planned output is being felt throughout the world.

Abu Dhabi’s state-owned oil firm Adnoc is investing heavily in increasing its oil production by 1 million bpd through 2030. To achieve this figure, 
Adnoc says it will need to drill 700 wells every year. notes Adnoc will spend $127 billion between 2022-2026 to expand its oil operations and develop its low-carbon oil business.

Reuters reports Norway’s oil and gas firms plan to invest almost 159.5 billion crowns ($17.9 billion) in 2022, up from a projected 154.4 billion crowns ($17.4 billion) in November, as they take advantage of pandemic-era tax incentives, a national statistics office (SSB) survey showed on Thursday.

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