Investors Eye Canadian Energy as Game-Changing Projects - Transcript

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Hello and welcome to Energy Transition in Focus, a podcast series from RBC Capital Markets, where we look at how corporates and investors are driving sustainable innovation on their road to net zero. I'm your host, Joe Coletti. Today we're broadcasting from RBC's Global Energy Power and Infrastructure Conference in New York. As we close our day data, I've pulled a few of our bankers off the conference floor to join us for this episode.

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We'll be talking to Jeff Cormack, managing Director and Global Energy Investment Banking, and Mike POVA Schuck, managing director and head of RBC Rundell, which is part of RBC Capital Markets Energy Platform that provides cross-border execution into energy companies looking to acquire or divest of assets and infrastructure in Canada and globally. We'll be talking about some of their key takeaways from their conversations at the conference over the last two days and hit on some of the key themes that are top of mind for companies and investors in the space.

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Jeff, Mike, thanks for joining us. Perfect. Great to be here. Yeah, thanks for having us. So let's start with the conference. You guys have been in a lot of meetings. You've been talking to a lot of people over the last couple of days. Like, maybe we start with you. What's top of mind for companies, investors? What are you hearing in all these meetings and conversations?

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Yeah, for sure. Well, first thing I would say, it's just a great buzz in the conference so far this year. You know, been attending for a number of years. You can tell that there's record number of attendance, whether it be investors or corporates that are presenting here, that we had over 2001 on ones for it. You know, a lot of topical questions that have came up.

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A number have been around Canada, the tremendous resource that we have in place, the quality of that resource and kind of questions around infrastructure. So on infrastructure, we are seeing a bit of a game change here in Canada. Taxes online, incremental 590,000 barrels a day, exporting crude to the West Coast and LNG Canada's coming on an incremental two Bcf a day of natural gas off the West Coast.

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So that's created a pretty good buzz on people asking more about Canada and the potential growth of our tremendous natural resources in Canada. Jeff, what about you, what you've been hearing in your conversations? Yeah, I would echo a lot of the same themes that Michael spoke about in a lot of the discussions I was part of. We spent a lot of time talking about just M&A in general and activity levels.

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There's obviously been a bunch of activity in the first part of 20, 24 year to date, and we'd expect to see a whole lot more for the rest of the fiscal year really driven by companies focused on achieving scale. So obviously a key important theme here for from an investor perspective, there's also the ability to grow more rapidly where producers haven't been as focused as much in the past in terms of organic development.

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So certainly M&A is very topical. I would agree with Michael's comment Overall, there's been a lot of buzz on the M&A front, a bunch of things that have came up in questions around, you know, why not Canada? Why aren't we seeing more M&A? I think it's important on that part to actually rewind the tape a little bit. And we actually have seen a lot of M&A.

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And in Canada, I'd say the differentiating factor between Canada and the U.S. is over the last number of years, we've had a number of private, corporate and large assets that have satisfied the acquisition needs of public corporates in Canada. So when you think about the top ten producers in Canada and you look at the size and scale of those organizations back, you know, two or three years ago, a lot of them actually completed a number of transactions and grown materially.

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If we look at the U.S., same trend a number of years back with Andy. And as that Andy supply dried up, there was more focus on corporate opportunities. So when I look at Canada, I see it exactly the same way. We've had that significant supply of assets. We've had significant supply of private corporates. We've seen a lot of those be cleaned up over the last number of years.

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And now, you know, more focus on possible consolidation between corporate M&A. Staying on M&A just for a second, you guys have a unique position where you're talking to these companies and you're maybe getting a little bit more of a view of what's in their heads, what's really impacting their their decisions and their and their thinking right now over their next move, their next step.

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What is pushing them forward? What is holding them back? Or are they sort of looking at really closely to really help kind of make some of these decisions and that sort of months and years ahead right now? Maybe start with Mike for sure. I'd say, you know, commodity price, environment and sentiment is really important factor that considers into acquisition decisions.

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On that front, we've been in a period for the past six plus months where we've actually seen a lot of stability around crude pricing, you know, plus or -$75 a barrel on a WTI basis. So that's been really helpful. From the oil side, I'd say with respect to gas, it has been significantly more choppy right from winding back to 2022.

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Gas prices were high over the course of the last 18 months. We've seen some weakness. But when you look out, you actually see material contango in the curve, a higher gas prices further out. So you do have entities that say, hey, we get pretty comfortable around an oil price environment, whether we're underwriting a flat U.S. $75 deck on the gas side of the equation, just more uncertainty with what is U.S. power consumption look like.

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How quick is LNG build out going to be? What is demand going to look like? And, you know, what are people underwriting with respect to valuations that they're they're completing? What do you think, Jeff? Yeah, I might just add to that as well. I think that's created this interesting dynamic in the market when you think about sort of bidder spreads on the crude side with a bit more stability that Michael referenced.

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Transactions maybe be a bit easier to get done on the gas side of the equation just given how volatile commodity prices have been, particularly this year and a little bit more stability into next year, it's creating an environment where buyer expectations and seller expectations aren't necessarily aligned. So we'd expect as that starts to converge, probably an uptick in overall activity that does speak to valuations a little bit.

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When you think about it again on the gas side and you look at where some of the gas related peers are trading on a 2024 basis, incredibly high multiple. So a bit of a read through from a market perspective and where, you know, companies are anticipating commodity prices being in 2025. And, you know, we view it to be a pretty meaningful catalyst to see more consolidation, aggressive growth plans with the gas side of the equation heading into into next year.

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And you mentioned valuation. So it's fair to say investors see opportunities or investors in Canada or you are seeing opportunities in the same way they're seeing more in any one area versus another. Yeah, I'd say when it when it comes to Canada and you think about the valuation of the Canadian producer universe in general, we have companies with extremely high quality resource, great business plans, a great track record of execution, and in many cases they are trading at a discount to the U.S. peers.

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So I think when you look at the infrastructure build out that we're seeing the quality of resource that's in place, I think investors have been taking note of the quality of Canadian entities and the potential opportunities they have to invest in these companies. I think also just from an opportunity perspective and a couple of the conversations that we were involved, when there is a big discussion around the options set in U.S. versus what counterparties are seeing in Canada.

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And it's interesting, we just think about the size of the U.S. market in terms of number of entities and size of entities relative to what we have in Canada. A whole lot more competition in the U.S. for four opportunities versus what we're seeing in Canada. And I think that's actually starting to reverse a little bit where you've got U.S. counterparties looking across the border into Canada and creating a lot more competitive tension and processes that we're seeing.

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So if that continues to fall. So I want to turn very quickly to divestitures. You know, there's been some notable divestitures recently, Mike, being the experts. Can you shed some light and share some of your thoughts and what you're seeing and what your conversations are sort of revealing? Yeah, for sure. So we have seen some pretty material divestitures.

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And if you look back to coming out of COVID, you saw this perfect environment where you had a number of entities that weren't the natural holders of large positions. You had an environment where acquirers had access to capital and you had those same entities that had a desire for incremental size and scale for some of the things that we've been talking about.

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So is this perfect environment where had buyers and sellers? We actually had, you know, rising commodity price environment, which was helpful in in facilitating transactions. You know, a lot of questions come up with respect to international entities leaving Canada. And we have seen some entities kind of trimming that back their positions. Think about total, you know, roosting, reducing their exposure to their oil sands assets, which weren't core.

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You know, you think about Repsol that's exited, you think about an entity, Teck resources focused on something different, but would also say that you have had some, you know, large entities that have been very focused and continue to be focused on Canada. So total Leffe and Conoco bought, you know, half of that, offering the segment assets. You think about northeast B.C. and the potential for LNG Canada.

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You do have some large international players that have upstream resource and plan to have upstream resource for a long time. So I think the likes of Petronas thinks the likes of Shell mentioned Conoco, they've been acquisitive in the Montney as well as the oil sands assets. So I think sometimes it's taken a little bit out of context on all the international entities are leaving Canada, but we actually have some very large entities that once again see the quality of resource that we have in place and in some case are looking to add to their portfolios.

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All right. One one final question for you both. And Jeff, maybe we'll start with you. You both have extensive experience in the energy sector. What are themes are you thinking about? You see that the industry is going to continue to focus on and think about as we sort of move forward, not just the rest of this year, but I think even over the next couple of years?

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Yeah, it's a great question. One theme that we see come up often is just sort of the regulatory uncertainty that we're experiencing in Canada. From a certain perspective, a lot of that's been alleviated with obviously the development of the Trans Mountain pipeline and the Coast Guard pipeline, major infrastructure projects that allow Canadian products access to global markets. You know, we've got a bunch of existing and impending infrastructure projects like the Pathways Oil Sands Alliance that's going to allow for zero carbon production coming out of the oil sands sector.

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I think there's going to need to be a whole lot more regulatory certainty and a political framework in place to allow for investors to underpin investment within Canada. And it's a bit TBD at this point in time with obviously upcoming provincial and federal elections still looming. But I think that's going to become an important catalyst that investors are going to heavily focus on when looking at opportunities within Canada for sure.

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And we spoke about it. We expect that consolidation continues to happen in the space, Right. Just larger, more investable entities. And I think we are at a bit of a turning point with important egress coming on Canadian molecules, getting access to international markets outside of the U.S., a recognition from people on the quality of resource that we have in place.

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And just expect to see more deal activity. Great. I think we will end it there. Mike and Jeff, really appreciate you hopping off the floor to join us last minute today. Appreciate your insights and hope we'll have you back in the future. Perfect. Thanks for having us. Well, that's it for our conversation today. Thanks again for listening. Two Energy Transition in Focus brought to you by RBC Capital Markets.

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