Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to have on the show
Speaker 1: Steve Church and Amelia Pollard, who covered bankruptcy at Bloomberg
Speaker 1: News based in Delaware and New York, respectively. How are
Speaker 1: you both doing today?
Speaker 2: Fantastic?
Speaker 3: Thanks for having us, James.
Speaker 1: Thank you for joining us. We're also delighted to welcome
Speaker 1: back on the Credit Edge Spencer Cutter, a credit analyst
Speaker 1: with Bloomberg Intelligence in Seattle. There's a big story brewing
Speaker 1: in the oil sector and we'll be looking at that
Speaker 1: with Spencer just a little bit later in the show,
Speaker 1: So do stay with us. But first, Steve Church, with
Speaker 1: Bloomberg News, you've been covering the bankruptcy courts for years.
Speaker 1: We've had the pleasure of working together for a lot
Speaker 1: of that time. As you've reported, a prominent bankruptcy judge
Speaker 1: is stepping down after revelations that he dated and lived
Speaker 1: with a top Houston bankruptcy lawyer since twenty seventeen. I'm
Speaker 1: not going to get into that scandal or why it
Speaker 1: took six years for anyone to figure that out. I mean,
Speaker 1: Houston's not a big town. People must talk to each other,
Speaker 1: especially in a small world like bankruptcy. But it really
Speaker 1: is amazing to me that no one saw that coming.
Speaker 1: But more interesting to the credit markets, who is Judge
Speaker 1: Jones and why is it such a big deal that
Speaker 1: he's leaving the court?
Speaker 2: I think the big deal is Jones was known as
Speaker 2: a judge who could work fast, was willing to make
Speaker 2: hard decisions quickly without spending months of expensive litigation or
Speaker 2: expensive briefings. He always let companies and creditors know upfront
Speaker 2: what he was thinking. He did that deliberately because he
Speaker 2: thought it would speed up the process and save money
Speaker 2: in the long run. But most importantly, I think corporations
Speaker 2: in distress began to look at Texas as a place
Speaker 2: to return to to bring their bankruptcy cases there because
Speaker 2: Jones and another judge, judge is Gar that he knows
Speaker 2: very well. The two of them have worked together for years,
Speaker 2: because they made such a powerful team, and because they
Speaker 2: were so willing to make a lot of adjustments to
Speaker 2: how the process worked, not only legal rulings so much,
Speaker 2: but definitely to make it easier to get into the
Speaker 2: court easier to file cases, and of course they both
Speaker 2: have expertise in oil cases, big oil cases. Corporations got
Speaker 2: comfortable coming to Houston, and so a lot of the
Speaker 2: biggest law firms brought their cases there because of Judge
Speaker 2: Jones primarily and judgees Ger.
Speaker 1: And one of your sources described it as a nightmare
Speaker 1: for the bankruptcy bench. You've been covering this a long
Speaker 1: time to see though, So how much of a surprise
Speaker 1: was it to you and how well did you know
Speaker 1: the judge.
Speaker 2: I've been listening to the judge for many, many years.
Speaker 2: He is one of the rare judges who will actually
Speaker 2: talk to the press on background, and occasionally he would
Speaker 2: communicate on the record when he was talking about certain
Speaker 2: issues that were not directly involved in a case. So
Speaker 2: he was approachable. So I knew him fairly. I wouldn't
Speaker 2: say very well, but well enough to be able to
Speaker 2: call him up and ask him what was going on
Speaker 2: with the process of bankruptcies in general, not about specific cases.
Speaker 2: He simply wouldn't comment on that. And as for the
Speaker 2: surprise I was, I was very surprised. I was shocked, actually,
Speaker 2: And the lawyers that I've talked to who are not
Speaker 2: Houston lawyers, some of the big bankruptcy attorneys that have
Speaker 2: been around for many years. They had no idea, they said,
Speaker 2: they did not know what was happening.
Speaker 1: So Amelia tell us about some of his cases. You know,
Speaker 1: what was he actually involved with? And you know why
Speaker 1: was he so important for bankruptcy.
Speaker 3: Yeah, So what I started covering bankruptcy, which was only
Speaker 3: in January. Some of the biggest cases that were coming
Speaker 3: before him were ones with so called liability management deals,
Speaker 3: which is basically a jargony word for these contentious debt
Speaker 3: deals that get done between creditors and they're often known
Speaker 3: for spurring you know, credit on credit or violence or fights.
Speaker 3: And so he became very important recently with those types
Speaker 3: of deals and companies that had done those transactions because
Speaker 3: he was willing to kind of go above and beyond
Speaker 3: other courts and making quick decisions, sweeping decisions when other courts,
Speaker 3: you know, district courts or the like, would take months
Speaker 3: and months to make make a call or a ruling.
Speaker 3: And so one case we watched with this play out
Speaker 3: with was the mattress maker Serta. Simmons had an infamous
Speaker 3: debt deal that was highly contentious in twenty twenty. It
Speaker 3: filed for bankruptcy in January before Judge Jones, and within
Speaker 3: a matter of months he was willing to make, you know,
Speaker 3: a sweeping opinion that basically blessed the deal and said
Speaker 3: that it was done in good faith and was an
Speaker 3: open market purchase. Two, you know, components that were highly
Speaker 3: litigated prior in other venues. So you know, we heard
Speaker 3: from sources far before Judge Jones resigned that companies had
Speaker 3: similarly contested deals in their belts were going to make
Speaker 3: sure that they had, you know, some kind of jurisdiction
Speaker 3: in Texas if they did have to file for bankruptcy.
Speaker 3: You know, with the idea that they wanted to be
Speaker 3: in front of Jones.
Speaker 1: Why and maybe you could win bits on this as
Speaker 1: well as Steve. But why do you think he was
Speaker 1: so good at handling these really tough cases.
Speaker 2: He was a litigator for many years. He did a
Speaker 2: lot of oil litigation in the bankruptcy courts, and his
Speaker 2: personality is lent itself to being willing to press forward
Speaker 2: with not with minimal information, but without requiring a huge
Speaker 2: amount of back and forth between say, creditors and the
Speaker 2: companies that require months of briefing. He would often give
Speaker 2: you an he was willing to take the risk that
Speaker 2: he might be wrong. He was very confident on the bench.
Speaker 2: He had a lot of experience with the kinds of
Speaker 2: cases that were coming in front of him, and he
Speaker 2: would often say, well, when I was in practice, we
Speaker 2: had these kinds of issues. He was also an expert
Speaker 2: in litigation, in the daily grind of two parties fighting
Speaker 2: with each other to collect information about each other and
Speaker 2: to decide what was presentable to the court what was
Speaker 2: off limits. And he cut through those those kinds of
Speaker 2: fights which can bog down a lawsuit for years. He
Speaker 2: cut through that very quickly, and that's what made him
Speaker 2: sort of a favorite among a lot of companies that
Speaker 2: are in distress.
Speaker 1: Obviously, speed of execution is great when you're dealing with
Speaker 1: lawyers that cost thousands of dollars an hour. But did
Speaker 1: he always get it right?
Speaker 2: That's a good question.
Speaker 3: Well, it depends on who you know, which side of
Speaker 3: the eyele you're talking to. I would say there are
Speaker 3: a number of cases on appeal now that he rolled on,
Speaker 3: so yeah, But I do will say that, like one
Speaker 3: source I spoke to, who's a professor, you know, did
Speaker 3: go on for a while when I spoke to him
Speaker 3: earlier this week about how well respected Judge Jones was,
Speaker 3: and you know, he was known for someone who worked
Speaker 3: incredibly hard. He was willing to you know, schedule, you know,
Speaker 3: the first stay hearing of a case near hours after
Speaker 3: a case was filed. And so I think that big
Speaker 3: law firms also, you know, demanded a certain level of
Speaker 3: you know, kind of intensity and readiness to take on
Speaker 3: big cases and clear your schedule, you know, if a
Speaker 3: multi billion dollar case comes onto your docket. So I
Speaker 3: think there was a lot of respect among you know,
Speaker 3: all sides for that.
Speaker 2: I can't think of a specific case, a big case
Speaker 2: where he was overruled by either the district Court or
Speaker 2: the Court of Appeals in Houston. He had a good
Speaker 2: enough reputation, and the court itself, including Judge is Ger
Speaker 2: and now Judge Lopez, they have strong reputations and that
Speaker 2: means something thing to the judges above them, the judges
Speaker 2: who have to review their decisions. So they were not
Speaker 2: overruled very often.
Speaker 1: And companies that had any reason to file, maybe they
Speaker 1: had a unit in Texas, they would deliberately go to
Speaker 1: Texas just so they could deal with Judge Jones.
Speaker 2: Is that right, Jones?
Speaker 1: Or I isger Yes, Okay, We're creditors as happy as
Speaker 1: the companies to be down there.
Speaker 2: In most cases, some creditors some It depended on the case.
Speaker 2: I think some creditors may have viewed him as with
Speaker 2: a little suspicion because he was willing to go fast,
Speaker 2: and creditors often want to go slow in order to
Speaker 2: negotiate and bargain and see if they can get more money.
Speaker 1: So, given the conflict of interest that has now come
Speaker 1: to like Judge Jones and the lawyer he was personally
Speaker 1: involved with, isn't there a risk that some creditors may
Speaker 1: go back and even some companies go back and challenge
Speaker 1: some of the cases that he oversaw.
Speaker 3: Yeah, there is, you know, sources did say this week
Speaker 3: that there is that risk, and there's not a lot
Speaker 3: of precedence for this. I mean, this is a a
Speaker 3: really specific case and just the sheer volume of cases
Speaker 3: that were before Judge Jones makes this a logistical nightmare.
Speaker 3: But today we did see you know, there was a
Speaker 3: brief filed in the appeal of Surda and the lenders
Speaker 3: who are appealing the case are the ones that were
Speaker 3: left out of the deal? Did mention just you know,
Speaker 3: basically as a line item that because Judge Jones resigned,
Speaker 3: there's some reason to believe that the case should be
Speaker 3: you know, punted either to the district court in Texas
Speaker 3: or back to the court in New York. It didn't
Speaker 3: mention the scandal or you know, make any claim that
Speaker 3: because of the scandal and the resignation the whole thing
Speaker 3: should be overruled. But I think that it'll be used
Speaker 3: as a as a bargaining chip for sure, especially in
Speaker 3: highly contentious cases where you know, lenders are grasping at
Speaker 3: anything to build out their argument.
Speaker 1: Steve, do you expect to see some of those old
Speaker 1: cases were the ugly heads again?
Speaker 2: Oh, lawyers will try. I think it's an easy argument
Speaker 2: to make. It's a hard one to win. Unless you
Speaker 2: can specifically link a decision he made to the conflict
Speaker 2: that he that caused him to leave. That might be possible,
Speaker 2: but I suspect it will be on a very It'll
Speaker 2: be a limited number of cases that can actually make
Speaker 2: that leap.
Speaker 1: But the law firm that he you know, he was
Speaker 1: involved with a lawyer as a prominent law firm. That
Speaker 1: law firm was involved in some big cases.
Speaker 2: That law firm mostly worked as what they call local council,
Speaker 2: which meant they did they did not take the lead
Speaker 2: on a lot of the most contentious issues. So you'd
Speaker 2: have a national law firm, say Kirkland and Ellis, Wyle Gotshaw,
Speaker 2: Aiken and Gump, one of these very big, you know,
Speaker 2: world straddling law firms that actually did the most important
Speaker 2: and contentious work. And the argument will be made by
Speaker 2: the winners of John Jones's cases that Jackson Walker did
Speaker 2: small amounts of work and therefore they don't have to
Speaker 2: that you shouldn't overturn it. They weren't involved, but there
Speaker 2: were some cases that Jackson Walker did did handle themselves.
Speaker 2: Those cases could be You could make the argument, especially
Speaker 2: if something new comes out about the fees that were
Speaker 2: paid or about any other conflicts of interest related to
Speaker 2: his girlfriend.
Speaker 1: What are the other big takeaways from this case? Anything
Speaker 1: else come delight from your reporting.
Speaker 2: There's one irony. Judge Jones made some enemies, He made
Speaker 2: some very He made people angry. There was one well
Speaker 2: known Wall Street distress debt trader who was convicted of
Speaker 2: essentially manipulating the bankruptcy process because he was playing he
Speaker 2: was using his position in the Nieman Marcus case. Neman Marcus,
Speaker 2: the retailer, the luxury retailer that went bankrupt. This Wall
Speaker 2: Street insider was using his position, his knowledge to do
Speaker 2: to threaten other participants in the case. Jones went ballistic
Speaker 2: when he found out about this and personally pushed for
Speaker 2: prosecutors to look at this Wall Street trader, and the
Speaker 2: person was eventually pled guilty. That's one example of a
Speaker 2: very angry a person, very angry judgment. One other, and
Speaker 2: that is the consulting company. McKenzie was accused by some
Speaker 2: creditors and by the US trustee of not disclosing their
Speaker 2: own conflicts of interest. At one point, when handling these allegations,
Speaker 2: Judge Jones told them that some careers might be ended
Speaker 2: because of this, and that he was perfectly willing to
Speaker 2: submit a recommendation to prosecutors if he found that there
Speaker 2: were problems. He didn't make any final rulings that specifically
Speaker 2: sanctioned McKenzie, but he made enough of a problem for
Speaker 2: them that they spent a lot of money defending themselves,
Speaker 2: and eventually that case did go on. In other courts
Speaker 2: that that continue to use some of Judge Jones's findings
Speaker 2: and rulings.
Speaker 1: Interesting, Amelia, did you have other observations.
Speaker 3: I was just going to say that, you know, there
Speaker 3: have been pushes historically for a venue reform, and you know,
Speaker 3: it's a very hard piece of legislation to draft from
Speaker 3: what I hear, and I think that some people do
Speaker 3: expect there'd be renewed calls for venue reform, like the
Speaker 3: fact that Houston alone as a venue had I think
Speaker 3: more than a third of national cases and there are
Speaker 3: surely not that many companies based in Houston or you know,
Speaker 3: Texas with a prominent footprint there, and so I think
Speaker 3: that that will be something to watch out for in
Speaker 3: the coming months, to see whether there's kind of greater
Speaker 3: scrutiny on the bankruptcy process and you know what sort
Speaker 3: of sorts of reform or calls for it come out
Speaker 3: of this great stuff.
Speaker 1: Steve Church and Emelia Palla from bloom News, thank you
Speaker 1: so much for joining us.
Speaker 3: Thank you, James.
Speaker 2: Thanks James.
Speaker 1: Read all of their great scoops on the Bloomberg terminal,
Speaker 1: and of course at Bloomberg dot com, bankruptcy is a
Speaker 1: huge story. We have a fantastic global team treking it
Speaker 1: so do check it out. Thanks so much. As I
Speaker 1: mentioned earlier, we're joined by Spencer Cutter from Bloomberg Intelligence
Speaker 1: in Seattle. It's great to have you back on the show.
Speaker 4: How's it going, James, Thanks for having me back again.
Speaker 4: It's going well great.
Speaker 1: So we hit so well M and A. That is
Speaker 1: consolidation in the energy sector, oil and gas companies buying other,
Speaker 1: mostly smaller producers, so oil prices are up. Producers are
Speaker 1: enjoying a windfall. Have they run out of things to
Speaker 1: do with the cash they now have to buy each other?
Speaker 1: Is that the end game here?
Speaker 4: Well, there's a couple of things going on. The part
Speaker 4: of the cash that they've been generating over the past
Speaker 4: year has been going out the door to shareholders in
Speaker 4: the form of stock buybacks and these variable dividends, and
Speaker 4: a lot of companies have basically committed to saying we
Speaker 4: will return something in the neighborhood of fifty to even
Speaker 4: seventy five percent of free cash flow every quarter every
Speaker 4: year or two shareholders. But there's also a lot of
Speaker 4: fragmentation within the industry, and there's a lot of small
Speaker 4: to medium sized players and there's not You know, if
Speaker 4: you roll the tape back ten years ago, it's kind
Speaker 4: of the wild West with the shale revolution and a
Speaker 4: lot of basins that we're not producing all of a
Speaker 4: sudden that we were able to produce, and that's kind
Speaker 4: of run its course to a large part. So now
Speaker 4: there's expectations that there should be some consolidation within the
Speaker 4: industry to bring some of the scale on scope that
Speaker 4: you would get in that case. So we've seen some
Speaker 4: M and A activity certainly over the last couple of years.
Speaker 4: But with the announcement of Exon buying Pioneer, there's some
Speaker 4: expectation that that could really push everything into high gear.
Speaker 1: That was a big deal, right, how much was it worth?
Speaker 4: Sixty billion? Yeah, it's a very big deal. And it
Speaker 4: is basically focused on Exon expanding its footpair footprint in
Speaker 4: the premium basin, which is the premier basin in the
Speaker 4: United States and North America.
Speaker 1: And is it really is it really simple as just
Speaker 1: big companies like Xon buying the smaller ones.
Speaker 4: I think you're gonna you could see you could see
Speaker 4: a couple of different things. You could certainly see big
Speaker 4: companies like X like Exon trying to expand their footprint
Speaker 4: in certain areas. So you know, Chevron could be a
Speaker 4: buyer of another large company if they want to do
Speaker 4: the same thing. But I also think you could see
Speaker 4: a lot of consolidation within the mid tier and two
Speaker 4: smaller to medium sized companies kind of teaming up to
Speaker 4: be to make a larger you know, certainly nothing on
Speaker 4: the rival exon, but a much larger producer within a
Speaker 4: certain area. So I think you're going to see both
Speaker 4: of those. And you know we're talking about you know,
Speaker 4: credit focused podcasts here. Fortunately, today, I think whether it's
Speaker 4: a big company buying a smaller company or two mid
Speaker 4: sized companies merging, I think it's going to largely be
Speaker 4: a credit positive event for bondholders of in in most cases, is.
Speaker 1: It simply the case as in other commodities that bigger
Speaker 1: is better, just more efficient, bigger reach, all that stuff.
Speaker 4: Yeah, to a certain extent, Yeah, bigger is better. And
Speaker 4: there's a couple of things driving my view that I
Speaker 4: think this is a positive for creditors. You know, usually
Speaker 4: when you start talking about M and A, bond holders
Speaker 4: get a little bit nervous because, on the one hand,
Speaker 4: you could have the city scenario of a big A
Speaker 4: double A rated credit buying a smaller B or double
Speaker 4: B rated credit, and then the small bondholders of the
Speaker 4: smaller companies certainly make out with a bit of a windfall.
Speaker 4: But you could also have the opposite extreme with extreme
Speaker 4: which is an LBO. But we haven't been seeing LBOs
Speaker 4: or highly levered deals in the oil and gas space
Speaker 4: for quite a while, and it's largely because of the
Speaker 4: downturns we saw in twenty sixteen in twenty twenty where
Speaker 4: you had waves of bankruptcies, and ever since then, companies
Speaker 4: have been very focused on rebuilding and reinforcing their balance sheets,
Speaker 4: paying down debt, and one of the ways they've done
Speaker 4: that is not just paying down debt, but also acquiring
Speaker 4: other companies in all stock deals. So if you look
Speaker 4: at the deals that have been done since twenty twenty,
Speaker 4: all the large deals, almost all the large deals were
Speaker 4: one hundred percent equity focused, and the handful of large
Speaker 4: deals that weren't so Like when Pioneer bought Double Point,
Speaker 4: there was a large cash portion of that that involved
Speaker 4: a private equity firm, and so private equity companies obviously
Speaker 4: would rather have cash than stock. They'll take some stock,
Speaker 4: but they need something to return to their LPs. So
Speaker 4: I do think you're going to see most of these
Speaker 4: deals be structured as largely, if not all stock, mostly stock.
Speaker 4: And then the Exxon Pioneer case, you saw that, so
Speaker 4: it's a continuation of that, and then the other you know,
Speaker 4: let's talk about a merger of equals. And you mentioned
Speaker 4: is bigger better, not oil focused, but natural gas focused.
Speaker 4: This week there were rumors that Chesapeake is looking to
Speaker 4: buy Southwestern. These are two natural gas companies. They're both
Speaker 4: fairly large North America, but small when you compare them
Speaker 4: to a Chevron or Exxon, both double B rated credits.
Speaker 4: And my view is if those two combine in an
Speaker 4: all stock merger, that would give it much bigger footprint,
Speaker 4: more size and scope and business diversity, and that could
Speaker 4: then lead to an upgrade in their credit ratings because
Speaker 4: the agencies do do look at that as a primary factor.
Speaker 4: You know, bigger does give you certain advantages.
Speaker 1: Is there any associated issuance with this? I mean, you
Speaker 1: know it's all stock deals and the obviously on the
Speaker 1: LBO side, debt is hugely more expensive than it was.
Speaker 1: But is there going to be liability management? Is there
Speaker 1: going to be cleaning up the balance sheet. I mean
Speaker 1: there have been also some some issuance of energy companies
Speaker 1: over the last few weeks. Actually, so I was wondering,
Speaker 1: do we see more new money coming out?
Speaker 4: You could see some liability management to the extent that
Speaker 4: the acquiring company may want a tender for some of
Speaker 4: the target companies bomb ones. Maybe they want to change
Speaker 4: the covenants or somehow to match you know, the indenture
Speaker 4: for their existing bonds, so the new you know, the
Speaker 4: whole every bond that is now underneath that corporate umbrella
Speaker 4: is relatively identical from a covenant standpoint, or maybe they
Speaker 4: just sort of want to clean up the balance sheet.
Speaker 4: You mentioned some of the activity new issue activity.
Speaker 2: A lot of that.
Speaker 4: You know, I've been going here talking about how a
Speaker 4: lot of these M and A deals are equity focused,
Speaker 4: but when you do look at some of the smaller ones,
Speaker 4: there has been some debt, and again a lot of
Speaker 4: that is PE related. So Civitas Resources is a was
Speaker 4: a relatively small oil and gas producer focused in the
Speaker 4: DJ basin, and they have gone from having only four
Speaker 4: hundred million of bonds outstanding at the end of last
Speaker 4: year two uh now they are the largest issuer in
Speaker 4: the High Yield Independent Energy index because they have announced
Speaker 4: that they have They have announced and closed on two
Speaker 4: deals and just announced their third, and each one of
Speaker 4: those did involve quite a bit of debt. But they
Speaker 4: were buying assets from private equity companies, which, like I
Speaker 4: mentioned earlier, pe company will take some stock, but they
Speaker 4: also need some cash so that they can give that
Speaker 4: back to their investors pretty quick.
Speaker 1: Are there any relative value place here? Is there an
Speaker 1: opportunity for an investor to I mean, I'm just going
Speaker 1: to be cruely breaking it down. I'm not an investor
Speaker 1: in any means, but find a target company that's junk
Speaker 1: rated that might be brought by an investment grade company,
Speaker 1: buy the bonds and hope for an upgrade and get
Speaker 1: some money there.
Speaker 4: Yeah. I mean, if you want to play that angle,
Speaker 4: the thing to do is look at who has I
Speaker 4: think you're going to want the target company to have
Speaker 4: a fairly first of all, a clean balance sheet. Nobody
Speaker 4: wants to acquire a mess and a fairly simple asset profile,
Speaker 4: so reserves in one, maybe two basins, and that their
Speaker 4: reserves are located fairly close to some of the larger
Speaker 4: producers who have a bigger balance sheet and higher credit ratings,
Speaker 4: and the theory being the larger producer understands that region
Speaker 4: already has operations in that region, has people on the ground,
Speaker 4: has gathering and processing infrastructure, and would be relatively easy
Speaker 4: for them to then acquire the adjacent acreage and then
Speaker 4: hook up all their systems to that newly acquired acreage.
Speaker 4: There'd be certain synergies because now you have one company
Speaker 4: running instead of two. So that's kind of the playbook.
Speaker 4: You know, Pioneers is focused in the Permian, and then
Speaker 4: you look at sorry Chesapeake Energy. Now they're trying to
Speaker 4: be the acquirer here, as is rumored, But if you
Speaker 4: look at what they've done, and you know, I've been
Speaker 4: writing about this for a little while, they when they
Speaker 4: came out of bankruptcy, they had sort of diverse assets
Speaker 4: kind of all over the North, all over the United States,
Speaker 4: and they have since sold off a bunch of the
Speaker 4: non core assets, paid down some debt, and they're now
Speaker 4: focused on just two regions. And if you look at
Speaker 4: that kind of like, okay, they don't have a whole
Speaker 4: lot of debt, and they've streamlined their operations and their
Speaker 4: reserve base. That makes it fairly easier for them to
Speaker 4: either be the acquire or get acquired. So I'm not
Speaker 4: surprised to see them in the market a rumor at
Speaker 4: least to be in the market to do some sort
Speaker 4: of deal.
Speaker 1: In basic terms of these deals, this ma that's going on,
Speaker 1: This is more just companies in you know, mostly fossil
Speaker 1: fuels companies just buying up more production. They just want
Speaker 1: to produce more barrels or more liters of whatever is
Speaker 1: they're producing.
Speaker 4: Yeah, for a large part that is most of what
Speaker 4: you're seeing. Keep in mind, you know, it's a depleting
Speaker 4: asset base, so every barrel of oil you pump out
Speaker 4: of the ground depletes, you know, is a barrel you
Speaker 4: can't pump out of the ground ten years from now.
Speaker 4: So you need to keep replacing that asset base. And
Speaker 4: that can be either through you know, going out and
Speaker 4: exploring for new reserves somewhere in the world, and there
Speaker 4: certainly is quite a bit of that going on, particularly offshore,
Speaker 4: or you can just acquire somebody else's already existing reserves
Speaker 4: and hope that you can get a good deal and
Speaker 4: then that extends your reserve life profile. You've also seen
Speaker 4: some deals involving esg angles. So another excellent deal Denbury
Speaker 4: Resources that was largely I think an esg angle because
Speaker 4: Denbury does this enhanced oil recovery process where you basically
Speaker 4: take CO two and inject it into the ground in
Speaker 4: an existing producing well to increase the pressure underground in
Speaker 4: that well to then force more oil and gas molecules
Speaker 4: out up to the surface. And so you're getting more
Speaker 4: gas out, more oil and gas out, and you're taking
Speaker 4: CO two and injecting it in. And they also have
Speaker 4: two network of CO two pipelines to help facilitate this,
Speaker 4: and of course in this day and age, trying to
Speaker 4: find ways to inject CO two back into the ground
Speaker 4: is something that people look pretty favorably upon.
Speaker 1: But they're not buying wind farms or solar that they're
Speaker 1: staying in fossil fuelds, right.
Speaker 4: They're largely staying in fossil fuels. Occidental Petroleum is branching
Speaker 4: out not into wind farms or solar, but into this
Speaker 4: direct air capture arena. So kind of similar to the
Speaker 4: Exxon buying Denbury, but that's a sort of buying a
Speaker 4: proven company with proven operations. Occidental is I'm gonna get
Speaker 4: a little bit out of my area of expertise because
Speaker 4: direct air capture, from what I understand, is a slightly
Speaker 4: proven technology, but not proven on the scope and scale
Speaker 4: yet that Occidental is hoping to build. But they're basically
Speaker 4: planning to spend billions of dollars to build these facilities
Speaker 4: that just essentially, as the name implies, sucks carbon dioxide
Speaker 4: out of the air directly and then they can take
Speaker 4: that put in a pipeline acted somewhere else in the ground.
Speaker 4: So you are seeing a little bit of that. Occidental
Speaker 4: is kind of the poster child for trying to lead
Speaker 4: the charge developing a new area, and we'll see how
Speaker 4: that goes.
Speaker 1: It's a credit show. So I always like to talk
Speaker 1: about risk. What are the risks here? I mean, surely
Speaker 1: these companies can't just get bigger and bigger and endlessly
Speaker 1: be acquiring resources.
Speaker 4: There's got to be some limits, right, Well, it depends
Speaker 4: if you're talking about the short term risks or the
Speaker 4: long term risks. Is sort of like, you know, as
Speaker 4: the economists say, in the long term we're all dead,
Speaker 4: and in the long term we will eventually run out
Speaker 4: of oil and gas and if you're an oil and
Speaker 4: gas producer and that's all you're doing, well, then you
Speaker 4: don't have a business anymore. And there's lots of different
Speaker 4: theories out there as to what that runway looks like.
Speaker 4: And I'm not going to to argue one point or
Speaker 4: the other other than to say there is a lot
Speaker 4: of evidence coming to light that within the United States,
Speaker 4: the shape revolution as it was, a lot of the
Speaker 4: best reserves have been drilled and produced, and you're going
Speaker 4: to have to start to expand out into second tier
Speaker 4: type reserves, which will cost just as much to drill,
Speaker 4: but you can get less oil or gas out of
Speaker 4: the ground from it, so your relative cost per barrel
Speaker 4: of oil produced goes up. So that could be one
Speaker 4: reason for these companies to then continue to try to
Speaker 4: expand through MNAs, to try to continue to buy these
Speaker 4: good reserves while they still exist. You know, the other
Speaker 4: credit risk is just leverage and commodity prices. So you know,
Speaker 4: oil has been holding fairly steady north of seventy dollars
Speaker 4: a barrel now for several years, ever since we've bounced
Speaker 4: off of the historic loths of twenty twenty. But if
Speaker 4: we hit enter a global recession that that could certainly change. Fortunately,
Speaker 4: as I've mentioned, most of these deals have been funded largely,
Speaker 4: if not exclusively, with stocks, so you haven't seen leverage
Speaker 4: climb very much, if at all, so that the sector
Speaker 4: as a whole is about as healthy as it's ever
Speaker 4: been from a credit scandpoint. But there are always these
Speaker 4: exegenius factors that can come into play when you're talking
Speaker 4: about a commodity based business and you.
Speaker 1: On a high note, Spencer Cutter, Bloomberg Intelligence, thank you
Speaker 1: very much for joining us.
Speaker 4: Sure, thanks for having me, and we hope.
Speaker 1: To have you back on the show very soon. Please
Speaker 1: do check out all of Spencer's great research on the
Speaker 1: Bloomberg Terminal and thanks again to Steve Church and Amelia
Speaker 1: Pollard from Bloomberg News. Read all of their great scoops
Speaker 1: on the Terminal and at Bloomberg dot com, and please
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Speaker 1: or email me directly at jcrumby eight at Bloomberg dot net.
Speaker 1: That's J. Crom b i e as in my surname
Speaker 1: and the number eight at Bloomberg dot net. I'm James Crumby.
Speaker 1: It's been a pleasure having you join us again next
Speaker 1: week on the Credit Edge