And now we return to our regularly scheduled #mergermonday!
Lots to discuss in the world of oil and gas
Executive Summary: PDC buys a Colorado PrivateCo, Chevron holds it’s nose on valuation for a renewable diesel company to get a “greenwash” bump, and bp does what bp does best… the exact opposite of what it should be doing.
Fun facts: I watched the video from my 3 minutes on Bloomberg TV in January 2020 and if you’d been in a coma for the last 24 months, it looks pretty accurate.
Additional Reading:
Viscosity Redux. You best start believe in RD stories.
Quoth the Raven. Fiat Currency Zero Hour: Russia And China Might Collectively Challenge The Dollar's Reserve Status
#mergermonday??!! It's about time! Three announcements of note to go through, but the last one is the controversial one: PDC, Chevron and bp.
Anyone with a pulse that follows the DJ basin knew that it was only a matter of time until Great Western got rolled into someone. As Chevron and Oxy are fully focused on their Permian position and “lower carbon ventures” and after Civitas acquired Bison last month following their Crestone Peak - Extraction - Bonanza Creek genesis event, you knew the buyer had to be PDC. PDC is already pregnant with Colorado regulatory risk (you can’t be MORE pregnant that I know of) so this deal makes a lot of sense.
PDC acquires Great Western for $1.3 billion (40% cash, 20% stock and 40% assumption of debt) and as the CEO/bbl ratio in industry continues to fall, the market loves it and has pushed the stock up 10%.
I’ve liked PDC for a long time and they were one of the three companies I mentioned on Bloomberg TV in January 2020 as a “significant relative undervalued.” Check out the video below- 3 minutes on hedging, balance sheets and relative value, without COVID we would have been here a year ago.
Consolidation must continue and only the Permian and Marcellus can support more than "1" or "2" players of significance. Therefore, with cash flow forecasts in 2022 at $95/bbl looking robust and a very positive stock market reaction to the deal, I’d expect to see a lot more merger announcements over the next 6 weeks. Look for Devon, Continental and Oasis/Whiting to play a significant role (not investment advice, I have no position in those stocks).
Speaking of Chevron, they confirmed the rumor from last week that they were buying Renewables Energy Group for $3.15 billion in cash. REG makes renewable diesel, made from bio feedstocks and the produce 20-80% less full cycle greenhouse gas emissions than conventional fuels. I'm not going to weigh in valuation because clearly, this is a purely strategic acquisition but I will borrow from Viscosity Redux, who is great follow on technical oil and gas stuff on Substack.
To recap, REGI’s biodiesel business isn’t great. It has the potential for material margin/EBITDA uplift in 2024 with the startup of its large Geismar expansion, though ongoing pressure in gross margins and deteriorating value of environmental attributes muddy the prospects for a step change in value creation post-Geismar. Until 2024, REGI is by consensus estimates generating negative free cash flow every year (we take the under even on these given our stance on the viability of biodiesel as renewable diesel volumes hit the market). It’s just not a good business.
Here is his full piece on renewable diesel.
BUT!! The acquisition is a good greenwash for Chevron, a company that Wall Street laments it must love, and no one can complain they aren’t trying to lower carbon intensity. Bottom line, with oil at $95, debt basically free, nuclear readiness in Russia and more cash flow than they can spend, you have to like the move.
Finally, in the news of the weekend, in the category of moves you absolutely have to hate, is what bp did. I'm starting to think "bp" stands for "big puff pieces." They are so dead set on looking noble, they appear to have totally forgot their job is to make money. Said CEO Bernard Looney:
Like so many, I have been deeply shocked and saddened by the situation unfolding in Ukraine and my heart goes out to everyone affected. It has caused us to fundamentally rethink bp’s position with Rosneft. I am convinced that the decisions we have taken as a board are not only the right thing to do, but are also in the long-term interests of bp.
Really? NOW you have questions about Rosneft? I’m a cynical guy, and I acknowledge that sometimes I can state things as facts when they are a hypothesis, but here’s what bp is actually doing under the cover of moral objections.
The U.K. has been talking about implementing a windfall profits tax as a result of high energy prices. Consumer bills are up 54% and the energy transition has been going very badly. That means voters are pissed and when you have a perma-Grinch (like bp), it’s easy to blame big bad oil and gas, no matter how much they promise to change. Sometimes, you should just embrace being the villain. Batman did.
So how do you get rid of profits? To make an accounting change by having your two board members on Rosneft resign so that under IFRS, you no longer have significant influence in your equity position. Conveniently, this looks like a $25 billion charge, which will at least dent the windfall profits tax liability. If it wasn't so obvious, I'd give them credit for strategic trickery. Said bp:
First, it is expected to give rise to a non-cash adjusting item charge at the time of the first quarter 2022 results, representing the difference between the fair value of bp’s Rosneft shareholding at 31 March 2022 and the carrying value of the asset. At the end of 2021 this carrying value stood at around $14 billion.
Second, in addition, the change is expected to result in non-cash adjusting item charge, principally arising from foreign exchange losses accumulated since 2013 that under IFRS were previously recorded directly in equity rather than the income statement. At the end of 2021 these totaled around $11 billion, and this adjustment will not impact equity.
The change in accounting treatment also means that bp will no longer recognise a share in Rosneft’s net income, production and reserves1. bp will no longer report Rosneft as a separate segment from the first quarter 2022 results.
Implied in all the headlines carried by major media outlets was bp was “abandoning” the 19.75% stake because they left out the details on exactly HOW they would get rid of it. Clearly, there are two groups of buyers. The first are the Russians who will under pay, and the Chinese, who are slowly grabbing all the world’s commodities as the West commits economic suicide with their “energy transition.” Here's a great piece on the how China and Russia have become strange bedfellows to counteract the West and in particular, the role of the USD. My bet, the Chinese are the buyers and bp did a great job making it look like any price they get for it is a good price AND getting political coverage for selling to China.
But to say this is about war and morals and humanity? Please. That's just virtue signaling.
If you’d like the truth about how unserious the world is about the Russia-Ukraine situation? The financial sanctions EXCLUDE energy (of course they do) because while wind and solar make for nice puff pieces and winning votes from a naive populous, when the rubber hits the road... it's fossil fuels that are alarming consumers and losing votes for politicians.
But hey! The ‘new normal’ is a world where divesting an asset ‘reduces emissions’ and avoiding tax liability will save Ukraine. I can’t help but drink to that.