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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to have on the show

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Speaker 1: Steve Church and Amelia Pollard, who covered bankruptcy at Bloomberg

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Speaker 1: News based in Delaware and New York, respectively. How are

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Speaker 1: you both doing today?

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Speaker 2: Fantastic?

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Speaker 3: Thanks for having us, James.

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Speaker 1: Thank you for joining us. We're also delighted to welcome

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Speaker 1: back on the Credit Edge Spencer Cutter, a credit analyst

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Speaker 1: with Bloomberg Intelligence in Seattle. There's a big story brewing

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Speaker 1: in the oil sector and we'll be looking at that

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Speaker 1: with Spencer just a little bit later in the show,

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Speaker 1: So do stay with us. But first, Steve Church, with

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Speaker 1: Bloomberg News, you've been covering the bankruptcy courts for years.

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Speaker 1: We've had the pleasure of working together for a lot

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Speaker 1: of that time. As you've reported, a prominent bankruptcy judge

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Speaker 1: is stepping down after revelations that he dated and lived

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Speaker 1: with a top Houston bankruptcy lawyer since twenty seventeen. I'm

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Speaker 1: not going to get into that scandal or why it

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Speaker 1: took six years for anyone to figure that out. I mean,

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Speaker 1: Houston's not a big town. People must talk to each other,

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Speaker 1: especially in a small world like bankruptcy. But it really

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Speaker 1: is amazing to me that no one saw that coming.

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Speaker 1: But more interesting to the credit markets, who is Judge

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Speaker 1: Jones and why is it such a big deal that

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Speaker 1: he's leaving the court?

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Speaker 2: I think the big deal is Jones was known as

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Speaker 2: a judge who could work fast, was willing to make

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Speaker 2: hard decisions quickly without spending months of expensive litigation or

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Speaker 2: expensive briefings. He always let companies and creditors know upfront

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Speaker 2: what he was thinking. He did that deliberately because he

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Speaker 2: thought it would speed up the process and save money

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Speaker 2: in the long run. But most importantly, I think corporations

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Speaker 2: in distress began to look at Texas as a place

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Speaker 2: to return to to bring their bankruptcy cases there because

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Speaker 2: Jones and another judge, judge is Gar that he knows

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Speaker 2: very well. The two of them have worked together for years,

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Speaker 2: because they made such a powerful team, and because they

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Speaker 2: were so willing to make a lot of adjustments to

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Speaker 2: how the process worked, not only legal rulings so much,

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Speaker 2: but definitely to make it easier to get into the

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Speaker 2: court easier to file cases, and of course they both

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Speaker 2: have expertise in oil cases, big oil cases. Corporations got

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Speaker 2: comfortable coming to Houston, and so a lot of the

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Speaker 2: biggest law firms brought their cases there because of Judge

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Speaker 2: Jones primarily and judgees Ger.

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Speaker 1: And one of your sources described it as a nightmare

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Speaker 1: for the bankruptcy bench. You've been covering this a long

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Speaker 1: time to see though, So how much of a surprise

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Speaker 1: was it to you and how well did you know

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Speaker 1: the judge.

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Speaker 2: I've been listening to the judge for many, many years.

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Speaker 2: He is one of the rare judges who will actually

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Speaker 2: talk to the press on background, and occasionally he would

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Speaker 2: communicate on the record when he was talking about certain

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Speaker 2: issues that were not directly involved in a case. So

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Speaker 2: he was approachable. So I knew him fairly. I wouldn't

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Speaker 2: say very well, but well enough to be able to

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Speaker 2: call him up and ask him what was going on

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Speaker 2: with the process of bankruptcies in general, not about specific cases.

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Speaker 2: He simply wouldn't comment on that. And as for the

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Speaker 2: surprise I was, I was very surprised. I was shocked, actually,

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Speaker 2: And the lawyers that I've talked to who are not

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Speaker 2: Houston lawyers, some of the big bankruptcy attorneys that have

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Speaker 2: been around for many years. They had no idea, they said,

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Speaker 2: they did not know what was happening.

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Speaker 1: So Amelia tell us about some of his cases. You know,

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Speaker 1: what was he actually involved with? And you know why

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Speaker 1: was he so important for bankruptcy.

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Speaker 3: Yeah, So what I started covering bankruptcy, which was only

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Speaker 3: in January. Some of the biggest cases that were coming

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Speaker 3: before him were ones with so called liability management deals,

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Speaker 3: which is basically a jargony word for these contentious debt

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Speaker 3: deals that get done between creditors and they're often known

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Speaker 3: for spurring you know, credit on credit or violence or fights.

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Speaker 3: And so he became very important recently with those types

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Speaker 3: of deals and companies that had done those transactions because

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Speaker 3: he was willing to kind of go above and beyond

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Speaker 3: other courts and making quick decisions, sweeping decisions when other courts,

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Speaker 3: you know, district courts or the like, would take months

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Speaker 3: and months to make make a call or a ruling.

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Speaker 3: And so one case we watched with this play out

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Speaker 3: with was the mattress maker Serta. Simmons had an infamous

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Speaker 3: debt deal that was highly contentious in twenty twenty. It

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Speaker 3: filed for bankruptcy in January before Judge Jones, and within

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Speaker 3: a matter of months he was willing to make, you know,

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Speaker 3: a sweeping opinion that basically blessed the deal and said

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Speaker 3: that it was done in good faith and was an

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Speaker 3: open market purchase. Two, you know, components that were highly

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Speaker 3: litigated prior in other venues. So you know, we heard

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Speaker 3: from sources far before Judge Jones resigned that companies had

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Speaker 3: similarly contested deals in their belts were going to make

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Speaker 3: sure that they had, you know, some kind of jurisdiction

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Speaker 3: in Texas if they did have to file for bankruptcy.

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Speaker 3: You know, with the idea that they wanted to be

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Speaker 3: in front of Jones.

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Speaker 1: Why and maybe you could win bits on this as

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Speaker 1: well as Steve. But why do you think he was

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Speaker 1: so good at handling these really tough cases.

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Speaker 2: He was a litigator for many years. He did a

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Speaker 2: lot of oil litigation in the bankruptcy courts, and his

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Speaker 2: personality is lent itself to being willing to press forward

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Speaker 2: with not with minimal information, but without requiring a huge

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Speaker 2: amount of back and forth between say, creditors and the

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Speaker 2: companies that require months of briefing. He would often give

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Speaker 2: you an he was willing to take the risk that

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Speaker 2: he might be wrong. He was very confident on the bench.

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Speaker 2: He had a lot of experience with the kinds of

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Speaker 2: cases that were coming in front of him, and he

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Speaker 2: would often say, well, when I was in practice, we

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Speaker 2: had these kinds of issues. He was also an expert

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Speaker 2: in litigation, in the daily grind of two parties fighting

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Speaker 2: with each other to collect information about each other and

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Speaker 2: to decide what was presentable to the court what was

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Speaker 2: off limits. And he cut through those those kinds of

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Speaker 2: fights which can bog down a lawsuit for years. He

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Speaker 2: cut through that very quickly, and that's what made him

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Speaker 2: sort of a favorite among a lot of companies that

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Speaker 2: are in distress.

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Speaker 1: Obviously, speed of execution is great when you're dealing with

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Speaker 1: lawyers that cost thousands of dollars an hour. But did

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Speaker 1: he always get it right?

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Speaker 2: That's a good question.

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Speaker 3: Well, it depends on who you know, which side of

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Speaker 3: the eyele you're talking to. I would say there are

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Speaker 3: a number of cases on appeal now that he rolled on,

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Speaker 3: so yeah, But I do will say that, like one

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Speaker 3: source I spoke to, who's a professor, you know, did

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Speaker 3: go on for a while when I spoke to him

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Speaker 3: earlier this week about how well respected Judge Jones was,

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Speaker 3: and you know, he was known for someone who worked

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Speaker 3: incredibly hard. He was willing to you know, schedule, you know,

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Speaker 3: the first stay hearing of a case near hours after

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Speaker 3: a case was filed. And so I think that big

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Speaker 3: law firms also, you know, demanded a certain level of

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Speaker 3: you know, kind of intensity and readiness to take on

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Speaker 3: big cases and clear your schedule, you know, if a

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Speaker 3: multi billion dollar case comes onto your docket. So I

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Speaker 3: think there was a lot of respect among you know,

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Speaker 3: all sides for that.

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Speaker 2: I can't think of a specific case, a big case

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Speaker 2: where he was overruled by either the district Court or

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Speaker 2: the Court of Appeals in Houston. He had a good

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Speaker 2: enough reputation, and the court itself, including Judge is Ger

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Speaker 2: and now Judge Lopez, they have strong reputations and that

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Speaker 2: means something thing to the judges above them, the judges

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Speaker 2: who have to review their decisions. So they were not

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Speaker 2: overruled very often.

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Speaker 1: And companies that had any reason to file, maybe they

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Speaker 1: had a unit in Texas, they would deliberately go to

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Speaker 1: Texas just so they could deal with Judge Jones.

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Speaker 2: Is that right, Jones?

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Speaker 1: Or I isger Yes, Okay, We're creditors as happy as

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Speaker 1: the companies to be down there.

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Speaker 2: In most cases, some creditors some It depended on the case.

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Speaker 2: I think some creditors may have viewed him as with

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Speaker 2: a little suspicion because he was willing to go fast,

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Speaker 2: and creditors often want to go slow in order to

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Speaker 2: negotiate and bargain and see if they can get more money.

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Speaker 1: So, given the conflict of interest that has now come

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Speaker 1: to like Judge Jones and the lawyer he was personally

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Speaker 1: involved with, isn't there a risk that some creditors may

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Speaker 1: go back and even some companies go back and challenge

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Speaker 1: some of the cases that he oversaw.

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Speaker 3: Yeah, there is, you know, sources did say this week

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Speaker 3: that there is that risk, and there's not a lot

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Speaker 3: of precedence for this. I mean, this is a a

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Speaker 3: really specific case and just the sheer volume of cases

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Speaker 3: that were before Judge Jones makes this a logistical nightmare.

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Speaker 3: But today we did see you know, there was a

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Speaker 3: brief filed in the appeal of Surda and the lenders

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Speaker 3: who are appealing the case are the ones that were

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Speaker 3: left out of the deal? Did mention just you know,

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Speaker 3: basically as a line item that because Judge Jones resigned,

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Speaker 3: there's some reason to believe that the case should be

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Speaker 3: you know, punted either to the district court in Texas

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Speaker 3: or back to the court in New York. It didn't

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Speaker 3: mention the scandal or you know, make any claim that

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Speaker 3: because of the scandal and the resignation the whole thing

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Speaker 3: should be overruled. But I think that it'll be used

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Speaker 3: as a as a bargaining chip for sure, especially in

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Speaker 3: highly contentious cases where you know, lenders are grasping at

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Speaker 3: anything to build out their argument.

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Speaker 1: Steve, do you expect to see some of those old

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Speaker 1: cases were the ugly heads again?

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Speaker 2: Oh, lawyers will try. I think it's an easy argument

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Speaker 2: to make. It's a hard one to win. Unless you

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Speaker 2: can specifically link a decision he made to the conflict

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Speaker 2: that he that caused him to leave. That might be possible,

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Speaker 2: but I suspect it will be on a very It'll

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Speaker 2: be a limited number of cases that can actually make

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Speaker 2: that leap.

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Speaker 1: But the law firm that he you know, he was

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Speaker 1: involved with a lawyer as a prominent law firm. That

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Speaker 1: law firm was involved in some big cases.

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Speaker 2: That law firm mostly worked as what they call local council,

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Speaker 2: which meant they did they did not take the lead

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Speaker 2: on a lot of the most contentious issues. So you'd

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Speaker 2: have a national law firm, say Kirkland and Ellis, Wyle Gotshaw,

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Speaker 2: Aiken and Gump, one of these very big, you know,

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Speaker 2: world straddling law firms that actually did the most important

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Speaker 2: and contentious work. And the argument will be made by

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Speaker 2: the winners of John Jones's cases that Jackson Walker did

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Speaker 2: small amounts of work and therefore they don't have to

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Speaker 2: that you shouldn't overturn it. They weren't involved, but there

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Speaker 2: were some cases that Jackson Walker did did handle themselves.

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Speaker 2: Those cases could be You could make the argument, especially

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Speaker 2: if something new comes out about the fees that were

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Speaker 2: paid or about any other conflicts of interest related to

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Speaker 2: his girlfriend.

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Speaker 1: What are the other big takeaways from this case? Anything

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Speaker 1: else come delight from your reporting.

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Speaker 2: There's one irony. Judge Jones made some enemies, He made

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Speaker 2: some very He made people angry. There was one well

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Speaker 2: known Wall Street distress debt trader who was convicted of

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Speaker 2: essentially manipulating the bankruptcy process because he was playing he

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Speaker 2: was using his position in the Nieman Marcus case. Neman Marcus,

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Speaker 2: the retailer, the luxury retailer that went bankrupt. This Wall

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Speaker 2: Street insider was using his position, his knowledge to do

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Speaker 2: to threaten other participants in the case. Jones went ballistic

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Speaker 2: when he found out about this and personally pushed for

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Speaker 2: prosecutors to look at this Wall Street trader, and the

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Speaker 2: person was eventually pled guilty. That's one example of a

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Speaker 2: very angry a person, very angry judgment. One other, and

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Speaker 2: that is the consulting company. McKenzie was accused by some

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Speaker 2: creditors and by the US trustee of not disclosing their

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Speaker 2: own conflicts of interest. At one point, when handling these allegations,

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Speaker 2: Judge Jones told them that some careers might be ended

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Speaker 2: because of this, and that he was perfectly willing to

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Speaker 2: submit a recommendation to prosecutors if he found that there

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Speaker 2: were problems. He didn't make any final rulings that specifically

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Speaker 2: sanctioned McKenzie, but he made enough of a problem for

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Speaker 2: them that they spent a lot of money defending themselves,

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Speaker 2: and eventually that case did go on. In other courts

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Speaker 2: that that continue to use some of Judge Jones's findings

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Speaker 2: and rulings.

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Speaker 1: Interesting, Amelia, did you have other observations.

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Speaker 3: I was just going to say that, you know, there

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Speaker 3: have been pushes historically for a venue reform, and you know,

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Speaker 3: it's a very hard piece of legislation to draft from

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Speaker 3: what I hear, and I think that some people do

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Speaker 3: expect there'd be renewed calls for venue reform, like the

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Speaker 3: fact that Houston alone as a venue had I think

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Speaker 3: more than a third of national cases and there are

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Speaker 3: surely not that many companies based in Houston or you know,

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Speaker 3: Texas with a prominent footprint there, and so I think

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Speaker 3: that that will be something to watch out for in

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Speaker 3: the coming months, to see whether there's kind of greater

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Speaker 3: scrutiny on the bankruptcy process and you know what sort

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Speaker 3: of sorts of reform or calls for it come out

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Speaker 3: of this great stuff.

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Speaker 1: Steve Church and Emelia Palla from bloom News, thank you

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Speaker 1: so much for joining us.

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Speaker 3: Thank you, James.

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Speaker 2: Thanks James.

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Speaker 1: Read all of their great scoops on the Bloomberg terminal,

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Speaker 1: and of course at Bloomberg dot com, bankruptcy is a

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Speaker 1: huge story. We have a fantastic global team treking it

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Speaker 1: so do check it out. Thanks so much. As I

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Speaker 1: mentioned earlier, we're joined by Spencer Cutter from Bloomberg Intelligence

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Speaker 1: in Seattle. It's great to have you back on the show.

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Speaker 4: How's it going, James, Thanks for having me back again.

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Speaker 4: It's going well great.

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Speaker 1: So we hit so well M and A. That is

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Speaker 1: consolidation in the energy sector, oil and gas companies buying other,

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Speaker 1: mostly smaller producers, so oil prices are up. Producers are

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Speaker 1: enjoying a windfall. Have they run out of things to

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Speaker 1: do with the cash they now have to buy each other?

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Speaker 1: Is that the end game here?

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Speaker 4: Well, there's a couple of things going on. The part

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Speaker 4: of the cash that they've been generating over the past

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Speaker 4: year has been going out the door to shareholders in

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Speaker 4: the form of stock buybacks and these variable dividends, and

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Speaker 4: a lot of companies have basically committed to saying we

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Speaker 4: will return something in the neighborhood of fifty to even

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Speaker 4: seventy five percent of free cash flow every quarter every

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Speaker 4: year or two shareholders. But there's also a lot of

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Speaker 4: fragmentation within the industry, and there's a lot of small

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Speaker 4: to medium sized players and there's not You know, if

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Speaker 4: you roll the tape back ten years ago, it's kind

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Speaker 4: of the wild West with the shale revolution and a

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Speaker 4: lot of basins that we're not producing all of a

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Speaker 4: sudden that we were able to produce, and that's kind

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Speaker 4: of run its course to a large part. So now

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Speaker 4: there's expectations that there should be some consolidation within the

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Speaker 4: industry to bring some of the scale on scope that

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Speaker 4: you would get in that case. So we've seen some

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Speaker 4: M and A activity certainly over the last couple of years.

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Speaker 4: But with the announcement of Exon buying Pioneer, there's some

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Speaker 4: expectation that that could really push everything into high gear.

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Speaker 1: That was a big deal, right, how much was it worth?

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Speaker 4: Sixty billion? Yeah, it's a very big deal. And it

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Speaker 4: is basically focused on Exon expanding its footpair footprint in

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Speaker 4: the premium basin, which is the premier basin in the

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Speaker 4: United States and North America.

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Speaker 1: And is it really is it really simple as just

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Speaker 1: big companies like Xon buying the smaller ones.

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Speaker 4: I think you're gonna you could see you could see

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Speaker 4: a couple of different things. You could certainly see big

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Speaker 4: companies like X like Exon trying to expand their footprint

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Speaker 4: in certain areas. So you know, Chevron could be a

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Speaker 4: buyer of another large company if they want to do

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Speaker 4: the same thing. But I also think you could see

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Speaker 4: a lot of consolidation within the mid tier and two

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Speaker 4: smaller to medium sized companies kind of teaming up to

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Speaker 4: be to make a larger you know, certainly nothing on

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Speaker 4: the rival exon, but a much larger producer within a

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Speaker 4: certain area. So I think you're going to see both

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Speaker 4: of those. And you know we're talking about you know,

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Speaker 4: credit focused podcasts here. Fortunately, today, I think whether it's

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Speaker 4: a big company buying a smaller company or two mid

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Speaker 4: sized companies merging, I think it's going to largely be

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Speaker 4: a credit positive event for bondholders of in in most cases, is.

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Speaker 1: It simply the case as in other commodities that bigger

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Speaker 1: is better, just more efficient, bigger reach, all that stuff.

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Speaker 4: Yeah, to a certain extent, Yeah, bigger is better. And

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Speaker 4: there's a couple of things driving my view that I

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Speaker 4: think this is a positive for creditors. You know, usually

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Speaker 4: when you start talking about M and A, bond holders

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Speaker 4: get a little bit nervous because, on the one hand,

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Speaker 4: you could have the city scenario of a big A

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Speaker 4: double A rated credit buying a smaller B or double

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Speaker 4: B rated credit, and then the small bondholders of the

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Speaker 4: smaller companies certainly make out with a bit of a windfall.

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Speaker 4: But you could also have the opposite extreme with extreme

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Speaker 4: which is an LBO. But we haven't been seeing LBOs

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Speaker 4: or highly levered deals in the oil and gas space

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Speaker 4: for quite a while, and it's largely because of the

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Speaker 4: downturns we saw in twenty sixteen in twenty twenty where

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Speaker 4: you had waves of bankruptcies, and ever since then, companies

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Speaker 4: have been very focused on rebuilding and reinforcing their balance sheets,

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Speaker 4: paying down debt, and one of the ways they've done

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Speaker 4: that is not just paying down debt, but also acquiring

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Speaker 4: other companies in all stock deals. So if you look

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Speaker 4: at the deals that have been done since twenty twenty,

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Speaker 4: all the large deals, almost all the large deals were

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Speaker 4: one hundred percent equity focused, and the handful of large

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Speaker 4: deals that weren't so Like when Pioneer bought Double Point,

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Speaker 4: there was a large cash portion of that that involved

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Speaker 4: a private equity firm, and so private equity companies obviously

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Speaker 4: would rather have cash than stock. They'll take some stock,

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Speaker 4: but they need something to return to their LPs. So

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Speaker 4: I do think you're going to see most of these

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Speaker 4: deals be structured as largely, if not all stock, mostly stock.

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Speaker 4: And then the Exxon Pioneer case, you saw that, so

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Speaker 4: it's a continuation of that, and then the other you know,

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Speaker 4: let's talk about a merger of equals. And you mentioned

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Speaker 4: is bigger better, not oil focused, but natural gas focused.

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Speaker 4: This week there were rumors that Chesapeake is looking to

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Speaker 4: buy Southwestern. These are two natural gas companies. They're both

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Speaker 4: fairly large North America, but small when you compare them

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Speaker 4: to a Chevron or Exxon, both double B rated credits.

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Speaker 4: And my view is if those two combine in an

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Speaker 4: all stock merger, that would give it much bigger footprint,

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Speaker 4: more size and scope and business diversity, and that could

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Speaker 4: then lead to an upgrade in their credit ratings because

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Speaker 4: the agencies do do look at that as a primary factor.

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Speaker 4: You know, bigger does give you certain advantages.

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Speaker 1: Is there any associated issuance with this? I mean, you

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Speaker 1: know it's all stock deals and the obviously on the

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Speaker 1: LBO side, debt is hugely more expensive than it was.

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Speaker 1: But is there going to be liability management? Is there

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Speaker 1: going to be cleaning up the balance sheet. I mean

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Speaker 1: there have been also some some issuance of energy companies

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Speaker 1: over the last few weeks. Actually, so I was wondering,

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Speaker 1: do we see more new money coming out?

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Speaker 4: You could see some liability management to the extent that

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Speaker 4: the acquiring company may want a tender for some of

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Speaker 4: the target companies bomb ones. Maybe they want to change

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Speaker 4: the covenants or somehow to match you know, the indenture

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Speaker 4: for their existing bonds, so the new you know, the

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Speaker 4: whole every bond that is now underneath that corporate umbrella

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Speaker 4: is relatively identical from a covenant standpoint, or maybe they

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Speaker 4: just sort of want to clean up the balance sheet.

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Speaker 4: You mentioned some of the activity new issue activity.

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Speaker 2: A lot of that.

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Speaker 4: You know, I've been going here talking about how a

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Speaker 4: lot of these M and A deals are equity focused,

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Speaker 4: but when you do look at some of the smaller ones,

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Speaker 4: there has been some debt, and again a lot of

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Speaker 4: that is PE related. So Civitas Resources is a was

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Speaker 4: a relatively small oil and gas producer focused in the

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Speaker 4: DJ basin, and they have gone from having only four

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Speaker 4: hundred million of bonds outstanding at the end of last

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Speaker 4: year two uh now they are the largest issuer in

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Speaker 4: the High Yield Independent Energy index because they have announced

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Speaker 4: that they have They have announced and closed on two

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Speaker 4: deals and just announced their third, and each one of

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Speaker 4: those did involve quite a bit of debt. But they

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Speaker 4: were buying assets from private equity companies, which, like I

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Speaker 4: mentioned earlier, pe company will take some stock, but they

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Speaker 4: also need some cash so that they can give that

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Speaker 4: back to their investors pretty quick.

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Speaker 1: Are there any relative value place here? Is there an

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Speaker 1: opportunity for an investor to I mean, I'm just going

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Speaker 1: to be cruely breaking it down. I'm not an investor

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Speaker 1: in any means, but find a target company that's junk

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Speaker 1: rated that might be brought by an investment grade company,

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Speaker 1: buy the bonds and hope for an upgrade and get

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Speaker 1: some money there.

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Speaker 4: Yeah. I mean, if you want to play that angle,

403
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Speaker 4: the thing to do is look at who has I

404
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Speaker 4: think you're going to want the target company to have

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Speaker 4: a fairly first of all, a clean balance sheet. Nobody

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Speaker 4: wants to acquire a mess and a fairly simple asset profile,

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Speaker 4: so reserves in one, maybe two basins, and that their

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Speaker 4: reserves are located fairly close to some of the larger

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Speaker 4: producers who have a bigger balance sheet and higher credit ratings,

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Speaker 4: and the theory being the larger producer understands that region

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Speaker 4: already has operations in that region, has people on the ground,

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Speaker 4: has gathering and processing infrastructure, and would be relatively easy

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Speaker 4: for them to then acquire the adjacent acreage and then

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Speaker 4: hook up all their systems to that newly acquired acreage.

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Speaker 4: There'd be certain synergies because now you have one company

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Speaker 4: running instead of two. So that's kind of the playbook.

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Speaker 4: You know, Pioneers is focused in the Permian, and then

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Speaker 4: you look at sorry Chesapeake Energy. Now they're trying to

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Speaker 4: be the acquirer here, as is rumored, But if you

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Speaker 4: look at what they've done, and you know, I've been

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Speaker 4: writing about this for a little while, they when they

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Speaker 4: came out of bankruptcy, they had sort of diverse assets

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Speaker 4: kind of all over the North, all over the United States,

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Speaker 4: and they have since sold off a bunch of the

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Speaker 4: non core assets, paid down some debt, and they're now

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Speaker 4: focused on just two regions. And if you look at

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Speaker 4: that kind of like, okay, they don't have a whole

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Speaker 4: lot of debt, and they've streamlined their operations and their

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Speaker 4: reserve base. That makes it fairly easier for them to

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Speaker 4: either be the acquire or get acquired. So I'm not

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Speaker 4: surprised to see them in the market a rumor at

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Speaker 4: least to be in the market to do some sort

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Speaker 4: of deal.

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Speaker 1: In basic terms of these deals, this ma that's going on,

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Speaker 1: This is more just companies in you know, mostly fossil

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Speaker 1: fuels companies just buying up more production. They just want

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Speaker 1: to produce more barrels or more liters of whatever is

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Speaker 1: they're producing.

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Speaker 4: Yeah, for a large part that is most of what

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Speaker 4: you're seeing. Keep in mind, you know, it's a depleting

441
00:23:38,480 --> 00:23:42,679
Speaker 4: asset base, so every barrel of oil you pump out

442
00:23:42,720 --> 00:23:46,240
Speaker 4: of the ground depletes, you know, is a barrel you

443
00:23:46,280 --> 00:23:48,080
Speaker 4: can't pump out of the ground ten years from now.

444
00:23:48,119 --> 00:23:50,240
Speaker 4: So you need to keep replacing that asset base. And

445
00:23:50,280 --> 00:23:53,240
Speaker 4: that can be either through you know, going out and

446
00:23:53,280 --> 00:23:57,080
Speaker 4: exploring for new reserves somewhere in the world, and there

447
00:23:57,119 --> 00:23:59,640
Speaker 4: certainly is quite a bit of that going on, particularly offshore,

448
00:24:00,840 --> 00:24:04,760
Speaker 4: or you can just acquire somebody else's already existing reserves

449
00:24:05,200 --> 00:24:07,080
Speaker 4: and hope that you can get a good deal and

450
00:24:07,119 --> 00:24:11,480
Speaker 4: then that extends your reserve life profile. You've also seen

451
00:24:12,680 --> 00:24:20,680
Speaker 4: some deals involving esg angles. So another excellent deal Denbury

452
00:24:20,720 --> 00:24:24,359
Speaker 4: Resources that was largely I think an esg angle because

453
00:24:24,400 --> 00:24:31,520
Speaker 4: Denbury does this enhanced oil recovery process where you basically

454
00:24:31,520 --> 00:24:34,760
Speaker 4: take CO two and inject it into the ground in

455
00:24:34,840 --> 00:24:39,439
Speaker 4: an existing producing well to increase the pressure underground in

456
00:24:39,480 --> 00:24:42,959
Speaker 4: that well to then force more oil and gas molecules

457
00:24:43,000 --> 00:24:45,320
Speaker 4: out up to the surface. And so you're getting more

458
00:24:45,359 --> 00:24:48,639
Speaker 4: gas out, more oil and gas out, and you're taking

459
00:24:48,680 --> 00:24:50,840
Speaker 4: CO two and injecting it in. And they also have

460
00:24:51,200 --> 00:24:55,040
Speaker 4: two network of CO two pipelines to help facilitate this,

461
00:24:55,160 --> 00:24:57,760
Speaker 4: and of course in this day and age, trying to

462
00:24:57,760 --> 00:25:01,080
Speaker 4: find ways to inject CO two back into the ground

463
00:25:01,320 --> 00:25:04,080
Speaker 4: is something that people look pretty favorably upon.

464
00:25:04,560 --> 00:25:07,680
Speaker 1: But they're not buying wind farms or solar that they're

465
00:25:08,240 --> 00:25:10,439
Speaker 1: staying in fossil fuelds, right.

466
00:25:10,680 --> 00:25:14,520
Speaker 4: They're largely staying in fossil fuels. Occidental Petroleum is branching

467
00:25:14,560 --> 00:25:17,080
Speaker 4: out not into wind farms or solar, but into this

468
00:25:17,200 --> 00:25:23,200
Speaker 4: direct air capture arena. So kind of similar to the

469
00:25:23,240 --> 00:25:27,320
Speaker 4: Exxon buying Denbury, but that's a sort of buying a

470
00:25:27,400 --> 00:25:33,679
Speaker 4: proven company with proven operations. Occidental is I'm gonna get

471
00:25:33,720 --> 00:25:35,400
Speaker 4: a little bit out of my area of expertise because

472
00:25:35,440 --> 00:25:39,400
Speaker 4: direct air capture, from what I understand, is a slightly

473
00:25:39,440 --> 00:25:42,800
Speaker 4: proven technology, but not proven on the scope and scale

474
00:25:43,280 --> 00:25:47,520
Speaker 4: yet that Occidental is hoping to build. But they're basically

475
00:25:47,720 --> 00:25:50,639
Speaker 4: planning to spend billions of dollars to build these facilities

476
00:25:50,680 --> 00:25:55,280
Speaker 4: that just essentially, as the name implies, sucks carbon dioxide

477
00:25:55,280 --> 00:25:57,760
Speaker 4: out of the air directly and then they can take

478
00:25:57,800 --> 00:26:01,600
Speaker 4: that put in a pipeline acted somewhere else in the ground.

479
00:26:01,800 --> 00:26:06,680
Speaker 4: So you are seeing a little bit of that. Occidental

480
00:26:06,760 --> 00:26:10,040
Speaker 4: is kind of the poster child for trying to lead

481
00:26:10,080 --> 00:26:13,360
Speaker 4: the charge developing a new area, and we'll see how

482
00:26:13,400 --> 00:26:13,919
Speaker 4: that goes.

483
00:26:14,400 --> 00:26:16,000
Speaker 1: It's a credit show. So I always like to talk

484
00:26:16,000 --> 00:26:18,119
Speaker 1: about risk. What are the risks here? I mean, surely

485
00:26:18,240 --> 00:26:21,560
Speaker 1: these companies can't just get bigger and bigger and endlessly

486
00:26:21,640 --> 00:26:22,800
Speaker 1: be acquiring resources.

487
00:26:22,800 --> 00:26:26,000
Speaker 4: There's got to be some limits, right, Well, it depends

488
00:26:26,040 --> 00:26:28,359
Speaker 4: if you're talking about the short term risks or the

489
00:26:28,440 --> 00:26:30,800
Speaker 4: long term risks. Is sort of like, you know, as

490
00:26:30,840 --> 00:26:33,200
Speaker 4: the economists say, in the long term we're all dead,

491
00:26:34,080 --> 00:26:37,840
Speaker 4: and in the long term we will eventually run out

492
00:26:37,880 --> 00:26:39,679
Speaker 4: of oil and gas and if you're an oil and

493
00:26:39,720 --> 00:26:42,679
Speaker 4: gas producer and that's all you're doing, well, then you

494
00:26:42,680 --> 00:26:46,639
Speaker 4: don't have a business anymore. And there's lots of different

495
00:26:46,720 --> 00:26:49,560
Speaker 4: theories out there as to what that runway looks like.

496
00:26:50,840 --> 00:26:53,760
Speaker 4: And I'm not going to to argue one point or

497
00:26:53,760 --> 00:26:55,920
Speaker 4: the other other than to say there is a lot

498
00:26:55,960 --> 00:26:59,480
Speaker 4: of evidence coming to light that within the United States,

499
00:26:59,600 --> 00:27:04,120
Speaker 4: the shape revolution as it was, a lot of the

500
00:27:04,160 --> 00:27:07,560
Speaker 4: best reserves have been drilled and produced, and you're going

501
00:27:07,600 --> 00:27:12,359
Speaker 4: to have to start to expand out into second tier

502
00:27:12,400 --> 00:27:16,280
Speaker 4: type reserves, which will cost just as much to drill,

503
00:27:16,359 --> 00:27:18,440
Speaker 4: but you can get less oil or gas out of

504
00:27:18,440 --> 00:27:21,320
Speaker 4: the ground from it, so your relative cost per barrel

505
00:27:21,520 --> 00:27:25,760
Speaker 4: of oil produced goes up. So that could be one

506
00:27:25,760 --> 00:27:28,080
Speaker 4: reason for these companies to then continue to try to

507
00:27:28,080 --> 00:27:30,880
Speaker 4: expand through MNAs, to try to continue to buy these

508
00:27:30,920 --> 00:27:35,120
Speaker 4: good reserves while they still exist. You know, the other

509
00:27:35,200 --> 00:27:41,440
Speaker 4: credit risk is just leverage and commodity prices. So you know,

510
00:27:41,680 --> 00:27:46,280
Speaker 4: oil has been holding fairly steady north of seventy dollars

511
00:27:46,280 --> 00:27:48,719
Speaker 4: a barrel now for several years, ever since we've bounced

512
00:27:48,720 --> 00:27:53,640
Speaker 4: off of the historic loths of twenty twenty. But if

513
00:27:53,640 --> 00:27:59,080
Speaker 4: we hit enter a global recession that that could certainly change. Fortunately,

514
00:27:59,119 --> 00:28:02,439
Speaker 4: as I've mentioned, most of these deals have been funded largely,

515
00:28:02,440 --> 00:28:05,800
Speaker 4: if not exclusively, with stocks, so you haven't seen leverage

516
00:28:06,160 --> 00:28:10,040
Speaker 4: climb very much, if at all, so that the sector

517
00:28:10,080 --> 00:28:12,359
Speaker 4: as a whole is about as healthy as it's ever

518
00:28:12,400 --> 00:28:14,679
Speaker 4: been from a credit scandpoint. But there are always these

519
00:28:14,680 --> 00:28:16,880
Speaker 4: exegenius factors that can come into play when you're talking

520
00:28:16,880 --> 00:28:19,600
Speaker 4: about a commodity based business and you.

521
00:28:19,640 --> 00:28:21,840
Speaker 1: On a high note, Spencer Cutter, Bloomberg Intelligence, thank you

522
00:28:21,960 --> 00:28:22,840
Speaker 1: very much for joining us.

523
00:28:23,080 --> 00:28:25,000
Speaker 4: Sure, thanks for having me, and we hope.

524
00:28:24,800 --> 00:28:26,440
Speaker 1: To have you back on the show very soon. Please

525
00:28:26,480 --> 00:28:28,760
Speaker 1: do check out all of Spencer's great research on the

526
00:28:28,760 --> 00:28:32,040
Speaker 1: Bloomberg Terminal and thanks again to Steve Church and Amelia

527
00:28:32,080 --> 00:28:35,000
Speaker 1: Pollard from Bloomberg News. Read all of their great scoops

528
00:28:35,040 --> 00:28:38,200
Speaker 1: on the Terminal and at Bloomberg dot com, and please

529
00:28:38,240 --> 00:28:40,840
Speaker 1: do subscribe wherever you get your podcasts. We're on Apple,

530
00:28:40,920 --> 00:28:44,160
Speaker 1: Google and Spotify. Give us a review, tell your friends,

531
00:28:44,240 --> 00:28:48,440
Speaker 1: or email me directly at jcrumby eight at Bloomberg dot net.

532
00:28:48,480 --> 00:28:52,200
Speaker 1: That's J. Crom b i e as in my surname

533
00:28:52,240 --> 00:28:55,880
Speaker 1: and the number eight at Bloomberg dot net. I'm James Crumby.

534
00:28:55,960 --> 00:28:58,200
Speaker 1: It's been a pleasure having you join us again next

535
00:28:58,240 --> 00:29:16,000
Speaker 1: week on the Credit Edge