Deon Daugherty, editor-in-chief, Oil and Gas Investor: Hi, I am Deon Daugherty, editor-in-chief of Oil and Gas Investor here at the Energy Capital Conference in Dallas. And with me I have Daniel Hoverman, the head of corporate and investment banking at Texas Capital.

So Daniel, I guess let's just begin with, how is Texas Capital helping to draw investment into Texas?

Daniel Hoverman, managing director and head of corporate and investment banking, Texas Capital: Happy to answer that. Texas Capital is the first full-service financial services firm that is headquartered in the state of Texas. We do things that full service firms do, so we lend, we help arrange capital. One of the more innovative things that we've done is to launch a series of exchange-traded funds. In the energy sector in particular, we have a fund called the Texas Oil Fund, which is OILT, and it tracks the production data from the Texas Railroad Commission about who is actually producing oil in the state of Texas. And it makes it easy for your average investor to go buy shares and have real exposure to the companies that are responsible for oil production. We have two other funds, the Texas Capital Texas Equity Index, which holds shares in about 230 Texas-headquartered public companies. That's TXS. And we have a small-cap version as well, TXSS, which is Texas-headquartered small-cap companies.

The fun fact that I like to reference is that the smaller the company, the more of its business is in Texas, and the smaller the company, the better the companies tend to do because they are more based in Texas. So it's been, I think serving the state, the eighth-largest economy in the world, has been our kind of primary passion and luckily the business values that we have in Texas tend to resonate some other places, just do what you say you're going to do. And so it's been a real journey to create the firm that we have today.

DD: So what's the reception been like to these Texas-based, Texas-focused funds?

DH: It's been surprisingly engaging. We launched our flagship fund, the Texas Capital Texas Equity Index in July of 2013. It got on Governor Abbott's radar and Governor Abbott volunteered to fly to the New York Stock Exchange to help ring the bell. And so he made it up there in September of last year, and particularly with the Texas Stock Exchange now coming to Texas and a little bit more visibility about how we participate in the capital markets. Did you know that 10% of all trading volume on the New York Stock Exchange is for Texas-headquartered companies?

DD: I did not, but I'm not shocked either.

DH: We are the eighth-largest economy in the world, so we should probably have more things that are built here and based here, and where decisions are made here, and that's really the guiding light of building Texas Capital.

DD: Okay. Well that's fascinating. I didn't realize it was so, I mean, Texas Capital is obviously Texas-centric, but very Texas-centric evidently.

DH: The capital markets are global, but we do want to be the first call for any company that is based in Texas. If you have not just a capital need, if there's a financial solution, we are the firm that you can call and if we can't provide the capital ourselves, we can certainly get you to the folks that can. And again, delivering solutions is, I think what Texans are known for. It doesn't always work. You dust yourself off, you get back on the horse and off you go to try to find success.

DD: Okay, and then I guess more broadly speaking, but still bringing it back home to Texas is, how have shifts in financial markets affected energy transactions, whether we're looking at Texas alone or across the industry?

DH: Sure. So there's a couple trends that have really become evident over the last five years.

On the one hand, you have ESG as a trend which has reduced certain institutional capital providers’ ability to provide capital for certain types of energy companies. We are a Texas state bank, so we are a little bit unique in our ability to serve industries that are really important to the Texas economy. The other important part is that banks in general had a little bit of a reset after their regional banking crisis in 2022. Texas Capital is among the best capitalized and most liquid banks in the country, so it didn't impact us as much as a number of our competitors really reassessed their lending books and they reassessed their deposit franchise and pulled back a little bit from lending.

We've seen that change now. Over the last 6 to 12 months, our syndications desk, we led 104 different transactions last year as lead left agent in the bank market. Eighteen months ago, the syndications market was challenging. You needed to go to market to more folks in order to have the minimum number of people to get your transaction done. We were in the market two weeks ago where we didn't intend to be two times oversubscribed, but we ended up being oversubscribed because the market had shifted and capital was flowing back in. People are looking to put dollars to work again. So there's always a little bit of the supply and demand, but in the energy sector in particular, banks withdrew. They're now back not as robust as they used to be.

We've also seen the return of private credit. So private credit as a part of the capital structure of large companies has become increasingly important. We were a sole manager on a $1.2 billion institutional term loan for a company in Fort Worth called HighPeak Energy—a great transaction, great outcome for the company, but they went from a capital structure that was about 50% bank, 50% institutional term loan to a capital structure that was about 10% bank and 90% institutional term loan. And that's really reflective, I think, of the broader credit markets.

And on the equity side, it has been a horrible equity market for the last couple years. You haven't seen a lot of IPOs. We've seen about a half dozen this year, and there are a number that are in the pipeline, but the equity market is probably the last part of the capital markets to come back. And luckily we're starting to see some green shoots in that market and feel pretty good about 2025.

DD: And see, that was actually going to be my next question is what's your perspective on IPOs and those follow-on opportunities?

DH: So IPOs, every IPO answers only two questions, which is: why buy my stock? and then why should I buy it today? In the IPO market in the equity market, there's really only two answers to that. It is either growth or it is value, i.e. cashflow or dividend payments. So the rate market that we're in, as the Fed starts cutting rates, companies are going to have an easier time from a cashflow perspective paying a dividend that investors find attractive. So I think you will start to see some IPOs that are marketed on the basis of yield start coming to market. We haven't seen those for a couple years. And then I think it's really a question of growth. Finding growth in the energy industry outside of acquisition and organic-led growth has been pretty hard unless you're looking at areas that are adjacent, you're looking at alternative sources of energy, you're looking at nuclear, you're looking at solar or other areas. I think finding that growth story might continue to be challenging given the market that we're in and the consolidation that we're seeing from the larger players. But because the small- and mid-cap space has contracted so much, I think you do have a lot of investors that are hungry for diversification, they're hungry for new stories, they're very knowledgeable about the industry and just haven't seen anything to sink their teeth into. And so again, we are pretty optimistic about 2025.

DD: To what extent might the Federal Reserve cut or interest rate cut have any sort of impact on all of this?

DH: It really just is the cost of money. So even in the most boring situations, managing the money that is in your savings account versus your checking account, you don't get paid interest on your checking account. And for a company that's your payroll account and your operating account, we've seen a much greater amount of discipline and managing liquidity. So when the Fed takes rates from zero to five plus percent, suddenly the opportunity cost of having that cash being thoughtfully deployed, an appropriate return profile becomes really important. If you had a hundred dollars in savings three years ago, you were earning 25 cents in interest. Today, you're earning $4 and change in interest. That's a very meaningful difference. So when you think about the discount rate that people are applying to investment, suddenly when you go from effectively a 0% interest rate, you're indifferent of whether or not your investment returns a dollar today or in 10 years because on a present value basis, it's basically the same, 5% discount rate from a risk-free perspective. Suddenly you're discounting that cashflow in 10 years at a much higher percentage discount to nominal value. And that means the value today is much lower. And so as the cost of money comes down, the Fed starts cutting interest rates, you're going to see the value of those longer term cash flows go up in present value terms. And I think, again, that'll help when people think about investments in equity that'll help support those underlying valuations and hopefully draw some people back into the market.

DD: Great. Well, thank you Daniel very much. This is Daniel Homan with Texas Capital. And I'm Deon Daugherty with Oil and Gas Investor at the Energy Capital Conference. Thank you very much for joining us.

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