C.O.B. Tuesday Veriten

For today’s discussion we were pleased to host Jim Matheson, CEO of the National Rural Electric Cooperative Association (NRECA). Jim’s distinguished background includes roles in both the public and private sectors. Prior to joining the NRECA in 2016, he served in the public policy practice at Squire Patton Boggs based in Washington, D.C. Jim was elected as a U.S. Representative for Utah from 2001 to 2015 and has significant experience in the energy industry. The NRECA is a vital national service organization representing over 900 consumer-owned electric cooperatives, collectively serving 42 million people across 48 states in the US. We were excited to visit with Jim and gain valuable insights into the cooperative landscape.
 
Jim first provides background on the unique structure of electric cooperatives, how they are owned by the members they serve, and focus on consumer interest rather than shareholder interests (a detailed overview of US electric co-ops is linked here). We explore how electric co-ops approach decision making regarding power systems to balance cost, reliability, and emissions reduction, the evolving generation mix, the shrinking margin of error in meeting peak demand and the increasing risk of outages, and the US’s struggle to keep up with building new power plants while also shutting down existing ones prematurely. Jim shares his perspective on the need for increased resiliency in the electric grid, particularly through the expansion of transmission infrastructure, and concerns with the feasibility and economic impact of recent EPA regulations targeting emissions reduction from coal and natural gas plants (details linked here). We discuss potential bipartisan efforts to revise permitting and streamline processes, growing awareness among the public on power issues, election year dynamics, the benefits of natural gas as a fuel source for electricity generation, the need for continued vigilance around cybersecurity measures in the electricity sector, the possibility of bipartisan efforts to prioritize energy security and reliability, and more. We greatly appreciate the work Jim and the team at NRECA are doing.
 
Mike Bradley kicked us off by highlighting that markets have been choppy this past week but managed to get by with modest gains. The 10-year bond yield has plunged to ~4.45%, down from ~4.7%, just one week ago. Bond yields dropped despite the FOMC leaving interest rates unchanged, mostly because Chairman Powell signaled the next rate move would likely not be a rate hike. WTI price this past week had collapsed ~5/bbl due to a large increase in US crude oil inventories, less concern over Mideast chaos, and WTI trading through important technical trading levels. Crude oil traders seem to firmly believe that OPEC will not announce they’re putting barrels back into the market at their June 1st meeting, especially at sub-~80/bbl. Natural gas is trading at its highest level since early January, mostly due to the monthly futures contract roll. The US natural gas storage surplus is still high, but lower 48 natural gas production is falling faster than expected and recently averaged less than 99bcfd. Most S&P companies have reported Q1 results, and so broader markets will need to look elsewhere for direction. Broader markets have rallied recently as they’re less worried today about higher interest rates and higher commodity prices. He further noted that broader markets recently have had a nice bounce because they were technically oversold, and volatility had spiked but are now moving towards overbought territory again. He ended by flagging most energy companies have reported Q1 results and this week will be a heavy dose of SMID-cap E&Ps, Global Oil Majors

Today we had the pleasure of hosting David Holt, President of the Consumer Energy Alliance (CEA), for an important discussion on electricity affordability and reliability for consumers. David’s background is in government affairs with over thirty years of experience working for state and federal agencies and directing outreach and advocacy efforts. The CEA will be celebrating its 20th anniversary in 2025 and has nearly 400 corporate members and over 550,000 individual members representing families, farmers, small businesses, distributors, labor organizations, manufacturers, and energy providers. Beyond his leadership at the CEA, David also serves as Managing Partner of HBW Resources, a consultancy specializing in strategic planning and government affairs in the energy, transportation, and environmental sectors. We were thrilled to have the opportunity to visit with David.
 
In our conversation, David first provides background on the CEA and the groups they represent as well as their “all of the above” approach to meeting energy needs in an affordable, reliable, and sustainable manner. David shares his perspective on the impact of energy policies on prices, concerns with reliability, how energy policy has become overly politicized with a focus on environmental aspects at the expense of affordability and reliability, the role of inflation in the current energy landscape, and the need for increased investment in natural gas infrastructure. We discuss permitting and signaling issues, regulatory framework and regional differences between oil and gas and the electricity sector, factors contributing to the increase in electricity prices, identifying reliable sources of information for understanding energy costs, policy implications, and environmental impacts, and strategies for educating and mobilizing consumers to advocate for their interests in energy policy decisions. We explore voter influence on policy, the role of US oil and natural gas production in moderating global oil prices, the future of the CEA, the challenges of getting the public’s attention on energy and power issues, the CEA’s reaction to recent policies including the IRA, and more. David was a fantastic guest and we greatly enjoyed the conversation.
 
Mike Bradley highlighted a few topics to kick us off. He noted the 10-year government bond yield looks to have found some temporary support at 4.65% and flagged that this could be an unusually volatile trading week for markets (especially bonds) given that both the JOLTS Job Openings Report and FOMC Rate Decision will be taking place on Wednesday. WTI (~$82/bbl) has pulled back recently on the news of a temporary cooling in Mideast tension; nevertheless, he noted that the 2024 crude oil S/D setup still looks very constructive. Q1 earnings for the Magnificent Seven tech stocks will be winding up this week and investor focus will begin shifting to the other 60% of the S&P 500 for near-term direction. On the energy equity front, over seventy energy and electric utility companies will be reporting Q1 results this week with a heavy focus on E&P, Midstream & Electric Utility companies. He ended by flagging that electricity growth will be a more widely discussed topic/theme across most of the reporting energy and electric companies, just as it has been for industrial companies so far in the Q1 reporting season. Todd Scruggs prepped us for our discussion with David by sharing data on electricity costs across the United States. Comparing recent data from February and last summer, he found that California and Northeastern states consistently pay the most, while the West South-Central region pays the least, even during peak summer months.
 
We look forward to following the CEA’s progress and will be sure to share their state electricity scorecards when they’re launched. Thank you again to David for joining and thanks to you all for your support and friendship!

Today we had the pleasure of hosting David Sacks, Fellow for Asia Studies at the Council on Foreign Relations (CFR), for a comprehensive discussion on China and the intricate dynamics of US-China, US-Taiwan, and cross-Strait relations. Prior to joining the CFR in 2017, David served at the American Institute in Taiwan focused on political military affairs. David’s research spans Asia, China, Taiwan, defense and security, as well as political history and theory including the political thought of Hans Morgenthau. The CFR is an independent think-tank and publisher committed to providing insights into global affairs and serves as a resource for its members and the broader public in navigating the complexities of international relations. We have been interested for quite some time in finding an expert on China and were thrilled to visit with David.
 
In our conversation, David first shares background on China’s evolving role globally and the changing dynamics of US-China relations, the security-related and economic implications of conflict between China and Taiwan, the challenges in managing tensions in the Taiwan Strait, escalating tensions in the South China Sea, US-China rivalry in the region and its effects on maritime activity, and China’s assertive foreign policy under Xi Jinping’s leadership and its implications for global power dynamics. David shares his perspective on similarities and differences between the Trump and Biden Administrations’ approaches to China, the feasibility and implications of decoupling from China economically and the interdependence between the US and China in the global economy, the potential for future leadership changes in China, and how other countries are responding to China’s assertiveness including how European perceptions and policies towards China have evolved. We explore China’s economic and demographic outlook and the country’s overall strengths and weaknesses, potential implications if China were to become weaker in the next 10-20 years, the potential export of low-cost EVs from China, trust issues in US-China relations, Taiwan’s perspective and defense strategies, the CFR’s role in international diplomacy, and much more. Thank you, David, for sharing your insights with us all! We learned a tremendous amount and could have gone another hour we were so intrigued with the conversation.
 
Mike Bradley kicked us off with a few updates. He noted the 10-year government bond yield looks to have found some temporary support at ~4.6% but will likely move on Friday’s PCE deflator report. WTI (~$83/bbl) pulled back this past week on what looks to be temporary cooling in Mideast tension. Oil trader sentiment seems to have shifted to one that could be underestimating future geopolitical risks, which could send oil prices materially higher, and force OPEC to push barrels back into the market. Q4 earnings are kicking into high gear with ~35% of S&P 500 companies reporting this week, which should result in elevated broader market trading volatility. S&P 500 relative strength has recently reversed from overbought to oversold levels, and S&P 500 volatility has also spiked to 1-year highs. On the energy equity front, he highlighted that Q1 results are also beginning to kick into high gear with a barrage of results from E&Ps, Oil Majors, Oil Services & Refiners. Electric Utilities were by far the best performing S&P sector last week and there will be many companies reporting this week. He ended by discussing YTD Asian equity market performance, noting that Japan and Taiwan are the top two regional equity market performers. Arjun Murti discussed the concept of geopolitical risk premiums in oil prices, noting three key factors: structural changes in major producers, civil strife causing production fluctuations and difficult forecasting, and the impact of war. Sharing examples for each element, he noted the complex nature of geopolitical risk and its influence on s

Today we were delighted to host Matt Parker, Managing Director and Head of Strategy, alongside Alex Melvin, Commodity Risk Analyst, with Mobius Risk Group for an extensive discussion on commodity and power markets, as well as volatility and risk management in particular. Matt joined Mobius in 2018 and oversees fundamental analytics, decision strategies, financial trading, and physical marketing teams. Alex is the author of Mobius’ Intel Briefs and Energy Shots research and brings prior experience in data analysis and technical writing. Mobius Risk Group is a risk advisory firm offering market guidance to producers, consumers, and capital market participants, influencing transactions totaling over $100B across more than 50 commodities annually. We were thrilled to visit with Matt and Alex.
 
The catalyst to our discussion stems from a report Mobius recently released titled “Eclipse Power Prices Hit $471/MWh: Tracking the Texas grid during the 2024 Total Solar Eclipse” (linked here). Matt and Alex first share background on the Mobius team and their research, natural gas market volatility and its impact on hedging strategies for producers and consumers, and the role of speculators in commodity markets and the influence on pricing dynamics. We explore factors influencing the growth of LNG markets and its implications for energy markets, the challenges and opportunities in renewable energy variability and its impact on grid stability, and regional energy market dynamics, including the reluctance to build pipelines and storage facilities on the West and East Coasts of the US. We discuss key themes from the Eclipse report including the inspiration behind writing the report, storage dynamics and the impact of gas prices on production, the potential shift towards LNG as a solution to market imbalances, the effectiveness of market mechanisms versus centralized control in addressing energy challenges, how consumers are adapting to increased volatility in gas prices, efforts by gas producers to manage volatility in prices and production decisions, the potential for increased gas exports to Mexico, risk management strategy differences between public and private companies, and much more. Thanks to Matt and Alex for joining us today!

Mike Bradley started the show by highlighting this week’s spike in the 10-year government bond yield to ~4.65%, mostly due to a hot Retail Sales report on Monday. He noted the next big economic report will be Initial Jobless Claims on Thursday, and if that report prints hotter than expected, odds for a rate cut (anytime soon) would appear very low. On the commodity front, Brent (~$90/bbl) & WTI (~$85/bbl) prices barely budged on the recent Iranian/Israeli conflict, mostly because it was pretty well announced, and to a certain degree already dialed into oil prices. A 2H’24 global oil S/D deficit could position OPEC to begin adding back barrels into the market, potentially as early as June. On the broader equity market front, equities continue to take their cue from interest rate volatility, potential additional Mideast conflict, and Q1 EPS results. Q1 earnings season has begun (with mixed results) and it’s important, given lofty valuations, that S&P companies deliver solid Q1 results and guidance. He ended by flagging that Q1 energy results begin this week with Kinder Morgan and Liberty Energy reporting on Wednesday and SLB on Friday. Liberty Energy should provide investors with an early glimpse of U.S. pressure pumping dynamics while the SLB call should be predominately focused on international and offshore growth. Todd Scruggs emphasized recent analysis from Mobius regarding global coal generation, particularly in China, India, and Indonesia, and compared it to renewable energy development in the US. Globally, approximately 50 GW of coal capacity was added, while the US saw an addition of around 30

Today we were thrilled to be joined by Maya MacGuineas, President of the Committee for a Responsible Federal Budget (CRFB), to discuss a critical yet often ignored topic: the US national debt and budget deficits. Prior to her tenure at the CRFB starting in 2004, Maya served at the Brookings Institution and on Wall Street. Maya is a native Washingtonian, Harvard Kennedy School alumni, and frequently testifies before Congress as a leading budget expert. Founded in 1981, the CRFB is a bipartisan nonprofit dedicated to educating the public on issues with significant fiscal policy impact. The organization offers independent policy analysis, engages with policymakers to improve the country’s fiscal and economic condition, and serves as an educational resource. At over 100% of GDP and in the range of the all-time high last seen during World War 2, the US national debt looms large as a significant macroeconomic and overall risk factor to the nation and the world. We were so excited to hear Maya’s insights on this very important and very complex subject.
 
In our conversation, Maya shares historical context on past efforts to address fiscal issues and how interest in fiscal policy has fluctuated (from Ross Perot to Simpson-Bowles to today), the current economic situation, the impact of recent events like COVID-19 on government borrowing and spending, how the increase in interest rates has highlighted the structural nature of the problem and gained the public’s attention, and the current polarizing political environment and how it has halted efforts to address fiscal challenges. We discuss the responsibility of political leaders to acknowledge and address long-term budget concerns, challenges with addressing entitlement programs including Social Security and Medicaid, political leaders’ refusal to address issues that are headed towards trust fund insolvency, proposed solutions including establishing a fiscal commission to tackle the issue comprehensively, the idea of inflating away the debt or selling assets to reduce the debt, major threats posed by the growing national debt including loss of fiscal space, economic slowdown, national security risks and intergenerational inequity, and much more. We covered a great deal of territory and can’t thank Maya enough for joining. As you will hear, we offered to help Maya in any way we can, including helping her salute the “fiscal heroes” who are leaning in and trying to make a difference. 
 
Mike Bradley kicked us off by flagging that this is an extremely important week for markets given both the March CPI and PPI will be released on Wednesday and Thursday respectively, and that if these stats print hotter-than-expected, the FED will not be cutting rates anytime soon. He noted markets may be underestimating inflation given sharp YTD gains in a variety of commodities. On the commodity front, WTI is trading at ~$86/bbl (highest level since Oct’23), WTI time spreads continue to trade in huge backwardation and the 2H’24 oil S/D deficit positions OPEC to push barrels back into the market. He noted that even though we remain pretty constructive with the 2H’24 crude oil setup, we’re a bit concerned the recent crude oil bullishness is becoming too consensus. On the broader equity market front, equities continue to take their cue from both interest rates and an obsession with AI equities. If CPI and PPI readings print cooler-than-expected, it will result in a huge bond and broader equity market rally. This Friday will also be a heavy Q4 reporting week for U.S. major banks. He ended by highlighting that Exxon Mobil Corp. recently hit an all-time stock price high and that its market-cap and enterprise values (~$500B) finally rebounded back to their late-2007 levels. In late 2007, energy’s weighting as a percentage of the S&P 500 was ~13% (peaked at ~16% in mid-2008) and today is at ~4%, leaving the energy sector plenty more room to run in the years ahead. Arjun Murti dis

Today we had the pleasure of hosting our good friend Derek Podhaizer, Vice President of Equity Research at Barclays. Derek started his research career at the firm in 2014 and leads coverage of U.S. Onshore Energy Services and Geothermal. Given the recent flurry of activity within the services sector, including Tuesday’s SLB-ChampionX announcement (linked here), it was fantastic to hear Derek’s observations on the space including overall investor sentiment, emerging trends in services and geothermal, and investor perception and feedback.
 
In our conversation with Derek, we discuss the significant changes in energy services over the past decade, transitioning from a boom-and-bust cycle to a focus on capital discipline and shareholder returns, M&A themes driving consolidation in the oilfield services sector, primarily driven by supply rationalization and synergistic services, and the importance of cultural integration in M&A transactions. Derek shares current trends including emerging and growing power solutions businesses, growing interest in geothermal energy among oilfield service companies, the potential for a divergent market in companies providing integrated solutions compared to others, and how total cost of ownership and efficiency drives investor confidence and differentiation among service providers. We discuss long-term value creation in energy services, Barclay’s research department and coverage, technological advances and production efficiencies, excitement for the potential of geothermal energy to become a significant contributor to the energy mix, investor interest in geothermal, and more. We ended by asking Derek for his thoughts on the state of the energy transition discussion from his vantage point in New York. Thank you for joining, Derek!
 
Mike Bradley kicked us off by highlighting that Monday’s ISM Manufacturing report and Tuesday’s JOLTS Job Openings reports both surpassed expectations, which pushed the 10-year government bond yield to a YTD high of ~4.35%. He noted the current consensus for multiple interest rate cuts (starting in June) is getting challenged by recent strong economic prints, continued record U.S. budget deficits, strengthening energy commodities and accelerating future power demand growth. WTI is trading at ~$85/bbl, marking its highest level since October 2023 and crude oil is continuing to show signs of real physical tightness as WTI time spreads are trading at their steepest level of backwardation since June 2022. OPEC is meeting this Wednesday and most traders expect them to signal continued production constraint through Q2’24. He further noted that OPEC looks to be in full control of crude markets and that the global oil S/D setup looks very constructive heading into 2H’24, both of which should position OPEC to add barrels into an undersupplied global oil market in 2H’24. On the broader equity market front, over the last few days markets have been pressured due to an unexpected surge in interest rates. Tesla was also weighing on markets due to its disappointing Q1 deliveries and providing further proof that U.S. electric vehicle sales are facing some temporary demand headwinds. He ended by highlighting SLB’s agreement to buy ChampionX in an all-stock deal and also noted the solid YTD performance of Oil Services. Jeff Tillery noted the unique dynamics of M&A in energy services and the operational intricacies involved, segueing into our conversation with Derek.
 
It was great luck to have Derek on a day when a major transaction was announced in oilfield services. The OFS space remains super intriguing for its ability to range across classic as well as new energy technologies. We look forward to staying in touch with Derek and thank you, as always, for your friendship!