Energy Investment

Josh: Welcome to Coming Down the Pipe, ARS Global's monthly podcast about pipeline assets, investments, construction, the market in general. ARS Global is the midstream partner for Streamline Sourcing Solutions. I'm Josh Averitt, president of ARS Global, and today we have-- - Joe: Joe Hoepfl I'm a partner with PPHB, which is an investment banking firm focusing on the energy industry. Josh: Great, well, Joe, good to see you, good to have you. Today's topic, we're gonna be talking about investment, the investment landscape in the energy industry. So Joe, I guess I'll turn it over to you for a little bit. If you just kind of want to fill our listeners in on what PPHB does and how you guys interact in that space. – Joe: Yeah, so as I mentioned, we're an investment banking firm. We have been established as an independent firm for about 21 years now. We've closed 200 -ish transactions for about 12 and a half billion of transaction value. I would say about 60 -ish percent is M&A financial advisory, and then the rest of that 40% is capital formation, both on the private equity and debt side. Josh: Okay, well, that kind of dovetails right into what we're gonna talk about today, and I guess the first question out of the gate, is at a high level, what's happening right now in the energy space as it relates to investment and major market movement? It's kind of a weird time right now, but we're still seeing a lot of shifts and a lot of fluidity. Joe: You're right, Josh. It's a lot of shifts and it is a challenging marketplace to say the least, especially as an advisor trying to help companies raise capital or facilitate transactions. You know, I would say that when we started our firm, it was early phases of shale development here in the U .S. And it was just unbelievable access to capital. Everything was about funding growth and grow, grow, grow. Josh: Gangbusters. 2.15 Joe: It was gangbusters. And then 2004 to actually '08, '09 happens. We have this global crisis, illiquidity. We see a reset, but fairly shortly thereafter, '09 and into '10, We're back at it in the E&P and services and midstream areas of energy where everything is grow. ‘14 comes along and little OPEC player called Saudi Arabia says let's change the game a little bit and they literally decided we're gonna go after market share. We're getting tired of watching the US producers just grow their share of production volumes on the global marketplace. Once that occurred, it really reset the button on how the fundamentals of the oil and gas sector are evolving here. 3.01 Joe: Ever since then, it's been a bit more of a challenge. And once we hit into COVID, it really hit another reset button, such that now it's all about capital discipline. And it goes from the operators to service companies to mid-stream providers, everything up and down the value chain. And instead of just grow, now it's about I want a financial return, and I also want lower risk. I don't want the volatility. I don't want all the cyclicality that has traditionally come from oil and gas. Then you add on top of that a little ESG initiative movement where, you know, God bless all the, you know, individuals that are looking for a cleaner way to provide energy to the world, and we all agree with that, but the thought that we're just going to go suddenly to windmills and solar and have, you know, just completely phase out oil and gas overnight, it's unrealistic. So there is a role for fossil fuels for the long term, and I don't think people appreciate in our general society how pervasive oil and gas is. 4.07 Joe: It's everywhere around all the products that we have, whether it's your iPhone or sourcing electricity, we can't just get enough from the turbines out there. It takes particularly natural gas. So a lot of changes and a lot of continued changes. Josh: Sure, and I think one of the biggest things that we see in the headlines right now is E&P consolidation. You know, some of the some of the factors that you're talking about kind of rolls into the consolidation, I guess the demand for big players to consolidate. What do you think are some of the other influential factors in specifically the E&P consolidations that we continue to see? 4.55 Josh: I feel like every week. It's just another big domino that falls and companies that have hundreds of thousands of miles of pipelines, if not hundreds of thousands, tens of thousands of miles of pipeline, been around forever have been major staples in in all the markets locally and nationally. I never thought would get bought by someone. I thought they were too big. How are they pushing this consolidation in a market where we talk about disciplined investors and disciplined capital, how are they getting these massive mega deals across the finish line? – Joe: So I think actually that's what the big catalyst is. And if you've watched what the outcomes of a lot of this capital discipline about, it's driving efficiencies and trying to do better with less. And we've gotten to the point now, in particularly in the US shale plays, where it has truly become a manufacturing type of program. And these very, very large E &P companies with economics of scale are able to drive down the cost even further and further and further. And that's what I believe is really driving, particularly as you see these big mega -players come together, whether that's, you know, an Exxon Pioneer or Diamondback and Endeavour, or you name it, to your point, there's been a dozen plus, very, very large transactions, and it does tip the scales on how the E&P world is operating now, and it's all about efficiencies, and it'll even further accelerate this capital discipline program. Josh: Do you think that we're going to continue to see consolidation in some of the major markets right now, like we're seeing in LNG Exports or you know geographically Permian Assets, Eagleford Assets, Hainesville Assets, do you think we're going to continue to see that or do you think we've reached a peak or what's your thoughts? 06:49 Joe: No, I think we're going to continue to see, even in the E&P world, I don't think it's over, we're going to continue to see some additional transactions. But I do think it starts to trickle down even further throughout the entire energy value chain. Whether that's service companies like Schlumberger acquiring Champion X, or we've seen Innovex combining with Dril-Quip. And there's others out there that are doing the same thing. Patterson UTI has done it. But I think we're still in the early stages, at least seemingly, of that broader consolidation, particularly services. We've seen some in the midstream space already. And I think, again, that drive towards scale and efficiency is going to continue to promote that even further. Josh: Sure. Well, earlier you and I were talking offline and we were talking about the fact that there's a ton of transactions to be had on the seller's side but when it comes to raising capital and sourcing buyers, what do you think are some of the key considerations in raising capital in the energy space from a I guess from a buyer standpoint? Joe: Yeah so you know, we're routinely working with prospective clients about either trying to source additional capital to help fund their growth initiatives, or even looking at exiting the business and maybe selling. And so often we're, you know, working with clients that are ready to go to market, but on the other side of the table where the buyers and the investors are at, we don't seem the same level of depth. So we're really going to spend our time judiciously about which deals do we think can get to the finish line because that's the only way we really get paid and you know so what we really try to focus on is cash flow generation. Every single company or opportunity the first and foremost is about cash flow generation, is that sustainable and defendable? and does it have the long -term profile? And if you have that, and then you can add other types of defensible characteristics, whether that's a technology content, or leadership, or growth profile. But it always seems to start and end with cash flow generation. And that's what every buyer and every investor is highly, highly focused on. Josh: Got it, well, Joe, I appreciate you joining us for a brief episode of Coming Down the Pipe. It was great to see you. Be sure to subscribe to our podcast. We're on every platform you get your podcasts on. Give us a rating and some feedback. We'd love to hear what you think and join us again next month for another episode of Coming Down the Pipe with ARS Global.