Mar 16, 2023
On March 10, The Capitol Forum’s Teddy Downey and Daniel Sherwood held a conference call to discuss the most pertinent issues impacting energy markets and policy. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Thanks everyone for joining us today. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And I’m joined by Daniel Sherwood and we are going to discuss the most pertinent issues impacting energy markets and policy this week.
Daniel, now everyone knows how much better looking you are than me. Are you excited to do the call?
DANIEL SHERWOOD: Yes, I’m very excited. Welcome to our guests. We’re trying out a new platform here today so bear with us. It’s exciting. We figured it might enhance the experience for you all if you could see us, so hopefully it won’t be a distraction—most of all to the speakers. Let’s dive in, Teddy. What do you want to discuss first?
TEDDY DOWNEY: Let’s talk about LNG development in North America. There’s a lot going on, some revised FID expectations, new offtake agreements, E&Ps increasingly getting direct exposure to the LNG market. What’s your take on how the North American LNG development is progressing?
DANIEL SHERWOOD: Yes, absolutely. Real quick on the macro level, why do we look at LNG? It’s a huge, huge demand base for natural gas produced in the United States – or “freedom gas” as some like to call it. It’s the pipeline on the sea that’s getting a lot of molecules now to markets in Europe to China and to Latin America and the Caribbean.
Why do we look at FID – or final investment decisions? As anybody who watches this space knows, these timelines are massaged by the looser operators to a great degree. It’s difficult to determine when there are shovels in the ground, when these projects are actually being developed and when will it come online. FID is one of the few terms that actually still means a little bit of something. That’s why we watch that.
Our larger take on LNG is similar to our other takes in the other spaces that we follow. It’s a story of winners and losers. It’s where we do value add in the LNG space. As people model that any given amount of volumes is going to come online right when it’s expected to and then this next project will and you see this beautiful little ramp. It’s ubiquitous in the space. We try to differentiate there. We look at these projects. We look at the permitting processes. We look at the offtake agreements to see what’s actually going to come online so we can tweak those models. That’s how we’ve helped people who bake those forecasts in.
We took last week off, so we have a little bit more news than we normally would to cover. I’m just going to run through the projects really quickly in order of how they’re listed in the bullet point on the invite. Energy Transfer, Sempra, New Fortress, Cheniere, Tellurian, Delfin and the Chesapeake/Gunvor deal with a dovetail about Devon Energy’s recent statements.
First off is the Energy Transfer Lake Charles project. That moved out it’s expected FID date. This caught our eye. Obviously, we like to highlight when those expected dates are amended. Why this is important is because of how Energy Transfer explained it. They cited the competition in the Gulf. I think that’s unique from a major player – you hear a lot of different excuses from the smaller players like Tellurian for instance, but for Energy Transfer to come forward and say, “Look, we’re still going to get this thing online. It’s going to take us a little bit longer because we have a lot of competition. A lot of our customers who are buying this gas can shop around.”
You contrast that with say Sempra, Sempra’s Port Arthur project. Now the time is ticking for them to hit FID by the end of March. They’ve got three weeks left, but they’re saying that they’re still on track.
Writ large, I think Sempra is more true to their word about their timelines. They can execute—would be a better way to say it—a little bit more consistently. As you know, Teddy, the only thing we’ve ever covered on Sempra is their Guaymas–El Oro pipeline in Sonora. That’s a unique indigenous rights overhang, so stereotypically, Sempra can execute. Sempra is in that same alley in the Gulf as Energy Transfer and Sempra can make it happen.
TEDDY DOWNEY: Can I ask you one quick question about Energy Transfer? When they say “competition in the Gulf,” is that because they’re not eager to get it online as quickly because there is competition or are there other projects competing with the suppliers that they need? What exactly do they mean when they say that?
DANIEL SHERWOOD: The latter. They want to get this online. The sooner they reach FID the better for these guys. Because FID means that the project is going to happen and that means that eventually gas is going to be moving through these facilities and their tolling agreements are going to generate good revenues like you see with Cheniere. This is not them playing hacky sack with the market. This is them saying look – stereotypically what gets these projects to FID is showing X amount of capacity is subscribed or contracted. What this is saying is “Hey, even though we have a number of offtake agreements, we don’t have enough yet to make the decision to say, ‘Let’s go. Let’s construct.’” I thought that was a material development. It’s tacit. You assume that, but you haven’t seen it cited in such explicit terms, at least I haven’t.
TEDDY DOWNEY: Okay, thanks.
DANIEL SHERWOOD: You bet.
TEDDY DOWNEY: Keep going.
DANIEL SHERWOOD: Lake Charles and Port Arthur, those are some big facilities. Now we’re going to get into the scrappier players, the ones that we like to look at a little bit more.
Next up on our list is New Fortress Energy. We have talked about them ad nauseum. If anybody is interested in New Fortress Energy, please reach out. I encourage anyone who is attending to shoot us a question and chat. We’d be happy to take them. We want to make this more of a dialogue and a conversation. New Fortress is a familiar friend of ours.
Unsurprisingly they’ve moved back their FAST LNG timeline which we’ve written about. We’ve written about different technological difficulties that they will meet in materializing those goals. We have written extensively about their ability to execute on their timeline. That was not a surprise to us. The market reacted pretty severely when they posted earnings. That news is a little stale, I think two weeks old.
They dropped their EBITA and they moved out their timeline, but they’re still shooting for that first unit. It’s kind of a unique business model. They’re introducing floating liquification facilities over what would otherwise be a stranded gas deposit. We’ll keep on watching. That was their update.
TEDDY DOWNEY: Do you think New Fortress now—are people who are more inline with us at this point finally in terms of their challenges or are they still too optimistic? What are you thinking there?
DANIEL SHERWOOD: I think people have come around. I think that there is still some consensus building going on effectively from the sell side there. I think Wes’ team is very good at structuring a narrative and they have a number of different mechanisms. Just look at their foray into Brazil for instance or their transactions with Golar where they announce a huge change in vision and they execute in part and then they shift. They can sometimes successfully spin it off or divest it.
Look at their facility in Pichilingue where now they’ve sold it to the government when before the big risk was that it was some merchant plant. They are to a degree agile, but I think writ large, people are understanding that it does seem to be the nature of their business model. There is a lot of hype and then that hype fails to materialize at the rate that they say it will.
I was going to hit Cheniere next, but I should go into Tellurian and Delfin because they are related as far as the aggressive timelines. Tellurian is a glorified E&P now. They have a little bit of producing assets in the Haynesville, but they have not been able to make Driftwood come to be. The bears on that side were hyping this Gunvor expiration that was supposed to happen at the end of February if my memory serves. There has been no update on that, but Souki who is the CEO of Tellurian is at CERA week and he’s complaining it’s not about offtakes, it’s about partners. We’re going to keep on watching Tellurian.
By about midway through this year, if there is not a material update on Driftwood, I don’t know what their way forward is going to be. They’re holding on to last hopes in my view.
Delfin – another small entity. The reason why we like to look at that is because it’s also a floating facility in its own right. It’s a little bit different than New Fortress’ but we like those marginal volume players. Delfin there is a funny little update posted. We like to talk about the TGLO penny stock as a barometer of where people think Delfin will be. One of the hype men on that penny stock posted an update about a Hartree Capital offtake agreement. Then they’re shooting for a FID in 2023. I think that’s highly aspirational.
That’s going to pretty much round us out, Teddy.
I’m just going to say that Cheniere is continuing to hum along. I know we have different levels of interest from subscribers on that name in particular. That’s the best, the gold medal operator as far as liquified natural gas is concerned. They’re going to build out. Sabine Pass they’re expanding. They have two facilities that continue to build out. That’s an accomplishment on their end.
To round out the E&P exposure. Chesapeake just made their most recent announcement and that impacts us in a couple ways. We’re watching them shift a little bit of their focus away from the Marcellus Utica into Haynesville. Then there is this greater trend of E&Ps getting direct exposure to LNG offtake. Think about what that’s going to do to domestic prices here and in the long term as LNG continues to ramp into 2025 and notable is Chesapeake’s deal with Gunvor which as I stated Gunvor is the same name with Tellurian that is on the hook with Driftwood.
I know that’s a lot of companies and projects. I tried not to go too fast.
TEDDY DOWNEY: It’s always good to get an update on LNG particularly because we’re always talking about how it will affect prices, affect the market for gas drilling in the Marcellus and Utica where we focus a lot of our attention. I think that’s a good transition moment for us.
We’d love to get your update post earnings on the companies operating in the Marcellus and Utica and what we’re learning from Upstream right now.
DANIEL SHERWOOD: Absolutely. Less headlines to throw at our viewers for this section, so we can take a break from the news desk so to speak.
Again, something that we do with Marcellus/Utica is that we really like to look at these operators in a more specific and granular fashion, especially around earnings season. So many of these details can get ironed over.
Let’s go in order of the invite again. Let’s start with Range Resources. For people who watch this space closely, trading was halted for a brief period of time due to a Bloomberg rumor that Range was going to get bought out by Pioneer. Both entities have pushed back and have said that it’s a rumor. People online have postulated that maybe there was some veracity to it. I think it’s moot. I think it shows though in this new A&D context with lower commodity prices, especially in natural gas, it’s interesting to see that this is maybe on the table.
We wanted to look at Range. Maybe next week, if anybody’s interested, we might eventually share our screen on the broadcasts. I’m looking at what we call our Operator Performer Index where we have an automated capability to aggregate all the different data of every major operator and then compare it to their peers and the basin itself.
What sticks out about Range is their ability to continue to bring on wells, continuing to keep production high. They have a relatively low decline rate relative to peers. And they have been able to maintain their relatively high well efficiency. What do I see there? I see a sustainable operation. I see a good future. I see guidance that’s probably going to get met as they’ve been able to meet. I think that it makes sense as to why any kind of oil-exposed major might be interested in bolting on Range’s acreage in the Marcellus. It’s giving Cimarex/Cabot energy. It would be a replica of that and then as we know, hopefully a more successful one. We have written about Coterra extensively. Any questions on Range, Teddy or do you want me to just roll right through to Repsol?
TEDDY DOWNEY: I don’t know if you’ve thought about this, but any antitrust issues potentially or is it a complimentary thing? Would antitrust issues suggest a certain type of acquirer over others? I’m just curious if you thought about that. I’m always thinking antitrust.
DANIEL SHERWOOD: That’s an important question from The Capitol Forum lens and for anybody who is online for the call today, what you should know is that we provide coverage in this context in a way that is unique unto us. We were the only place that identified possible antitrust risk in EQTs bolt-on of Tug Hill.
To zoom out to answer the question initially, my common refrain Teddy, as you know, initially when we would discuss this was, “No. It’s not big enough. It’s not going to have enough market share,” and so on. With the paradigm shift of the administration and with more legitimate scrutiny over these deals, what I’ve learned in real time is that there are anticompetitive aspects of these deals even if it’s not total a monopsony or monopoly issue, there still can be other issues whether it’s the Clayton Act or whether it’s tamping down production that at least, at the very least deserve more inquiry.
And yes, with this deal in particular, I can’t posit to the specifics because there was no announcement of what they intended to do with the assets. There was the opposite. They announced, “No we were never going to do this.” From a sheer market share perspective, I don’t think it would rise to that level just due to what you said—the disparate geography. It’s taking a Permian exposed operator and a Marcellus/Utica exposed operator.
TEDDY DOWNEY: Right, that was my question.
DANIEL SHERWOOD: Repsol next up. We like Repsol. Repsol is a small volume producer compared to the bigger guys like Range, but Repsol is unique because they and Equinor are the only two, to my knowledge, Europe-based operators that still have assets in the Marcellus/Utica.
We scooped that Rockdale purchase. I just wanted to give an update to our readers that they’ve integrated those assets, they’re performing well, as we wrote in the report, if Repsol wants to grow, they’re not going to be able to do it too much from their drilling locations and they’re going to need a bolt on which they’ve recently stated. They’re looking for another splash.
For any of our people who follow A&D real close in the space, feel free to reach out. We can discuss possible packages that Repsol would be interested in. They just got a pretty big infusion of capital. I think they’re going to be true to their word. Right now, in my view with lower commodity prices, if you’re willing to be exposed for the long term, this is a good time to make a deal for an entity like Repsol.
Let’s just round it out really quick with EOG. Again, we were way ahead of this. We found one of the first permits that they pulled in their exploration efforts in Ohio. We went to the county deed level to see where they were building out pipelines. They continue to drill. They’re pulling permits very regularly. A nice little hack if anyone wants to get under the backend is that they’re doing it under their subsidiary Energy Search. That would not come naturally to anyone who would want to do a further inquiry. You can see that clearly in the transfer tab of Upstream and they love their production results. EOG is going to continue to push. I have not seen the oily mix that they promised yet, but it’s a little early to say based on their preliminary drilling results.
And that rounds out our Utica/Marcellus E&P updates.
TEDDY DOWNEY: I love it. Very interesting. If anyone has any questions, you can enter them in the app hopefully easily. Please, we’re happy to take questions.
Rounding it out, I love talking about Mountain Valley Pipeline and permitting. I would love to get your update there. It sounds like there was a little bit of positive news from Fish and Wildlife Service. I also want to get a sense of if that’s enough really to change our view that it’s still a really big uphill climb or if we are still taking that view.
DANIEL SHERWOOD: Yes, it’s incredible. This is something that Teddy highlighted to me as a topic that we should make recurring, which I was reticent to do because I thought that we had covered this sufficiently with our reporting. This is something we’ve received pretty much the most interest on of all the stuff that we discuss. Good look there, Teddy and I’m happy to give an update.
Then I’m going to have a question for you that we received this week that I think you are especially equipped to answer as it relates to both antitrust as well as Administrative Law in relation to Congress.
Yes Teddy, you foretold our sentiment here; is this BiOp, this biological opinion that is, enough to really move the needle? Not really. Equitrans is still shooting for 2023. Some major analysts are still agreeing with Equitrans despite, as we’ve covered ad nauseum, EQT and others moving it out. I think Goldman moved it out.
What needs to happen? A lot. Does this change that? No. Is Equitrans still relying on some move from Congress to accelerate this process? Yes.
This is the third time that the Fish and Wildlife Service issued this document. This document has been challenged successfully in court repeatedly. In the Reuters story that covered this move, they interviewed Patrick Grenter from the Sierra Club. He’s somebody that we talk to. He said in the story, “This has been rushed.” Sierra Club and other entities have challenged this process successfully. I took that as some foreshadowing. I reached out to Patrick, and he said, “I don’t know what Equitrans knows about Congress that would make them so confident that this is going to get done.” So I think we can see some movement there. And that’s just one one of the moving parts of this process.
On the political side of things, there is some chatter. Politico had a little story—overhearing some anonymous aid, a Democrat saying, “we’re going to want to get something done. We’re going to have to take something that we don’t like, but we need something changed with NEPA to get these transmission assets moving. We might be uncomfortable with some terms about a pipeline for instance, but it might just be the reality.” The reporting didn’t go to that level of specificity but that was my read of the tealeaves, but regardless Teddy, as we’ve discussed repeatedly, that timeline – they would need to get that bill signed by Biden in the next two months for it to meet construction deadlines this summer. That’s where we are.
Teddy, the reason I wanted to ask something of you. My interpretation is that formerly influential members of Congress have less negotiating power with the Administration. I’ve been seeing, on the energy side of things the Administration acting more autonomously and acting more swiftly than they did say last year. I don’t know, maybe the Department of Transportation is a recent example in that regard. What do you see as far as those priorities, the power dynamics shifting? Do you disagree with my characterization that the Administration is leaning less on Congress?
TEDDY DOWNEY: Well, I think there is a function. Last year you had both chambers of Congress, and the President probably viewed his success more as what kind of legislation can we get done and wanting to build a legacy around that. Now it’s like, alright, my legacy is actually going to be almost certainly for the next two years administrative efforts. You’re seeing a lot more of that.
Obviously, we follow the executive order on competition. The White House has been very successful at getting additional cabinet members and decisionmakers in the Administration to act on that as you mentioned. From my perspective, DOT has gotten involved. There was some action out of the USDA on “Made in the USA” partnerships between the CFPB and the Department of Labor.
There is just a lot of activity. We’re certainly going to see that. That doesn’t mean that legislation won’t get done, but certainly you’re going to see a lot more activity out of the Administration. I think they probably have a little bit more urgency, a little bit more effort there because they view their legacy now as being about that more so than what kind of legislation they can get done.
I do have one question for you. One thing we’ve always been looking at on Equitrans and Mountain Valley Pipeline is even if they do get legislation, do you think it would be able to solve everything? It would speed things up maybe a little bit. I know we’ve talked about the devil in the details. Maybe they’ll get votes for something, but the votes for everything they would need to button this up so that it could get done quickly seems like a much higher bar. That, to me, seems unachievable versus maybe they could get something that’s helpful, but not fully what they need. Is that a fair way to characterize it?
DANIEL SHERWOOD: Yes, in my view, that dovetails with what you’re saying and is consistent with how I’m reading the Hill right now. It shouldn’t come as a surprise to anyone because of the dynamic of what happened in Congress as far as the Republicans taking the House as well as it being the last two years for the President’s term. You get your legislation done when you can and then you act on the legislation.
I think in that same sense, the talk last year was Manchin being able to bypass Fourth Circuit review of Mountain Valley Pipeline. Would that have a material impact on the company? Absolutely! If that legislation came out the door in the next month, then Equitrans looks like maybe it could happen this year.
To our point, there is not that political energy and there is no way – sure Biden promised Manchin that he was going to do that to get IRA out, but the IRA is out. There is not the political will on the Democrat’s side to be in support of this pipeline and to be in support of venue shifting. What kind of federal government is going to allow the court system to bypass a federal statue? How likely is that to happen?
TEDDY DOWNEY: I think it’s plausible that something could get done as a rider, like you said, in exchange for something on one of these budget bills at some point if those get riders. A lot of times, those riders fall off at the end. I just don’t see it being the sort of panacea that the Mountain Valley Pipeline would need to get everything they want to really accelerate things. Just the number of problems that it has run into. We’ve been covering this for so long. Go back all the way to the erosion issues. There are just a number of problems both logistical and legal. People tend to underestimate them and I just think you can’t solve all that will a bill and you certainly can’t solve all that with a bill with a Democratic Senate that doesn’t want to do it.
The last thing I would say about Manchin is my take on him is that it’s getting a little desperate the way that he’s trying to hold on to power. You don’t really say, “I won’t rule out running for President.” That is just so – first of all, it’s not going to work, but second of all, it’s not a position of strength. If Manchin is holding onto influence by threatening to run for President –
DANIEL SHERWOOD: It’s so strange.
TEDDY DOWNEY: It’s not a good indicator for the chances of this legislation.
DANIEL SHERWOOD: Why do you think Biden hasn’t announced that he’s going to officially run yet?
TEDDY DOWNEY: They have to get all their ducks in a row, getting the rollout announcement. I’m sure they have some kind of plan on when they’re going to announce. They have given way more than enough indicators that he’s going to run. I think it’s just a matter of when they feel that it will have the maximum impact. I don’t know the exact reason. It should happen pretty soon I would imagine.
Look, we covered a lot of ground as always. Very interesting stuff, particularly about Range Resources and deals and Repsol. I love to think about what deals are on the horizon and again, from my standpoint, I like to think about the antitrust issues when we get those.
The last thing I would say about Section 8 enforcement – another feather in the cap for Capitol Forum. The DOJ did another round of announcements about overlapping directors and Section 8. Straight out of one of our articles when we said that Atlas Air was getting acquired by Apollo and they had some overlapping directors, not even the same one. People at the same company were overlapping. They voluntarily withdrew.
To your point, just to your point, there are so many more things to look at in terms of what is antitrust risk especially in these industries that aren’t used to it and they just have so many interconnecting relationships over the years. I think looking at Upstream, you can see all the different companies and how they’re bought and sold and bought and sold. Just by the nature of how the industry works, you end up with these overlapping directors. I just wanted to mention that before we head out. We wrote a big report about that as an issue and it turned out again just like with EQT that the antitrust agencies were interested and it caused a reaction.
Any final thoughts, Daniel before we conclude the call?
DANIEL SHERWOOD: No, I appreciate it. This was fun. Thank you for our team to facilitate this new medium. I hope for our audience it was more engaging. We’re always open for feedback. Just trying to keep everybody informed and on the cutting edge.
TEDDY DOWNEY: Thanks everyone for joining the call today. This concludes the call.