Trauber: Inventory Drives M&A, But E&Ps Also Vying for Relevancy

Energy finance whiz Stephen Trauber has advised on more than $700 billion—yes, that “b” is correct—worth of energy deals during his 35 years of investment banking. His career started at Credit Suisse and included other top firms such as Morgan Stanley and UBS Investment Bank before he tried to retire a few years ago. At the time, he was at Citi, where he was vice chairman and global co-head of natural resources and clean energy.

“I wasn’t retiring from work, I was trying to retire to see what else I could go do that might be different,” he said during an interview with Oil and Gas Investor. “But there were a lot of deals going on and when deals are in your blood, you start to kind of miss that. If it had been two years of a quiet period and not as much for consolidation, maybe I wouldn’t have been as anxious to think about whether there was an opportunity.”

Week after week, the deals came fast and furious. Trauber swatted down several offers to rejoin the fray. Instead he advised those firms to hire his former team members. But when Ken Moelis asked him to join his firm and lead a crackerjack team, “it made it a little bit harder to say no, and ultimately I came back.”

Trauber returned to the business as managing director, chairman and global head of energy and clean technology at Moelis in February. He hasn’t regretted it.

Indeed, there’s been little time to reconsider. The deal flow shows no sign of a quick abatement, and Trauber says the work is fun.

“We’re working on a lot of interesting things, and there is still a lot of activity going on out there,” he said.

Deon Daugherty: What is your overall sense of where we are in the cycle of M&A, the follow-on A&D activity and how it may all shape up going into and throughout 2025?

Stephen Trauber: We have just undergone a serious wave of increased activity in M&A, and a lot of the large companies have made pretty significant acquisitions. Typically, that is followed by some digestion of the assets and some rationalization of the new pro forma combined company. It could be assets of the buyer, it could be assets of some of the ones they just acquired that are lower quality.

I think we’re still in the mode also of companies that need to continue to get bigger. The bar has gotten higher for companies to be relevant. There was a time way back in the day when it was $5 billion [market capitalization] and then it moved to $10 billion for, I think, most people to consider it to be a long-term sustainable, relevant, important company. In the upstream space you’re closer to $20 billion.

And so, I think there are companies in the marketplace that are thinking about what those alternatives are. In the same vein, I think there’s a lot of companies that now they’ve got the size, they’re wondering whether they are going to be able to continue to replace reserves with the drill bit. Most people will probably conclude that they can’t. So, there are going to continue to be the acquisitions of what I would call “the more sizable companies” in the space.

When you start to think about companies that are $5 billion and higher, I think all of those companies have to think about whether they are takeover candidates today. And then there are some that will continue to try to achieve to get bigger, but I think a lot of those companies will find themselves more in the lens of somebody that wants to acquire them.

DD: When you consider the potential for additional M&A, what are the most likely targets for acquisition? And, will buyers look outside the Permian for these deals?

ST: Companies are continuing to look to add to their portfolio. I think there are assets predominantly permeated in the Eagle Ford. I think there’s certainly assets still in Appalachia, but given where gas prices are, that’s a different discussion for the time being.

I think a lot of the assets have kind of run their course out of the Bakken, so there’s less to buy in the Bakken. I think most of the deals you’ll see—obviously Ovintiv selling Uinta is one—but I think most of the things you’ll see are things that are coming out of the Permian and Eagle Ford.

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The Midcon is starting to pick up with regard to potential interest. When you look at a part of the country, it has not been favored by the public market. These are relatively low valuation but yet generate really good cash flow. There are companies in the Midcon that could contemplate a potential sale at some point in the next year or two, probably sooner rather later.

DD: What’s making some of the more mature plays or even conventional assets more attractive? Are those sorts of deals trending upward?

ST: Refracking, for sure, is already picking up, particularly in the Eagle Ford, and people are having success. So, I do think that’s going to pick up some unconventional activity to a certain extent. I’m starting to hear more and more, however, that some of the bigger companies are starting to think out-of-the-box internationally and about what might be some growth opportunities.

DD: Offshore?
ST: It could be offshore. Could be areas or various concessions in other places, whether that could be Australia—the one that’s talked about a lot—or opportunities in various places, maybe the more friendly countries in Africa.

You’re starting to see opportunities down in South America. But I think people have gotten very concerned about Argentina—that’s been off and on again. And Canada is starting to get a little bit of dialogue. The valuations they are getting up there have been pretty attractive.

People are starting to open up the aperture of the lens a little bit to see what other opportunities may be out there that may come at better valuations.

DD: Given the volume of private firms that have been acquired, does the industry need to reload with another set of small producers? And, where would they access the capital to do so?

ST: The successful private equity firms that have remained in upstream, namely NGP, Quantum [Energy Partners], Pearl [Energy Investments] and others have had a track record. EnCap [Investments] is obviously a very important one.

Those companies, while they may not achieve the source of fund sizes they have historically, I think there is still a universe of companies out there that believe companies can achieve strong returns.

If you looked at what EnCap has done in particular this year with the sale of Grayson Mill and others … they have had very good success. Investors generated excellent returns. I think those companies will continue to invest, will be able to track capital and continue to invest in the sector.

Because there’s less competition, they will have an easier time doing it. There are increasingly entities or individuals that are looking to build capital pools with family offices.

DD: We’re hearing a lot about family offices this year.
ST: That’s another angle that people are looking at to figure out how they can raise pools of capital, adequate pools of capital, amongst family offices, which don’t have the same sort of pressures that many of the larger LPs have from insurance companies, other institutions, pension funds or university endowments, which have come under pressure for investing in fossil fuels. Family offices just want to generate returns and certainly the energy sector has been a place over the last few years that has generated very good returns.

DD: What can you tell us about some emerging or alternative methods of finance, such as ABS, secondary markets and bridge financing?

ST: They have their applications for sure, particularly where certain funds don’t have an adequate amount of capital to make the acquisition and the seller wants more cash.

Whether it be securitization/ABS ways to monetize some of the reserve, particularly the PDP part of the reserves, in order to generate more capital to be able to make purchase prices, to make acquisitions … a lot of these companies that are increasingly becoming more mature and have a lot of PDP, they want to be able continue to fund the development of existing reserves and may take some of that PDP and securitize it. You can attract pretty low-cost capital by doing that, particularly if you’re non-investment grade. The cost of capital has risen so dramatically over the last 24 or 36 months and that cost of capital is cheaper. There are a number of parties out there providing that kind of capital that are being pretty aggressive.

And in terms of secondary funds, they are allowing some of these private equity firms to hang onto their assets a little bit longer without having to monetize them. In case-by-case situations, that could be a valuable tool, as well.

DD: What else is going on that maybe hasn’t gotten much traction yet in the public dialogue?
ST: I sometimes try to think outside the box about these things. What deals out there, what transactions, what business combinations in the energy sector make the most sense? And I tend to want to go to the big deals, I tend to want to look at the supermajors. Why does it not make sense for BP and Shell to come together? Why does it not make sense for a Chevron and Conoco to come together? Is that the next wave of deals we see?

As a banker, I’m always looking at thinking about whether that’s something that could happen. There are issues for number, not the least of which is the current FTC [Federal Trade Commission] and their view in evaluating small deals, you can only imagine what [might be the regulatory hurdle] if big deals will happen.

But when you think about it, that’s where the savings are. …You want to find billions of dollars of cost savings and synergies to further drive down your cost of capital, and further strengthen these companies? Those are the deals that make the most strategic sense and create very strong enterprises on a global basis.

And can we free up capital, at the end of the day, for those companies to, No. 1, distribute it back to shareholders; but No. 2, reinvest it in the business, whether that be in the hydrocarbon business and also in the energy transition business? I think there are opportunities there that probably can’t get done in the current administration that may get done in the Republican administration—certainly more likely to be done than in the current administration.