☀️☕️ Big Fracking Deal

Welcome to the Year of the Dragon🐉🧧

📝 Focus

• Big Fracking Deal

• Mini-Explainer: Wildcats

📊 In the Markets

• S&P 5k, Bitcoin 50k, Nikkei 5%; “Summertime” rate cut;

• Arm Strong

📖 MoneyFitt Explains

• 🎓 Free Cash (Flow)!

💸 Personal Finance Corner

• Retire Early with the FIRE Movement: How Does it Work and is it for You?

📝 Focus

Big Fracking Deal

Diamondback Energy announced the acquisition of its largest privately held shale oil rival, Endeavor, for $26 billion in cash and stock. It edged out ConocoPhillips (a Big Oil “supermajor” until spinning off its Phillips 66 downstream business) in the competition for one of America's top private oil producers amid the fierce consolidation of the shale industry that’s reshaping the landscape of the American energy sector.

This deal creates an oil and gas company valued at more than $50bn and makes Diamondback the largest, pure-play producer in the Permian Basin shale field, the largest US oilfield (though smaller there than supermajors ExxonMobil and Chevron.) This aggressive expansion comes on the heels of Warren Buffett-backed Occidental Petroleum’s $12bn acquisition of CrownRock (in the Permian, beating out Diamondback), Chevron’s $53bn deal for Hess (in Bakken but also in Guyana) and ExxonMobil’s even bigger $59.5bn purchase of Pioneer (Permian again) all in about the last half year. 

The energy supermajors have all been cutting back on exploration and drilling capital expenditure (“capex”) under pressure from Wall Street in recent years… not for ESG reasons (see below) but to generate “free cash flow” (FCF)🎓 to “return” cash to shareholders. This opened the door for private players to aggressively ramp up their production capex, helping drive overall US production to record levels. With billions already sunk into capex, Big Oil is now stepping in and acquiring producing assets and securing giant, high-quality and yet-to-be-drilled inventory for future output by buying up the biggest and best independents, such as Endeavor, CrownRock and Pioneer. (Is Mewbourne Oil the next to go?)

(MFM: Fracking huge deal for Exxon; Chevron bulks up to Run for Cash)

..... ▷ The deal consists of 117 million shares of Diamondback worth $118bn and $8 billion in cash, and will mean Endeavor shareholders will end up with just under 40% of the combined firm.

And it means Endeavor founder Autry Stephens will continue to play a major role in the final company. Stephens is an old-school Texas “wildcatter” (see below), building the company from a single rig in 1979 into a major player. 

By building out his own supporting services companies, he was able to acquire unwanted acreage cheaply from his bigger competitors and still profitably extract oil and gas.

As a result, he became one of the wealthiest individuals in the state with a fortune of $14.8bn, according to the Bloomberg billionaires list, placing him 130th in the world.

..... ▷ But what’s the big deal with fracking and shale oil and gas drilling anyway? It’s clearly a hot-button issue for environmentalists and ESG consultants (not the same thing) alike.

There are both pros and cons, whatever each side would have you believe.

- FOR Fracking:

Natural gas from fracking can serve as a transition (“Bridge Fuel”) away from coal and petroleum while renewable energies like solar and wind are developed into viable industries. Specifically, replacing coal with natural gas immediately reduces greenhouse gas emissions.

Fracking generates employment in regions with active drilling, and local economies benefit from increased tax revenue and royalties paid by energy companies. 

Fracking enhances energy independence by reducing reliance on foreign oil and gas imports and contributes to a stable domestic energy supply, especially during periods of heightened geopolitical tension.

- AGAINST Fracking:

Environmentalists express concern about water pollution due to fracking. The process involves injecting chemicals and water into the ground, which can contaminate groundwater and surface water.

Fracking has induced earthquakes as the high-pressure injection of fluids can destabilise fault lines and trigger seismic events.

The infrastructure associated with fracking, including well pads, roads, and pipelines, also disrupts natural habitats and ecosystems.

And fracking operations release methane (below), a potent greenhouse gas, into the atmosphere. Leaks during extraction and transportation directly contribute to air pollution and climate change.

..... ▷ Methane is the second most potent greenhouse gas after carbon dioxide.

The greenhouse effect occurs when certain gases (including methane) in the atmosphere trap heat from the sun. These allow sunlight to enter but prevent some heat from escaping back into space.

Methane initially absorbs heat more effectively than carbon dioxide (CO₂), and though its shorter lifespan (about 12 years) means that its impact diminishes more quickly, over a 20-year period, methane has a global warming potential 25 times greater than CO₂ (and 28 times over a 100 years). 

It has already contributed 15% to 45% of Earth’s 1.1°C warming since 1880. 

Wildcats - a Mini Explainer

In the oil industry, a "wildcatter" refers to an enterprising, risk-taking or innovative individual heading a smaller firm which engages in speculative drilling ventures, typically in untapped or unproven areas for potential oil or natural gas reserves. These regions lack concrete historical production records. 

They also explore fields abandoned by larger companies as these fields may still hold pockets of reserves—uneconomic for giants but worthwhile for agile wildcatters who ironically can’t rely on economies of scale like their larger counterparts.

The term "wildcatter" originated in the early 20th century, inspired by the image of fiercely independent oil prospectors who ventured into untamed territories, often characterised by rugged landscapes and uncertain geological formations. 

However, the odds are stacked against them. Wildcat drilling results in more misses than hits - a gamble where the action is underground and the potential returns are sky-high.

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

US stocks pulled back from record highs, with the S&P 500 closing 0.1% lower after rising 0.4% and hitting a new intraday peak, but held ground just above the 5,000-point level it crossed on Friday.

Though the majority of stocks in the index finished higher, megacap tech declines dragged down the broader benchmark. The Nasdaq closed weaker after briefly exceeding its November 2021 record closing high. Nvidia and Meta were the only up names of the Magnificent Seven, and during the day, Nvidia briefly passed Amazon to be the fourth most valuable stock in the world, just behind Alphabet, though it settled back to close at fifth. 

Traders awaited January's CPI and PPI data for insights into potential interest rate cuts. Atlanta Fed President Raphael Bostic, who is a 2024 voter on the rate-setting Federal Open Market Committee, told CNN he only expected a rate cut “in the summertime,” especially after January’s monthly jobs report. Expectations for early (like March) rate cuts have tempered in the last month, though Treasuries on Monday firmed as yields dipped. 

Bitcoin surged to $50,000, driven by the SEC's long-expected approval of bitcoin ETFs, though the initial trades were down. Its price has risen nearly 20% since January.

European stocks hit multiyear highs, with the Stoxx Europe 600 up 0.5%. France's Cac 40 rose 0.6%, Germany's Dax gained 0.7%.

Asia markets had a quiet start to the week as markets began a Lunar New Year holiday-shortened week, with China closed till Monday 19th. Major stock exchanges like Hong Kong, Taiwan and South Korea remain shut. India’s Nifty 50 index saw a slight decline of 0.3%, while Paytm, listed as One 97 Communications, gained 1.6%. 

Both Japan’s Topix and Nikkei 225 reached 34-year highs on Friday, helped along by the weaker Yen, with the more export-sensitive Nikkei within 5% of its all-time high. 

Arm Strong

Arm Holdings' shares soared again on Monday, closing up 29% on the day at $149, up 99% from this time last week. 

The rally follows a stellar quarterly outlook, boosting Arm's market value to $153 billion, nearly 3X since its IPO, nearly 5X up from where SoftBank took it private off the LSE, and even 140% up from where it bought 25% back from its own Vision Fund shortly before the IPO. (MFM: A Shot in the ARM.)

Despite short interest of $1.4 billion, there seems to be little evidence of a short squeeze. Arm has limited available shares due to Softbank's 90.6% stake post-IPO, so scarcity of available shares may fuel the surge, but the underlying buying is from FOMO buying into the next AI play, as Nvidia has been, especially after reporting results last May. 

Options trading in Arm has increased tenfold since the results compared to the month before. 

At this stage, traders are showing little fear of Softbank selling some of its shares in Arm after lock-up restrictions related to the September IPO end on March 12th.

Also, Magnificent Seven tech stocks are a huge part of the market (about 10% of the S&P 500), an even bigger part of its recent bull-run performance (40-60% in 2023/24), and are worryingly crowded positions (according to the BofA survey), particularly for hedge funds. 

It’s possible that some active long-only institutional US fund portfolios may have underweight positions in them individually or in aggregate because their risk managers and mandates prevent single stock weightings from being too high. 

And if so, the continued rally in those names would not only crush performance but also lead to either chasing or just being more and more underweight. (Even with the special Nasdaq 100 rebalancing in July.)

So some of those long-only managers may need to offset their painful underweight positions by adding “off-index” bets in names correlated to some of the Magnificent Seven’s industry exposure… Like Arm in AI. 

(Arm Holdings is not included in the S&P 500 index or the S&P 500 Technology index as it is a UK-based company.)