What is the sentiment among energy investors today?
Vito Sperduto: The consolidation that’s been occurring across the energy sector has been a leading indicator of the overall M&A market. Coming out of our recent Energy, Power, and Infrastructure Conference (EPIC), what is the general tone of energy investors today?
Tim Perry: Investors continue to feel positive about commodities, particularly right now with natural gas and AI driving demand. The second big theme would be M&A. In the last month we’ve seen an additional USD$10 billion plus M&A transactions in the space.
Nick Woodruff: We’ve certainly seen some interesting opportunities and continue to see consolidation in oil. ConocoPhillips Co. took Marathon Oil off the board, and then Matador came in and did almost a $2 billion deal buying EnCaps and Ameredev. Now, we’re waiting for gas prices to improve a little bit. We've seen some volatility on the gas side. One that settles, I think it's off to the races on the gas side.
“We’re waiting for gas prices to improve. Once they settle, I think it's off to the races for gas M&A.”
Nick Woodruff, Managing Director, Global Energy
How do M&A dynamics vary across companies of different sizes?
Sperduto: As the consolidation wave continues, are smaller companies attempting to match the pace of these larger M&A transactions?
Woodruff: We're seeing an interesting dichotomy between the two sizes. Smaller names are limited in what they can buy and are chasing down ways to be more relevant, increase liquidity, and develop a more robust return to capital program. Larger names are trying to figure out how to lower the cost of supply and improve their inventory base so they can have a durable business for the next 20 to 30 years. Long-only investors in particular are looking for bigger names, healthier balance sheets and opportunities to deploy capital in different parts of the commodity cycle. It’s been encouraging to see that alignment from operators and investors.
Perry: Every corporate and board is thinking about M&A on a daily basis. There’s a real chess match happening in this sector today. There's a high correlation between market cap, daily trading volume, and what type of multiple you trade in the market today.
“Every corporate is thinking about M&A on a daily basis. There’s a real chess match happening in the energy sector today.”
Tim Perry, Vice Chairman, Global Energy
How are energy operators getting ready to meet the rising demand from AI and data centers?
Perry: AI is definitely getting a lot of interest in a variety of ways from the market. Operators are thinking about how they can reliably and very cost effectively power more AI data centers while at the same time decarbonizing their products and reducing carbon in the atmosphere. It's a real challenge. Certain operators are strategically locating data centers directly above their energy resources and simultaneously developing carbon capture instruments.
Woodruff: We have a lot of clients trying to figure out how we can get the infrastructure to ultimately power these data centers and rescom areas. As populations grow and baseload demand increases, within the ESG theme in particular, we’re seeing S and G factors being increasingly prioritized.
Perry: AI could mean a re-industrialization of society globally. This gets us back to the drivers of the EPIC Conference, where we really had many more generalist long-only investors than we've had in many years, attend the conference. They see how the tech industry and energy industries are going to really need each other over the long term, which bodes well for the sector.
Sperduto: According to the Conference Board’s CEO Confidence Survey, folks are cautiously optimistic on the outlook. ESG, climate change, energy supply constraints, and increasing inequalities and social unrest, are the three lowest risks. The highest are cyber, AI and new technology, legal and regulatory uncertainty, and geopolitical instability. This seems to line up with what we're seeing across the board.
Has antitrust scrutiny dissuaded companies from transacting?
Sperduto: Looking at some of the risks to the outlook. We recently had an opportunity to speak to members of the Department of Justice (DoJ) regarding antitrust regulation. It’s clear they want a better understanding of how the policies they've been putting in place are being interpreted. Has more regulatory scrutiny dissuaded anybody from actually doing deals?
“We had opportunity to speak to members of the Department of Justice (DoJ) regarding antitrust regulation. It’s clear they want a better understanding of how their policies are being interpreted.”
Vito Sperduto, Head of RBC Capital Markets U.S.
Woodruff: There are unintended consequences of being on the sideline while you’re in the review process. Will it prevent a further second or third derivative opportunity? Will that deal get scooped up by an interloper while a potential second request is being reviewed? Antitrust is certainly impacting how companies evaluate what opportunities on that chessboard really line up to create value for shareholders.
Perry: Companies seem willing to accept that there could be a strong possibility of a second request. Hopefully, going forward, we’ll see fewer second requests as the FTC and DoJ familiarize themselves with how oil and natural gas markets work.
How are geopolitical risks affecting oil markets today?
Perry: Ever since the Israeli-Palestine war started, we have continued to see price consistency in oil markets. However, the Middle East continues to be an area of significant concern. If the war grows larger, there is a risk to shipping lanes out of the Middle East and crude, which could cause significant spikes upward in oil prices.
