Category: Energy

 

The Drop In Canadian Oil Production Will Have Long-term Effects

 

The drop in oil prices in April has not been kind to Canadian producers.  That, combined with imposed production curtailments by the government of Alberta has led to a 20% decline in daily production versus the 2019 average.  This decline is twice the output decline of OPEC countries and the third largest overall decline after Russia and the United States.  The decline for the fourth-largest producer of oil amounts to 1 million barrels of oil per day or 1.3% of the world’s daily supply.

 

Source: U.S. Energy Information Administration (EIA)

 

Canadian producers are especially hard hit by declines in oil prices.  Oil sand production is among the higher cost production.  Production costs have been dropping from a level of US$65 but are still believed to be in the mid-forties.  Canadian production may be the first to be shut in when oil prices drop.  What’s more, Western Canada typically receives a lower oil price than other areas due to pipeline constraints. This has been especially true in recent years because western Canadian oil prices have fallen sharper than the West Texas Intermediate oil price.  This disparity is unlikely to abate in the near future due to delays in construction of the Keystone Pipeline. It’s no wonder, then, that major producers such as ExxonMobil, Shell, ConocoPhillips and Marathon Oil Corporation have all reduced or withdrawn their investments in oil sands in recent years.

 

 

Some producers, including Canada’s largest producer Suncor, view the decline as temporary.  Suncor Chief Executive Mark Little said on a quarterly call with analysts that “By the end of the year, if we don’t have this upset with a second COVID outbreak, we expect essentially all crude in Western Canada to be back online.”  Others believe the problems faced by Western Canada producers precede COVID or OPEC production level issues.  Ricochet points out that major oil companies have more debt than revenues, estimated at $250 billion coming due in the next five years.  With electric vehicles eating into the largest component of oil demand, it is unlikely that oil producers will be bailed out by higher oil prices.

 

Source: U.S. Energy Information Administration

 

In many ways, the perils facing Canadian producers are not different than that of U.S. producers.  However, higher production costs and tighter pipeline capacity make the situation a more immediate concern. 

 

Suggested Reading:

Is M&A Picking up
in Energy Sector

Exploration and
Production Second Quarter Review and Outlook

Is $40 the Sweet Spot for Sweet Crude?

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

https://www.eia.gov/todayinenergy/detail.php?id=44396&src=email, U.S. Energy Information Administration, July 16, 2020

https://www.yahoo.com/news/canadian-oil-companies-moving-restore-144252160.html, Rod Nickel, Reuters, July 23, 2020

https://www.bloomberg.com/news/articles/2020-03-09/oil-rout-tests-canadian-energy-producers-cost-cutting-drive, Kevin Orland and Robert Tuttle, Bloomberg, March 9, 2020

https://ricochet.media/en/3116/oil-was-doomed-before-the-pandemic, Will Dubitsky, Ricochet, May 14, 2020

https://boereport.com/2019/05/01/costs-of-canadian-oil-sands-projects-fell-dramatically-in-recent-years-but-pipeline-constraints-and-other-factors-will-moderate-future-production-growth-ihs-markit-analysis-says/, BOE Report, May 1, 2019

Tuesday, August 11, 2020

Gevo, Inc. (GEVO)

Quarterly Loss Narrows After Cost Cuts. Capital Raise Creates Near-term Cash Cushion.

Gevo Inc is a renewable chemicals and biofuels company engaged in the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. Its operating segments are the Gevo segment and the Gevo Development/Agri-Energy segment. By its segments, it is involved in research and development activities related to the future production of isobutanol, including the development of its biocatalysts, the production and sale of biojet fuel, its Retrofit process and the next generation of chemicals and biofuels that will be based on its isobutanol technology. Gevo Development/Agri-Energy is the key revenue generating segment which involves the operation of the Luverne Facility and production of ethanol, isobutanol and related products.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Adjusted 2Q2020 EBITDA of $(3.1) million narrowed versus $(6.2) million in 1Q2020 due to idling Luverne plant and cost cutting. Lower cost structure pushed cash burn down to ~$4.7 million and cash burn should move below $4 million in 3Q2020. 2020 EBITDA loss estimate is $15.2 million, up from $14.4 million.


Two significant commercial agreements likely in near future. Discussions on added supply/licensing agreements are advanced even amidst current turmoil in the airline/refining industries. Agreements would expand supply portfolio of 17 million gallons/year already in place. Expansion plans now include building up supply portfolio to include isooctane (renewable gasoline) agreements. Interest in renewable fuel concept is …








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This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

BP Plc Cuts Dividend and Goes All in on Renewables, Is this a Trend?

 

Supermajor oil is a term used to describe the largest oil companies in the world. The supermajors are considered to be BP, Chevron, ENI, ExxonMobil, Royal Dutch Shell, Total, and ConocoPhillips. Supermajors were formed between 1998 and 2002 through a series of mergers. Exxon combined with Mobil. Chevron took over Texaco. Conoco Inc. merged with Phillips Petroleum. BP acquired Amoco and ARCO while Total combined with Petrofina and Elf Aquitaine. The supermajors are global energy companies with assets all over the world. They are large enough to be able to make major investments in new oil fields. They are involved in both upstream and downstream operations. Most pay large dividends. At one point, the supermajors were among the largest stocks by market capitalization. With the decline in oil prices and the rise of technology stocks, that is no longer true. 

 

On August 4, 2020, BP announced that it would cut its dividend 50%, cut oil and gas production by 40%, and boost renewable energy investments to $5 billion annually in order to become carbon neutral. BP becomes the third supermajor to pledge to the cut emissions to net-zero following Shell and Total. BP’s dividend cut follows a similar cut by Shell in April. A smaller energy company, Equinor, also cut its dividend in April. The dividend cuts are perhaps a reflection of decreased cash flow in a new, low oil price, environment. However, it can also be viewed as a recognition that the world’s energy landscape is changing. Technology improvements have lowered the cost of oil production, meaning oil prices may remain at current low levels. The rise of electric vehicles has the potential to take away oil demand. Also, the economic downturn associated with the COVID-19 pandemic has decreased the world’s demand for oil.

 

So, what does this mean for the supermajors going forward? Will other oil companies follow BP’s lead? Chevron has taken a different route. On July 19, 2020, the company announced the $13 billion (including the assumption of debt) acquisition of Noble Energy. The acquisition greatly increased its position in the Permian Basin and other oil-rich areas. Does the acquisition represent the management’s commitment to oil, or is it simply an attractive acquisition at a good price? Companies can be very profitable, picking up market share, even in industries that are in decline. Investors should pay close attention to Chevron management’s actions going forward to get a better understanding of its corporate strategy.

 

It is a bit early to declare an end to the era of supermajor oil companies. At the same time, the supermajors and investors in supermajors must recognize changing industry dynamics. Oil demand is slowing while renewable demand is growing. In a broader sense, perhaps it is best not to think in terms of oil demand versus renewable demand. The demand for energy continues to grow, and energy companies must be nimble to adjust to changes in the types of demand. To do so, energy companies may want to have a hand in all types of energy. Perhaps, this really is the end of the supermajor oil companies. But if that is true, it will only mean the birth of supermajor energy companies.

 

Suggested Reading:

Is M&A Picking up in Energy Sector

Exploration and Production Second Quarter Review and Outlook

Is $40 the Sweet Spot for Sweet Crude?

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

https://finance.yahoo.com/news/bp-walks-away-oil-supermajor-080220211.html, Will Kennedy, Laura Hurst and Kevin Crowley, Bloomberg, August 5, 2020

https://www.washingtonpost.com/climate-environment/2020/08/04/bp-built-its-business-oil-gas-now-climate-change-is-taking-it-apart/, Steven Mufson, The Washington Post, August 4, 2020

http://priceofoil.org/2020/05/01/from-supermajors-to-superminors-the-fall-of-big-oil/, Andy Rowell, OilChange, May 1, 2020

https://www.worldoil.com/news/2020/5/12/supermajors-all-have-ambitious-and-widely-varying-net-zero-goals, Akshat Rathi, World Oil, May 12, 2020

https://news.bloomberglaw.com/corporate-governance/bp-walks-away-from-the-oil-supermajor-model-it-helped-create, Simon Dawson, Bloomberg, August 5, 2020

EIA Reports the Largest Weekly U.S. Crude Decline

The Energy Information Administration reported that inventories for the week ended July 24 fell 10.6 million barrels, the largest decline in seven months.  The decline reflects increased demand associated with a reopening of the economy as well as decreased supply associated with a drop in active drilling rigs.  Figure #1 below shows the sharp decline in active U.S. oil rigs that occurred when oil prices sank below $20 per barrel in early April.  Interestingly, the number of active rigs has not yet rebounded despite oil prices rising back above $40 per barrel.

 

Rising oil inventories have largely been concentrated in the middle of the country.  The chart below shows inventory trends by region through the month of June, showing that storage levels had been rising several months before the pandemic crisis began.  It also shows that the rise in inventory has been largely concentrated in the Midwest, Cushing-Oklahoma, and Gulf Coast regions.  It also shows that the Midwest and Cushing-Oklahoma regions are starting to see a decrease in inventories in response to decreased drilling while the Gulf Coast has not.  This is not surprising given that higher well costs in the Gulf make the region less flexible to making short-term drilling adjustments to price changes.

Figure #2

 

The decline in inventories was a much-needed relief from a long steady rise of U.S. Crude inventories, as shown in figure #3.  It’s too early to make the claim that we are now seeing a reduction in supply arising from decreased drilling. One week of data does not make a trend; however, it does warrant increased attention to future inventory reports. 

 

Suggested Reading:

Is M&A Picking up in Energy Sector

Exploration and Production Second Quarter Review and Outlook

Virtual Power Plants and Tesla Car Batteries

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

Sources:

https://finance.yahoo.com/m/885423dd-6248-3267-8c4d-de7148e60f0b/oil-prices-get-a-lift-as-eia.html, Myra P. Saefong, Marketwatch, July 29, 2020

https://tradingeconomics.com/united-states/crude-oil-rigs, Trading Economics, July 24, 2020

https://www.eia.gov/outlooks/steo/report/us_oil.php, EIA, July 7, 2020

 

Chevron Announces the Acquisition of Noble Energy
Will Other Oil and Gas Producers Follow?

On July 20, Chevron Corporation announced it would buy oil and gas producer Noble Energy Inc for $5 billion in stock.  Noble is a highly leveraged company with $8 billion of debt that will be assumed by Chevron.  The shares of Noble have been weak this year along with most leveraged energy companies, having begun the year with a market capitalization near $12 billion.  Noble’s assets will expand Chevron’s shale presence in Colorado and the Permian Basin.  Chevron was close to adding Permian Basin assets last year when it attempted to acquire Anadarko Petroleum.  The Noble acquisition is the largest energy acquisition to be announced in 2020.  As is usually the case, the acquisition begs the questions, “will the acquisition lead to other acquisitions?”

Why Merger Activity Picks Up

The energy industry has always been cyclical, and we remain in the down part of the cycle.  When energy prices are high, managements often take on additional leverage to expand drilling efforts because returns look so attractive.  When prices drop like we have seen this year, the return on those assets is not as attractive, but management is still saddled with the debt they have taken on.  Selling assets is always an option, but there are few takers when everyone is in the process of cutting back, and asset returns are low.  Often, smaller, leveraged energy companies are forced to issue stock at low prices or face the risk of being forced into bankruptcy.

Another option is to sell the entire company.  It is not unusual to see a pickup in merger activity when energy prices have fallen.  Major oil companies, which built up large cash positions during the upcycle, are more than willing to pounce on companies during times of desperation.  Of course, the major oils are not going to waste their time on small acquisitions that will not have an impact on top-line growth.  They want mid-sized companies that will take them into new areas of production, which is why a combination like Chevron and Noble makes sense – a major oil buying a mid-sized energy company.

Expectations for the Months Ahead

S&P Global Market Intelligence concludes that the biggest oil deals have come following oil price crashes.  They point out that since 1995, more than 50 deals have been completed, valued at over $10 billion.

 

So, will Chevron’s acquisition of Noble push the other major oils to follow suit?  Probably not.  In some ways, Chevron was still playing catch up the merger activity completed by the other majors in recent years.  The $13 billion acquisition of Noble still pales in comparison to the $33 billion attempted acquisition of Anadarko last year.  In fact, it would not be surprising for Chevron to announce additional acquisitions, albeit once it has had the time to digest the Noble acquisition.  In our opinion, the events surrounding the acquisition are unique in that Chevron was a uniquely motivated buyer seeking to make a major splash to expand in the Permian Basin.

Take-Away

Chevron’s acquisition of Noble probably speaks more to the validity of the Permian Basin than it does to the energy consolidation environment.  Recall that the Permian Basin has become one of the world’s most prolific oil fields following years of falling operating costs due to improved drilling technology.  That came to a bit of a halt this spring when a global economic downturn drove down oil demand forecasts, and an oil price war between Saudi Arabia and Russia flooded the market with additional supply.  With oil prices dropping into the twenties, it became difficult for energy companies to justify drilling new wells in the Permian Basin.  Most experts think producers need an oil price in the forties to justify drilling in the Permian.  Although oil prices have risen back into the forties, the threat of further global weakness or the ending of a contentious detente between Saudi Arabia could mean lower oil prices. Chevron’s acquisition, then, is a sign that they believe in the long-term viability of drilling in the Permian Basin.

Suggested:

Energy Industry Report – Second Quarter Review and Outlook

Will There be an Explosion in New Acquisitions

C-Suite Interview, Indonesia Energy

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Benefits of Premium Channelchek Content at No Cost

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you 
here.

 

Sources:

https://finance.yahoo.com/news/chevron-buy-noble-energy-5-111125456.html, Jennifer Hiller, Reuters, July 20, 2020

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/consolidation-coming-oil-companies-set-to-party-like-it-s-1999-58753567, S&P Global Market Intelligence, May 28, 2020

https://www.bizjournals.com/houston/news/2020/02/06/energy-analyst-expects-consolidation-deals-in-2020.html, Joshua Mann, Houston Business Journal, February 6, 2020

https://seekingalpha.com/article/4358468-energy-stocks-breakout-following-healthy-consolidation-just-global-oil-inventories-start-to, Seeking Alpha, Juley 14, 2020

https://www.reuters.com/article/us-global-oil-shale-bust-insight/oil-in-the-age-of-coronavirus-a-u-s-shale-bust-like-no-other-idUSKCN21X0HC, Jennifer Hiller, Liz Hampton, Reuters, April 15, 2020

Monday, July 20, 2020

Energy Fuels (UUUU)(EFR:CA)

Broadening Its Portfolio to Include Rare Earth Minerals

As of April 24, 2020, Noble Capital Markets research on Energy Fuels is published under ticker symbols (UUUU and EFR:CA). The price target is in USD and based on ticker symbol UUUU. Research reports dated prior to April 24, 2020 may not follow these guidelines and could account for a variance in the price target.
Energy Fuels is the largest uranium producer in the U.S. and holds more production capacity and uranium resources than any other U.S. producer. The Company also produces vanadium. Headquartered in Colorado, Energy Fuels holds three of America’s key uranium production centers: the White Mesa Mill in Utah, the Nichols Ranch ISR Facility in Wyoming, and the Alta Mesa ISR Facility in Texas. The producing White Mesa Mill is the only conventional uranium mill in the U.S. and has a licensed capacity of 8 million pounds of U3O8 per year. Nichols Ranch is in production and has a licensed capacity of 2 million pounds of U3O8 per year. Alta Mesa is currently on standby. Energy Fuels also owns several licensed and developed uranium and vanadium mines on standby and other projects in development

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Advancing rare earths strategy. Energy Fuels contemplates minor modifications to its operations to enable the processing of uranium and rare earth ores at its White Mesa mill. Ores would be sourced from third parties, either through ore purchase, tolling, or other arrangements, and Energy Fuels would seek to produce concentrates, while also recycling and recovering uranium from the ores. The concentrates could be sold to third party rare earth element (REE) oxide separation and recovery facilities and/or refined, separated, and recovered at White Mesa. Additional investment could be required to enhance White Mesa’s readiness and capability in this respect.


Energy Fuels’ rare earth strategy is timely. We note that rare earth minerals producer MP Materials recently announced an agreement to merge with a special purpose acquisition corporation (SPAC). Along with a New York Stock Exchange listing, the new company to be named MP Materials, is expected to have …









Click to get the full report

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Thursday, July 9, 2020

Energy Industry Report

Exploration and Production Second Quarter Review and Outlook

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Listen To The Analyst

Refer to end of report for Analyst Certification & Disclosures

• Oil and Gas Prices rebounds after hitting record lows.  Oil spot prices even went negative after COVID- 19 killed demand and Saudi Arabia and Russia began a price war. Current prices rebounded to finish the quarter near $40. Natural gas prices fell to $1.58, a level not seen since December 1998, before rising to finish the quarter at $1.67.
• Energy stocks reported a strong quarter rising 33%.   The strength largely reflects a rebound in the overall market. The XLE Energy Index remains down 40% year to date.
• The outlook has improved but remains dark given COVID-19 reemergence concerns and a shaky OPEC truce.   Low-cost producers will generate positive cash flow if oil remains above $40, but high-cost producers are not out of the woods yet.
• We recommend investors remain cautious and focus on low-cost producers with limited debt.

Energy Prices

When you hit bottom, there is nowhere to go but up. Oil prices crashed in April following the spread of COVID-19 and a price war between Saudi Arabia and Russia. Spot prices even traded as low as negative $37 per barrel. The concept of investors paying another investor to take oil off their hands is perhaps bizarre, explainable when viewed only as a short-term issue of speculators being caught with contracts in their hands and nowhere to dump the contracts with storage fields full. Nevertheless, longer-term contracts followed spot prices downward, if not into the negative range. Oil future contracts going out a month or two fell from prices in the thirties per barrel into prices around $20 per barrel. As expected, the sharp drop in pricing lead to an immediate response. Domestic producers all but eliminated new drilling and Saudi Arabia, Russia and other allies made up (kind of) and agreed to cut supply by 10% through the end of July. Whether the cuts last remains to be seen as there are already reports that several OPEC members are not adhering to reductions. However, current WTI and Brent oil prices, both near $40 per barrel, provide energy companies a lifeline they didn’t have three months ago.

 

Natural Gas prices fell, albeit not as much as oil prices. Spot prices began the quarter around $1.75 per thousand cubic feet (mcf) and fell as low as $1.38 per mcf, the lowest level in nominal dollars since December 1998. Inventories remain high following a mild winter and demand remains low due to the shut down of the economy. Liquified Natural Gas (LNG) terminals are reporting a decrease in gas exports and the pace of development of new projects is slipping. Production levels are holding steady even as natural gas rig count has decreased.

Energy Stocks

Energy stocks, as measured by the XLE Energy Index, rose 33% in the second quarter. The strong performance generally tracked the rise in oil prices with most of the gain coming at the end of the quarter. Truth be told, however, the gain is primarily due to an improvement in the overall market and not a rise in energy prices. The S&P 500 Composite index rose 26% during the quarter. Both indices were down sharply in the first quarter and the strong performance in the second quarter merely reflects a rebound from the first quarter. Year to date, the XLE is still down some 40%.

Outlook

The return to oil prices in the forties was welcome news to leveraged energy companies facing negative cash flow and an inability to meet financial obligations. At prices in the forties, companies with a low-cost basis should generate positive cash flow. That said, marginal wells will most likely not be drilled. Of particular interest is whether or not these companies will lock in modest gains by hedging out production. Or, will they view these returns as inadequate to compensate owners for the risks they are taking and continue to roll the dice on the hopes of higher prices? In the end, the outlook for energy prices and energy company stocks has not changed. The outlook will depend on the pace of recovery of global economic conditions and the will of OPEC plus to hold the line on pricing.

 

Recommendations

We believe investors should continue to be wary regarding energy stocks. Investors would be wise to focus energy investment towards companies with little to no debt. A large hedge position may provide a lifeline. Low lifting costs per barrel remain important. A supportive ownership group with a long investment timeframe is also important. That said, there are compelling values within the group now that individual stock prices have fallen. We continue to believe energy prices will eventually return to higher levels with a return to more normal economic conditions and a supply response by domestic producers. We have adjusted our long-term oil and gas price assumption to $50/bbl and $2.50/mcf respectively, although we believe it may be several years before we reach those levels. Our individual stock net asset values and price targets are based off of our long-term energy price assumptions.

 

GENERAL DISCLAIMERS

All statements or opinions contained herein that include the words “we”, “us”, or “our” are solely the responsibility of Noble Capital Markets, Inc.(“Noble”) and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.

This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results. Noble accepts no liability for loss arising from the use of the material in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Noble. This report is not to be relied upon as a substitute for the exercising of independent judgement. Noble may have published, and may in the future publish, other research reports that are inconsistent with, and reach different conclusions from, the information provided in this report. Noble is under no obligation to bring to the attention of any recipient of this report, any past or future reports. Investors should only consider this report as single factor in making an investment decision.

IMPORTANT DISCLOSURES

This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. (“Noble”). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst’s judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.
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The following disclosures relate to relationships between Noble and the company (the “Company”) covered by the Noble Research Division and referred to in this research report.
Noble is not a market maker in any of the companies mentioned in this report. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) with any or all of the companies mentioned in this report within the next 3 months

ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87

WARNING

This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of
transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc..

RESEARCH ANALYST CERTIFICATION

Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.

Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public
appearance and/or research report.

Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.

NOBLE RATINGS DEFINITIONS	% OF SECURITIES COVERED	% IB CLIENTS
Outperform: potential return is >15% above the current price	88%	43%
Market Perform: potential return is -15% to 15% of the current price	12%	3%
Underperform: potential return is >15% below the current price	0%	0%

NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from “Buy” to “Outperform”, from “Hold” to “Market Perform” and from “Sell” to “Underperform.” The percentage relationships, as compared to current price (definitions), have remained the same. Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.

Noble Capital Markets, Inc.
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Noble Capital Markets, Inc. is a FINRA (Financial Industry Regulatory Authority) registered broker/dealer.
Noble Capital Markets, Inc. is an MSRB (Municipal Securities Rulemaking Board) registered broker/dealer.
Member – SIPC (Securities Investor Protection Corporation)
Report ID: 11365

Thursday, July 9, 2020

Energy Industry Report

Exploration and Production Second Quarter Review and Outlook

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Listen To The Analyst

Refer to end of report for Analyst Certification & Disclosures

• Oil and Gas Prices rebounds after hitting record lows.  Oil spot prices even went negative after COVID- 19 killed demand and Saudi Arabia and Russia began a price war. Current prices rebounded to finish the quarter near $40. Natural gas prices fell to $1.58, a level not seen since December 1998, before rising to finish the quarter at $1.67.
• Energy stocks reported a strong quarter rising 33%.   The strength largely reflects a rebound in the overall market. The XLE Energy Index remains down 40% year to date.
• The outlook has improved but remains dark given COVID-19 reemergence concerns and a shaky OPEC truce.   Low-cost producers will generate positive cash flow if oil remains above $40, but high-cost producers are not out of the woods yet.
• We recommend investors remain cautious and focus on low-cost producers with limited debt.

Energy Prices

When you hit bottom, there is nowhere to go but up. Oil prices crashed in April following the spread of COVID-19 and a price war between Saudi Arabia and Russia. Spot prices even traded as low as negative $37 per barrel. The concept of investors paying another investor to take oil off their hands is perhaps bizarre, explainable when viewed only as a short-term issue of speculators being caught with contracts in their hands and nowhere to dump the contracts with storage fields full. Nevertheless, longer-term contracts followed spot prices downward, if not into the negative range. Oil future contracts going out a month or two fell from prices in the thirties per barrel into prices around $20 per barrel. As expected, the sharp drop in pricing lead to an immediate response. Domestic producers all but eliminated new drilling and Saudi Arabia, Russia and other allies made up (kind of) and agreed to cut supply by 10% through the end of July. Whether the cuts last remains to be seen as there are already reports that several OPEC members are not adhering to reductions. However, current WTI and Brent oil prices, both near $40 per barrel, provide energy companies a lifeline they didn’t have three months ago.

 

Natural Gas prices fell, albeit not as much as oil prices. Spot prices began the quarter around $1.75 per thousand cubic feet (mcf) and fell as low as $1.38 per mcf, the lowest level in nominal dollars since December 1998. Inventories remain high following a mild winter and demand remains low due to the shut down of the economy. Liquified Natural Gas (LNG) terminals are reporting a decrease in gas exports and the pace of development of new projects is slipping. Production levels are holding steady even as natural gas rig count has decreased.

Energy Stocks

Energy stocks, as measured by the XLE Energy Index, rose 33% in the second quarter. The strong performance generally tracked the rise in oil prices with most of the gain coming at the end of the quarter. Truth be told, however, the gain is primarily due to an improvement in the overall market and not a rise in energy prices. The S&P 500 Composite index rose 26% during the quarter. Both indices were down sharply in the first quarter and the strong performance in the second quarter merely reflects a rebound from the first quarter. Year to date, the XLE is still down some 40%.

Outlook

The return to oil prices in the forties was welcome news to leveraged energy companies facing negative cash flow and an inability to meet financial obligations. At prices in the forties, companies with a low-cost basis should generate positive cash flow. That said, marginal wells will most likely not be drilled. Of particular interest is whether or not these companies will lock in modest gains by hedging out production. Or, will they view these returns as inadequate to compensate owners for the risks they are taking and continue to roll the dice on the hopes of higher prices? In the end, the outlook for energy prices and energy company stocks has not changed. The outlook will depend on the pace of recovery of global economic conditions and the will of OPEC plus to hold the line on pricing.

 

Recommendations

We believe investors should continue to be wary regarding energy stocks. Investors would be wise to focus energy investment towards companies with little to no debt. A large hedge position may provide a lifeline. Low lifting costs per barrel remain important. A supportive ownership group with a long investment timeframe is also important. That said, there are compelling values within the group now that individual stock prices have fallen. We continue to believe energy prices will eventually return to higher levels with a return to more normal economic conditions and a supply response by domestic producers. We have adjusted our long-term oil and gas price assumption to $50/bbl and $2.50/mcf respectively, although we believe it may be several years before we reach those levels. Our individual stock net asset values and price targets are based off of our long-term energy price assumptions.

 

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All statements or opinions contained herein that include the words “we”, “us”, or “our” are solely the responsibility of Noble Capital Markets, Inc.(“Noble”) and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
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NOBLE RATINGS DEFINITIONS	% OF SECURITIES COVERED	% IB CLIENTS
Outperform: potential return is >15% above the current price	88%	43%
Market Perform: potential return is -15% to 15% of the current price	12%	3%
Underperform: potential return is >15% below the current price	0%	0%

NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from “Buy” to “Outperform”, from “Hold” to “Market Perform” and from “Sell” to “Underperform.” The percentage relationships, as compared to current price (definitions), have remained the same. Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.

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Ruling Out Nuclear Energy Now Could Be a Mistake

With expected growth in electric vehicles and demand for lower greenhouse gas emissions, one might think the merits of nuclear energy are growing more powerful.  Nuclear plants generate almost 20% of the electricity produced in the United States and 55% of its carbon-free electricity.  However, the U.S. Energy Information Agency (EIA) expects renewables to be the fastest growing source of electricity generation through 2050 with nuclear generation expected to decline from 20% in 2019 to 12% in 2050.  On April 23, 2020, the U.S. Department of Energy released a document summarizing work by the U.S. Nuclear Fuel Working Group entitled “Restoring America’s Competitive Nuclear Energy Advantage” and offered recommendations to revive and strengthen the uranium mining industry, preserve and grow the assets and investments of the U.S. nuclear enterprise and regain global nuclear leadership .  Will the recommendations change the trajectory of existing expectations?

 

Positives

Source of clean energy. According to the EIA, nuclear energy is the largest source of clean energy in the United States and produced more carbon-free electricity than all other sources combined.  Nuclear generation avoids greater than 525 million metric tons of carbon dioxide emissions that would otherwise emanate from fossil fuels.

Economical and reliable source of electricity. In 2019, nuclear power plants operated at roughly 94% of their capacity and are a reliable source of baseload demand for electricity.  Even though there were fewer nuclear reactors than in 2000, the amount of energy production in 2019 increased due to greater capacity from power plant upgrades and shorter refueling and maintenance cycles. While costs are high to commission a nuclear plant, they can be a source of less expensive power on a cost per kilowatt hour compared to coal or gas-fired power plants.

Nuclear industry may be a source of innovation.  Investment in advanced nuclear technology could support a safe and reliable source of energy and promote a cleaner environment.  Additionally, growth and innovation in the nuclear power industry could be a source of job growth for those wanting or needing to transition from the fossil fuel industry to careers in green energy.

 

Negatives

Renewables are a better option.  According to the Annual World Nuclear Industry Status Report, renewables, including new wind and solar generators are increasingly cost competitive with existing nuclear power plants with generating capacity increasing faster than any other source of power.  Viewed as a cleaner and relatively inexpensive fuel, natural gas is increasingly viewed as the fossil fuel of choice to bridge the gap as the United States transitions to lower carbon renewable energy sources such as wind and solar. 

Risk of accidental nuclear meltdown.  Three major nuclear meltdowns, including Three Mile Island in 1979, Chernobyl in 1986 and Fukushima in 2011, resulted in environmental and human costs for those living in the affected areas.  Opponents of nuclear energy believe the risks and costs associated with one accident outweighs the benefits of expanding the nuclear power generation fleet.

Nuclear waste disposal.  Opponents view nuclear energy as undesirable due to the production and use of radioactive fuels and the need to dispose of nuclear waste that takes years to degrade.  Additionally, the question of where to store it is also controversial.  Radiation associated with spent fuel slowly declines as it generally is stored on the grounds of operating reactors in impenetrable storage facilities.

 

Balanced View:

Renewables are becoming a more viable source of energy due to advances in technology and lower cost, albeit with significant government subsidies presently.  While the United States pioneered nuclear technology, the number of nuclear plants in the U.S. is declining while growing abroad. With investment in advanced nuclear reactors, electric transmission, and greater consideration to designing safe and efficient siting, could the U.S. industry be reimagined and play an important role in supplying low-cost and reliable energy while promoting a cleaner environment?  While the market will be the final arbiter, recommendations from the U.S. Nuclear Fuel Working Group deserve consideration.

 

Suggested Reading:

The Case for Silver

Gold is the New Green

Energy Sector in Rapidly Growing Indonesia

 

Still Spots Open to Attend Wednesday July 8, Virtual Road Show

Indonesia Energy with Frank Ingriselli, President

 

Sources:

Monthly Energy Review, U.S. Energy Information Administration, June 2020.

Annual Energy Outlook 2020 with projections through 2050, U.S. Energy Information Agency, January 29, 2020.

Restoring America’s Competitive Nuclear Energy Advantage, U.S. Department of Energy, 2020.

Don’t Ignore the Nuclear Option, Bloomberg, Clara Ferreira Marques, May 31, 2020.

Nuclear Is Getting Hammered by Green Power and the Pandemic, Bloomberg, Lars Paulsson and Rachael Morison, May 3, 2020.

The World Nuclear Industry Status Report 2019, A Mycle Schneider Consulting Project, Mycle Schneider and Antony Froggat et al., September 2019.

Nuclear Energy Too Slow, Too Expensive to Save Climate: Report, Reuters, Marton Dunai and Geert De Clerq, September 23, 2019.

Why Nuclear Power Must Be Part of the Energy Solution, Yale Environment 360, Richard Rhodes, July 19, 2018.

A Primer On The Indonesian Energy Industry

Indonesia has a long history of energy production, dating back to the first oil discovery in 1883.  Indonesia’s oil and gas output is contracting as aging fields, and project delays keep production levels below government targets.  The largest fields in Indonesia (Chevron’s Rokan PSC and Pertamina’s Mahakam block) are prime examples of the decline.  At the same time, demand is growing as the Indonesian economy continues to grow at a rate of twice the global average.  The result is a growing reliance on oil imports. A similar story can be told regarding Indonesian gas production and demand at a time when gas imports are being pressured by a more competitive LNG market.

 

The impact on the government is significant

The Indonesian government is reliant on the energy industry to support its budget.  Traditionally, the energy industry has contributed around 20% of revenues, but that number has fallen into the single digits in recent years in response to decreased production and lower energy prices.  Government officials are well aware of the risks it faces from decreased energy investment and is very supportive of future investments.

 

 

The Government is Responding.

Price Waterhouse Coopers (PWC) says existing contractors are losing interest in further exploration in Indonesia due to regulatory instability and an uncertain investment climate. The state oil and gas company, PT Pertamina, is working to reduce the red tape.  In addition, it has introduced a “Gross Split Scheme” that improves the economics of investing in new energy fields.  The Gross Split Scheme replaces Law No. 22, which allowed for cost recoveries but allowed investors recovery of costs but mandated government control of upstream and downstream activities.  The Gross Split Scheme will enable producers to earn higher returns if production levels surpass mandated levels or if energy prices rise.

What Does the Future Hold for the Energy Industry in Indonesia?

Forecasts call for the overall demand for energy to continue to grow at a rapid pace.  Indonesia’s population growth is 1.1%, and the GDP is growing at a 5.6% rate.  The government continues to pursue the expansion of the country’s electric grid, and that is resulting in strong energy demand.  Renewable energy will increase in importance as it will in most countries.  Projections show renewables largely eating into oil’s market share as coal and natural gas hold market share.

 

Source: www-pub.iaea.org

 

What does this mean for investors?

To support a diversified energy portfolio without becoming overly reliant on oil imports, Indonesia will need the oil industry to continue to expand.  It is supporting the industry but still somewhat wary of outside investors.  Local companies directly investing in Indonesian energy assets are in a good position to benefit from recent government changes.

Suggested:

Attend
Channelchek’s Indonesia Energy Corp.(INDO)
Virtual Road Show on Wednesday July 8, 1:00PM EST

 

Sources:

https://www.reuters.com/article/indonesia-oil-gas-production/indonesias-new-law-to-take-years-to-reverse-oil-and-gas-output-slump-idUSL4N2AL0OF, Fathin Ungku, Reuters, February 24, 2020

https://www.pwc.com/id/en/energy-utilities-mining/assets/oil-and-gas/oil-gas-guide-2019.pdf, PWC, September 2019

https://www.indonesia-investments.com/business/commodities/crude-oil/item267, Indonesia-Investments,

https://theenergyyear.com/market/indonesia/, The Energy Year

https://www.trade.gov/energy-resource-guide-indonesia-oil-and-gas, International Trade Administration, 2020

https://www.iea.org/countries/Indonesia, iea, June 2020

https://www.esdm.go.id/assets/media/content/content-indonesia-energy-outlook-2019-english-version.pdf, Secretariat General National Energy Council, Indonesia Energy Outlook 2019.

Tuesday, June 23, 2020

Indonesia Energy Corp (INDO)

Estimates and PO raised on sharper-than-expected oil price rebound

Indonesia Energy Corp Ltd is an oil and gas exploration and production company focused on Indonesia. It holds two oil and gas assets through its subsidiaries in Indonesia: one producing block (the Kruh Block) and one exploration block (the Citarum Block). The Kruh Block is located to the northwest of Pendopo, Pali, South Sumatra. The Citarum Block is located to the south of Jakarta.

Michael Heim, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Oil prices have rebounded sharply from the level assumed when we launched coverage in April. Brent oil prices, which were down near $20 at the time of our initiation, have rebounded to a level in the mid forties. We had modeled a rebound of $5 per quarter, a much slower rebound than we are witnessing. We are maintaining our long-term oil price assumption of $50 but now believe pricing will reach that level several years earlier than previously modeled.


Higher oil prices mean higher earnings and cash flow. We are significantly raising our earnings and cash flow projections for the upcoming quarters to reflect higher prices. In addition, we have increased confidence that the company will meet our estimates. Importantly, higher cash flow will mean less external financing will be…

Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Tesla “Battery Day” Announcements Could Include Virtual Power Plants

A virtual power plant (VPP) is a cloud-based power plant that aggregates the capacities of independent energy resources at different locations into a power network.  The concept of a VPP is different from the traditional utility model that has a centralized generator, transmission lines, and a distribution network.  Under the traditional model, power flows in one direction.  The growth of renewable energy has changed the dynamics of power generation.  Once thought of as government-subsidized experiments, wind and solar power are now competitive with other energy sources.  The growth of renewable power has increased the need for a system that can efficiently store energy.  It has also spurred the growth of a market with dynamic pricing to reflect inconsistent supply and demand levels.

As renewable energy has grown, so too has distributed energy – small generation units that provide electricity on location, at times selling power back into the grid.  Owners value on-site generation now only for economic reasons but also reliability reasons as power outages have increased.  The result is an evolving system of hundreds of thousands of generation units in various locations and different cost structures.  In theory, computer models could coordinate all these generations units, dispatching units through a coordinated, dynamic, real-time pricing market.  In reality, VPP development is in the initial stages, although small experimental networks have been established in parts of Australia, Europe, California, and New York.

Where Does Tesla Come In?

In 2018, Tesla began installing Powerwalls in homes.  Powerwalls are large lithium-ion batteries that can provide up to seven days of continuous power in the event of an outage.  They often work in tandem with residential solar panels.  Powerwalls can be installed in parallel to increase capacity. Powerwalls can be controlled remotely by a mobile app to optimize the cost of energy for customers with electric rates that vary depending on the time of day or the season.  Typically, users will generate energy from solar panels during the day and store any excess power in the Powerwall.  At night, when power prices are typically lower, the user will take electricity from the grid or draw down on the Powerwall battery.  One use of the Powerwall would be to charge electric car batteries overnight.

Why are Electric Cars Important?

Tesla, as with other electric cars, requires enormous battery capacity, the company has hinted that it is making advances that could increase the capacity and storage life of the batteries.  Elon Musk has indicated that it will hold a “Battery Day” perhaps in July, which has ignited speculation regarding their latest battery developments.   Some believe Tesla will reveal a cheaper battery that will make electric cars as inexpensive as gas cars.  Others expect Tesla to announce that it can make a battery that lasts a million miles or one that doubles the mileage range of cars.  Others speculate that the next generation of car batteries will be powerful enough and last long enough that they can frequently cycle charges.  The car batteries, then, would act in tandem or perhaps even as a substitute for Powerwalls, perhaps taking the next step of selling excess capacity back into the grid.

So How Would this Work?

Tesla car batteries would be charged overnight using solar power stored in a homeowner’s Powerwall.  The owner then drives the car to work and plugs into an outlet that can either take electricity from the grid or give it back.  With power prices typically higher during the day during times of peak demand and the car sitting idle, charging and uncharging the car each day would be economical.  The owner can program base power requirements into a mobile app to make sure he has adequate power to drive home, run errands, etc.  Car batteries could also take the place of backup generators.  If there is a power outage, one could use the stored current in the battery to power up the Powerwall.  And, since car batteries are mobile, they can charge up in areas with power and then relocate to areas without power.  Imagine a rolling blackout that is accompanied by a rotating fleet of vehicles that power up at night and then transport to the next area where blackouts are planned.  Add the mobility of cars to the mix and the utility system as we know it will have completely changed.

What Does This Mean for Utilities?

Utilities have undergone a process of deregulation that separates power generation from power distribution.  Distribution will remain regulated as there will remain cost advantages to having one entity own and coordinate a distribution grid.  Generation is more open to competition, including the use of battery power as a source of power “generation.”  Electric utilities have long sought ways to reduce growing demand to forego building new, expensive power plants.  Most utilities promote conservation even though it means less demand for their product.  Existing power plants are typically low-cost producers that will continue to provide baseload demand.  The idea of VPPs should not be viewed as competition for electric utilities but rather partners to them.

 

Suggested Reading:

Will Tesla’s Big Reveal Slash Electric Vehicle Prices?

Has Robinhood, the Online Brokerage Disruptor, Been Disrupted?

Will There be an Explosion in New Acquisitions

 

Enjoy Premium Channelchek Content at No Cost

 

Sources:

https://cleantechnica.com/2020/02/09/everything-you-need-to-know-about-the-powerwall-2-2019-edition/, Kyle Field, CleanTechnica, February 9^th, 2020

https://www.youtube.com/watch?v=pP971PYzQJs, Battery Day is Coming, In Depth, May 15, 2020

https://www.eenews.net/stories/1063234625, David Ferris, E&E News, May 26, 2020

https://www.greentechmedia.com/articles/read/what-will-it-take-to-build-the-market-for-virtual-power-plants, Justin Gerdes, gtm, June 25, 2020

https://www.energy.gov/sites/prod/files/oeprod/DocumentsandMedia/ABB_Attachment.pdf, Aaron Zurborg, worldpower 2010

https://www.infoq.com/presentations/tesla-vpp/

Monday, June 1, 2020

Energy Fuels (UUUU)(EFR:CA)

Reinforcing its Role in the U.S. Critical Minerals Supply Chain

As of April 24, 2020, Noble Capital Markets research on Energy Fuels is published under ticker symbols (UUUU and EFR:CA). The price target is in USD and based on ticker symbol UUUU. Research reports dated prior to April 24, 2020 may not follow these guidelines and could account for a variance in the price target.
Energy Fuels is the largest uranium producer in the U.S. and holds more production capacity and uranium resources than any other U.S. producer. The Company also produces vanadium. Headquartered in Colorado, Energy Fuels holds three of America’s key uranium production centers: the White Mesa Mill in Utah, the Nichols Ranch ISR Facility in Wyoming, and the Alta Mesa ISR Facility in Texas. The producing White Mesa Mill is the only conventional uranium mill in the U.S. and has a licensed capacity of 8 million pounds of U3O8 per year. Nichols Ranch is in production and has a licensed capacity of 2 million pounds of U3O8 per year. Alta Mesa is currently on standby. Energy Fuels also owns several licensed and developed uranium and vanadium mines on standby and other projects in development

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Department of Energy update on nuclear leadership strategy. The U.S. Department of Energy hosted a webinar on Friday, May 29 to discuss the Trump Administration’s strategy to restore American nuclear leadership. While the discussion did not provide much in the way of new information, it served to reaffirm the strategic importance of the front end of the nuclear fuel cycle and a desire to revive and strengthen the domestic uranium mining industry.


Energy Fuels evaluates feasibility of processing rare earth elements (REE). While Energy Fuels’ primary business is uranium production and mining, the company is evaluating the expansion of its mission to include processing rare earth elements to enhance the domestic supply chain for critical minerals and…









Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision.