00:00Do I have to start with you because you're known really for building up Blackstone's credit business into a behemoth.
00:06And I wonder how many people know that before that you actually got your start in energy investment banking.
00:10But for you to join Quantum, you must have seen a very large opportunity of scale and size.
00:16So what is that opportunity for you?
00:18Well, first of all, thank you both for having us here.
00:20And, Landy, I look forward to having this conversation.
00:23When I look around the world today, there are a lot of different asset categories that have been fully capitalized.
00:32There are a lot of flow that's gone into large-cap private equity, other places like that.
00:36Energy has really fought that trend.
00:39And I think what's getting ready to happen, like take Upstream for a minute.
00:43Upstream, every day we see a new article that shows how critical Upstream assets are to the economy.
00:49You know, you hear about data center development, AI development, what's happening with national defense, electrification of the economy.
00:57We're proving every day that having a robust Upstream business in your market is very important.
01:03And it's undercapitalized.
01:04There's only 4% of the S&P 500 in Upstream.
01:08And that was 15% 15 years ago, 25% 40 years ago.
01:11And even in the private markets where we compete, where there were 70 competitors that could go buy Upstream assets
01:1910 years ago, today it's 10.
01:22And so you have an undercapitalized asset that needs to spend capital.
01:26The forecast is $1 trillion a year to drill wells worldwide over the next 15 years.
01:31So you need capital, you're undercapitalized, and you're cheap.
01:34So they're trading at six times EBITDA.
01:36That is, compared to any other asset class in the market, very cheap today, and the private markets traded a
01:42discount to that.
01:44And then you add one more thing.
01:45The risk is coming out, particularly in the U.S.
01:48As the basins mature and as the shale plays, you get more and more data.
01:52So Quantum, for instance, looks at is investing in one out of every four wells drilled in the U.S.
01:57today.
01:58So we get a lot of data.
01:59And you see where the wells are being successful, where the costs are coming down, and you can invest around
02:04that.
02:05So you have a critical asset that's cheap, that's undercapitalized, and that risk is coming down.
02:10And so I think that's going to be a place where we raise capital in the future and we find
02:15good opportunities to invest.
02:16Mandy, are you seeing similar drivers for deals happening right now as well?
02:19Well, we are.
02:22But I think right now, when there's so much uncertainty about what crude oil prices are going to be 12
02:34months from now, deals can get done in uncertainty.
02:37It's hard for them to get done in uncertainty that there's a reasonable belief that might be resolved in the
02:44relatively near term.
02:46And I think there currently is that.
02:48So I think that's what's slowing down deal activity right now.
02:51In terms of capital, I couldn't agree more with Dwight.
02:54We really have seen there be less capital raised to go out and make these investments in U.S. upstream
03:03in oil and gas.
03:04And there's just a lot more dry powder in other places right now.
03:09And so I think we do need to see more fundraising to go out and invest in upstream to really
03:13see a lot of increase in deal activity there.
03:16So, Lenny, to follow up on that, I mean, you're based in Houston.
03:20You work with oil and gas companies.
03:22Many of them are public.
03:24I wonder how the mindset of companies is shifting in this new reality when it comes to deal making.
03:31It is my sort of impression that the deals that we've seen before the war, it was a bit of
03:36a hunger game type of situation like fighting for survival, right?
03:40Creating scale, creating synergies, you know, with oil price at 60 and the outlook not being so great.
03:46That was kind of the mindset.
03:48How is that shifting right now?
03:51I mean, what are companies telling you when it comes to the rationale for doing deals in this new reality?
03:58I think that the long-term rationale is the same.
04:02If you're a big publicly traded or mid-sized publicly traded oil and gas company, what these companies want to
04:12do is continue to grow cash flow.
04:17And if they can't keep doing that through organic acquisitions, through being the buyer, they feel like ultimately you're going
04:27to get smaller unless you're growing.
04:30And so that kind of pushes people towards looking at a merger where they're merging with a merger of equals
04:37or merging into a larger company.
04:38So I think that there still is this general push for consolidation because of that, because it's an asset class
04:46that very much you sell a little piece of your business every day.
04:50And so you need to be growing or you've kind of reached the end where now it's time to maximize
04:56value for shareholders by selling.
04:58Just putting all this together, Scott, I'd also love to get your thoughts on what this current volatility means for
05:03deals that you're looking at.
05:05Obviously, there's a lot, especially in upstream, that's attractive to you.
05:08But when you see energy prices that are either, one, volatile or, two, to Landy's point, this big question mark
05:13over what it looks like in 12 months from now, how does that impact what you're doing?
05:18Yeah, and I would agree with what Landy said about the public companies.
05:22Sometimes this volatility causes you to step back if you're a public company because your price is moving around.
05:27Private markets, so Quantum's been doing this for 30 years.
05:30We have seen these cycles come and go.
05:32You make cautious investments.
05:34You hedge them appropriately.
05:35You make sure that you have an exceptional management team that can take that asset and grow it to the
05:40next level and then sell it to a buyer who sees that growth.
05:44And so you don't overreact to these moves in the market.
05:47And I'd say that's true across the private markets right now.
05:50We're seeing good opportunities.
05:51There's not a step back right now.
05:53And nobody's rushing to the exits.
05:55Back to one of the things you said, the market's not rushing to the exits here because these are long
06:00-term assets.
06:00I will say I do think that what's happening in the Middle East may reprice the bottom for commodity prices
06:07up a little bit, which may impact value long-term.
06:09So, Dwight, just in terms of one trend that we've been seeing is these public companies optimizing their portfolios and
06:18selling packages.
06:19I wonder what's the sentiment in the market around those opportunities right now because, of course, what I'm hearing from
06:27my sources is that it's very hard to price assets in this environment.
06:31So I wonder whether some of those processes are on a holding pattern or sort of waiting to launch to
06:38have more visibility on our price at this point.
06:41Well, I think what's happening with the public companies is ultimately interesting in the private markets because as these public
06:47companies merge, some of the assets are less impactful to them and they divested those.
06:52That's why you're asking the question.
06:54I think that will continue to be true.
06:56And they're not as price sensitive as to where that goes.
06:58They need to clear that out so they can invest in their core assets.
07:02And as prices go up and the cost to drill go up, they don't have the cash flow quite yet.
07:08So they're looking for other sources of capital to go drill in the Permian if that's where their core asset
07:12is or some other market.
07:14So I think it's going to continue.
07:16We'll continue to see flow there.
07:18Well, I think, you know, talking about a deal that was mentioned before on the show, Cotera Devon, is one
07:27of those mergers that is going to sort of shake up as a portfolio optimization opportunity down the road.
07:34I think there's going to be plenty of opportunities for your firm to scoop up from that merger for sure.
07:40And I do just wonder, by the way, speaking of other deals that have been happening, not in energy at
07:45all, but United CEO floating the idea of a merger with American.
07:50It feels like everything is on the table.
07:52Landy, is that the case when it comes to regulators, that we could be talking about two oil giants merging
07:57together and maybe regulators would be OK with that?
08:02Ooh, so I do think that this is a time when it will be more idiosyncratic in terms of what
08:13really large mergers get through.
08:16In terms of energy, it's actually, particularly upstream oil and gas, which we've been talking about a fair amount,
08:24it's not a sector that really has a huge competition lens to it.
08:31What we feel like it does, because under the prior, in the Biden administration, we had a lot of big
08:35oil and gas deals that got held up in second request for a very long time.
08:39But if you look at how those were resolved, they ultimately didn't find any actually competitive concerns with the mergers
08:46of Chevron and Hess or the merger with Exxon and Pioneer.
08:51What they ultimately did was negotiate settlements that involved the CEOs or the chairman of the targets not going on
08:59a combined company board.
09:00So there were a variety of transactions where very big transactions that actually, even in the prior administration, they didn't
09:08find competition issues with.
09:10And so I think that you have a lot of room to merge upstream without running into those.
09:15And I think this administration is friendlier to bigger companies and friendlier to energy.
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