25
Jul
Thursday Morning – QS, PTEN, VLO, OII, and more
Housekeeping Watch:
- The 2Q24 reporting season is heating up and some of our comments may be more brief than usual. If something is not clear please ask.
- Please bookmark our back up site, just in case: www.zmanbackup.wordpress.com.
- If you are not getting emails at the proper address or not getting them at all please let us know at zmanalpha@gmail.com
In today's post please find:
- the oil inventory snapshot - Slide Show link at left
- the natural gas inventory preview,
- comments on the QS 2Q24 update (new PowerCo details),
- comments on the PTEN 2Q24 results (miss, interesting guide),
- comments on the VLO 2Q24 results (lower but solid, no surprise given 2Q cracks),
- comments on the OII 2Q24 results,
- comments on the RES 2Q24 results,
- and some other odds and ends.
Ecodata Watch:
- We get jobless claims at 8:30 am EST (F = 235,000; last read was 243,000),
- We get 2Q GDP at 8:30 am EST (F = 2.1% vs 1Q of 1.4%),
- We get durable goods of 8:30 am EST (F = 0.3%, last read of 0.1%),
- We get the EIA natural gas storage report at 10:30 am EST.
In Today’s Post:
- Holdings Watch
- Commodity Watch - with oil inventory slide show and natural gas inventory previews
- Stuff We Care About Today - QS, PTEN, VLO, OII, RES, 2Q24 Energy Calendar, 2Q24 Calendar Week 2
- Odds & Ends
Holdings Watch:
ZLT
- Yesterday's Trades: None
- The Blotter is updated.
Commodity Watch:
Crude oil closed up $0.63 yesterday at $77.59 after the EIA weekly report was more bullish than expected. This morning crude is trading down on another round of peace in the Middle East thoughts and profit taking/protection selling. We note that at current levels OPEC+ is less likely to begin decurtailing in October and we also note cheaters like Russia have submitted new plans to reduce volumes to "make up" for past over production.
Big 3 Watch:
Natural gas closed off 7 cents at $2.12 yesterday on concern over Freeport's return to service time line (still dealing with Beryl issues) and despite a return to much hotter weather forecast for the 8 to 14 day period across all of the US. Overnight Freeport was said to be expected to return fully to service (2.1 Bcfgpd capacity) by early August.
- Production Watch: BNEF put production at 102.5 Bcfgpd on Wednesday. Note that while EQT (unowned) said yesterday that they are "tactically" curtailing now, production guidance is unaltered due to better than expected drilling efficiencies.
- LNG Watch: BNEF put LNG at 12.6 Bcfgpd on Wednesday.
- This morning gas is trading up slightly.
Natural Gas Storage Preview
- Z4: +15 to +25 Bcf
- Street: +19 Bcf (WSJ consensus)
-
- Last week: +10 Bcf
- Last year: +23 Bcf
- 5 year average: +31 Bcf
-
Oil Inventory Review
.
The oil inventory slide show can be viewed using the link at left or by clicking here.
Stuff We Care About Today
QS held their call and notes from the call are incorporated below.
PowerCo (VW's battery segment) deal additional color
- This was the deal announced on 7/11/24.
- QS to receive $130 mm prepayment of royalties contigent upon meeting technical hurdles (NEW!).
- Now saying this extends their cash runway to 2028 (18 month extension over prior) (NEW!),
- PowerCo gets non exclusive right to QS battery tech up 40 GWh per year with an option for 80,
- Favorite Quote Watch: "This agreement is a major step in our global scale-up strategy to bring our solid-state lithiummetal battery technology to market for electric vehicles. By joining forces, we can combine our
cutting-edge technology with PowerCo’s capabilities in industrialization and manufacturing. Under
this licensing model, we can leverage our partners’ investment of billions of dollars to industrialize
our technology while maintaining our focus on innovation and development"- Basically this deal derisks and reduces capex for commercialization of their solid state battery tech, proving the concept at commercial scale while leaving upside via the non exclusive nature of the deal. Recall that their batteries are more power dense and faster charging than batteries used by EV's at present.
- Note this does not change plans in 2024 (low volume samples) and 2025 (high volume samples) as previously stated. In the interim QS and PowerCo will work together to achieve an agreed upon design to then move into GW scale production. QS and PowerCo will have 150 engineers on this project.
Product Update
- Alpha 2 proto-type cells shipped to both auto and CE potential customers.
- On track for QSE-5 prototype low volume production this year before scaling to higher volumes in 2025.
- Safety testing showing cells stable at higher than expected temperatures at 300C vs lithium ion batteries that are stable only up to 174 to 185 C which may open up additional markets.
- Management stressed they are focused on the EV market first and that they have high and ongoing interest from other auto OEMs aside from VW. Their preference will be to develop unique models for each OEM like the PowerCo deal to structure deals under a similar asset light basis.
- The continue to look at consumer electronics and one analyst noted ai in devices as in need of battery solutions (we noted the other day iPhone 16 will have ai on board).
- They are also in talks with eVTOL companies and maybe with etruck companies.
Production Process Update
- Raptor process showing beneftis, on track to be fully on line this year.
- Cobra equipment being received.
Guidance:
- Reiterated prior EBITDA loss of $250 to $300 mm
- Now thinking capex to be at lower end of prior range of $70 to $120 mm due to the deal with PowerCo and shelving of the prior JV.
Nutshell:
- QS remains nearly all of our remaining small EV tied wedge for the portfolio and sits, for now, way down in the #17 slot in the portfolio with a $16.92 average cost.
- Favorite Quote Watch (why we are here): "The secular trend toward EV adoption continues, but despite decades of development, existing conventional battery technologies still cannot address the requirements of large segments of the automotive market. There is a clear need for a next-generation battery to drive broad adoption of EVs, and this need represents an extraordinary market opportunity, potentially hundreds of billions of dollars annually. We believe that our solid-state lithium-metal platform is the clear leader in the next-generation battery race, and to seize this massive market opportunity, a global manufacturing ecosystem must be developed. This is where our collaboration with PowerCo fits in: they can bring their industrial expertise and operational excellence to bear on the formidable practical challenges of producing our next-generation battery platform at the gigawatt-hour scale. This non-exclusive deal also allows us to pursue additional opportunities while maintaining our tenacious focus on innovation and return on invested capital."
- We are holding QS for the long term here and may add to our position at any time.
- Free cash flow of $67 mm vs $139 mm in 1Q.
- Previously they expected oily basin activity to see slight improvement in 3Q24.
- Now they see "relatively steady" drilling activity for the rest of the year and the potential for less calendar white space in 3Q vs 2Q (still elevated, just less elevated),
- They entered into their first performance based fully integrated drilling and completions contract using a full suite of PTEN products across a full pad. We've all been waiting for this and look for questions on this to dominate the Q&A today.
Drilling Services:
- $440 mm revenue with US contract drilling seeing a slight bump in prices.
- Margins remains strong due to steady revenue per day through the first half.
Completions Services:
- $805 mm revenue with the Permian accounting for > 50% of revenues (in line with their expectations).
- Margins were impacted by higher than expected calendar white space for several fleets. Gassy basin activity fell more than expected.
- Price was relatively stable.
- 10% of total hours pumped in quarter were performed by efleets and efrac performance was "extremely well received by customers". efrac is expected to rise in 3Q.
- 80% of fleets are now natural gas capable and this expected to rise into year end.
Power Segment (CNG delivery):
- Their power segment is now supporting nearly 2 mm HP of frac equipment (this is likely a mix of PTEN spreads and third party fleets as this would be 35 to 40 fleets.
- This quote should also draw interesting questions "Our experienced teams in natural gas fueling and electrical controls engineering are delivering a diverse suite of power services and assets both inside and outside the oilfield. We believe there is a large addressable market outside of powering our own assets, and we are pleased with our progress as we continue to grow our presence in those markets. "
- Return of capital guidance: Reaffirmed prior guidance to return "at least $400 mm" to shareholders this year.
- Share repurchases
- Returned $130 mm in 1Q including 9 mm shares repurchased during the quarter
- and $164 mm in 2Q including 12 mm shares repurchased (3% reduction).
- They have $819 mm remaining authorized.
- Dividend: Maintained at $0.08/quarter for an implied yield of 3.2%.
- Soft quarter.
- Solid outlook. Estimates will retreat and we may buy weakness over the next few days as we are in the story for a recovery in US frac and not for quarterly beats.
- We own PTEN as our 6th largest holding and have a $8.91 cost excluding dividends.
- One last favorite quote watch: "In just three full quarters since we closed the NexTier merger and the Ulterra acquisition, through June 30, 2024 we used $309 million to repurchase 28 million shares, while maintaining our dividend and lowering our net debt, including leases. We are demonstrating the strong free cash flow generation capability of our company, which is a testament to the capital discipline of our team and our operational and commercial strategy. We expect to convert approximately 40% of our adjusted EBITDA to free cash flow in 2024."
Other Stuff
VLO (unowned refiner) reported OK 2Q24 Results as weaker margins in 2024 weigh; SAF project on track, commitment to shareholder return on track
- EPS of $2.71 vs $2.60 expected and $5.40 in the year ago quarter.
- Refining:
- Throughput was 3.0 mm bopd.
- Operating profit of $1.2 B vs $1.7 B in 1Q and $2.4 B in 2Q23,
- Operating margin of $11.14 per barrel vs $6.97 last quiarter and $15.62 year ago.
- Green diesel:
- Volumes at 3.5 mm gallons per day vs 3.7 mm gpd in 1Q and 4.4 mm gpd a year ago,
- Operating profit of $112 mm vs $440 mm a year ago, falling from 1Q levels as well on lower volumes due to planned maintenance and weaker margins.
- Margin per gallon at $0.80 vs $1.51 a year ago.
- Ethanol:
- Operating profit of $105 mm vs $127 mm a year ago.
- Margin per gallon of $0.61 vs $0.68 a year ago.
- Catalyst Potential: Look for their sustainable aviation project to be online in 4Q24 which would give them the ability to upgrade 50% of their Port Arthur capacity of 470 mm gpy of green diesel to green avgas (SAF - sustainable aviation fuel).
- Balance sheet: Remains in good shape with net debt to cap of 16%.
- Return of capital: "Valero remains committed to a through-cycle minimum annual payout ratio of 40 to 50 percent. "
- Base dividend of $1.07 per quarter rate maintained, implied yield of 2.9%.
- $1.0 B spent repurchasing 6 mm shares in the quarter (~ 2% of total).
- Conference Call: Today 10 EST (we will be on the replay on this one).
- Why we care?
- Given current cracks guidance for throughput (always given in the call) will be interesting.
- We like to keep up with the story and their macro thoughts regarding US and export demand.
- We don't own it but it's very well run and we note each quarter that were I smart enough to model a refiner this would be the one I'd pick to hold.
- Revenue of $669 mm vs $653 mm expected
- EBITDA of $85.9 mm vs their guidance of $80 to $90 mm,
- EPS of $0.28 vs $0.30 expected
- 2024 Guidance Reaffirmed:
- EBITDA range same as prior range of $330 to $380 mm
- FCF range same as prior range of $110 to $150 mm
- Conference Call: Today 10 EST.
- Nutshell: . We play this one from time to time for a trade but are not in currently and for now are just keeping tabs on the story for both trade potential and macro for global offshore activity.
- Revenue of $364.2 mm vs $380 mm expected,
- EBITDA margin ticks up to 18.8% from 16.7% last quarter but remains well below the year ago 26.4% level on lower fixed cost coverage.
- EPS of $0.15 vs $0.13 expected
- They noted growth in coiled tubing which is notable for any growth of late as well as growth in downhole tools and cementing and rental tools.
- Frac remains "highly competitive" which is not surprising. They call the market over supplied which is something we see as transitory as equipment atrits and as no new net capacity is added (they upgraded one fleet to Tier IV DSG but added no fleets in the quarter). They should have about 10 fleets running now.
- Dividend: 4 cent / quarter dividend maintained; implied yield of 2.8%
- Conference Call: Today 9 am EST.
- Nutshell:
- Solid quarter.
- We do not own the name but have in the past.
- Recall that their balance sheet is $260 mm in cash and no debt. Valuation remains a little elevated at this time and we are keeping an eye on it for a future potential add. We would like to own this one later when other NAM centric frac and service names rally into higher activity levels and potentially after they make their next acquistion.
Odds & Ends
Analyst Watch:
- TBA in comments.
U.S GDP (QOQ) (Q2) ACTUAL: 2.8% VS 1.4% PREVIOUS; EST 2.0%
July 25th, 2024 at 7:41 amFed funds tool showing 100% chance of rate cut.
83% for 25 bips with balance for 50.
July 25th, 2024 at 7:42 amAnalyst Watch
ENPH – Barclays maintains Overweight, trims target from $131 to $129.
July 25th, 2024 at 7:51 amRES (unowned) call in 10 minutes, notes to follow.
July 25th, 2024 at 7:52 amQS getting hit hard pre market.
July 25th, 2024 at 7:55 amTrades today …
July 25th, 2024 at 7:59 amRES (unowned) 2Q24 notes
– resilient results across non frac
– frac still challenged.
– overall sales down modestly but EBITDA growing sequentially.
– working on more cost control
– frac pricing is stabilizing
– utilization is below optimal levels, some short notice white space in the calendar.
– Tier IV DGB fleets are highly utilized, have 3 now with the recent upgrade.
– will continue to upgrade fleet but not add to horsepower.
– pump hour capacity in the Permian is above demand.
Coil tubing – up 18%, traction in P&A work. Alluded to contract in CA next year with large E&P.
Technical services (includes frac) down 4%
Support services up 6% and were 6% of revenues.
Pressure pumping 40.4% of revenue in q.
Lower cost of revenues were low fuel costs and lower materials costs (including sand).
Going to Q&A 12 minutes in …
July 25th, 2024 at 8:12 amRES (unowned) 2Q24 Q&A
Q) what are you looking for in M&A
A) acquisitions that are CF accretive and earnings/valuation perspective with good people. Valuations are getting a little more reasonable.
They are maintaining frac price discipline, refusing some under priced jobs.
Q) Oil activity has been weaker than we thought, some is M&A. When you look at 2025 what do you think your customers need to see to re-accelerate.
A) Wtih respect to oil, they want to believe in the fairway of oil prices,
Q) Peers not investing in fleets, not a lot of rebuild activity – would it make sense to stock up on Tier IV engines, could you get them at a low price.
A) we did that before, not doing that now.
Q) M&A – tuck in or transformative.
A) open to both.
Q) 3Q thoughts
A) non pressure pumping lines improving, a little disappointed in frac but doesn’t sound bad.
Q) rest of year non frac margins – can you hold that level.
A) didn’t really answer – sees steady activity.
Call over, tone was fine, few care at this time.
July 25th, 2024 at 8:29 amZTRADE – ZLT – QS
QS – We significantly increased our position in QS at average $6.19 (down 17% on profit taking) this morning in the wake of last night’s 2Q update call. The company is making good progress on commercializing their solid state batteries for EV and consumer electronics. Progress continues for low volume sample production this year and higher volume samples next year. Their deal with PowerCo (VW’s battery wing) is a non exclusive license that will help them ramp to GW scale shipments with a capital light structure while allowing other auto OEMs to license the tech in the same way for their lines. Please see today’s post for additional color. QS moves up to the #16 slot in the portfolio with this add and our average cost drops to $13.35 and remains the only meaningful piece of the portfolio focused on batteries and improved EV tech.
July 25th, 2024 at 8:30 amWe will be on the PTEN call at 10 am EST.
July 25th, 2024 at 8:40 amPTEN webcast
https://events.q4inc.com/attendee/519788216
July 25th, 2024 at 8:52 amPTEN down 5 to 10 pennies pre call – not bad for badly missing revenue.
July 25th, 2024 at 8:53 amPTEN 2Q24 Call Notes
PTEN slightly green at start of call.
Largely reading the release.
Increasingly excited about power services. E&P customers continue to electrify and utilities are not prepared to meet that.
Data center servers now use 3x prior servers and ai search is 10x google search.
Have supplied power to non E&P uses including construction and marine equipment.
Also one data center and are in talks for more.
…
July 25th, 2024 at 9:08 amPTEN 2Q24 Notes 2
– delivering equiv of > 1 GW power
July 25th, 2024 at 9:10 am– supply own fleets and preferred supplier for 3rd party fleets.
– adding new tech to better blend CNG and field gas. Will address complex nature of Permian gas blending.
– exploring power services for a large data center.
PTEN 2Q24 Notes 3
– activity in gassy basins steadied in early 3Q24.
– sees potential for higher activity in gassy basin 2025.
on the oily basin side sees steady ahead.
In 2025, for frac see modest growth in 2025 on the modest recovery in gassy basins.
Rigs:
107 rigs now vs 111 at start of quarter.
Think near trough now.
Could see modest improvement in rig count in 2025 as customers high grade.
PTEN up 2% now.
July 25th, 2024 at 9:13 amPTEN 2Q24 Notes 4
Ulterra drilling products – sees bounce in 3Q, good progress in Saudi and offshore.
Ran through the 3Q guide in the release.
Expect to spend < original capex budget at present. Going to Q&A 25 minutes in, PTEN up 2.5% ...
July 25th, 2024 at 9:25 amNatural Gas Storage Quick Look
+22 Bcf vs our +15 to +25
and vs the WSJ of +19
and vs the Desk consensus at +13
Storage is now 3,231 Bcf
249 Bcf above year ago
456 Bcf above the 5 year avg
We will have our view on next week’s report out tonight.
July 25th, 2024 at 9:41 amPTEN 2Q24 Q&A
Power and that performance based contract should be top of Q&A mind.
Q) Power
A) we have 2 CNG facilities, we have > 100 truck trailer systems delivering (virtual pipeline)
– powering almost 2 mm HP of frac now.
– that’s 1 GW of electricity of gas provided.
– it’s a large biz, under appreciated
– excited about fut growth potential
– just starting to do work on data centers which have high future growth – those are going to locate in areas that have fuel sources (lot of data center interest in nw LA now?),
– it’s sizable, TRANSCRIPT on reven but think said $100 mm / yr already.
Q) efleet thoughts
A) have been running for a year now, excited about the efficiencies but think the industry will still rely on the Tier iv dgb for years to come but seeing good take up. These are high up time, low maintenance assets. Will grow it over time.,
Q) Question on the peformance based drill and complete contract
A) we saw this as future potential when we bot NexTier. Packaging it in a way to give us and the E&P player upside. It’s not a package of bundled services. It’s a way to be more efficient in D&C but also in improving the well, it includes the bits, the steering, better data on the frac, and then all the logistics.
It’s early days but excited about it and it’s off to a good start.
Q) frac pricing
A) noting , like RES (unowned) earlier, would rather have some white space than work for lower prices.
Q) power services – will you own the MW’s?
A) we are operating several turbines in the field to produce electricity for our own frac systems. So we have experience in that. We are seeing good reliability in the turbine systems, so that’s probably the way we go, but it’s early days. We could make the MW for those other industries.
Q) frac capacity tightness in 2025? Any thoughts on accelerated attrition, are you retiring some legacy pumps (tier ii)
A) Tier ii – we own some, we operate some, we are certainly not investing in it. As it ages out we park it and it will get cut up.
80% of equipment can burn natural gas and that will rise going forward.
Q) margins on drilling – bottom
A) top tier rigs are 85% utilization, slowdown has been in non tier 1 super spec. Bottom could be later in the year (it’s possible) but think of it as more steady – think more potential in 2025.
Repeats pricing is relatively stable as well.
On both rigs and frac think it’s important to protect pricing and the brand.
…
July 25th, 2024 at 9:44 amPTEN 2Q24 Q&A
At the price Tier II fleets are working for, you can’t afford to reinvest (maintain). We’re certainly not going to try to compete at those low prices.
In the wake of all the upstream consolidation they think the indigestion in the system has largely been worked through. Sees upside in 2025 from this.
LBRT said similar including the new hands on divested assets angle.
Q) Adnoc term sheet question
A) still working through some things, it’s non binding JV, will comment more when have something more definitive to say.
Q) capex below $740 mm …?
A) base maintenance – not a big change for rigs or frac spreads. Not going to really color in why lower but it’s some growth cap it sounds.
Q) field blending for CNG biz – anything supply chain wise that would gate you?
A) we have some interesting IP on this so are working to protect it, and there are some bottleneck items but we’ve ordered the long lead stuff.
NexTier integration is done. “Can’t imagine how it could have gone better”. Thinks there is further upside there via wireline and chemicals that are not yet run on all fleets.
Call over, positive tone both sides.
July 25th, 2024 at 10:02 amOT – grabbing coffee, back in 10
July 25th, 2024 at 10:02 amSouth Central saw a 6 Bcf summer draw last week on all that heat.
July 25th, 2024 at 10:14 amWTI green
July 25th, 2024 at 10:36 amWill be getting on the VLO (unowned) replay in 20 minutes.
July 25th, 2024 at 10:40 amACDC up 8%.
Two quarters back ACDC departed from peer comments speaking to being able to bring back fleets at lower pricing at acceptable/improving margins. Today’s comments on price discipline from PTEN and to a lessor extent RES (unowned) are helping ACDC rally.
RES up 17% now – likely on speculation they could get bought by LBRT (we think not) or another player. Eventually it probably gets gobbled up but I think it’s early.
July 25th, 2024 at 10:44 amGetting on the VLO (unowned), macro tied notes in a bit.
July 25th, 2024 at 11:07 amVLO (unowned) 2Q24 macro notes
US economy pretty strong
Gasoline up < 1%, Vehicle miles travelled up 1.4% EIA weekly would suggest slight down. Our view is that gasoline demand is roughly flat. On diesel, seeing 10% higher from our system. DOE data is down a bit. Makes sense to us on freight earlier in the year and mild weather. Offset partially by higher jet. Sees distillates down slightly in US. Says cracks in far east negative. Says may be bottoming mid cycle market now for refining, calls that bullish. Market in Europe is pretty strong. Freight indexes looking up. Notes longer term lack of refining capacity adds.
July 25th, 2024 at 11:23 amLBRT up 4% now. We plan to contiue to build the position into year end. Last add was $21.41 on 7/22.
https://zmansenergybrain.com/subscriber-data/zeb-zlt-blotter-ii/
July 25th, 2024 at 11:26 amVLO (unowned) – seeing others make run cuts at what normally would have been a mid cycle margin.
Interesting, positive.
July 25th, 2024 at 11:36 amOnce Port Arthur facility is online in 4Q they will be the largest SAF producer. And they see higher margins for SAF vs traditional avgas.
July 25th, 2024 at 11:39 amPTEN seems to be giving the St. another narrative with their CNG-gas supply-AI link.
July 25th, 2024 at 11:43 amre 30 – yeah and LBRT has exact same narrative in progress. Not 2024 but in 2025 both interesting for virutal pipeline to power non O&G tied demand.
July 25th, 2024 at 11:54 amOT – grabbing lunch, back in a bit.
July 25th, 2024 at 12:10 pmThe trading blotter is updated for today’s QS add.
https://zmansenergybrain.com/subscriber-data/zeb-zlt-blotter-ii/
July 25th, 2024 at 12:59 pmCIVI mentioned in Barrons articel – 6 stocks that could thrive in a rebound.
Would not mention other than its Leo Mariani who I used to work with and he’s a smart egg.
csdocuments@summitutilities.com
July 25th, 2024 at 1:08 pmre 34 – Its interesting that he’s recommending names where he hasn’t updated his targets in quite some time. The only PT for CIVI he has is $74 from June of 2023. Do you see any updated PTs from him anywhere?
July 25th, 2024 at 1:34 pmre 35 – he does have recent targets for TALO, COP and MUR but not the others he mentioned
July 25th, 2024 at 1:36 pmre 35 – took me a minute to find, July 15th, $85.
July 25th, 2024 at 2:04 pmToday makes the LBRT daily a bit more constructive after the recent rest. $23 to $25 would make it interesting. We plan to continue to add to the position, at a measured pace between $20 and $25 to get it up into the top 10 by year end.
July 25th, 2024 at 2:14 pmLook for an updated calendar overnight. Next week gets a lot busier.
July 25th, 2024 at 2:15 pmZ4 looking for a significantly larger storage build next week.
July 25th, 2024 at 2:55 pmBeerthirty, back in a bit.
July 25th, 2024 at 3:00 pmNice beat at BKR (unowned).
July 25th, 2024 at 4:40 pmCalendar update:
https://zmansenergybrain.com/subscriber-data/calendar/
July 25th, 2024 at 6:37 pmThe natural gas slide show is updated:
https://zmansenergybrain.com/natural-gas-storage-slide-show/
July 25th, 2024 at 8:26 pmProduction Watch: BNEF put production at 102.2 Bcfgpd on Thursday,
LNG Watch: BNEF put LNG exports at 12.7 Bcfgpd on Thursday,
July 25th, 2024 at 8:44 pm