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arjun murti

3 Apr, 8 tweets, 2 min read

https://twitter.com/ArjunNMurti/status/1375814587573018626

1 of 8/ ROCE and the Path Back for Old Energy, Part 3

An Easter weekend continuation of my Saturday thread series on the potential for improved ROCE from Old Energy. I focus on what is possible for the well-run…not what we all already know is bad about the laggards.

https://twitter.com/ArjunNMurti/status/1375814587573018626

2/ In the pre-super cycle decade of 1991-2000, 16 companies generated 10%+ ROCE, including 13 integrateds (BP, AN, ARC, CHV ,TX, XON, MOB, MRO, OXY, P, REP, STO, TOT), 2 E&Ps (EOG, SU), and 1 service (SLB). The Sweet 16 averaged a 17% ROCE. Legacy tickers used, in memorium.

3/ Of the pre-super cycle good ROCE-ers, 11 generated positive operating free cash flow (cash flow from ops less CAPEX). The 5 that didn’t — OXY, P, STO, EOG, and SU — were near break-even. Those 5 show that while positive FCF is helpful, it is not a prerequisite to good ROCE.

4/ In the post-super cycle decade of 2010-2019, 11 companies generated ROCE of 10%+, including 5 integrated oils (CVX, XOM, RDS, EQNR, TOT), 2 E&Ps (CLR, 1 other), and 4 refiners (HFC, MPC, PSX, VLO). The average of these 11 was a 13% ROCE.

5/ In the post super cycle period, all companies had positive operating free cash flow, with the notable exception of CLR which was negative. To be sure, I never directly covered CLR and did not appreciate they would be in the good ROCE bucket.

6/ 2020 was a terrible year for Old Energy. The hurdle for “good” ROCE in a deep trough is a number over 0%. While I still need to better scrub year-end disclosures, preliminarily it appears only COG didn’t lose money among Old Energy companies I track.

7/ In my view, the double dip nature of a 2nd extreme trough within 5 years (2016, 2020) is skewing market psychology to the idea that Old Energy “never” generates good ROCE unless oil prices are very high. This is historically false.

8 LAST/ I have no idea if an oil px super cycle is coming (I lean towards “not yet”). But I do think ROCE hit a generational trough in 2020 for Old Energy. The majority should see big improvement in the coming 5 years. The top quartile I think can be among the market leaders.

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More from @ArjunNMurti

arjun murti

@ArjunNMurti

20 Mar

1 of 10/ ROCE vs Well IRRs and the Path Back for Old Energy

Since the shale revolution, there is a massive disconnect between promised well-level IRRs and actual, corporate-level returns on capital employed (ROCE) for the oil industry.

2/ Oil producers promised 30%-50%+ well IRRs at seemingly conservative oil prices (<$50/bbl). Over the previous 5 and 10 years, WTI averaged $51 and $68/bbl. Corresponding median ROCE for Old Energy averaged +0.6% and 3.9%. What the heck!?!

3/ Why the crazy big gap? It appears that numerous ongoing costs were not reconciled including for acreage, infrastructure, less successful drilling, DUC builds, etc. Why ignore so many costs? I have no explanation.

Read 10 tweets

arjun murti

@ArjunNMurti

13 Mar

1 of 15/ Bubble psychology from the perspective of a retired stock analyst

When you first make a big call as an analyst, the doubters come out en masse as you are going against the overwhelming consensus. Initially, you are way right and everyone else is wrong. Then it switches.

2/ In 2004, we first published our call that oil could rise to a sustained $50-$80 range, a time everyone KNEW oil would never stay over $25. Many thought oil would only reach $50 if Saudi collapsed, after which the world economy would sink. Oil blew through $50 without calamity.

3/ In 2004, everyone had a 1970s mindset on what would cause oil to spike and and a ‘90s mindset on what would follow. Recency bias, anchoring, and a bunch of related terms were operating in full force. The market was willing to assume away an entire structural move. Bad idea.

Read 15 tweets

arjun murti

@ArjunNMurti

7 Mar

1/ Observations of a retired stock analyst.

As someone who called a then coming super-spike era for oil markets in 2004, but failed to get off in 2008 until well into the downturn, the current innovation/Bubble stock gurus seem to be making many of the same mistakes I made.

2/ The idea that your favorite innovation/Bubble stock never discounted 0-1% Treasuries is as dumb as when I said oil equities weren’t discounting $140 and “only” $90-$100/bbl (or something like that). The market is almost certainly discounting better conditions than you realize.

3/ The idea that we were using “conservative” normalized assumptions for oil equities I sincerely thought was true. However, it didn’t matter. When you are toward the end of massive bull market, no one else is using conservative assumptions.

Read 8 tweets

arjun murti

@ArjunNMurti

5 Mar

1 of6/ Energy S&P 500 weight and the path back to respectability.

For most of my 30 year career, Energy has been 8%-15% of the SPX. This cycle it troughed below 2%, less than Utilities or Materials, rendering Old Energy irrelevant for generalist PMs.

2/ With the sharp recovery from pre-vaccine lows last October, Energy is now back through 3% and above Utes and Materials. Unlike the latter 2 sectors, Energy has a history of a much more sizable SPX weight.

3/ As Old Energy recovers, I don’t think it can or will remain ignored. In the same way we had a massive fundamental and momentum overshoot on the downside, structurally better ROCE can combine with renewed interest to take it back up.

Read 6 tweets

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