In the past week, several energy-related gatherings have been held in the Dallas area. We attended two of them: the D-CEO Energy Awards and Hart Energy’s Energy Capital Conference. We had numerous discussions with company representatives, dealmakers, and service providers. The marketplace appears excited about the potential for the upcoming year amid challenges. At both events, several industry themes were evident including: the energy industry has strong fundamentals, capital markets are showing signs of a resurgence in needed capital, and energy security is returning to the lexicon.
Several speakers and panelists at both events expressed optimism and confidence in the important role that the sector is playing both today and in the future. “This will be the golden decade for hydrocarbon production,” said Kyle Bass of Hayman Capital at the D-CEO Energy Awards. In this inflationary environment, the best place to be in energy, according to Mr. Bass, is royalties because they capture all the cost issues beneath them.
This will be the golden decade for hydrocarbon production
At the Hart Energy Capital Conference, Tim Perry of Credit Suisse said that returns are very strong considering high profits coupled with lower than historical valuations. Upstream companies that used to trade at 6-8 times EBITDA now trade between 3-5 times. IPOs are coming out at higher discounts to these multiples, and as such, returns expected are higher. Mr. Perry pointed out that energy occupies only about 5.1% of the S&P market capitalization, whereas historically, it has typically been between 8 – 13%.
Which upstream area (oil vs. gas) was a better place to be right now has been a big boardroom discussion, with oil producers getting higher margins but gas producers facing a bright future with the major energy transition fuel.
Another theme was the prospect of capital returning to the space. Considering the deleveraging trend that has been happening for several years now, it was interesting to hear from multiple panelists that capital sources are coming back to the space. Banks are starting to return and borrowing bases, which were hard to come by, are now becoming more available to upstream producers. Over the past five years or so, so-called “casual” investors have left the space. The smaller landscape is now populated with sophisticated investors who are interested in energy’s strong tenets.
Due to the fundamentals, private capital has also been responsive to filling the void with more unconventional sources, such as private placements and even family offices offering debt and equity capital. The space has become more attractive as what was described on one panel as the 3 “R”s – returns; realization of the industry’s importance; and regulatory framework to allow more investing.
These trends have also begun to creep into the institutional space as well. It has become less polarizing in the past year, and more people are willing to listen to energy-oriented investment theses. One panelist remarked that some larger institutional shops are quietly “repurposing’ some of their internal talent to the oil and gas space, with some even planning to hire energy industry teams.
Part of the optimism for the space is the realization that the geopolitical landscape is not as stable as it has been. Both conferences referenced the likelihood of food and energy shortages in the next decade. “There are going to be riots in Europe this winter,” said Jim Wicklund of Wicklund & Associates. With issues ranging from wars to fertilizer to pipelines; the focus in the U.S. on energy transition in the longer term may have overlooked energy security in the shorter term.
Part of the optimism for the space is the realization that the geopolitical landscape is not as stable as it has been
We can export 12 BCF a day now, but will that be enough for Europe’s needs this winter? Mohit Singh, Chesapeake’s new CFO said that 75% of future demand growth in gas will come from LNG. The key will be takeaway, and the next wave of LNG completions are supposed to be in 2025 or 2026, where we may be able to export closer to 28 BCF per day. However, in the meantime, there may be more turmoil as energy markets attempt to get energy where it is needed now in both Europe and Asia.
Multiple speakers and panelists lamented the overreach of the idea of energy transition to renewables at the expense of potentially available energy today. Some expressed optimism that the Inflation Reduction Act would help remove bottlenecks on a lot of renewable projects; however, they conceded that it still won’t change the situation in the shorter term. In addition, most panelists agreed that disincentivizing and demonizing the oil and gas industry during this energy transition has been a mistake.
Jay Allison of Comstock Resources, who received the Energy Executive of the Year award at the D-CEO Awards Dinner, put it this way: “When Henry Ford invented the Model T, he didn’t kill all the horses.”
Thanks again to everyone we connected with this week. The conversations were terrific, and we enjoyed seeing all of you.