The five most interesting things from 4Q earnings season
Why Houston is like Los Angeles, why I don't see $0.20 in marketing for Expand, the coming Ohio gas shortfall, and more
Everything in global oil and gas markets changed with the February 28 onset of the war in Iran, including that levered LNG bets that looked suspect now seem more likely to pay off. As a result, earnings season feels like months ago, even though the last companies were reporting until just a couple of weeks ago.
And this earnings season highlighted a maturing industry: consolidating into a single hub, bearing more fixed costs to reduce risk, and closing the door on projects that are no longer viable. It’s also one still prone to provocative — perhaps outlandish — goals and regional price dislocations.
No one wants to hire an oil and gas executive outside Houston
The consolidation of the US oil and gas industry into Houston-based companies dates back decades, but after supermajors ExxonMobil and Chevron moved their headquarters to Houston in 2023 and 2024, respectively, the trend is only accelerating. This earnings season, Devon announced its acquisition of Coterra and concomitant move to Houston, and a week later, Expand announced its own move to Houston.1
In regional-economy terms, Houston is becoming much more like Los Angeles than it is Dallas or Chicago or Atlanta. Which is to say, Houston absolutely attracts a disproportionate share of the top 1% US oil and gas industry talent, just as Los Angeles does in the entertainment industry. For a market leader like Diamondback, with a strong executive team in place, there’s no urgent need to move. But for smaller companies trying to make the leap to big-time, they have a better chance of making the key hires to do that in the place those people disproportionately live. I expect continued relocation — whether organically or inorganically — of public E&Ps headquartered in Denver, Midland, or Oklahoma City.
LNG projects are being canceled instead of remaining on life support
After Energy Transfer officially suspended development of its Lake Charles LNG facility in December, Sempra announced this earnings season that it had terminated the development agreement for Vista Pacifico LNG. Many proposed US LNG projects are going nowhere but have not yet been formally canceled. These two cases are interesting because the developers opted to formally pull the plug.
Perhaps the formal cancellations reflect these developers’ size and backlog depth. But usually, there’s more of an angle than that. For Energy Transfer, perhaps it’s that the economics of Lower-48 pipeline development are so much better than for US Gulf Coast liquefaction; for Sempra, perhaps about the regulatory climate for pipeline development through central Mexico.
Venture Global’s FT pivot
With its first two LNG projects, Venture Global took a minimalist approach to pipeline contracting, focusing on securing sufficient feedgas liquidity. In contrast, Cheniere contracts for pipeline capacity to multiple basins. After this strategy led to Plaquemines’ in-service bidding TGP 500L prices to as much as a $0.50/MMBtu premium to Henry Hub, Venture Global pivoted. For CP2, Venture Global is making two large investments to source Permian gas supplies:
spending more than $1 billion to develop large-scale nitrogen removal units
developing CP Express, partnering with WhiteWater to develop Blackfin, and contracting for 2 Bcfd of Permian capacity, presumably on Eiger Express
Contracting further upstream was clearly the right decision for a player of Venture Global’s size. However, Permian associated gas growth is likely to fall well short of takeaway capacity additions, narrowing Waha differentials sharply. Paying a levelized ~$1.25/MMBtu for the FT and NRU may end up much more expensive than committing to ~$1.50-1.75/MMBtu in FT to move gas from much weaker Appalachian hubs.
A $0.20/MMBtu improvement in price realizations?!
In the same press release announcing its move to Houston, Expand’s former CEO Nick Del’Osso “stepped down,” with board chairman Michael Wichterich appointed interim CEO. On Expand’s earnings call the next week, Wichterich announced a target of improving price realizations by $0.20/MMBtu. Analysts pressed for details, and Wichterich reiterated the target but offered few specifics.
Typical third-party marketing margins are a penny or two, so $0.20/MMBtu requires much more than insourcing. In a market that’s been deregulated for more than 30 years, there aren’t any free lunches — improving realizations more than a couple cents entails taking more risk, typically in the form of FT commitments or reduced hedging.
EQT’s approach was to own its wellhead gathering. This lets EQT shut in without the burden of fixed gathering commitments, and therefore hedge less, avoiding the vig paid to market-makers. But with Transco alone likely worth more than Expand, Expand can’t run the EQT play.2
Bigger picture, I don’t buy the construct of improving realizations by $X/MMBtu, regardless of what X is. On EQT’s earnings call, the company detailed its strategic decision to sell all of its February volumes at bidweek rather than take exposure into the month, based on its view that fundamentals did not support such strong futures prices. But EQT rightly did not extend this thinking to a promise of continued outsize realizations. Expand’s goal may be a headwind as it tries to staff up its marketing team, and the company probably needs to walk it back.
The coming Ohio gas shortfall
I previously wrote about the specific connectivity deficiencies that constrain various western Appalachia takeaway utilization, leaving ~900 MMcfd of spare capacity in aggregate. But across all four pipelines, the overarching issue is that the Utica in Ohio, and to a lesser extent the rich-gas Marcellus, are short inventory relative to the dry-gas Marcellus further east.
Against that backdrop, this earnings season suggests the situation is likely to get worse before it gets better: TC Energy announced that its Columbus Area Project and Crossroads expansion could each add 1.5 Bcfd, while Williams upsized its planned Ohio power projects. I’ll dive into the details in a future post, but the pre-2019 TCO Pool dislocation from other Appalachian hubs looks set to return.
Here I’m going to be that Heights person and say that actually, Expand moved its headquarters to Spring, as did ExxonMobil
A possibility I’ve spitballed is whether the most sensible outcome for shareholders would be for Williams to buy Expand and then spin out its transmission business