22 of my favorite children from 2022 (that's a lot of kids)

Happy New Year everyone. I thought we should send this year off with a bang by just recapping some of my favorite charts from 2022.

It’s like trying to answer the question, “which one of your kids is your favorite?”

That being said, just like I tell my real kids, “I love you all just in different ways.”

First up is my roadmap of the cycles.

If you have been with me for awhile you have seen this one. The columns are the 6 cycles and the rows are the stages.

History repeats in Hydrocarbons.

#1 - The Cycles

This is one of the top 3 charts I watch as to when the commodity/energy cycle will peak - oil divided by stocks.

#2 - Crude Assets divided by Paper Assets - Oil/Stocks.

These cycles can be violent and often end in war. Also note from the chart that all commodities move in unison. IMO this is why over the long run the “transition” to make EVs which pulls up the price of base metals also pulls up the price of hydrocarbons. Call it commodity arbitrage.

#3 - The Geopolitics of Commodities (and Crude)

I put this one on twitter a couple days ago and got some great feedback. At the end of the day even barrel counters are just Fed watchers as well. My Global Liquidity Indicator (GLI) has been adjusted to now include China’s Total Social Financing, much of which is shadow banking. Note in the bottom right that Global Liquidity could be bottoming here.

#4 - Central Banks and Oil - Are we all just a bunch of Fed watchers?

This one just takes the above chart and de-trends the GLI - it lines up well with y/y oil price.

#5 is one of my favorite charts of not just 2022 but all time. In 2023 I am going to add natural gas to this chart. Gotta gather the data. Note the way oil intensity in the U.S. has declined steadily since the 1973 oil shock. Nothing regulates like price.

#5 - Oil Demand per capita

This next one took a lot of digging through a ton of annual reports but you can see just how big, Big Oil once was. At their height in the post WW2 era these companies were responsible for over 55% of global oil production.

It’s not shown in the chart but during that time period (1950s to pre-1973/74 crisis) there was no volatility in oil prices with steadily declining prices year after year when adjusted for inflation. History shows that monopolies in Big Oil are to the advantage of the consumer. Just saying.

#6 - Supermajors Oil Production History

But since the nationalization wave of the 1970s all the growth (excluding National Oil Companies) has come from the smaller E&P sector.

#7 - All the incremental growth in supply has come from E&Ps

The average return on capital in this industry is about 10%. But the average is also meaningless - it’s something you pass through when going from one extreme to the other. In 2020 we bounced off the lowest ROCE in history. 2021 was right on the long term average. Gonna be cool to update this for 2022 numbers.

#8 - Oil & Gas Industry Returns on Capital Employed Cycles

ROE can be taken back a bit further because I am able to gather more components of the calculation. I love this chart because it also includes some of the Standard Oil years. If you really look at the chart, ROE tends to peak just ahead of oil prices.

#9 - Oil & Gas Industry Returns on Equity Cycles

Onto some capex charts. Below we have capex growth with a 5-yr smooth effect for the E&Ps and Supermajors - all acquired companies included. The world has woken up to the fact that capex is at an all time low - to the point that it is starting to become consensus.

The last data point is updated through 3Q22 and it is the first time since 2015 that the line is positive. This is mostly because of the basing effect and dropping some of the bad years (2016 & 2017). But still, it is a turn. Something to keep an eye on.

#10 - Capex Cycles - 5 yr moving average

Looking at it a different way is Capex/DD&A. If you are not familiar with the ratio think of it as spending for new assets relative to using up of old assets. This chart shows you how much more of risk takers the E&Ps are hence the earlier chart of why they have been all of incremental supply side growth outside of the NOCs.

For the first time in history, replacement rates have been sustainably below 1x. This is a big reason why there has been zero supply side response and wont be one for the next several years.

Also, if you wanted to form a long term bullish view on some oilfield service names this is the chart.

#11 - Capex Replacement Rates

Sticking with the capex theme, here is upstream only capex vs. oil prices since 1948. At these prices the industry is usually spending more than double what it is. Something I want to do in 2023 is add buyback and dividends to the chart - I bet that would close the gap between the bars and the line.

#12 - Upstream Capex vs. the Cash Crop of Crude Oil

In 2022, I did a mini series on Finding & Development costs for the Supermajors (HERE) and oil E&Ps (HERE).

In January I have a post that will aggregate all of them plus the gassy E&Ps to derive F&D costs for the industry but in the interim here is a preview.

Supermajors organic F&D are higher than the others. Oily E&Ps are lower - their issue is just land acquisition costs. And gas is the cheapest of them all. The problem with gas is not F&D costs but rather transportation and pipelines in getting it to market.

#13 - What it costs to get some hydrocarbons - Organic Finding & Development Costs

Wrapping up the capex theme is a chart of upstream capex vs. oilfield service revenues for the big 3.

#14 - Upstream Capex & The Big 3 in Oilfield Service

Moving onto some equity charts. This one took me 2 years to build and I introduced it earlier this year (HERE). I went back and gathered all the share price history for the major oil and OFS companies because (1) most services (ie Bloomberg, FactSet, etc) only go back to the late 1970s if you are lucky (2) the one or two O&G indices out there could not tell me what the constituents are. So I made my own. It is the only one of its kind. I love this chart.

#15 - Crude Chronicles Energy Index - From Standard Oil to Now

Energy earnings vs. multiples - Multiples don’t expand during an up-cycle, they compress to single digits. They are doing so yet again. Equity performance is driven by ever acceleration in earnings - The anti-thesis of growth stocks.

#16 - Crude Chronicles Energy Index EPS & P/E over the years.

I like applying a Shiller P/E or Cyclically Adjusted P/E to my index to get a smoothed view. On this view, energy got down to it’s lowest valuation vs. the market in over 100 years of history but closed the gap in 2022.

#17 - Cyclically Adjusted P/E of S&P and Energy

The awesome research team over at Goldman Sachs has a great chart on energy earnings as a % of S&P 500 and how it lines up with energy’s weighting in the S&P. Their chart goes back to the late 1970s. I have tried to recreate the same chart but I can’t get the S&P constituents by year. I called S&P but they charge a pretty penny for that data. So I created this chart which is the next best thing. And just like the team at GS says, energy punches its weight in the market.

#18 - CCEI Relative Earnings and Performance

Why do I pay attention to returns on capital? It drives relative performance for the equities. Here are just a couple charts for XOM 0.00%↑ CVX 0.00%↑ and COP 0.00%↑ that have shown this to stand the test of time.

#19 - King ROCE rules all.

You can’t talk energy without talking politics. I debuted this table in the lead up to midterms in the U.S. Did you know that after adjusting for inflation the current Congress and Administration has been the best thing for equity investors going back over 100 years! Will be sad to see the combo go. Do politicians drive energy performance? No but it is in the backdrop. When you get a sec, go down the list and check out when you have blue in the WH and Congress - There has never been negative performance….Never.

#20 - Energy Stocks and Politics - They love an all blue Washington D.C.

I get a lot of questions on ESG and maybe this is too simplistic a view but I just believe it is the opposite side of the same coin. Or a yin to the yang of energy. When energy is cheap, environmentalism is on the rise and vice versa.

#21 - Energy & ESG

Let’s cap it off with the first chart I ever posted on Twitter. To give you some history this chart is actually from 2020 when I put up this chart in a comment to my friend Paul Sankey (@crudegusher). He reached out and we got to talking. Paul is also the one who told me to start a Substack. And here we are.

#22 - First Twitter Chart Ever

Welp, there we have it, onto 2023.

“Oh my the place we will go!”

See ya next year.

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Disclaimer

I certify that these are my personal views at the time of this writing. I am not paid or compensated for any of my content. And above all else, this IS NOT an investment newsletter and there is no explicit or implicit financial advice provided here. My views can and will change in the future as warranted by updated analyses and developments. As you may have noticed, I make comments for entertainment purposes as well.

The Crude Chronicler