Thursday Morning Links

• The main thing to avoid with crypto is FOMO. Focus on being productive and owning productive assets. Even if the crypto nerds are right and we all wish we had gotten in early, they’re still going to need to trade that crypto for goods and services in the real world. In the event it becomes money, Bitcoin’s price will become boring in its daily movements, and productive people and assets will capture economic value as they always have. [The Tom File]
• The world is hurtling towards an oil supply crisis. Starved of cash flow during a seven-year bear market, the oil industry has been unable to sufficiently invest in new productive capacity that both satisfies growth in demand while offsetting base declines. Investment spending peaked in 2014 and has remained low since then. The last of the major projects sanctioned in an era of US$100 WTI has been brought online and the cupboard of new projects, so to speak, is now bare. Historically, spending would have strongly rebounded along with better corporate cash flows due to the recent rise in oil prices, yet what is unique in this cycle are the gating factors of environmental, social and corporate governance (ESG) pressures coupled with shareholders’ demand for dividends and share buybacks over production growth. [Eric Nuttall]
• The US is still the largest producer of oil and gas in the world, making its energy policy – and the desire of foreign powers to influence it – no less important than it was then. Longtime readers of Doomberg will know we have been critical of America’s energy strategy and have spilled much ink describing the predictable consequences of its obvious blunders. By closing existing nuclear power plants, opposing the development of reliable fossil fuels at virtually every opportunity, attacking existing energy infrastructure choke points, and constraining capital for future development, the behavior seems virtually indistinguishable from what we would be doing if an adversarial foreign power were in charge of our affairs. Consider the big news from last week. On Thursday, a lone federal judge appointed by former President Obama revoked entire swaths of recently auctioned oil and gas leases in the Gulf of Mexico. [Doomberg]
• Unconventional wells in the most prolific shale plays tend to exhibit a 70% decline in the first year of production and another 30% in their second year. On average, it takes 8-10 years for decline rates to level off around 10%. Over 70% of US oil production comes from this steep, rapid production decline shale, implying that substantial drilling activity is necessary just to hold production flat, let alone grow output. In the context of these high annual decline rates, the current rapid pace of depletion of DUC inventory is unsustainable. Absent a reversal soon, US oil production growth could stall out, and production could fall. [Bison Interests]
  
• It is true that, as measured by GDP, or by the size of the credit and equity markets, or even just by the gaudy presence of our Googles, Amazons and Apples, the United States is the greatest machine for the production of money in the modern history of the world. But this wealth is largely an abstraction, a trick of the broad and largely meaningless aggregations of numbers that makes up most of what the business pages call “economics.” The American commonwealth is shockingly impoverished. Ask anyone who’s compared the nine-plus-hour train ride from Pittsburgh to New York with the barely two-hour journey from Paris to Bordeaux, an equidistant journey, or who’s watched the orderly, accurate exit polls from a German election and compared them with the fizzling, overheating voting machines in Florida. [The Egregious Lie Americans Tell Themselves]
• If the well was drilled by an entity with a cost of capital of 50 percent, it would definitely be a losing proposition. That would be a sign that the entity did not make effective capital allocation decisions. The decisions could be rational if the entity had hidden motives; perhaps principal/agent conflicts like a desire to look busy and stay employed drilling wells. By the way, how could the agents of that entity hide this? They would want to focus attention on the highest point on the chart, namely the nearly-instantaneous rate of initial production, and avoid discussing the rate of production decline, the present value of revenue, the present value relative to cost, and the internal rate of return of the well relative to other opportunities (like buying back debt) or to doing nothing. What would be the end game for that strategy? An entity that will reinvest capital at negative rates of return will eventually deplete all of its capital and become worthless, unless the principals relieve the agents of control. [CBS]
• Chevron is one of the 10 largest oil producers in the world. They spent $6 billion on capex last year, and have announced that they are going to spend $15 billion this year. Global oil demand will be likely be up ~10% this year over 2013, but they are going to invest only 40% as much as in 2013. It reminds me of how first the airline industry, and now auto manufacturers, figured out that its smart not to constantly expand production capacity. When they restrain themselves, they get a double benefit because they can charge more (capture more consumer surplus) and they have more cash for shareholder returns instead of capex. [CBS]
• Do you hate America and want it to fail?  A lot of younger right-wingers will say yes… in a certain sense, they do. And they have reasons for saying that. What young man with any sense wants to die for the Joe Biden regime in the Ukraine? Who wants to pay taxes so Kamala Harris can shower money on illegal immigrants and left-wing shock troops? That’s a hard message to hear for anyone who lived through the 1960s and the Cold War. For a long time, to be on the right—to defend liberty and morality and decency—meant to be a patriot and to love America. And it still does. But the enemies of freedom and decency who hate America are no longer godless communists abroad, they are the godless leftists at home who are currently in power. If America means transgender rights and suffocating biomedical security measures, then those who love freedom will come to hate America—or, to be more specific, the current regime that has taken control of what used to be America. Young people on the Right don’t hate liberty and morality and decency; they despise woke ideology. The older idea of “America” that the Boomers love is gone, as far as the younger generation is concerned. Most Boomers will never share this antipathy, but they must learn to distinguish between America the nation and America the state. The American state—as the COVID lockdowns, Russiagate hoax, and the political prosecution of the January 6 protestors show—is at war with the American people. [American Mind]
• “We have Vitamin C, D, NAC and zinc if you want to take those with dinner,” I offered. “Why,” my parents both said with a confused look. “Oh those are just good to take when you get covid, just like any other cold, to help boost the immune system and fight the virus,” I answered. Actually treating your body is not part of their covid approach. This might be a blue state blind spot. My dad and I went to Walgreens again to get some Sudafed. [The American Sun]
• Magellan finished the year with another strong quarter, generating financial and operational results that exceeded our expectations and solidified 2021 as a year of robust demand recovery for the services we provide," said Michael Mears, chief executive officer. "During 2021, Magellan returned a record $1.4 billion of value to our investors through a combination of consistent cash distributions and equity repurchases, an increase of 19% over 2020... [MMP]
• "2021 was a year of records and we delivered with record earnings and free cash flow and record safety, environmental, quality, and reliability performance," commented U. S. Steel President and CEO David B. Burritt. "We enter 2022 from a position of strength and are relentlessly focused on continuing our disciplined approach to creating stockholder value. Our balance sheet has been transformed, record cash significantly de-risks strategy execution, and our capital allocation priorities have enhanced direct stockholder returns. We are a fundamentally different company from a year ago and expect 2022 to be another strong year." [X]
• I'll finish with our thoughts on the changing sentiments around oil and gas. For some time now, the sentiment toward all traditional forms of energy, especially in political circles has been very negative. Many said that the world should pull the plug on traditional energy as soon as possible and completely devote our capital and efforts toward renewable energy. Without a doubt, this was always naive. The world now realizes that an overnight transition to renewable sources of energy is not at all possible as evidenced by the rapid development of various global crises, including high natural gas and LNG prices, high crude oil prices and not seen since 2014 and runaway inflation, not seen for about 40 years. Europe is starved for gas and is faced with heat or eat, while Russia, with its major oil and gas supplier, is amassing troops on the Ukraine border. Try as you may, it's hard to blame this crisis on the pandemic. Over one-third of the world lives in energy poverty, mainly in developing countries. Europe's energy policies have now made energy poverty a reality in first-world countries. As an oil analyst said, energy is the economy. We, in the United States, live in a country of plenty. We are a rich nation with the high quality of life of creative culture, now also blessed with abundant energy. Maybe that has distorted our thinking about the situation in other countries or regions. People who don't want developing nations to have what we have are either in denial, hypocrites, or both. At Enterprise, we've been outspoken that is going to take all of the above, not for a few years, but for decades to come. Look to comments made by a variety of sources, everyone from the IEA to the head of Saudi Aramco, members of the European Union, and even the U.S. energy secretary. Ultimately, they all message the same thing. Investment in oil and gas needs to ramp up sharply in order to provide the badly needed baseload traditional sources of energy that will be needed alongside low carbon fuels and green energy to meet the world's growing demand. [EPD]
• In 2021, Suncor exceeded its return to shareholder targets for the year, repurchasing the company's common shares at the highest annual rate in the company's history and increasing the dividend by 100% during the fourth quarter, while reducing debt at the highest annual pace in the company's history. During the year, the company returned a total of $3.9 billion to shareholders through $1.6 billion in dividends paid and, since the start of its NCIB in February 2021, $2.3 billion in share repurchases, representing 5.5% of Suncor's public float as at January 31, 2021. The company also reduced net debt by $3.7 billion to $16.1 billion, accelerating its initial goal to return to 2019 net debt levels. In the fourth quarter, the company paid $607 million of dividends, representing the increased quarterly dividend of $0.42 per share which was doubled and reinstated back to 2019 levels. In addition, the company repurchased approximately 21 million common shares for $639 million under its NCIB, representing 1.4% of Suncor's public float as at January 31, 2021, while reducing its net debt by $522 million. [SU]