Vito Sperduto
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast. We're here to uncover new ways to raise capital, drive growth and create value in an ever changing world, with insights and outlooks from the RBC Capital Markets team. I'm Vito Sperduto, head of RBC Capital Markets us and today, I'm joined again by Tim Perry, Vice Chairman of Global Energy, And Nick Woodruff, Managing Director Within Global Energy. Tim and Nick, Welcome back to the podcast.
Nick Woodruff
Thanks, Vito
Tim Perry
Thanks. Vito. Delighted to be here.
Vito Sperduto
So about a month ago, we recorded two episodes of strategic alternatives talking about the current landscape in the energy sector, and especially about a lot of M&A activity that's been occurring across energy, which has been a leading indicator for the overall M&A market. And as we talked about, we had our EPIC conference, our energy power infrastructure conference. This year again, we had record attendance on the part of companies that attended the conference, but also on the part of institutional investors. And so we have fresh, real time data in terms of what clients are talking about. So maybe, why don't we start off guys with, you know, what was the general tone and sentiment of the conference attendees? I know is a robust several days here in New York City. So Tim, how are people feeling?
Tim Perry
Well, first of all, you know, it was a tremendous conference. But there were well over 2000 one on one interviews between institutional investors and companies, or the two day conference. So, you know, all that leads to a bit of continued bullishness. And I think what investors are seeing is one. I think they continue to feel the themes of bullishness on the commodities, particularly right now with natural gas and AI driven demand, something that really as we think about the conference of 2023 versus 2024 no one was talking about AI and what, how that could drive gas demand. And then the second big theme, I think, would be M&A and, in fact, since we had our first podcast, since then, there's, you know, another 10 billion plus M&A transactions into space, and that was Conoco buying Marathon. So that theme absolutely continues to persist. And both of those items are attractive to investors to continue investing in the space.
Nick Woodruff
The big themes were oil and where some interesting opportunities with fewer and fewer names, as you indicated, Marathon getting taken off the board, and then Matador came in and did almost a $2 billion deal buying EnCap’s Ameredev. So, we continue to see oil consolidation, and we're waiting for gas prices to improve a little bit. We've seen some volatility between 280 and 320 on the gas side. But once we settle a little bit closer to that 350 mark, I think it's off to the races from the gas side.
Vito Sperduto
Maybe let's drill in a little bit in terms of the M&A consolidation. I mean, one of the things we talked about before was the fact that you have some of these larger transactions, and then the wave that occurs behind them, in terms of other players in the space following suit, feeling like they also need to consolidate to keep pace with the largest players in the space. How are you seeing that as you think about companies across various sizes within your sector?
Nick Woodruff 05:49
It's been interesting. Tim and I actually had a dinner while we were up in New York with long only investors, ARB, spread, hedge fund, traders. And similar themes came out from those conversations, in addition to the one on one and corporate meetings we had at the conference as well. That bigger names, healthier balance sheets and opportunities to deploy capital in different parts of the commodity cycle are what investors want. And that's what we're starting to see. So that's really encouraging that we're seeing alignment from the operators and the investors. And whenever we're reading with several of the smaller names, sub $5 billion space, they're just certainly limited on where they trade on a multiple of EV to EBITDA, and they have certain items that they can buy, whether it's private or public. And they're certainly chasing down ways to be more relevant, increase liquidity in the name, and improve a more robust return to capital program. And then, as we look at the much larger names, north of $20 billion these companies have more degrees of freedom, if you will, and they're certainly looking at trying to figure out how we can lower the cost of supply and improve the inventory base to really have a durable business for the next 20 to 30 years. So we're seeing an interesting dichotomy between the two sizes and ultimately, what they're after in the marketplace and what's available to them.
Tim Perry
You know, right now, every c-suite and every corporate board is thinking about M&A on a daily basis right now in this sector and what they're thinking about is you know, who do we merge with? Who's the best fit for us? How will our shareholders retain the most value? And then they're also thinking, you know, what's the right timing on that? And it may not be the right time today, in a dynamic marketplace, but it might be, you know, a few quarters from now, as they continue to improve their business. And then they're thinking about is ‘Who might approach us and what, how? What will we do if someone approaches us?’ So a lot of a real chess match is going on daily basis right now in this sector, and that's really what Nick and I spend most of our time with,
Nick Woodruff
And I will say that even on a couple management teams and boards, we're getting those groups ready for the battlefield, if you will. On understanding the business from an outside perspective, the company and the management and the board are certainly going to understand their internal assets and value proposition and the standalone business. And we've been brought in very recently on a few different names to do some reconnaissance work, if you will, on what do we look like if you're a company from the outside, looking in, looking at public data, and then the management teams and the boards can certainly try to create different options and game theory on ultimately, how to play it out. Do we improve and execute the base business because that's the best value proposition, or do we have certain weaknesses, whether it's in inventory, whether it's in commodity mix or balance sheet or recycle investment opportunities, and how do we defend against those? So then we're in a better position as the consolidation wave continues.
Vito Sperduto
Tim, one of the comments you made was how, just like everything else we're hearing, AI, artificial intelligence as a key topic that people are thinking about. How were some of the clients talking about it? How in depth were they getting?
Tim Perry 11:14
They're incredibly excited about it, because it is a whole new demand structure for the sector. How can we produce, you know, reliably and very cost effectively, more power for AI data centers or for society, while at the same time decarbonizing our product, reducing the carbon atmosphere. It's a real challenge. It's getting a lot of interest in a variety of ways from the market. And the gas side, that might be another 10 to 20% gas demand from where we are today by the end of the decade. And you know, we have a hard time supplying what we need right now, much less in additional growth in that. And at the same time, the, you know, the traditional fossil fuels business is very much trying to produce their product for less carbon, and I think they're doing a good job of it, and they need to do even an better job of it. They're working very hard at that. You know, one of the things we had is, we had a panel in which the company talked about, basically building data centers on top of, really, their oil and gas resources. Because one of the things is, where do you get the resource to power the data center? And they're talking about building the data center right on top of their resource. And then they have a carbon capture business, and they would further any carbon that's emitted from the data center, then they would go ahead and capture that carbon and put it into wells below the surface of the Earth. So that kind of gives you an example of what's going on at the conference.
Nick Woodruff
And Tim, some of the themes that we certainly had conversations that were underscored at the conference was around ESG as it relates to our sector. And some of the conversations we had was, it seems like historically, over the last few years, we've been too focused on E, and now with the power demand, et cetera, we're now starting to bring up to a similar playing field, the S and the G, which is social and governance. And energy is directly correlated to population growth and GDP. And certainly we're going to have increasing power demand, and where does that come from? And we're starting to see gas, certainly in Spain and other countries, is green and is part of the solution. And I think that's just as baseload demand as we talked about in our prior podcast is going to be further reinforced, is a needed product on here, and certainly we got a lot of clients trying to figure out how we can get the infrastructure, not only the resource to the end use to ultimately power these data centers and rescom areas.
Vito Sperduto
Tim and Nick, just curious in terms of the sentiment on a go forward basis, it feels like folks are pretty aligned today in terms of expectations on the economy. I mean right now. If you look at today versus a year ago, certainly the anticipation of a US recession has significantly declined from where it was a year ago. As we think about rate cuts, I think everybody's coalescing around one rate cut at some point later this year. We've obviously heard that out of out of out of the Chairman directly. Anything interesting in terms of how clients were thinking about just the overall economic environment outside of their own companies?
Nick Woodruff
You know, what we've seen, certainly from a capital market perspective, since we talked last was just ever increasing supply coming on from an investment grade and a high yield issuance in the energy space. We've seen spreads tighten, really, to the tightest levels we've seen looking back in the last 10 years. So we've got an opportunistic and or related to acquisitions financings that are very supported in the marketplace. We've got investors that are looking for yield in the marketplace. And that's been a nice positive attribute, in addition to the main macro environment tailwinds that we're seeing to support broader M&A and energy specific M&A. But the capital markets are very robust right now, which is helping facilitate. And certainly, as you look forward into the election season, we further expect the M&A wave in capital markets to increase heading into potential uncertainty coming into November on ultimately what regime and what public policies are going to be implemented for the next four years.
Tim Perry
The fascinating thing which is going on is really getting back to AI and AI could be, you know, frankly, a re-industrialization of society globally. And it kind of gets back to the drivers of this Energy Conference, where we really had many more generalist long only investors than we've had in many years, attend the conference, and these are the fascinating items that's driving them. They see these macro trends, and they see how the tech industry and the energy industry are becoming good friends, and even more so, they really are going to need each other in the long term future.
Vito Sperduto
It's interesting, we always talk about the CEO confidence survey done by the Conference Board, and how the most recent measure the second quarter this year, is 54, on a scale of 100 which, you know, says folks are cautiously optimistic on the outlook. Above 50 is a positive, right? But the other things they also look at in the survey is, what are the risks that CEOs are concerned about? And Nick apropos to your comment about ESG, it's interesting. Climate change, energy supply constraints and increasing inequalities in social unrest are the three lowest risks that they are looking at. And the highest are cyber, AI, and new technology, legal and regulatory uncertainty and geopolitical instability. I mean, those far outweigh the rest of the risks that they list. But it kind of lines up with what we're hearing and what we're seeing across the board. You know, actually, let's hit on the regulatory piece one second, because we had an opportunity earlier this week to have some conversations with the folks from the Department of Justice on the antitrust side. It's clear that they want to better understand what is being done in the marketplace and how some of the policies that they're putting in the in place are being interpreted, how we are talking to our clients about it. And I would say, you know, we talked in the last podcast about the fact that, you know, there were a number of transactions in the energy space that were getting second requests from the FTC. How was the tone there to folks feel, feel okay in terms of getting transactions through. It's just going to be a longer timeline or was that dissuading anybody from actually doing deals?
Nick Woodruff
The FTC review process, and ultimately the hit rate of how many transactions we've seen go through a second request is certainly noted by public company CEOs and CFOs, and conversations we had in New York and our conference, and subsequent to the conference, has certainly really evaluated what opportunities on that chessboard really line up to create value for our shareholders, and would those potentially go through a review process? And if so, does that prevent the further second or third derivative opportunity? And will that deal get scooped up by an interloper while a potential second request is being reviewed and data being prepared, etc., which can take anywhere from six months to a year. And certainly that is being discussed. It is an uncertainty, and uncertainty leads to more cautious review and evaluation of opportunities and making sure that it is certainly the right, you know, combination, if you will, for transactions. So nothing's really new over the last three to six months from a review standpoint, other than it's just a potential of being on the sideline, And then what are the unintended consequences of being on the sideline. Does your dream deal come up while you're in the in the review process? And that that is impacting how people think about transactions and definitely making sure that the right one is being selected.
Tim Perry
The FTC, until a couple of years ago, had basically never reviewed upstream oil and gas transactions, feeling that it's an industry that's extremely fragmented, that the commodity is set by the world, not set by any local market. And what you've had over the last two years, you know, frankly, has been a set of learnings by the FTC and the Department of Justice in terms of how the oil and natural gas markets work. We don't see any companies staying away from doing a transaction because they're concerned about FTC or Department of Justice. They do think there could be a strong probability that you might have a second request, and I think they're willing to accept that But hopefully what we'll see is we're going to see fewer second requests going forward than we have in the past.
Vito Sperduto
Tim, we briefly mentioned geopolitical risk is one of the concerns that's top of mind for our CEOs. Obviously, we are well positioned to talk about that with our head of commodities research, Helima Croft, who hosted a keynote lunch on the topic, How are people thinking about that in relative to their businesses?
Tim Perry
Well, it's kind of interesting. First of all, Helima, really, certainly is one of the top, if not the top, geopolitical analysts, and how that affects commodity markets in the world. She had just come when she did the keynote speech, almost directly from the Middle East, had just talked to several leaders there. And the remarkable thing is, ever since the Israeli-Palestine war really happened, beginning early October, we have continued to see these oil markets relatively consistent in terms of oil prices. We hope we continue to see that, certainly volatility is bad for the industry. Helima pointed out, though, that the Middle East, you know, continues to be an area of significant concern. While there is certainly capacity, particularly in Saudi Arabia, for crude shortages, they probably have two to 3 million barrels of additional capacity from their approximately 10 to 11 million barrels they produce now, there continues to be a lot of concern about Iran and them continuing to influence different areas of the Middle East, and that the Israeli war could get much, much larger. And if it gets much, much larger, then potentially you can even see shipping lanes out of the Middle East and crude, and that would cause significant spikes upward in oil. So she said, ‘Listen, the oil markets people should realize have continued to manage this situation for several months, very well for the world's economy, but it continues to be an area of real concern for all of us.’
Vito Sperduto
Well, Tim, Nick, thank you for joining me again on the on the podcast.It’s a great lead into the remainder of the year, as we're seeing a lot of activity and anticipating a fairly high volume of transactions.
Tim Perry
Well, thank you, Vito.
Nick Woodruff
Thanks Vito, it was good conversation, as always.
Vito Sperduto
You've been listening to Strategic Alternatives, the RBC Capital Markets podcast. This episode was recorded on June 20, 2024. Listen and subscribe to Strategic Alternatives on Apple podcasts Spotify, or wherever you listen to your podcasts. If you enjoyed the podcast, please leave us a review and share the podcast with others. Thank you.