Q&A: Dan Pickering Talks M&A, US Production Growth and the Energy Transition

Pickering Energy Partners (PEP) Chief Investment Officer Dan Pickering recently spoke exclusively with Hart Energy about a slew of energy topics: the future of U.S. production growth, 2023 M&A after a “funky and weird” 2022 and the (fading?) U.S. shale boom. 

Pickering also addressed the market outlook amid the Russia-Ukraine conflict. Whenever the war ends, Russia will remain in the sanctions’ “doghouse” for a long time to come, he said. 

And he weighed in on how the war has altered the pace of the energy transition. 

“Russia has reminded us that hydrocarbons are pretty damn important,” he said.

“Our view is in 2023 M&A picks up. There was some this [past] year, but again, it was such a funky, weird macro world. We expect fewer surprises in 2023.” — Dan Pickering, Pickering Energy Partners.

PEP offers expertise that spans decades across the entire energy landscape. The firm has deployed $15 billion in investments across all energy sub-sectors since 2004. Pickering spoke with Hart Energy’s International Managing Editor Pietro D. Pitts on the sidelines of the Independent Petroleum Association of America’s Private Capital Conference on Jan. 19 in Houston. 

Pietro D. Pitts: Where is the U.S. market going in terms of any increases in oil and gas production?

Dan Pickering: So we’ve got a positive price environment and we have energy security as a dynamic. But at the same time, amid all this uncertainty and scars of the past … there’s high profitability in the business, so there’s plenty of cash to reinvest, but a fairly low willingness to get aggressive and try and grow. 

Over the next five years, U.S. production will go back to new highs. Spending is going to go up a little this year, but it's not going to accelerate dramatically. So, the answer is not as much activity as you would expect with oil at $80/bbl, but it's building and that sort of slow burn that's happening is going to flow over into kind of the global reinvestment cycle. 

The U.S. took a bunch of market share during the shale boom. It's probably not taking any more market share as demand recovers, and so the next two or three years the U.S. claws back a little bit. These longer dated projects internationally offshore are going to pick up some steam because we know we need the crude, we need it from trustworthy places and the health of the business is now such that folks can start to think about spending on longer[-term] projects.

PDP: Now that the U.S. has had this shale boom that’s “now a shale business,” do we have that energy independence that we really have been pushing for?

DP: The U.S. is at near record levels of production, so we are in as good a shape as we've been in decades around energy security and independence. The reality is it's a very complicated market, particularly on the oil side. We don't refine all of our crude… we're shipping out products and crude because of all of the logistics of different crude grades and whatnot. Just because we have a lot of production doesn't necessarily mean that there can't be bottlenecks in the supply chain that can make things funky. And so we couldn't and wouldn't want to be an island, because we're not built to just run U.S. energy. We're built to run global energy. That's part of why all of this is going to take a very long time to sort out because it's a massively complex system. And again, you don't necessarily see that complexity when you put gasoline in your gas tank, but it's there right behind the scenes. 

PDP: Last year we saw a lot of share buybacks. Is that trend going to continue this year, or do you see more money going toward M&A to grow production this year?

DP: You have a couple of dynamics going on. The demand from investors for the return of capital I don't think is going away. We're going to see continued dividends, special dividends and share repurchases. At the same time, we're starting to see some maturing of conventional shale production. And so if you're a company in that environment, you're trying to balance out your shareholders with rebuilding inventory or having quality inventory. Our view is [that] in 2023, M&A picks up. There was some this [past] year, but again, it was such a funky, weird macro world. We expect fewer surprises in 2023 as we come in with our eyes wide open on the pandemic, the economy, interest rates, all of those things, Ukraine. So the ability to sort of say, okay, now let's get back to business. And things aren't expensive, valuations are four or five times cash flow, not eight times cash flow. The publics are comfortable using their stock as some currency in transactions, and the private equities are willing to take it, so there should be more activity because 2023 is less surprising than 2022.

 RELATED

Private Equity Execs Expect Active Year for A&D

PDP: Is the U.S. shale boom behind us or is it still going on? Is there sufficient shale production to anchor new LNG projects on the U.S. Gulf Coast, or in the U.S. in general, and then LNG projects planned in Mexico?

DP: We had our shale boom. We now have the shale business. I don't think we're going to see the kind of dramatic rig count and production additions. The geology is there, and because productivity's beginning to plateau, we're going to have to drill more wells to get more production, we're going to have to have more rigs, more activity. Given all the dynamics, it's unlikely that things explode and we boom. Is there enough productivity for LNG projects? The answer on the gas side is yes. I think we have a lot more gas reserves, supply availability [and] speed to market, and so right now in the U.S. we have too much gas. In 2025, when these LNG projects start coming on, probably not. But the Haynesville, Eagle Ford, Permian — Permian associated gas — we’ll do some stuff on the East Coast and get the Appalachia involved, so the answer is I'm not worried about the supply side of gas for LNG projects. 

PDP: Does the U.S. really have enough gas to send down piped gas to Mexico for their current needs and not considering their LNG?

DP: I don't know what the actual physical pipe situation looks like to Mexico, but if there's pipe capacity we're going to have productive capacity. We have gas to put in, and if they want more, we'll send them more, assuming we've got the midstream to do that. So, Mexico and LNG, they want [the gas and] we got it. It's not going to be a $2.50/Mcf, and that's the other issue that we've put a better floor under. The Europe situation, LNG visibility centers put a better floor under gas prices, so we're not going to ship $2 gas there, we're going to be shipping $3, $4 and $5 gas.

PDP: How does the ongoing Russia-Ukraine conflict dictate the market this year? Are you modeling an end to the conflict anytime soon?

DP: We're not geopolitical experts so we're modeling status quo, which is neither a dramatic escalation or de-escalation because it doesn't seem like the people that could stop this are going to step up and really stop it. The U.S. isn't going to escalate, and it doesn't feel like either side has really got a tactical advantage. So status quo is what we're assuming. 

If there's a resolution there, it's probably great for markets, it's probably not great for the commodity in the short run, because our expectation would be everybody is going to assume Russian supply gets a lot more plentiful or easy. The reality would be Russia's in the doghouse for as long as the eye can see, and therefore the reality is they're going to be sanctioned, they're going to be a declining influence in global oil and gas markets for the next decade. But the knee-jerk reaction if peace happens, oil and gas prices go down. 

PDP: How have recent years with the pandemic and the Russia-Ukraine war changed the outlook for the energy transition? Has that transition slowed now because of what happened in Ukraine and if so how do we get back on track?

DP: What we've seen over the last two years is that the faster you go on energy transition, the more volatile things can be because of the intermittency around renewables, and it's expensive. Russia has reminded us that hydrocarbons are pretty damn important and will be for a while. High natural gas and U.S. gasoline prices sort of increase the resolve of governments and others to move more quickly toward energy transition. The one thing that everybody wants is to decarbonize. Very few people know what that actually costs. And it's being masked in many cases by government subsidies or whatnot. The energy transition, if anything, has accelerated because of high hydrocarbon prices. But the flipside is also we learned that we can't go fast, we can't get there fast, so it's really important to make sure we have secure sources of energy, and that's going to be fossil fuels. The energy transition didn't take a hit from everything that's happened. And if anything, the Inflation Reduction Act, sort of helped accelerate it. So the energy transition is alive and well, and it's going to be a big story for a long time.