Chris Mathews, senior editor of shale and A&D, Hart Energy: I'm Chris Matthews, senior editor of shale and A&D for Hart Energy, and I'm joined by Jon Hughes, co-founder and CEO of Petrie Partners for this edition of the OGInterview. Jon, thanks so much for your time today.
Jon Hughes, co-founder and CEO, Petrie Partners: You bet Chris, glad to be here.
CM: Could you tell us a bit about Petrie Partners for those that might be unfamiliar with the firm?
JH: Sure. We're a specialized investment banking firm. We focus just on energy. The predecessor of our firm was formed in 1989 and we sold that company to Merrill Lynch in 2006. My co-founders and I—Andy Rapp, Mike Bock and I—formed this incarnation of the Petrie firm in 2011.
CM: We're talking after Petrie recently worked on the massive Exxon Mobil-Pioneer acquisition. And I'm wondering if you can tell us a bit about what it was like to work on a deal of such scale.
JH: The Pioneer deal was a massive transaction, the biggest deal this century in oil and gas—it’s a $65 billion transaction. So there's no question it was unusual in that sense, but in another sense, my partners and I have advised on over 200 oil and gas deals, total value over $300 billion. So yes, this was a unique transaction from a scale perspective, but a lot of the attributes of it and our role in it are similar to things that we've done in the past.
CM: It was kind of an Exxon Mobil and Pioneer-sized version of what we're seeing take place across the Permian right now. And it's a need for premier drilling inventory. It's a factor of capital being eroded from the space. I'm curious if you can tell us a little bit about why we're seeing this need for M&A across the Permian and other basins.
JH: Well, the Permian Basin has premier rock. It has great returns. It has some of the lowest break evens in the country. Pioneer had built—Scott [Sheffield] and his team—had built a world-class asset, and it was something that even a world-class company like Exxon found very appealing. So it was kind of a natural fit, and we do see that in other transactions. And the principles are the same as you say—people, parties looking for scale, the benefits of scale, they're looking for high quality inventory. We're going to be—we’ve drilled up a lot of the Tier 1 assets. Opportunities are there. And so the ones that are remaining, like Pioneer, are very scarce and dear.
CM: And essentially people are going to have to, if those assets are already in the hands of a public company or a private company, you essentially have to go out and buy those assets from them to get your hands on them yourself.
JH: You can't lease 'em anymore. You can't go to a lease sale and buy the access to these assets. They're held already as you suggest.
CM: So do you expect to see more of this trend play out as we've now entered 2024?
JH: Sure, yeah, we do. We think that as the demand for high quality locations continues and we expect to see additional consolidation for the same reasons we've discussed. There's been—over the last several years for non-economic reasons, there's been a lack of investment, community support for the oil and gas industry. And so we've got great returns, but we've had capital diverted away. And so that's been a basis for consolidation. We expect that trend. It's beginning, we think, and we expect to see it continue over the balance of this decade to reverse itself and capital to begin flowing back to the industry because we offer such superior returns.
CM: So we talked about the Permian and the deal making happening there, a historic amount of deal making last year in large part due to the massive Exxon-Pioneer deal. But I'm curious if you expect to see deal making happening in other places around the nation as that need for Tier 1 inventory becomes more scarce in places like the Permian and those get increasingly developed?
JH: Sure. We talked about one of the macro trends we expect to see over the next few years [is] capital flowing, again flowing back in the public and private avenues to the sector. Another one is the growth of LNG. There's a lot of LNG facilities under construction, and so as the '26th, '27th, '28, '29, as U.S. gas becomes LNG and to some extent powers Europe and Asia, we're going to see demand for gas increasing. And so I guess we anticipate increased merger activity and even A&D activity on the natural gas side. The last several years have been focused on oil.
CM: So that brings to mind places like maybe Appalachia and the Haynesville as active locations.
JH: Absolutely. There's a geographic benefit. Well, first you have to have high quality rock and there's some of the best rock in the world, honestly, in Appalachia. And then the Haynesville and Eagle Ford are very close to—[they] have a geographic advantage relative to getting gas on the water.
CM: I'm curious what you think is next for the industry and similarly, what's next for Petrie Partners moving forward?
JH: The industry is going to continue to innovate. We are going to provide the critical resource that we provide, even though it's not always popular in the press, but we provide a very critical service and the industry is going to continue to do that. We expect capital to begin flowing back. We expect consolidation to continue and out of that consolidation. And independently, we're going to see, we expect to see increased oil and gas asset transaction activity. From a Petrie Partners standpoint, we've had a long history of innovation. We've been focused on this energy our entire careers. Andy and I have worked together for 25 years. Mike and I have worked together for 33 years. We're going to continue to focus on this industry and provide high quality, thoughtful advice to our clients as they navigate a capital intensive, commodity sensitive industry.
CM: Well, John, that's all the time we have. Thanks so much for joining us here today.
JH: Appreciate it, Chris.
CM: That's all the time we have for this edition of the OGInterview. For more, head to hartenergy.com.