1/27/2020

Good afternoon,

RIP to Kobe Bryant and his 13-year-old daughter, Gianna. Both were killed in a helicopter accident on Sunday. Kobe was a true legend who transcended sports. He was an ultimate competitor on the court and an exceptional father, husband, and mentor off it by all accounts. He was only 41. I remember attending OKC's first three playoff games ever and they were against the Kobe-led Lakers. I will never forget showing up to the arena and feeling like three teams were there: the Thunder, Lakers, and Kobe. OKC put up a fight that series but everyone in the arena knew that Kobe was never going to lose that series. I would imagine every fan base felt that same doom at some point over his two decades of brilliance. After that series in 2010, Kobe gave perhaps the greatest compliment he could to any competitor when he referred to durant and RUSS as "bad m'fers." That was a special trait about Kobe. He always wanted to dominant anyone who was against him on the court, but off the court he only wanted to be a mentor to the next generation. Several stories have come out over the last 24 hours about how Kobe reached out to countless athletes who were going through devastating injuries, rising in their own leagues to become superstars, going through personal tragedies themselves, and things of that nature and offering them his heartfelt support and words of wisdom to help them get through whatever it is that they were going through. It seemed like he enjoyed the years after his career more so than he did his years on the court when he could finally focus on just being a full time father and husband and not carry the weight of one of the world's biggest sports franchises. He always seemed to be at his happiest and full of joy when he was with his family. Kobe's legend will always be present, both on and off the court. Thank you for the memories, Kobe.

Switching gears back to regular #buckets blog things:

I hope everyone had a good weekend. The Thunder went 4-0 (4-0!) last week to improve to 28-19. OKC started the year off with a 5-10 record and have since gone 23-9 which translates to a ~72% win percentage. If that win percentage is applied over a full season of 82 games, then that translates to a 59 win season. 59 wins! For reference, OKC's best ever win total in a regular season was 60 which was set in the 2012-13 season. This was the year after OKC made the Finals, lost to the Heat, then traded away Harden...., then went on to set a historic margin of victory record the next year. They seemed destined to win the title that year and then Pat Beverly decided to run into Westbrook's knee and break it during the first round. OKC scraped by Houston still but lost to Memphis in the semi's and well, the rest is history and the Thunder are still without a title. This year's version of the Thunder is a joy to watch, but a title just isn't in their future. You need a top 5, at worst a top 10, guy to win a title and OKC just doesn't have one of those this year. I still expect them to be sellers at the deadline and continue to stockpile young players and draft picks in order to build for the future. OKC is setup to own the second half of the 2020 decade. This year is just a fun year to watch aesthetically pleasing team basketball and see Chris Paul fight off father time and have an absolute monster season. A top three sports holiday is on February 6th, the NBA trade deadline, and I fully expect to be glued to Twitter and anxiously waiting for "Woj bombs" to see how the NBA has just been reshaped by a mega trade. Absolutely love that day. The other two sports holidays that round out the top three are the NBA draft and the first day of NBA free agency. Some debate on the top three sports holidays is allowed, but just know that your opinion is probably wrong if it differs from mine. In this weeks #buckets blog, natural gas prices are dropping quicker than durant's public reputation after he left OKC for golden state, renewable energy stocks curb stomped oil and gas stocks in 2019, Phase 1 of the trade agreement between the U.S. and China may not actually be as great for energy companies as first thought, the coronavirus is more devastating than Kyrie Irving's ability to mentally destroy his teammates, U.S. Treasury Secretary Steven Mnuchin trash talks a kid, Chevron's CEO claims to be a gypsy, and ole cranky Carl Icahn gets bored and decides to sue someone.

January 27, 2020

Natural gas prices are cratering quicker than Harden's MVP case

• The bearded scoring machine was once close to averaging a whopping 40 points per game this season but has been mired in a very unusual prolonged slump as of late. His field goal percentage and three point percentage have both declined drastically in January so far. Something else that has been eating into his ppg is that his free throw attempts are down dramatically as well. Free throws are where Harden can usually snag 10ish easy points every game since he is an expert in baiting NBA refs into bogus calls all the time. Maybe now the refs are starting to stand firm and not fall for the bait after 52 years of being fooled. A handy dandy table of Harden's slump is below because the #buckets blog is here to bring you the stats you want, not the stats you need. Natural gas prices have made Harden's slump look like a hot streak though. A pretty much non-existent winter with no sustained cold weather on the horizon is responsible for much of the sell-off, but supply keeps growing as well. Historically, producers would pump the brakes on increasing production if prices fell too low, but that was before the Permian became the killer of all things prices. E&Ps in the Permian are there to produce oil and if gas is produced as well, which it is in large quantities, then there is no care as to what price that gas can fetch if the gas can even make it to a market in the first place. Permian producers have been turning to flaring off excess gas that has no space to be transported on a pipeline to a market downstream. There has been enough nat gas flared over the past couple of years out of the Permian to power 1,000 Russell Westbrooks for one year. There had previously not been enough energy in the world to power more than one Westbrook before the flaring started to happen. Nat gas prices dipped below $2/mmbtu last week which is the first time prices have touched this level since 2016. To further add to the problem, storage levels across the country are running higher than the five year average as can be seen by the graph below from the EIA. LNG export facilities were supposed to be the saving grace of domestic nat gas prices and the facilities that are up and running have been exporting LNG at a nice clip, but not enough to offset the rise in supply. To top things off, European and Asian LNG markets have seen prices crater as well which will likely cause incremental LNG exports out of the U.S. that are not tied to long-term supply agreements to halt, which will increase U.S. storage levels further, and then continue to kill off strip pricing. There are so many bears in this blurb that you would think we were in the Rocky Mountains.

The renewable energy sector was LSU last year and the oil and gas sector was OU

• I tried to come up with an NBA reference but there isn't a recent result that comes close to the beat down LSU delivered to OU in the College Football Playoff this year. According to S&P Global, "a basket of renewable energy stocks gained 49% in 2019, outperforming the S&P 500 by 20 percentage points, while the S&P Oil & Gas Exploration and Production index's 59 stocks in oil and gas drillers lost nearly 11% for the year." Renewable stocks just laid waste to oil and gas stocks in 2019 and that trend will likely continue. Pavel Molchanov, an analyst at Raymond James & Associates who has no relation to Pavlov and his dog to my knowledge, recently stated there are three main drivers why investors continue to flee oil and gas stocks: "improving economics of low-carbon energy; regulatory and political tailwinds driving adoption of "clean" technologies; and growing investor concern with environmental, social and governance issues." An increasing amount of dolla bills keep funneling into the renewable sector as well. Mr. Malchonov goes on to say "that 26% of all U.S. professionally managed assets are covered by some kind of ESG screen, and the dollar amount (nearly $12 trillion) has tripled since 2012. Among that $12 trillion, roughly $3 trillion is climate-focused." Oil and gas stocks have trouble spinning off consistent free cash flow at current prices. The ongoing abandonment of equity investors leads to lower stock prices for individual companies which will then lower an E&P's ability to use its stock as currency to either pay down debt or acquire another company. This is likely a large contributor to the drying up of the E&P M&A market. Paul Sankey, managing director at Mizuho Americas LLC, provided some light at the end of the tunnel for E&Ps at least. He said in a note last week that "the impact of the [oil and gas] sector on the environment is clearly big, but steps are being taken to reduce that burden, and within the sub-sectors and companies there are nuances that make the sector investable. The long-term future of the oil and gas sector is unlikely to be a draw for investors, but in the meantime, good returns will be made by the good companies, as future demand will far exceed [current] market expectations." Not all is gloom and doom in the eyes of some at least. Renewables big year:

China may not end up being a banana stand that is full of money

• Last week U.S. crude and LNG markets were a bit tickled because of the "Phase 1" trade agreement that was signed by America and China that called for China to increase its energy purchases by no less than $18.5B this year and $33.9B in 2021 from 2017 levels. This week, Julian Lee, an oil strategist for Bloomberg, wrote an article about how the Phase 1 deal may not be all it is chalked up to be for energy. 2017 represented a high mark for energy trade between the U.S. and China so you think any type of increase from levels set in that year would be a bullish signal for U.S. producers. Energy related exports from the U.S. to China eclipsed $9B that year as 81.8 million barrels of oil traversed the Pacific Ocean and arrived in the Far East, according to the EIA. LNG exports from the U.S. to China in 2017 were pegged at 103 bcf. Both commodities added up to be north of $2.5B in value, according to the International Energy Agency. For LNG out of the U.S., that represented 15% of all exports that year. According to Mr. Lee, "if the entire increase were to be in the form of crude, the industry could expect an additional 770,000 barrels a day of exports in 2020 and 1.4 million barrels a day in 2021, based on a WTI price of $60 a barrel and shipment cost of $5.50." A substantial obstacle to making this trade route work is the fact that China is still imposing a 5% import tariff on crude and a 25% import tariff on LNG from the U.S. In addition, the charts below show where China has been deriving its crude and natural gas needs. The distance from American to China causes shipping costs to be higher, thus further increasing costs for American products and making them far less competitive compared to China's alternative of buying product from producing areas nearby. China imports 60% of its natural gas demand via LNG cargoes, but the cargoes are arriving from Australia, Qatar, Malaysia, and Indonesia for the most part. Phase 1 of the trade agreement between the U.S. and China should at least help U.S. energy markets a bit, but to what extent will remain a mystery until export information starts to actualize. Charts:

The Coronavirus is infecting everything in its path

• It seems like every two to three years there is a new virus that pops up somewhere that rattles the nerves of everyone in the world. The 2020 decade decided to go ahead and start the decade off wrong by introducing the world to another super virus that has caused China to shut down cities and literally quarantine regions of its country. As of late last week, China has roughly 35 million people on lockdown around the epicenter of the epidemic in a place called Wuhan. PBS issued a short video about the drastic steps that Chinese officials have taken and how serious this virus has become:

• Oil prices have been effected materially by this outbreak as well. Per Dow Jones Market Data and summarized by MarketWatch: "West Texas Intermediate crude for March delivery CLH20, +0.02% fell $1.15, or 2%, to settle at $55.59 a barrel on the New York Mercantile Exchange. That was the lowest finish since Nov. 29 for a front-month contract." This was as of January 23rd. The reason for the sell off is tied to the fear that there will be lower demand due to travel restrictions coupled with the expectation that economic activity as a whole will slow down. Manish Raj, Chief Financial Officer at Velandera Energy, provides a nice, high-level summary: "There hasn’t been any material impact in fuel demand as of yet. However, as the Chinese authorities lockdown several cities around Wuhan, the market’s base case scenario has evolved to assume a widespread travel restriction, followed by flight cancellations, reduction in regional travel and lower overall economic activity in China. Demand reduction will emerge not only from reduced travel, but also from reduced economic activity resulting thereof." Hopefully the coronavirus is contained and remedied quickly. No one wants to see a zombie apocalypse breakout. We've all seen how that plays out in The Walking Dead and I don't think anyone wants to try and live through that unless your name is Negan and have a Lucille to carry around. Best case scenario for me is that I would find a community and try to be a cook there or something, but I can't cook so I that might not go too well either.

U.S. Treasury Secretary, Steven Mnuchin, has a strong start to the week and then decided to play some FIFA online and trash talk some kids

• Replace FIFA online with the World Economic Forum and kids with Greta Thornburg and that is what happened last week with Mr. Mnuchin. He was on a bit of a hot streak last week after completing Phase 1 of the trade deal between China and the U.S. in which he has been a lead negotiator since the beginning. Then he headed off to Davos, Switzerland to attend the annual World Economic Forum and decided to throw some shade at 17-year-old climate activist from Sweden, Greta Thunberg. It only took me five times to finally spell her name right. At first, I typed "Great Thornberg" and that sounded like a pretty awesome name for a shrub but I knew that couldn't be right so I had to re-check and sure enough, her name wasn't "Great Thornberg." Spelling things correctly ruins fun sometimes. Mr. Mnuchin was asked whether or not the U.S. needs to completely and immediately divest from fossil fuels. This has been something that Greta has been pushing major developed countries to do for the past year or two and has gained some notoriety doing it. Mr. Mnuchin answered by saying, "is she the chief economist or who is she? I’m confused,” Mnuchin said, before adding this was “a joke. That was funny. After she goes and studies economics in college she can come back and explain that to us.” Yaa c'mon, I think everyone knows that probably wasn't really a joke. Mr. Mnuchin seems like a super sharp dude when it comes to economics and finance, but it turns out he might not be so great at being a jester. President Trump also got in on the action by saying in his speech at the World Economic Forum that "to embrace the possibilities of tomorrow, we must reject the perennial prophets of doom." Mr. Trump did not name anyone specifically, but signaled to those in attendance to ignore environmental “alarmists” and their “predictions of the apocalypse.” Greta was also at the Forum and gave a speech of her own. In the speech, she said that "it doesn’t take a college degree in economics to understand ongoing fossil fuel subsidies and our remaining carbon budget don’t add up. So either you tell us how to achieve this mitigation or explain to future generations and those already affected by the climate emergency why we should abandon our climate commitments." Fighting fire with fire. This is about as TMZ as I hope to ever get, but I thought it was interesting that a 17-year-old is sparring with the POTUS and U.S. Treasury Secretary at the most prestigious economic forum in the world.

Chevron CEO claims he has a crystal ball

• One of the easiest things to do in the world is predict the future price of oil. Super simple because there aren't a billion factors that go into forecasting future supply and demand. Plus, it's not like world changing technology breaks through like the arrival of horizontal drilling being combined with hydraulic fracturing. This innovation went on to completely change the future energy outlook for the entire globe. So clearly, it is as easy to predict future oil prices as it is to predict when Kawhi Leonard is going to "rest" and engage in "load management." All that to say, Chevron CEO Michael Wirth stated at the World Economic Forum that oil prices may not reach $100/bbl for a "long time" thanks to the boom in production brought forth by U.S. shale activity. He probably isn't wrong though. Predicting the future price of oil is a daunting task but Mr. Wirth's outlook is probably spot on. At least for the next decade or so anyways. So halfway ignore that diatribe from earlier in this blurb. OPEC, mainly Saudi Arabia, has ~1.7mmbpd it can turn on pretty quickly, Iran has 4mmbpd waiting to be exported if sanctions are ever lifted, Venezuela is in the same boat as Iran but only with ~1mmbpd, and Libya is always a wild card that can increase it's production pretty quickly if civil strife ever calms down. Throw that spare production in with how quickly U.S. shale can ramp up and it is difficult to envision oil prices consistently breaking the $100/bbl mark for the next 5-10 years barring a black swan event. Mr. Wirth stated how oil markets have revolutionized over the past decade: "Oil markets have really changed over the last decade or so. We’ve moved from a period of time where there was a belief we were approaching peak oil, and now we’re in an era of abundance.” Oil prices for the 2020 decade are pretty much the exact opposite of the Thunder's outlook. OKC should win a couple titles this decade thanks to the 100 draft picks that Presti acquired this summer and the emergence of SGA. Mark that down. TITLES IN THE 2020 DECADE FOR OKC. Please forget I said this if the 2020 decade ends up going the same way as the 2010 decade though where OKC had the 2nd highest winning percentage in the NBA, three MVPs, multiple all-stars, and no titles. The 30 for 30 about the Thunder's 2010 decade is going to need to be a mini-series on its own.

Icahn is back to being angry

• To the relief of Occidental, Icahn's wrath is not directed at them this week. Instead, Icahn is back to being angry at Charif Souki, founder of Cheniere Energy and then later and currently Tellurian Energy, for "stealing" ideas from Cheniere after Icahn fired Souki. Mr. Icahn'thelpbutfirepeoplewhoareinnovators acquired a 15% stake in Cheniere in 2015 and immediately began to stomp his feet and throw a tantrum about how Mr. Souki, then CEO of Cheniere, needed to reign in spending, control costs, and focus on paying a hefty dividend to shareholders instead of re-investing returns into growth projects. Mr. Souki said nah bro I'm good and was fired that year by Icahn and his cronies. Mr. Souki then went on to found Tellurian Energy which is building America's biggest LNG facility in Lake Charles, Louisiana at the moment that goes by the name of Driftwood. When Driftwod is fully built, it will be able to chill 4bcf of natural gas per day and send it out for exports. First, the chilled gas will be delivered to Tokyo or Seoul as a part of long-term agreements and then the rest to shorter term customers or loaded onto spot cargoes. Cheniere on the other hand is focusing on paying a dividend and only has a small growth project, compared to Driftwood, being built in Corpus Christi. Icahn is a master of the short game and has made himself a billionaire by systematically raiding up and coming companies with visionaries at the helm and forcing the companies to funnel its cash back to investors instead of funding growth projects. Icahn does what is best for Icahn, not really what is best for the company he is raiding. Chesapeake and SandRidge have experienced his wrath to a large degree. Icahn has done the same with Souki and Cheniere but now Cheneire is suing Souki and Tellurian for $47 million because why not? Icahn is claiming that Souki stole plans from Cheniere to build the mega project in Lake Charles and partnered with a company that was already partnered with Cheniere to help build the facility. This company was called Parralax Energy and was ran by a friend of Souki. After Souki was fired, Parralax quickly partnered with Tellurian and broke off relations with Cheniere. Now Cheneire is suing Tellurian because of the fear they have in Driftwood becoming successful and stealing market share. Seems odd right? Icahn wanted Souki fired because he wanted to focus on growth instead of paying a large dividend and now Cheniere is suing Tellurian because of a growth project. Christopher Helman, Forbes write and author of the article this blurb is based on, summarized it well: "It’s ironic Cheniere sees any value in Driftwood at all; when Icahn first got involved, he was so turned off by the idea of Cheniere backing another expensive LNG project, that he orchestrated Souki’s ouster. Icahn’s POV: Cheniere was already nearing completion of its first LNG export terminal at Sabine Pass, Louisiana. Why risk messing it up? Icahn and Souki were at loggerheads. They each saw the same thing in Cheniere’s future — billions of dollars of cash profits once Sabine Pass became operational. Where they differed was on what Cheniere should do with that money. Souki wanted to build more. Icahn wanted to rein in spending, and make sure Souki didn’t mess up a company that was set to pay hefty dividends." Good for Souki for sticking to his guns. Good luck fighting off Icahn though. He doesn't lose very often..

Thought of the week:

• Appreciate the people in your lives when you can, while you can.