Daily Energy Standup Episode #268 – Grid Reliability Warning, India’s Oil Expansion, and Occidental’s $10.8B CrownRock Acquisition

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Major grid operator warns legal agreement to shutter coal plant will devastate electric reliability

Highlights of the Podcast

00:00 – Intro02:14 – Major grid operator warns legal agreement to shutter coal plant will devastate electric reliability06:58 – India to Boost Oil Refining Capacity by 1 Million Bpd a Year Until 202809:07 – Markets Update11:02 – Occidental to Buy Oil Driller CrownRock for $10.8 Billion16:05 – Outro

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Video Transcription edited for grammar. We disavow any errors unless they make us look better or smarter.

Michael Tanner: [00:00:14] What is going on, everybody? Welcome to another edition of the Daily Energy News Beat. Stand up here on this gorgeous who’s day December 12th, 2023. As always, I’m your humble correspondent Michael Tanner, coming to you from an undisclosed location here in Dallas, Texas, rocking a solo show tonight. So Stu has the night off. So I’m filling in so low, but we still have a great show. I mean, the big news of the day, Occidental officially officially buying a crown rock or crown quest for about $12 billion. I‘ll cover that really later. The majority of that deal in my finance segment. But to be honest, that’s the big news of the day. So I wanted to mention it upfront. First part of the show, guys. I’ll quickly cover two articles that Stu dropped on energy news today. Major Grid Operator Warns of Legal Agreement to Shutter Coal Plant Will Devastate Electric Liability. This goes right in line with a lot of the stuff. So you know, I’ve talked about grid reliability. So glad to cover that one. And then finally, India to boost oil refining capacity by 1 million barrels per day a year until 2028. Absolutely good for India, but it’s pretty incredible what they’ve pledged to do. So we’ll we’ll cover that. I then I’ll move over and again, cover the crown, the crown West Occidental, along with some other oil and gas financial information. But before we do all that, guys, remember, the news and analysis you are about to hear is brought to you by the world’s greatest website. www.energynewsbeat.com the best place for all your energy news. Stu and the team do a tremendous job of keeping that website up to speed with everything you need to know to be the tip of the spear. When it comes to the energy business, you can check out questions@EnergyNewsBeat.com A way to interact with the show. You can also hit the description below, see all the links to the articles, all the timestamps. You could jump ahead, not have to listen to me for first. Only listen to me as long as you need, which is nice. Dashboard.energynewsbeat.com. It’s kind of our data news combo. Great place to check out and see if you have any interesting information there. And with that, guys, we’re going to go ahead and kick it off. [00:02:14][119.5]

Michael Tanner: [00:02:14] So let’s start with major grid operator. Warren’s legal agreement to shutter coal plant will Devastate electric Liability. This is a really interesting, interesting article here. We have in a follow up letter obtained by Fox Business this week. PJM Interconnection, which oversees the electric supplies across the mid-Atlantic, repeatedly warned of a shutdown of the Brandon Shaw’s coal plant is warned that the shutdown of this brand will occur in the Maryland area will result in 1 million customers having, quote, degraded grid reliability, which includes the entire city of Baltimore. The plant’s operator confirmed that they are deactivating that Brandon Shaw’s coal plant in June 2025 as part of an agreement with, you guessed it, the Sierra Club. I mean, that’s the crazy part. We’ve we’re taking our grid reliability advice from the Sierra Club. This is an interesting quote from PJM President. I see you, Manitoba. As you are aware, talent is currently prevented from continuing to run without conversion beyond its stated DBA action date under a reliability must run framework to a private agreement. It entered in with you either PJM, the federally designated regional grid operator charge of maintaining grid Larry nor the state of Maryland is a party to this agreement. I mean, are you kidding me, folks? So the owners of this coal plant where they again, Texas based Talen Energy, they made a private agreement with the Sierra Club. Not not government, not the EPA, not another actual government jurisdiction, the Sierra Club. Again, the Sierra Club. He goes on to say, this situation requires immediate attention, failure to come to a resolution. This could result in the degrade grid reliability of over 1 million Maryland customers during peak hours, including the entire city of Baltimore for years and for years between the state. Blah, blah, blah, blah, blah. Point of the matter is, guys, this is what happens when you let non I would say non-experts because anyone’s an expert now and experts are always wrong. We’ve seen that time and time again. But when you let people who are so far detached from the actual ground operations to make the Sierra Club isn’t what’s going on in Maryland or Baltimore, they could care less. They’re you know, there’s they’re sitting somewhere probably in their really nice New York City penthouse conference suite that they’ve got, you know, pretending to be, you know, care about the environment. But really what they’re trying to do is to shut down an increase. The grid is reliability. It’s absolutely unbelievable. We’ve got an issue now with so much solar that we can’t get and wind that we can’t get hooked up to the grid. But now we’re shutting off coal exactly when we need it. And we can’t necessarily get the same grid reliably. It’s absolutely unbelievable. Again, I’m all for shutting down coal. It’s clear that there’s a huge amount of emissions that come from coal, natural gas. Where is the solution on how to transition this? They’re just going to shut it down. Well, Sierra Club is going to shut it down. Do you live in Bolt? It’s clear they’re not they don’t live in Maryland. It’s clear the headquarters of. The Sierra Club or not. It’s absolutely unbelievable. The letter further goes on to say that both the Sierra Club and Talon Energy should amend the agreement to allow the coal bed to continue providing power for customers and the necessary transmission projects are completed. According to the PGA prematurely closing Brandon Shores sparks the need for new infrastructure to transport electricity from other sources. But such transmission upgrades aren’t expected to be finished until 2028, three years after the plan. Brandon George goes, Well, it’s only three years, guys. You’ll survive, right? I mean, you’ll be fine. It’s EPA. Does it snow in Maryland? I don’t even know. Pride on snow. You’ll be fine. I’m actually. I’ve gone the other way on this one. Shut it down. I’m kidding. But I mean, in all reality, folks, this is, again, the problem. When you mix ideology with common sense. Obviously these people have the ideology of shot coal. Now, the problem is they’re not thinking of a second order of fact. You know, the PJM, you know, again, this is a federal grid operator. Okay. So this isn’t you know, this isn’t necessarily, you know, some, you know, crazy, you know, you know, Republican style. You know, you know, it’s not the Electric Reliability Council with yes, of course they’re going to say the grids unreliable part of their job. The interesting part of the matter is, though, is that these guys, again, are fairly nonpartisan. They just want to deliver energy to as much people as possible. It’s why we have these grid operators, these large scale grid operators. It’s pretty interesting. They operate 65, they serve 65 million customers and sell and coordinate movements of wholesale electricity in 13 states. So they know what they’re doing here and they’re not necessarily in it as much as you would think for profit, but they are for grid reliability. So just like that, we’re shipping off coal Again, not a bad thing, but we’re doing it without the idea. Thanks to the Sierra Club. Got to love it. I got to love it. [00:06:58][283.4]

Michael Tanner: [00:06:58] Let’s move on here. India to boost oil refining capacity by 1 million barrels per day a year until 2028. Absolutely unbelievable. India, who is the third largest crude oil importer, expects to raise its refining capacity by about 1.12 million barrels per day each year until 2028. This is according to India’s junior oil minister, Rameshwar Teli total Indian refining capacity expenses increased by 22% in five years from the 254 million metric tons per year, which are equal to about 5.8 million barrels per day, Delhi told lawmakers. Right now, crude processing capacity is set to grow by 56 million tonnes a year. The Government expects to boost refining capacity to meet the to be adequate to meet the country’s fuel demand in the long term. This is absolutely crazy. You know, India has been planning to increase its refining capacity for years as it’s hoping and really attempting to get rid of this idea that China is going to kind of control the next wave of refining. India’s coming in, say, no, no, no, we’re going to do it here. To give you guys an idea, two years ago, India’s state held oil refiners were planning to spend as much as 27 billion or 2 trillion Indian rupees on raising the country’s refining capacity by 20% by 2. You know, they’re one of the fastest growing economies. They’ve been buying crude oil. They’re one of the few people buying crude oil from Russia still now. So, you know, like them or hate them, India has been planning to increase its refining capacity for years as it’s hoping and really attempting to get rid of this idea that China is going to kind of control the next wave of refining. India’s coming in, say, no, no, no, we’re going to do it here. To give you guys an idea, two years ago, India’s state held oil refiners were planning to spend as much as 27 billion or 2 trillion Indian rupees on raising the country’s refining capacity by 20% by 2So you can kind of get that apples to apples comparison, which is absolutely interesting. India doing what they should do for the people. [00:09:06][128.5]

Michael Tanner: [00:09:07] But let’s move over to finance Guys know not much that really happened that we saw the S&P 500 jump about 3/10 of a percentage point. Nasdaq does the biggest move. It’s up about 8/10 of a percentage point. A ten year yields hold stand at about 44.23%, only about a quarter of a percent or only about a 5/10 of a percentage point change there. Bitcoin does drop a little bit, about six percentage points currently trading 41,208 as we record this crude oil fairly steady ish day 7141 as we record this about 545 here on the 11 are Brant oil 7660 natural gas up a little bit from it from its opening of about a little under $3 or a little below $3 and $2.30 excuse me, currently trading $2.44. I mean, investors are still, you know, fairly wary of what’s going on right now. You know, it’s pretty you know, it’s all I’ll say is this, folks, is that these oil cuts that keep coming from OPEC literally are not doing enough to offset this softer fuel demand expectation. And softer crude oversupply that we think is going to happen next year. So it’s probably somewhere around that level in terms of of where some of these things are. So absolutely interesting from a crude oil standpoint, you know, the softness we’re experiencing right now. I can’t necessarily tell you how long it’s going to continue. If it won’t continue, if, you know, keep pushing. I think the one thing that’s clear, though, is that the softness is going to continue, I think, into Christmas. And I don’t think we’re going to see you know, I don’t they were associated by year end. I think we’re going to roll into the new year somewhere around $75 on that WTI side. But what we’ll kind of have to wait and see. It’s really unfortunate what’s happened in the natural gas markets right now. I would have expected, again, a lot more strength this winter. But, you know, with considering the oversupply of natural gas that is really starting to rear its ugly head from the $9 natural gas space, I think, you know, we’re kind of paying for the sins of $9 gases, as I like to say. But I want to move I want to move over to the big deal of the day. [00:11:12][124.3]

Michael Tanner: [00:11:12] Occidental buying crown quest for $12 million or 12 or 12 million or $12 billion, 10.8 billion of that is actually assumed. The transaction price with about 1.2 billion in assumed debt. Really interesting on this one. It’s their largest purchase for Occidental since their takeover, Anadarko back in 2018, 2019. It really cements and really is the one of the one of the final. I don’t see the final, but one of the final dominoes to fall when it comes to that large Midland Basin operators. You know, this was kind of once I once pioneer yeah left left town really the only consolidated operator right there was Crown Quest or really Crown Rockets. It’s a joint venture between, you know, Crown Crown Quest operating, which is the Dunn family out there, and Midland and Lime Rock Resource Partners, which is an Absolutely absolutely. You know, we’re not sure the details on the breakdown of kind of who owns white whether you know, is it a 5050 joint venture. You know I the stuff I’ve read, it’s 6040. But to give you an idea. Crown rock there, the third largely closest held oil and gas producer in the Permian basins, they do about 170,000 BOE per day. You know, a couple interesting thing here. I think on Oxy’s side, there’s this it’s I think it’s a good deal. I don’t know. I want to hesitate to say it’s a great one of the reasons I say that is tomorrow on our deal spotlight or boldly recording this on Tuesday. We’ll we’ll see how quickly we can get this cranked out. We’re going to do our second ever deal spotlight and we’re actually going to dive into this deal and kind of give you why I think this deal is probably it’s an okay deal. I think when you’re talking about buying production, it’s not horrible. I think the issue the issue with what I see in this deal comes within the undeveloped locations. I’ll get to that. [00:12:57][105.1]

Michael Tanner: [00:12:57] But first, I think, you know, to give you an idea, Occidental’s assuming are one point billion in debt, you know, this is an interesting deal because it’s all stock you’ve got. Let me find the the actual breakdown here should be I thought it was 6 billion of of stock and then it was it’s basically in mostly an all stock deal. Let me see if I can find some of the deals up here. Not really. But let me go see if I can find it on this one here on this press release, you got 95 press releases for these things. So let’s let’s break it down here. They talk about increased cash flow. We got to love that. I’m going to tell you how they fund this thing. And one of the things we’re definitely going to get it to are we’re going to get into. Right. Here’s the deal. All right. Yeah. So $12 billion, they’re financing the purchase of nine point billion, 9.1 billion of new debt. They’re going to issue about 1.7 billion of common equity and about assume 1.2 billion of existing debt. So I lied. They’re going to pay cash for this thing, but they’re paying debt. You got to love it. Nothing like a good debt transaction for some PDP 9.1 billion and it’s a lot of parts. So don’t get me wrong. So there’s the breakdown. 9.1 billion of new debt, 1.7 billion of new equity. Think you know, the Dunn family likes that. And then they’re going to assume the 1.2 billion of debt outstanding specifically by Crown rock or Crown. Quest The thing I want to highlight here specifically is the fact that they’re they’re claiming 1700 undeveloped locations, including 1250, what they call developmental ready locations at sub 60 WTI break even. [00:14:30][92.9]

Michael Tanner: [00:14:31] Apparently they’ve got 750 locations that are sub 40 WTI break even, which apparently increases their onshore sub break even door to 25%. What they’re telling you is that 25% of their locations or undeveloped locations have less than a 25 or break even at sub 40, which seems crazy to me. That’s part of what we’re going to break down because this this deal, whether this deal is good or not, all hinges on those location because, you know, you’re only talking that the PDP is only worth about two, 3 billion. So for a $12 billion purchase price or really 10.8 billion, you’re going to have to break that down. So you do the math. It’s 4.8 million per undeveloped location now. Holy smokes. I don’t know about you, but that is going to be a very high tier to pass. Sure, if you got wells to break even at sub 40 possibility. But now you’re talking 4.8 million per location. But you don’t believe we’re going to break this deal down tomorrow? Kind of dive into probably build a few type curves, talk about what we think. You know this where this purchase price could have gone. I think it’s going to be actually a great, great piece. I’d highly recommend checking that out. It’s new series Deal Spotlight. Our first one is up right now where we do a non-op Afy over there in in the Eddy County, some big Wells Matador still in there. So we got to love that. But check us out again. You’ll be able we’ll be able to cover this on Deal Spotlight and to give you an inside baseball bowl. I think it’s a good deal. But I think, you know, I don’t think it’s going be a great deal if only because of that $4.8 million per undeveloped location. [00:16:04][93.6]

Michael Tanner: [00:16:05] Actually, all I’ve got, though, guys, appreciate you sticking with me here. Stu and I will be back in the chair tomorrow to keep you guys up to speed with everything you need to know in the energy business. But for Stuart Turley, Michael Tanner and the entire energy news beat family, we will see you tomorrow. [00:16:05][0.0][947.4]

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