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Darren Barbee, senior managing editor, Hart Energy: I'm Darren Barbee. I'm senior managing editor at Hart Energy. I'm at the Energy Capital Conference in Dallas and I'm joined by Cristina Stellar. She's the managing director at BOK Financial. I guess I wanted to start off by you just kind of describing what you're seeing in the A&D market right now. And I think on stage you were talking about some of the trends with consolidation and maybe you can walk us through what you're seeing trend wise.
Cristina Stellar, managing director, BOK Financial: So in general, what we've seen this year is a lot of activity on the M&A. So deals above $1 billion have been extremely active and the theme is the same. Consolidation and public companies are trying to aggregate and they're trying to gain a skill, they want inventory and I don't think that's going to change in the near future. Now what we will see as well at some point is some of those bigger deals, they will trickle down into the middle market, which has been very slow. The beginning of this year I would say we might be at a two decade low as far as transaction activity on those $300 million deals. We are seeing a lot more activity on that space as well now and it will continue.
DB: So on stage though, you talked about the fact that in pretty blunt terms, that the public equity markets are generally not deploying capital. The private equity funds have been struggling to raise money, particularly the past couple of years, and so I'm kind of wondering what they're missing and what happens with that next.
CS: Yeah, so we've definitely seen some groups that have left the space. They just don't want to do fossil fuels and that has led a void. And we've also seen as well that happen in the public markets. Now the public markets, when you look at the compression of the trading multiples, you see they're not there. The cost of capital on that end is expensive.
Is it going to come back? Probably. I think so, but it will take time and what needs to happen? Returns need to stay elevated, prices need to help. I'm not talking about $100/oil, but definitely $80 to $90 is constructive and the discipline to stay and it will come back I think in both public and private equities as well. I would say on the debt side, like we mentioned, that one is a little different because in this particular case it's not so much driven by and there's no correlation right now between the appetite for those new lending projects. It's not correlated with prices just because right now there is a disruption at the macro environment and back sector. So that's probably not going to ease capital on that end unless the regulation in terms of liquidity is clear than where we are right now
DB: With the public markets in particular, it's interesting to me that there's been so much cash that's been returned either through buybacks or dividends. And I'm curious why you think that hasn't led to more. I think the percentage of the S&P has gone up a little bit, but nowhere near where it was six years ago, five years ago. So I'm wondering why you think that is that even with that lure of additional cash, the investors aren't coming back.
CS: So yes, I think energy in terms of market cap is less than 5% of the S&P 500, which historically we were in the ‘80s it was 20%. Then pre 2014 we were talking about 13%- 15%. So it's definitely still very depressed. I think it's come back, it's just coming back slow because again, Dan Pickering mentioned at one point it was a near death experience. The 2018, 2019, those years of underperforming and I think it's taking a little bit, but it will come. I think also we are seeing that in a way in the renewable space it was all about growth, but it is a slowing down. So some of those returns might come back. I think investors are realizing that we are talking on the renewable space about single digit returns and there's really not that much value out on that opportunity. So some of that money might come back as well. Some of that capital might come back as well. It will take time.
And I will say as well, you've seen in general that the requirement for capital of our industry are not what they used to be. We have evolved, we have developed, we are more mature. And not only companies can self-fund now that flat production, which they can, but also they just need less of it.
DB: So how does that affect financial institutions like yours? I mean, do you still have people that are kind of knocking on your door or not?
CS: So we do. We've been extremely active on this space. I mean, just about any deal you hear in the market we've participated, whether it's in an agent capacity or in other capacities and the market is shrinking, but also so are the capital providers on the debt side as well. So you have a lot of banks leaving this space, but also now with the liquidity. Soon after marks this location, you have some regionals that are being very picky on where do they deploy, where to deploy their limited capital. So I think in our end we've definitely been active, but it is getting more challenging and it will continue as companies keep pulling from their own watches.
DB: This been Your Hart Energy LIVE Exclusive Interview with Cristina Stellar. To learn more, go to hartenergy.com.
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