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Daniel Snyder
All right, guys, let’s go ahead and get started, without further ado. My name is Daniel Snyder, and on behalf of Seeking Alpha, I wanna welcome you to today’s Webinar, Energy’s Next Big Move. So, you’ve seen the recent headlines, oil rockets north of $129 a barrel due to supply chain bottlenecks and geopolitical tensions, specifically the Russian invasion of Ukraine, and today, this morning it drops below $100 a barrel, before climbing back above $100 a barrel, we’ve all seen this story before. So gas is up nearly 55% from just a year ago, and the end of the year targets for gas prices are all over the place, with some people even saying it can go $10 per gallon, and that one is a mystery to me. Now, as the saying goes, in every crisis, there lies opportunity, and this is no exception. The question now is, will oil prices continue to ratchet higher? And with many stocks such as accidental petroleum, marathon oil and Chevron flying out of the gate this year, have we already seen the best move in these energy stocks? Or is there more upside potential to be made right now? And that’s why we ask Michael Boyd, Head Analysts at Energy Investing Authority to join us today, Michael is an expert in the energy sector, and he is going to break down the current state of play in the oil market, both in the states, as well as abroad. And then he’ll highlight a subset inside the energy group that he believes is offering a fantastic upside opportunity, as you see the man right there. And many investors are looking past it, he’ll even give two names here today of two companies he believes has good risk reward right now within the group. Now, if you’d like to find out more about Michael and or Energy Investing Authority, he’s offering a free two week trial for a limited time, so give the service a test, just click on the link, that my team is going to post in the chat box and you can get started. If you have any questions during today’s webinar, just type them in the chat box and we’ll have Michael get to some of those after his presentation today as well. Now, before we get started, I just wanna go ahead and do a quick poll with everyone that’s joined us today, and in specifically in regards to what I asked you earlier, gasoline prices. Where do you think the average price of gasoline in the United States will be by the end of 2022? We broke it up into three different answers there for you, we have lower than 25%, higher by at least 25 cents per gallon from where it is and within 25 cents per gallon, from where it is now, plus or minus. Go ahead and jump on your screens there and give us your answer as to what you think and we’ll give it just a second, and then I’ll share the results and we’ll get started with The Man The Myth The Legend, Michael Boyd, who is looking at me waiting to get started, I see him right now.
Michael Boyd
Yeah, I’m ready to go.
Daniel Snyder
I know you are, I know you are, just give me one more second, watching all the participants answer this question, and we’ll wrap it up here in just a few seconds, and actually it’s kind of split across the board, this is pretty interesting. All right, higher by at least 25 cents per gallon, from where it is now, is holding just over 40% of answers, lower by at least 25 cents per gallon from where it is now, is 25%, and within 25 cents per gallon from where it is now is 32%. Michael, we’ve got a pretty split audience here today with us, in regards to what they think the gas prices are gonna be doing here within the year. What do you think?
Michael Boyd
I think it’s symptomatic of the market at large, right? That’s where all this volatility is coming from, everybody has their own different opinion and kind of viewpoint of what’s gonna happen, and that always leads to some ups and downs and gyrations to the market, especially on what seems like small news items. So it’s interesting, I think people are on the right track there, at least for me, I think by end of the year, we’re probably down on gas prices, but I won’t give it all the way we’ll see.
Daniel Snyder
You’re giving it all away, we gotta pull it back a second, we gotta pull it back. Michael, why don’t you go ahead and start just by telling our audience, where’s home base for you?
Michael Boyd
I’m based out of Raleigh, North Carolina, I’ve been down here for 16 years or so now, moved down here after college, so, obviously with March Madness going on, we got this Duke UNC game coming up, so I’m excited for that, but should be a fun time around here.
Daniel Snyder
Yeah, Saturday, Saturday, right? April 2nd, Saturday we see that Duke UNC, the final four coming in.
Michael Boyd
First time in history, so.
Daniel Snyder
Well, we’ll see, it’s coach K’s last season for Duke as well, correct?
Michael Boyd
That’s right, yeah, it’s a lot of firsts in this tournament.
Daniel Snyder
There’s a lot of competition. Well, let’s go ahead and get into it. Why don’t ahead and just tell our audience, how did you get started in investing?
Michael Boyd
Yeah, I mean, just like anybody else, my parents tried to instill some good habits in me when I was younger, you know, I didn’t necessarily think I would be in like the research or financial advisory background, I was heading in the college, but graduated with a degree in economics and started my work life at a register investment advisory down here in Raleigh, this was 2008 and 2009, so post great financial crisis, but stayed there for a few years, you know, did the usual stuff there, did some private placements, client structuring of accounts, moved to an investment bank based in the area, I traded residential mortgage back securities for four or five years, remember this was post 2009 so you can’t blame me for all the volatility that it led into that, but there was a lot of opportunity in that market, after the market crashed, I did derivatives there for a while, did internal audit as well. I mean, I had started writing on Seeking Alpha, maybe in 2014 or ’15 in my spare time, just, you know, for me putting my ideas down into writing kinda helped to lay out the thesis and I left the investment banking role in 2016 and had been doing research trading and I guess advisory work in every year since, so.
Daniel Snyder
Yeah, so you started in investing banking with mortgage-backed securities, we won’t hold it against you and now you run the research service, Energy Investing Authority. Now that’s quite a journey and I know the name kind of gives it away, but can you tell us what you focus on specifically?
Michael Boyd
Yeah, sure, I mean, this is focused on the energy sector, you know, the energy value change is humongous, you have everything from producers to midstream pipelines, to refineries, you know, like, I cover everything there, you know, what kind of drew me into that space was there’s really not a lot of very strong public coverage available for investors to read, even for kind of a low price to kind of get into that, you know, I think this is one sector in general where institutional investors have had a very strong advantage for a very long time just based on information access, and my goal has always been to help people, so I felt like I kinda step into this world a little bit and bridge the gap even though I didn’t have any technical oil and gas that out in the field expertise, you know, the financial background, I think I kinda bring that to the plate. And I think there’s a lot of value to that, you know, the energy sector definitely has its ups and downs, you know, I’m not gonna call it like a highly risky sector, but the sector has had the most bankruptcies over any S&P sectors, basically every year since 2015 or 2014, if you go back in time, there’s been some issues of abuse, especially for investors that get involved in things like the high yield space, if you look at like master limited partnerships and general partner limited partner and I guess, IER resets, and just general things that kind of, you know, dividend cuts and all that stuff. So the goal is to kind of help investors protect capital, and if they’re retirees especially focused on income, making sure they avoid things that they should not be in and kind of take out some of the volatility, but still get exposure to a space that has, you know, a lot of potential and a lot of upside, especially as a lot of listeners know, if you were involved in energy, at the lows in 2020 or even in 2021, you made excellent returns off the bottom, it’s been a great place to be, and I think it’s gonna be a great place to be going forward as well.
Daniel Snyder
Yeah, you mentioned it, I mean, everybody seems to have done well and now we’re in a different market entirely it feels like and I can’t help but think about, you know, everything that I mentioned in the intro, but there’s no better time than now to speak with somebody like you, to get a handle of what’s going on within oil or within this specific inflationary, geopolitical, and ESG environment. The sector’s been dominated with headlines, with new multi decade highs, and some very inviolable swings over the last few weeks, so I’m hoping you can translate this for us. What’s the state of play right now for oil both here in the US and internationally?
Michael Boyd
I mean, I think, you know, everyone kind of is gonna tie this back into Russia and Ukraine, especially with everything that’s going on, right now it’s easy to kind of make the big issue and to an extent it is for today, But I think you have to remember that even prior to the pandemic, you know, there’s a lot of volatility, in oil and gas and oil prices and natural gas prices were going up before all of this all started. So, if you go back to early 2020 before COVID-19 was a thing, you had OPEC and Russia, you know, they formed OPEC plus this was a whole thing, putting the pressure on United States shale producers, you know, they were highly offended of the idea that they were losing their kind of position as like the dominant player in these markets, so, as these kind kind of went on, you know, COVID-19 took place, demand shrank, crude oil prices fell dramatically, so, investors remember when oil prices actually went negative on the front month for a while there in Cushing, in 2020. So, US production still hasn’t recovered from those levels and if you look towards today, let me get my slide back going on over here, you know, OPEC Plus has committed to boosting production but a lot of the smaller countries involved, they have not been able to meet those particular targets, whether you look at smaller nations like Nigeria, Libya, Kazakhstan, Angola, all of these countries for various reasons, I don’t wanna get down deep into each and every single one, but whether it be neglected maintenance on their wells, you know, just general geopolitical issues, like corruption and low investment from the government’s involved, there’s a lot of headaches there, and production just really has not been able to recover. There are some potential offsets in the market, investors are paying attention to the news flow today. Chevron announced some early agreements with Venezuela to maybe be able to boost production there, have to get the United States government on board as a potential replacement for Russian sanctioned barrels, but that’s a potential balancing point, you have a potential Iran nuclear deal that could bring some more currently sanctioned barrels back onto the market. So there’s a lot going on here but I think the big key thing is that inventories remain super low, so if you look at the chart I have there, you know, based on early 2021 outlook versus what’s the case now, you know, inventory is globally just remain super low and that’s put a lot of pressure on oil prices and to a large extent why we’re dealing with some of the best oil prices that we had in in many, many years and that’s a big benefit for oil and gas producers in general.
Daniel Snyder
Michael, you had mentioned OPEC Plus in your response right then. I’m just kind of curious, and I think other people might be as well. I mean, we know that there’s OPEC and the Plus becoming Russia, why doesn’t OPEC Plus just increase their supply to help with the inventory and bring oil prices back down?
Michael Boyd
Yeah, I mean, you know, Saudi Arabia definitely has some slack supply, that they could bring online, I think there’s a lot of questions out there, you know, how quickly they could, but I think the big thing is whether or not they will, and I think that just goes back to geopolitical relationships again. So if you remember Russia is obviously a key player on OPEC Plus, and with all the sanctions in place, they need to have oil prices high, especially when they’re selling Euro barrels, at 25 to $30 a barrel discounts to Brent. So, if they’re gonna be funding their internal needs, especially being cut off from the Western world, they need all the money can get, and at least for them, especially in the near term, they want prices as high as it can be, and Saudi Arabia is still a little bit better. With the Biden administration, there’s been some, I think definite tensions there, especially if you go back to the kind of the Khashoggi assassination and everything that went along on with that, you know, and the end of the day OPEC Plus met recently and they called the global oil market well balanced despite the continued shortfall, so there doesn’t really seem to be any support there, you know, I think that Biden administration has reached out time and time again, to OPEC Plus trying to get them to bump up production and there just doesn’t really seem to be any willingness from their side to help provide some relief there.
Daniel Snyder
Yeah, so let’s go back to your viewpoint, right? So we’re talking about, that’s on the other side of the world for most of us, but where do you see oil going in the short term, let’s say the next three months or by the end of the year?
Michael Boyd
Yeah, I mean, definitely, you know, short term price target are always hard, but at least the projection side for me, for those that kind of follow, oil prices in general, this is some market with, it’s a futures market, right? What’s quoted in the market day to day, that’s the front month price, so that’s what, if you were an investor wanting to buy a barrel of oil and have it delivered tomorrow, that’s the price you would pay but if you go out to December, 2022 or even December, 2023, there’s a lot less liquidity in that market, but that gives you an indication of where prices are gonna be, and prices out in the future are much lower than they are now. If you go out to 2024, for instance, oil prices are expected to be back down, in the $80 per barrel range. I think in general, I think you’re gonna see that kind of unfold, in this case, the future’s market can be wrong, but in general, it tends to be a pretty good indication, and in this case, I think it’s spot on, I think you’ll see oil prices start to come down over 2022 and into 2023. It doesn’t necessarily mean that oil producers are at bad by necessarily, but I think you definitely will see some relief, at least on the headline numbers that are quoted out there.
Daniel Snyder
Michael, I feel like what you just said might be a shock to some people. You and the future’s market are saying the price of oil is going to subside by the end of the year? I mean, I know even the fed is expecting inflation to calm down to under 5% by the end of the year, but that isn’t deflation, right? That’s just slowing down the price of upward pressure on prices. So, how are we gonna get the price of oil down in this environment and how does this affect the various stocks in the energy sector?
Michael Boyd
Yeah, I mean, I think the big thing there is, the United States, you know, we’ve had some issues in ramping supply just like any other business sector that are dealing with all the knock on effects from inflation and supply shortages and higher raw material costs, you know, if you’re an oil producer and you want to drill a new well, you’re on like a six month lag time, but a lot of these producers started firming up their drilling plants back in Q4 of last year, so you start to see that hit in probably June or July, I think the Permian Basin, especially if you look at the 2022 exit rate versus 2021, you know, just from the Permian Basin alone, we’re probably gonna be six, 700,000 of barrels per day higher, and then in general on the OPEC side, I think you’ll see some relief start to come through. I think, especially with the Chevron announcement, I think if everything goes well there you’ll start to see some boosted production from Venezuela, make its way into the United States to kind of offset Russian sanctioned barrels. I think you’ll start to see, some of the issues in the African nations that are part of OPEC, I think you’ll start to see those issues start to ease, so I think we’re gonna get into a situation, where there’s going to be a mild, I’m just talking, maybe just 100 or 200,000 barrels a day, but a mild supply outstripping demand as we get into the end of the year and we are working off of very, very low global oil and liquids inventory base, but in general, when you have some sort of mild supply outstrip like that, you’re gonna start to see prices come down. So I think that’s a good thing for consumers when it comes to the pump in general, you know, lower crude prices generally translates, to a lower refined product costs, whether it be gasoline, diesel, or jet fuel.
Daniel Snyder
Okay, so we’ve covered the macro side of the industry, let’s go ahead and move more micro and specific for our audience because here in my notes, I see there’s a sub-sector within the energy group which you feel isn’t getting the attention it deserves, which one is that?
Michael Boyd
Yeah, I think, you know, especially as we look into this year, I think natural gas stocks have been neglected for quite some time. I have a slide here, this kind of shows the price performance of crude oil versus natural gas producers since 2020. So obviously as you can see there, it’s been a pretty big gap between how natural gas producers this is US based producers, like EQT Corporation or someone like that compared to a buffet name like Occidental Petroleum had performed. So I think that there’s a lot of value there and if you look on a relative valuation basis, or if you take current strip prices, you hold that as you’re constant and kind of use that as your cash model base, the natural guest producers look cheaper than oil on a go forward basis at the moment.
Daniel Snyder
That’s really interesting. So, where does this take us?
Michael Boyd
Yeah, so this is like a slide here on why diversify into natural gas, right? So, as we were kind of talking about, there’s a lot going on with crude oil when you think of it. Crude is a decidedly global market and obviously there’s different grades of crude, you have Brent, you have West Texas Intermediate, you have the Canadian grades, but natural gas tends to be consumed more locally, obviously you have things like LNG, but pipelines can only be so long in many cases, especially when you think about the United States, LNG is still a pretty small share of the overall demand market. And I think the big thing with natural gas as you kind of look out, you know, we can all debate when peak oil is gonna be, everybody that was predicting peak oil, and, you know, seems like forever, right? So people were saying peak oil in 1990, 2000, 2010, 2020, now it seems like the base case is 2030, but the big thing with natural gas is global demand is expected to be higher in 2050 than it is right now, and that’s a fairly universal standard. And I think no matter where you fall on the when peak oil question, when that is gonna be, that question, nearly everyone’s gonna still come to the conclusion that natural gas has a longer tail. So, I think that’s a big positive when it comes to thinking about this market, you know, as you get into topics like ESG as well, that’s maybe a dirty word among some retail investors, but it’s still a big thing that institutional investors care about, natural gases, the cleaner, burning fuel, you know, this is still viewed as a bridge fuel among many people, and especially as you think about places is like Europe that maybe steps too far towards solar and wind as offsetting their old natural gas and crude oil plants, you’re starting to see ’em kind of walk that back and get back to thinking about natural gas as a bridge fuel. So I think the demand outlook looks very, very strong, and I think in general, I think it’s just natural gas is place to be in a lot of cases.
Daniel Snyder
Yeah, just last week, I actually saw, seeking office news team, cover a story saying that US energy department just approved specific companies to export additional liquified natural gas amounts. The reporter also stated, with Europe facing an energy crunch caused in part by Russia’s invasion of Ukraine, the energy department also says, every operating in US LNG export project is approved to export its full capacity, to any country where not prohibited by US law or policy. Now, you said there’s two stocks that you believe are positioned currently to take advantage of this move higher in natural gas and have as much as 50% upside from here, and that’s some great offer. So, I’m just wondering, I know our audience is wondering, what’s the first one?
Michael Boyd
All right, well, I’m starting today with Comstock. I have a $17 price target on Comstock, it’s been a big mover over the past week or so, you know, these are all companies, that just to let everybody know, I’m long, both of the companies I’m gonna talk about, I’ve covered these companies extensively on Energy Investing Authority over the past several months, and I plan to own them for a long time, but yeah, just to get to Comstock specifically, so the big thing with Comstock, is it’s a player in the Haynesville Shale, so this is located in Louisiana, and some of it kinda stretches over the border into Texas. As you kind of think about natural gas in the United States, people tend to think about the Marcellus Shale up in the Northeast, unfortunately, a lot of production growth there is curtailed, a lot of pipelines are just not being able to be approved there, you have a very vocal group of people, either with lawsuits or in the court systems, especially the Fourth Circuit Court that it continue to knock down these pipelines so that any growth in natural gas out of that area, is constrained, and then when you think about the Permian and Eagle forward, you think about associated gas, you know, LNG developers don’t really want to count on natural gas sourced from basins that are spout directed drilling. There might be lots of natural gas coming outta the Permian, by end of the day. producers are there for oil, so if oil tanks then drilling rigs fall, and then all these LNG developers don’t have a source of natural gas for feed gas. So, Comstock is a big player in the Haynesville, a lot of the acre jus been consolidated there, you know, geology is very tough so anybody that’s been there for a long time has a real distinct advantage. There’s been a rampant consolidation, so there are not a lot of options out there to buy. 2021 was rebuilding year for them, they did a lot of work on the balance sheet, refinanced a lot of debt, paid down a lot of debt, they had kind of unfortunate hedge book, so they kinda got caught with their pants down a little bit when it comes to the rise in natural gas prices, but that’s, you know, eased this year, so I think, you know, as you get into this year, you got higher natural gas prices, they’re gonna make a bucket load of free cash flow. I think you’ll see an implementation of a shareholder return program this year, whether that be a variable dividend or stock buybacks and, you know, like I said, there’s been a lot of strength but I don’t think that’s going away anytime soon.
Daniel Snyder
All right, so we have Comstock, obviously benefiting from higher prices, ticker CRK and what’s the other one?
Michael Boyd
Yeah, the other one I have for listeners today is Vermilion Energy, this is ticker VET. So, what’s unique about Vermilion is they have a dual listing, so they have American and Canadian ticker. So people kind of tend to think of them for their Canadian operations, you know, they produce a lot of light oil up there in Saskatchewan, but what’s unique about them is they have a pretty big presence in Europe as well, especially in Ireland when it comes to producing natural gas, so Europe has their general natural gas fields have declined a lot over the past 10 years, domestic production is down 15 or 20%, they’ve been increasing and reliant on Russia, and Nord Stream and all these other pipelines from Russia to supply their needs versus producing it at home. Obviously that has not worked out in their favor as recent geopolitical stuff kind of plays into that, but European gas prices are up tenfold since pandemic lows so that makes oil like a cake walk in comparison, politicians they are frantic for replacement for Russian gas, you know, Vermilion made a great acquisition from Equinor recently, they already had an interest in Corrib field, which is this Irish natural gas play, that’s the only source of domestic gas in Ireland and politicians there remain very against LNG imports, but at the same time, it’s very supportive gas, they have plans for four more natural gas power plants to be built in short order, so, they’re gonna be extremely reliant on Corrib going forward, and I think you might actually see them allow a little bit more development there, including in field drilling, which historically they have not allowed. So, for Vermillion specifically, they recently restored a monthly dividend, I think there’s gonna be some share repurchases this year, even with a recent acquisition that they announced yesterday, which adds another wrinkle to the story, I have more of that coverage on a deal within EIA, and versus everybody else, its that cheap on relative valuation, gobs are free cash flow they got a lot of options, with what they’re gonna do with that, and just like everything else in energy, the story is all about relative valuation, especially compared to other sectors, whether it be tech or industrials or anything like that, you know, the free cash flow here is humongous and that’s gonna be pay dividends for shareholders going forward.
Daniel Snyder
Yeah, sounds like the stories are a little bit similar as free cash flow is king, right?
Michael Boyd
Free cash flow is king, if you got the cash, then that’s what matters, so.
Daniel Snyder
Exactly, so just review for our audience, Comstock, ticker CRK was the first pick and Vermilion Energy, ticker VET, it also is worth noting out that as you were talking about VET, Seeking office Head of Quantitative Strategy, Steven Cress sent in a message and said, VET is actually one of the top Quant value energy stocks as well, from the seeking off a Quant system, so it seems like we got a good pick right there, amazing. Exactly, all right. Now that we’ve gotten a good overview here, where can everyone watching this Webinar get a deeper dive into your research and stay up to date on if you move your price targets up on these two stocks?
Michael Boyd
Right, yeah, so, like I said, Energy Investing Authority is hosted here, on the Seeking Alpha marketplace, I think you guys will be happy to kinda drop a link to the free trial down in the chat box, but two week free trial, you know, feel free to kind of stop by, poke around, look at everything I have to offer, you know, I cover VET and CRK as well dozens of other stocks in pretty high detail, you know, kind of great value proposition there, you know, relative valuation spreadsheets, all the good stuff that investors really need to make informed sound investing decisions in the space, and I like to think I won’t steer you wrong, but hopefully I give to you a chance to kind of check out my stuff and go from there.
Daniel Snyder
Yeah, that’s all we ask. Now, I’m gonna go ahead and ask, if our Seeking Alpha team can drop the link to the signup for the trial into the chat box at this time, and Michael, as you mentioned, is currently offering a two free week trial, so you can see everything Energy Investing Authority has to offer, just by following that link and signing up. Michael, great, great discussion today, and I hope you’re ready, because the list of questions that are coming in from the audience,
Michael Boyd
I’m sure they’re endless, I’ll sip a coffee and I’ll be good to.
Daniel Snyder
It’s amazing. So I’m gonna go ahead and start with this first one here, that came in, pulled by our team says, many people I know in the industry say that the current administration, tone and regulation is impacting rig count and supply. What are your thoughts?
Michael Boyd
Yeah, I mean, part of my approach to this sector, you know, talking with senior executives and I think, the big thing that I hear from them whether if I talk to Occidental or Patchy or any of these big names is, the big thing that they kind of felt like they were being left out of this discussion, you know, especially early on with the Biden administration, kind of reaching out to OPEC Plus, trying to figure out, you know, high gas prices, how do we kind of like pull this down? You know, obviously it’s a big issue for the Biden administration whenever it comes to reelections and things like that, ’cause consumers they don’t have to be paying these prices, it’s bad for reelection. And frankly, it seemed like they, you know, the Us industry was kind of left out of these discussions, nobody kind of reached out to talk to them and I think they’ve felt a little bit disenfranchised, and if you look at some potential pitch bills, you know, you’ve seen like windfall profit, excise tax kind of like pitches or large taxes on, you know, some of the larger producers, whether it be Exxon or Chevron or any of these large names. You know, I think the industry in general, feels like raising production, you know, granted yes, prices are higher, but they feel like they would be punished, I guess, for helping solve a problem for the Biden administration, rather than being helped, and on the other side of the equation, you know, these companies, they were at the end of the day, it’s driven by what shareholders want, and shareholders have spoken very loudly that they want shareholder returns, they want dividends, they want stock buybacks, they don’t want capital pushed towards further investment, they wanna make sure that there’s something left for them at the end of the day, ’cause the industry does have a somewhat bad reputation, if you go back to 2014 to 2017 or ’18, for lagers and not investing for the future, so they wanna make sure that their investment is being protected, so there’s, you know, at the end of the day, a corporation is run for its shareholders, so.
Daniel Snyder
Yeah, I think we all realize that too, with Warren Buffet’s recent buy, right? Occidental petroleum, I mean, he’s stepping up and of course he wants the value brought back to him as an investor. This question is continuously asked from multiple people throughout the Webinar, What do you think of MLPs?
Michael Boyd
I like MLPs personally, obviously if you’re an international investor, or someone where there’s, you know, tax issues or if you just have had some bad experiences with K-1 forms in general, then maybe you wanna avoid the MLP space. I think you have to pick your spots, I think one thing that investors have neglected in the past when it comes to MLPs is thinking about corporate governance. If you think about kind of like management incentives and alignments, I think the sector was kind of dog by investors, kind of running into some of these names, but especially if you go back a few years 10 to 15, 20% like dividend yields and then the rug pulled out from under them, so I think you have to really think about who you’re investing money along with and what their incentive structure is because you know, at the end of the day, especially with these captive partnerships, what is good for management and the general partner isn’t necessarily, what’s good for you as an investor, so you have to be careful about that. But at the end of the day, I think there are some good spots in the sector, but you have to pay a lot of attention to the corporate governance structure.
Daniel Snyder
Yeah, solid points. We had a question from Robert that asked, do you see any increased supply coming from your Northern neighbor Canada?
Michael Boyd
I think so, I think if you go through the pandemic, I think the big thing with Canadian producers is lower decline rates than US Shale, so production did not fall as much during the 2020 period, and they’ve been quicker to ramp up supply in the time since, so the big question with Canada is how they get this to market, right? So you had Keystone XL killed, you had aligned three replacement projects come through, and the Trans Mountain sink, you know, the government has decided they’re not gonna spend any more public funds to build it, so they’re gonna have to bring in outside investors. And that project has had its own delay since it was sold to the go government by Kinder Morgan. So the question with Canada, I think they’re more than willing to ramp supply it’s just whether or not they can get it across the border for US in the first place.
Daniel Snyder
Yeah, so Jeff asks, there are some really supply constraints and drilling materials and steel, etc, as well as the labor, also the fracking trucks aren’t all up to the latest new environmental standards. All of this is leading to less new rigs and drilling in place. Do you have any comments?
Michael Boyd
Yeah, I mean, there’s spot on there, right? That’s a big question as we get into 2022 and all the EMPs kind of setting their drilling programs for this year, the question has continuously been, like how much more expensive it is to drill a well this year, getting the labor in place, and if you look at 2020 and 2021, a lot of these companies weren’t necessarily drilling as much, they were working down their drilled but unforbided inventory, right? So those are called ducks in the industry, those are wells that they drilled it and now they just had to complete it, right? So a lot of those inventories are down, I think in my talks with the industry, some of these issues are starting to ease slightly, I think they tend to be a little bit more optimistic as they kind of get later into the year, but, you know, unfortunately, especially on the labor side, right? A lot of these guys, have been through so many boom and bus cycles, right? So, if you were an industry worker in 2014, you were riding high, then you got laid off in 2016, then you get rehired in 2017, then you get laid off again in 2020, you know, it gets a little bit old after time especially, even with the money involved, and with the labor market so tight right now, a lot of these guys have other options. So the industry is kind of working hard to figure out, how to pay labor and incentivize them to stick around and stay and convince them that they’re not just gonna be let go, in 2023 or ’24 if the oil market’s turned again.
Daniel Snyder
Which in itself is a whole other macro issue, not only just the oil industry, right? The labor supply crunch that we’re seeing, let’s continue to move on here. So, someone asked, how do you see this scenario playing out for companies’ servicing, big oil companies, like those who make the rigs, and also other or services?
Michael Boyd
Yeah, I’ve tended to be a little bit pessimistic on oil field services but I think it depends. If you think about heavy equipments, or if you think about like, pressure pumping and you know, the rigs themselves, this is all heavy equipment, there’s a big glut of excess supply that has been out there for quite some time, you know, if you look at rig counts in general, you know, a lot of this was old equipment, but we used to have more than 1,000 rigs running and we’re nowhere near that level still. So there’s still a lot of flex capacity out there in a lot of cases, a lot of spare horsepower on the pressure pumping side. So I think you have to be careful if you’re getting involved in heavy equipment like that. I actually think if you’re gonna get involved in that space, it’s probably better to stick with the bigger players, they’ve transitioned away from heavy equipment more towards capital light kind of oil field services stuff, so if you look I’m thinking about like Halliburton or Scherer or these kind of names, I think that’s where you’re better off putting your dollars rather than a kind of like a niche, you know, rig provider or something like that.
Daniel Snyder
All right, next question for you. Is the trend focusing on renewables and away from fossil fuels, or do they see an increase in drilling in eco-protected areas and other methods of increasing fossil fuel inventory?
Michael Boyd
I mean, I think you definitely have a trend towards renewables regardless, right? You know, at the end of the day, you know, my approach energy is I try not to have a bias one way or another, if I felt there was money in, you know, offshore, wind or solar, I would be investing in there too. I just think the value isn’t necessarily there, there it’s been a lot of advancements in solar tech and in wind tech, I think the question always been, how you supply the need for all of this solar and wind infrastructure, and also on the battery storage side or any other kind of storage solution for electricity and power generation and storage. You know, there’s been a lot of issues and a lot of growing paints in that part of the market. You know, I think there are some parts of the renewable market that are interesting, I think that, you know, the biodiesel market and renewable diesel is super interesting. You saw Chevron come out and buy renewable energy group recently at basically near 100% premium to the share price of the time granted you know Regy’s, R-E-G-Y, the share price had collapsed, but you see a big trend, you know, from the refiners shifting to renewable diesel, you’ve followed the Biden administration’s policies, you see some discussion about like sustainable aviation fuel and all these kind of things, and, you know, it’s a really interesting market, and at the end of the day, it’s a government supported market, but you have to kind of move where the puck is going, and kind of follow where profits are gonna be, and there’s a rosy outlook for that sector in general, I think so.
Daniel Snyder
Yeah, all right. So moving on, Manny asks, big oil/big energy, is a very powerful player into what happens in the world. So how do you see it with the influence in the Ukraine conflict? I see that it has great benefits from this situation.
Michael Boyd
Yeah, I mean, in general, if you think about, you know, the Russia Ukraine situation, I think the question for the energy sector is, you know, it’s very easy for Europe and the United States to sanction Russian barrels because, you know, crude is a global market. We have like seaboard and crude and tankers everywhere, right? So if you say, I’m not gonna buy Russian crude, then you just have to find an alternative source, and in a lot of cases, it’s not necessarily hard to do. Sometimes you might have to step down the geopolitical ladder into some places you don’t necessarily want to, like as we’re dealing with like Venezuela or ran potentially for heavy barrels. But I think there there’s always opportunity for big, for super majors to kind of step in in ramp production, or kind of helps support, shortfalls of in any energy sector in general. I think, what happens with Russia and sanctions is gonna have some cascading impacts. It’s a little bit quirky, sometimes sanction barrels, even if it’s illegal, they always have a tendency to find their way into the market somehow at least a small portion of it. But the Russian situation is very unique. I think what a lot of people don’t know about Russia is, they don’t really have a lot of storage capacity. So, a lot of their production is very far inland, and if once they’re cut off from the market, a lot of people don’t necessarily consider this, but if you don’t have a place to ship your barrels and you don’t have any place to store ’em, then you have to shut in your wells, and that takes that production offline. And especially with Russia being cut off from Western technology via sanctions, it can be a very difficult to kind of bring that production back online if the Russian situation resolves itself, even if that’s is soon as end of this year and sanctions are taken back off. So, we’ll have to see there, but there’s, it’s gonna be a very interesting geopolitical climate for oil, no matter what.
Daniel Snyder
Yeah, as you were just speaking, I couldn’t help, but think about, Germany and Europe relying so heavily on Russia for this liquid natural gas and this oil supply. And as I was thinking about that, I was also remembering back, there was a news item that said Europe was gonna get enough storage in their inventory for this next winter. And funny enough, Jean would like to know, could you comment on the summer storage loading volumes for this coming summer as this winter’s heating load dissipates?
Michael Boyd
Yeah, I mean the situation for Europe, they were lucky the winter was fairly mild in general, but they’re coming into this season with very low inventories, which you’ve seen happen with the US LNG market and global LNG trends in general is if cargo weren’t spoken for. So like if I’m a shipper and I’m not an Asian based shipper for instance, if I have capacity to ship where I please then Europe has been willing to pay more than Asia. So you’ve seen Europe take more and more share, they’re trying to build their inventories into this year. I think the question is whether there’s gonna be enough as we kind of get into that period. So I think that’s why you saw that Biden Administration Agreement and kind of come out and talk about how we’re gonna support Europe. I think the tough question there is, I think the administration is sort of claiming a little bit of benefit. We have saving pass, they have a new liquid fashion train that came online recently, and then you have Kakadu pass as well that just came online, US LNG, if you wanted to, even if you had unlimited money and you wanted to throw up a facility, it would take you three, four, five years to get it done. So the question for Europe is, if they want to move away from Russian source gas, it’s going to take a while to make that transfer I think you’ve seen some announcements. You saw Tellurian which is ticker T-E-L-L reach final investment decision on driftwood so that’s gonna be proceeding. And then you saw, it’s a big favorite of Seeking Alpha readers energy transfer. They had an contract agreement on Lake Charles that announced today, even if you like, if you think about Lake Charles, which is an advantage project, if they got all the contracts that needed tomorrow, it’s still two and a half, three years to completion. So, it’s a 2025, 2026, 2027 solution for Europe’s problems. And I think the question is, what are they gonna do in 2022, 2023 and 2024? And I think that goes back to, the VET pick of mine, it’s so reliant on European gas prices. And unfortunately, I don’t think Europe’s gas prices for natural gas are gonna go down anytime soon.
Daniel Snyder
Yeah, it’s kind of weird and strikingly eerie to me a little bit how what you’re describing, I see it parallel in the semiconductor industry, with their foundries and everything shifting there and how it’s also happening here. I couldn’t help, but see Sean’s question, which I actually personally love, and I’m glad we found this one. It says with countries like Saudi Arabia and others thinking about moving from the dollar for purchasing barrels of oil, how would that it affect us?
Michael Boyd
I mean, it’s an interesting question, the petrodollar it is been a big discussion for quite some time. And where you think about US dollar strength, especially as we get into fed rate policy decisions, coming up this year and next, and that kind of gets back into this whole inflation is transitory, or is inflation something that’s gonna stick around for quite some time. I think one of the, my favorite things to share with subscribers, if you go back to the 1970 period when inflation was rampant, and you look at S&P performance, it was actually negative over that decade, I mean, it was about down 10 or 15%. But the energy sector returned 90% over that period, and I think one of the only other market segments that did was the RE industry oddly enough, so commercial real estate. So, I think the question there is, if the dollar kind of, if we lose that status, if they transition away from it, if the dollar becomes weaker in general, and we kind of see inflation stick around, and it’s something that the fed can’t control to the levels that they want, then maybe that makes energy especially a great place to be in that kind of scenario.
Daniel Snyder
Yeah, it’s kinda hard to fathom with how strong the US dollar is becoming. I mean, the journal just for ran a report this morning about how the yen is staying weaker against the dollar and we’re just getting stronger. I wanna move on here though. Jarden asked, do you foresee any benefit for hydrogen companies in the future with high oil prices?
Michael Boyd
I think hydrogen is one of those quirky things. It’s definitely something that gets talked about a lot, especially in the midstream industry, as pipeline companies tend, as they start to think about what happens with all our pipelines, when as oil and gas demand inevitably maybe like falls or maybe demand kind of shifts from one place in the United States to another, what do we do with all this spare capacity? And hydrogen always kind of comes up in those discussions. I think in general, the industry’s view on hydrogen just tends to be a little bit, it’s maybe a little too early stage to really have a really strong foundational view on it, it’s still viewed as very, very speculative. I think if you talk to, the energy space and energy investors, they tend to view like Carbon sequestration. So, rather than moving hydrogen by pipeline we’ll move carbon dioxide and we’ll pump it into old shale wells and we’ll sequester it that way that’s viewed as a more viable technology. So at least for me, I tend to avoid the hydrogen space, I’ve kind of concentrated on at least industries where there’s a little bit more a near term commercial viability, but, there’s plenty of investors that tend to lean towards more speculative kind of like stocks and might see some value there five, 10 years down the line, but I’ve been more focused on near term value.
Daniel Snyder
Yeah, that makes sense. I hear the word hydrogen and I think extremely combustible, so there’s a long way we still have to go. Maybe that’s something that could go into an RQTF, we’ll see. Tom asked, does backwardation give premium today demand to offset disruption tomorrow, the supply?
Michael Boyd
Yeah, I mean that’s the end of the day, backwardation, what that means is that investors are willing to pay more for barrel today versus barrel is down the line. So I think the way to interpret current backwardation is honestly it’s been around for quite a long period of time now over the 2018, ’19, ’20, ’20, ’22 period, the past five years. And I think that really goes back to persistently low global inventories of oil in general. Oil and gas sector has invested underinvested in developing new reserves and kind of replacing barrels that kind of go offline. So if you think about global supply if you think about it in that 100 million barrels per day, if everybody’s stopped investing new funds into the sector for a year, you’d see 10% decline rate across the space. So in the next year, we don’t only be producing 90 million barrels a day, and we kind of go down from there until we see the global industry a little bit more willing to invest in the space and bring on new projects, then I don’t think you see that kind of dynamic going away. And unfortunately, I think maybe this changes with a recent geopolitical environment, but if you look at ExxonMobil, they install a lot of pressure on some of their longer term projects that were slated to maybe come online 2028, 2030, because so many investors were afraid that, by the time these multi-billion dollar projects come online, oil and gas is gonna be demand is just gonna be shrinking, and you’ve spent all this money and you’re not gonna get a return on your investment. So, I think both companies and investors and governments have to come to some sort of strong conclusion on how they view oil and gas as a fuel, and the timeline for a transition, if you believe a transition will happen. So if you think about the kind of net zero by 2050, kind of kind of goals, kind of like firm those up. So, everyone in the industry can be comfortable about when and how demand is gonna fall off and they’ll make investing decisions around that that make sense. But until we get a little bit more policy clarity, I think you’re gonna see the industry tend towards conservatism.
Daniel Snyder
Yeah, just wanted to take a quick moment. Jodi, I saw your comment. I was just gonna ask if the Seeking Alpha Team could drop the link to the trial again in the chat box for those who joined late, and then we’re gonna continue on. Michael just a few more questions for you before we wrap up here. With respect to the inventory list, wouldn’t the increase in price, alter the ramp up of the reserves?
Michael Boyd
Yeah, as you kind of like, think about things. So if you’re thinking about the question kind of, will higher prices kind of lead to more development in general? To an extent I think that’s true. I think the question there is, goes back once again to kind of like policy decisions and kind of like clarity on future prices. ‘Cause I think how the media kind of portrays this in a way is like especially maybe not as much now, but if you think about oil at like 110 $120 a barrel. I think the media kind of used that as, oh, that’s the price into perpetuity, and that’s what the oil and gas producer is going to realize. But with backwardation so steep and with price declines the way they are, I think many oil and gas producers are a little bit more cautious on using those kind of valuations to make drilling decisions, they tend to use more of what they view as like, a mid cycle price. So that might be $55 a barrel, it might be $65 a barrel, it could be higher, it could be lower, but there’s a lot of caution from the industry and kind of like extrapolating these prices forward, especially because they view it as maybe a somewhat, not necessarily a demand driven price, but a supply driven price. So if you go back to like all the production being offline, and then at the same time, potential supply ramping up, they wanna be careful that they don’t make a long term drilling decision on based on short term price moves.
Daniel Snyder
Yeah, you don’t want a long term glut. Let’s get to this next one. Steven asks, in light of your forecast for increased supply going forward, the economy does have a lot of positive momentum, which we’ve been hearing a lot over and over again. So, going out one year, are your stock price targets higher or lower for the big majors from current levels, such as Exxon and Chevron? We got a lot of questions like this for you.
Michael Boyd
Yeah, in general, I see, my one year I cover the majors pretty in depth. The thing with majors is, they’re not necessarily just upstream producers. So if you think about Exxon, they have production all over the world of course, but they have a big chemicals division, they own, I think like 35 or 40 refineries globally, and they have some pipeline presence as well. So there’s give and take in all of these companies and their price targets. So they’re not necessarily dollar for dollar reliant on where oil goes or where gas goes. I think, especially for Exxon, the chemicals business has performed wonderfully, especially in periods of low prices, it’s a great balancing point for them. But for my price targets for the majors in general, they tend to range from maybe 15 to 25% upside from current prices, I tend to be a little bit more bearish on the European majors, if you think about like BP or someone like that, just with some questions around like return on invested capital and their larger renewables program and stuff like that, we’ll have to see how that all plays out over time. But I think in general with the majors, especially think about like Shell, it’s a great place to believe it be, I think that’s my favorite major, if you’re gonna put it someplace, I think that plays well, especially if you think about the, they have a bias towards natural gas, LNG and I think these are all trends that they benefit from over the long term versus some of the other majors. So, if you’re gonna put a dollars in place, I would probably put it in shale on the major side.
Daniel Snyder
Gotcha, all right, so I’m gonna backtrack just a second, ’cause you were talking about the 2050 year net zero initiative. So Terry asks, what are your thoughts on produced scalable biochar, carbon credits being purchased by big oil and other large corporations, such as Microsoft, Delta, Berkshire, Hathaway, oil and gas Drillers, and headed to the farm fields for no-till regenerative farming?
Michael Boyd
I think it’s a viable solution. There’s give and takes when you think about credit programs, you can look towards the renewable volume application or RVO scheme in the United States for refineries as a great example. That whole system has kind of created some kind of perverse incentives, especially you think about food prices right now, if you think about ethanol production, how much corn ends up destined for use in your gas tank versus on the table, I think that’s a lot of pressure, on consumers kind of paying for things that way. And I think that’s actually, if I was a Biden administration, that’s an area I would kind of focus on maybe thinking about cutting RVOs, you can kind of lower food prices and gas prices at the same time, ’cause producing a gallon of ethanol is more expensive than a gallon of gasoline. So I think you have to be careful when you kind of design these programs especially you kind of, you can create incentives that you don’t necessarily want, they need to be crafted well, and there needs to be very strong political oversight. At the end of the day, that maybe that’s a tough thing to ask, especially for the government and it’s, it has its hands in so many things, it’s sometimes policy decisions can be late, but I think it’s a good solution to look at, to kind of incentivize lower production. And I think the oil and gas industry is super interested in it. If you look at the, we’ve talked about natural gas stocks today, responsibly sourced gas is a big thing that they’re trying to push and kind of take off. So, with that you have inspections on, oil wells making sure there’s no like fugitive methane emissions and carbon emissions and I think at least for now it seems that, major players are willing to pay a small premium, but a premium to non responsibly source gas. So, there’s a market for it. And if people are willing to pay for it and to be able to slap a sticker on there that they’re more environmentally friendly then I’m all for it and I think the industry is all for it.
Daniel Snyder
Yeah, all right, Mike, I’m gonna do one more with you before we get outta here, ’cause we’re getting close to the top of the hour, we wanna respect our audience’s time. So real quickly, just in a few words, what are your thoughts about coal?
Michael Boyd
I think coal is interesting. I think that my worry with coal, obviously if you’re in coal producers right now, coal prices are very high, these guys are making a lot of money, same as oil and gas. I think the question with coal is, I think the worry always with it is if it’s going to be kind of like the sacrificial lamb in a way. So if you’re positive on fossil fuels in general, maybe you say, okay, we’ll give you coal and we’ll do coal power plant retirements, but we need some concessions, and in that way, maybe we move towards natural gas and natural gas fire generation before we jump straight to like solar and wind. Because I think the question with coal, it’s a big part of, it’s still a big part of our energy generation here in the United States and globally, if you think about China and exports and everything like that as well. But I think as we think about like, once again, like net zero by 2050, those kind of targets, coal is, it sits very high on that chain, it’s like, it’s the easiest thing to get chopped, and I think that probably happens. But the question I think is, if you’re investing in coal maybe you, if prices are high, you get enough outta your investment. It’s a typical cigar by investment. Maybe you make all your money back in a couple years and it doesn’t really matter if the industry is dead by 2030. So you just have to be very price conscious and confident in your pricing predictions for the commodity.
Daniel Snyder
Yeah, all right everyone, there you have it. The man, the myth, the legend Michael Boyd also David Chew says, you look like Michael Prince. We all just take a second, love billions reference. Michael, can’t thank you enough for the time you join for joining us today and giving us the time. Again everyone, this is Michael Boyd from Energy Investing Authority. He is running a two free week trial right now. So go over, check out all of the research he’s been putting out to his audience and we thank you, and we can’t wait to see it till the next webinar. Take care and have a good day.
Michael Boyd
I’ll be happy to do this again anytime.
Daniel Snyder
Well, we will take care.
Michael Boyd
All right, have a good one.
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