Hi y’all. Yes I know I missed last week and my traditional Labour Day missive and I apologize. I was off doing some personal stuff (which was awesome) and just didn’t want to interrupt it to struggle through a blog. And I have to admit, it has been a struggle to get back into the blog after this summer. It has been a weird few months with lots of personal stuff and vacation and busy times at work – everyone knows the drill – life, right?
That said, the blog is a routine part of my work week that I find therazputic and soothing so I can’t take too much time off or Dave starts to get fed up with me asking too many questions about files he is working on.
Plus, it’s Labour Day. Or Labour Day week as opposed to Labour Day weekend and that can only mean two things. My annual Labour Day missive and the kickoff to the NFL Regular Season and thus my bold and typically inaccurate predictions.
Ah Labour Day. That annual celebration of the righteousness of the downtrodden worker, the brave collectives, union members putting it all on the line day after day in order to enrich the greedy corporate capitalist fat cats who live for exploiting the masses.
And which union am I talking about most specifically here? Why none other than the NFLPA (NFL Players Association) and their hardworking members as they head into what is the 105th season of NFL football. Certainly not PSAC and their whining about having to go back to the office a couple of days a week or CUPE and their inexplicably politically activist VP weirdo who won’t step down or even the teamsters and the rail unions – holding Canada’s economy hostage and providing Jagmeet with the cover he needed to break his party-destroying alliance (dalliance?) with the Liberals and the toxic Trudeau train.
So the NFLPA, because as most of you know, I am a huge NFL fan. And as mentioned above, I like to do an NFL preview blog, and I am going to do one. Just not a full one. A mini-preview. A hint of what to expect.
But I’m going to keep it short because rather than do two blogs, I am going to combine the NFL preview with my other Labour Day tradition – a very unscientific assessment of the current M&A environment.
Last year at this time, energy prices were kinda holding steady. The Russia/Ukraine war continued to truck along. Inflation was still a story although it was starting to taper. Interest rates were elevated and everyone was waiting for the economy to cool off so that we could all renew our mortgages.
Joe Biden and Donald Trump were the presumptive nominees for an election that was thankfully more than a year off.
In Canada, the economy seemed to be doing OK, even if real estate prices were still out of reach for pretty much everyone and record immigration had yet to become a big story in Canada since no arm-chair economists had actually read anything about “per capita GDP” and “relative productivity”.
Everything seemed in a state of equilibrium if felt like we could all take a collective breath.
The October 7th happened and the wheels, as they are wont to do, came off. In a hurry.
Volatility came back into energy markets as fears of a broader Middle Eastern conflict grew.
It looked like the world was on the brink.
Russia/Ukraine, Israel/Hamas et al, China reeling, high interest rates, recession fears, inflation. It’s a wonder any one slept at all!
Meanwhile energy companies continued to do their thing. Producing more oil by drilling less wells in the United States (go figure). Cahs flows continued to grow and dividends got paid. OPEC did its thing and manipulated the supply side to maintain a price deck that not only made them piles of money but also kept Russia from breaking ranks with OPEC+++ and flooding the non-sanctioning world with oil.
So, we made it through the “shock” phase of global conflict and stabilized. Inventories are low but not terrifyingly so. The conflict hasn’t spread. Markets have largely shrugged off war as a reason to drive up prices and instead seem to have decided that a highly volatile trading range between $67.50 and $78.27 a barrel is the way the market should be and every rumour of Chinese slowdowns or US recession or a well being spudded in Bolivia is sufficient to send prices careening down by 1-3-5% in a matter of hours, completely ignoring the physical market.
Where am I going with this? Nowhere really. It’s just more of the same volatility in the energy industry that makes it that much more difficult to predict, let alone plan, capex.
In Canada, we have seen interest rate reductions which have been celebrated by the Liberals (will someone please explain to them that rates are dropped by the BofC because the economy is slowing, which ain’t good). GDP per capita is stagnant and anyone who is in the business world is very well aware that Canada has actually been in a vibecession for pretty much the last two years.
The US continues as the economic juggernaut of the world, even if some politicians would have you believe otherwise.
Politically, we are at a fork in the road in North America. The most interesting developments are south of the border, because they always are, but Canada has been trying to get some attention as well.
The Trudeau Liberals are, for want of a better term, cooked. There might be an argument that a leadership change could refresh their fortunes but it doesn’t feel likely. The Conservatives have a 20% polling lead and now that Jagmeet has jumped ship, LPC support is going to decline further. We won’t have a fall election, but spring feels likely. Imagine what the LPC numbers would look like if Pierre Poilievre was even remotely likable!
The other fork in the road is in the US, in the latest “most consequential election ever”. After a media frenzy that saw Joe Biden run out of the Democratic race and replaced by Kamala Harris (you heard it from me first!), the battle lines have been drawn between the so-called “Joyous” candidacy of Harris-Walz and the dour, angry, grievance driven campaign of Trump-Vance.
Trump was leading, now he’s not. We are 60 days out and the shit is about to hit the fan. The debate on September 10th is going to be must watch TV.
Economically everything is slowing but not to recession levels. I think the US will escape a recession, especially if the election calms the world down. Canada may escape as well, even though our anemic growth feels recessionary.
On the energy front, everyone is making bank. Except of course gas producers, but they never really do. But their time is coming – just you wait!
Canada has record production.
We have a shiny new pipeline for oil. LNG Canada is already starting to freeze gas and get commissioned. This should be celebration times for the oilpatch but it’s hard to get that buzz of excitement – there is fear. Not even the winds of political change seem to be clearing the room. We need catalysts. New leadership. No more waiting games. A wake up call.
Which is ironic, because consumption of all forms of energy is still sky-high. Energy insecurity is real. OPEC+ does not ACTUALLY have a ton of spare capacity. Mexico is still a basket case. China and India are still the fastest growing markets for fossil fuels in the world. 5% interest rates aren’t actually that scary and are coming down. Capital is plentiful and WACC is dropping, even if taxes are creeping up. Growth in non-OPEC countries is nowhere near a sure thing as the IEA and other parties seem to think.
Notwithstanding the current death spiral in prices (exaggeration) it is actually starting to look as if some things may be lining up for us rubes in Canada. We should collectively lighten up.
I mean seriously, we have weathered pretty much every sling and arrow that can come our way, right? The only way things could have been worse is if Bernie Sanders had been elected President or if Justin Trudeau had stepped aside a year ago to make room for Steven Guilbeault – we all know what that would mean – #wexit and even more power to Danielle Smith.
All hail the Empress Danielle the First! Ruler of the sands of oil, first princess of Athabasca, Baroness of High River and Queen of the Duvernay. Marchioness of Medicine Hat. Knight of the Royal Order of Calgary and Duchess of Sherwood Park. Countess of Coutts and Grande Vizier of Vulcan.
Sorry, I digress.
Where was I? Oh yeah, Labour Day weekend, the sun is shining and the price of oil is holding at about $70 and change and natural gas is a whopping $0.02 an MCF (yes, I know, don’t even get me started).
Here in Calgary, Labour Day can bring a snowfall, a thunderstorm or a 32 degree sun splash for the Labour Day Classic football game. Or all three – we can be pretty volatile here.
It’s also the weekend where the back to school/back to work switch gets triggered and Calgary’s business community gets busy again in preparation for a hoped for “busier than last year” drilling season, since like any true energy industry participant, we are nothing if not eternally misguided optimists.
And true to form for every year around this time, kids go back to school, the leaves turn (trust me – it’s Calgary), budgets for 2025 start getting set and the pace of M&A heats up, regardless of stage in the commodity cycle or the commodity price, the only difference being whether it is upstream, midstream or downstream and which particular subsectors lead the charge.
As we discuss with clients in the energy services space, there are certain ideal times of year when deals get more attention in the market or start getting done. These times are just after Labour Day but before American Thanksgiving, just after Christmas and before March and then, uniquely for Western Canada, post spring break up.
For a variety of reasons, these times of year work, driven mainly by the service sector activity cycle but also by the buyer demographic and energy company capital budget timing.
In the context of the current market, where producers are harvesting cash and not barrels, one would assume that activity should be in the tank, but the reality is that the current market is pretty bullish for service companies in general, largely as a result of the self-selection and “culling of the herd” that has occurred over the last few years.
Scarcity is the name of the game and if you have equipment and more importantly, bodies, you are busy.
Layered on top of that is the imminent completion and commissioning of LNG Canada and a number of new, smaller indigenous led LNG projects and the aforementioned completion of the TransMountain Expansion. The increased capacity will allow significantly additional barrels to be sent to the BC coast for export (largely to California, but many to China as well) and facilitate the export of Montney gas – all of this requires more and more production.
Things, as they say, are looking up.
So, there will be jobs and capex. Manpower pressures and inflation have allowed service companies to raise their rates and cash-flush producers are paying them. Well, except for CNRL.
Service companies are making money again. Which finally leads to M&A and the usual rogues gallery of buyers: young and hungry start-ups, savvy veterans giving it one last kick because they sat on the sidelines for three years and, finally, private equity.
As I never get tired of saying, good companies will always attract quality buyers and that is true no matter what the economic environment or the cost of capital. There is just too much capital in the world and the industry is too important for the M&A market to go away. In many ways this is an ideal time for smart buyers to start doing deals as we are far enough away from the desperation of 2016 and COVID and now benefitting from a resolved egress conundrum to allow well-financed and patient buyers to pick up businesses with a lot of runway ahead of them.
As to the opportunity, we see buyers looking to consolidate industry segments, build asset bases, acquire customers and otherwise position themselves for the next few years, driven in large part by the larger infrastructure projects that have and are actually happening.
Against this is record oil production, massive profits and world that is about as insecure about energy as it has ever been. Sell Russia, buy North America.
I’m not predicting anything close to a return to heady, frothy, 2013-2014 crazy times, but we expect a robust M&A market going forward, led by gold standard, efficient Canadian operators.
An additional point to consider as activity increases is a sector rotation from “safer” mid and downstream related businesses into upstream oriented service providers whose growth prospects are suddenly more real than just a fancy slide deck saying “it’s coming”.
On the upstream side, industry subsectors that are typically the most beaten up during a downturn are often the ones to see the first levels of interest – mainly companies that provide front end services such as engineering, planning, infrastructure services like road and right of way clearing, smart rentals and most anything site service related such as transportation, safety, security and medical services. Next up are the drilling and completions companies and judging by activity levels reported, these companies are getting busier.
On the midstream side, along with the mega projects currently underway, there is an ongoing flow of dollars into pipeline and processing infrastructure whether it is new-build or maintenance, turnaround and integrity related. The thesis on investing and maintaining critical infrastructure will always hold regardless of market dynamics.
As far as who the buyers are, we anticipate a mix between Canadian strategic buyers including mid-market players and opportunistic private equity funds looking to support these mid-market players and pursue their own particular investment theses. We also anticipate that more US based buyers will be coming to kick the tires in Canada, as Canadian multiples are much more reasonable and we have great prospects with LNG Canada on track.
Canadian companies are leaders in ESG and, of course, are among the most highly regulated in the industry. This makes them attractive on a relative basis compared to other basins.
So, we are as always cautiously optimistic on the M&A front, both from a business cycle and seasonal perspective.
Which I think I say every year, eternal optimist that I am. Plus M&A never rests. We are closing deals and signing new clients all the time. More on this later in September.
Now, on to the NFL.
This 1,000,000,005th NFL season is going to be epic. I feel it. Lots of exciting young stars, emerging teams, holdouts, surprise retirements and team altering injuries, trades and suspensions. The pre-season was, as always, abysmal and excruciating. Unless you are a QB signing a new contract. Then you’re just absurdly rich.
But… But…
Much like Calgary after Labour Day and the M&A market, the NFL is in many ways predictable.
Teams and players that are meant to win, win. Losers will always lose. Cities that exist on heartbreak will get their hearts broken.
The Super Bowl this year will be in New Orleans.
If I had to pick a city to host a Super Bowl, New Orleans is it. The party will be epic and the gumbo to die for. Plus the Saints are objectively terrible, so they need something to look forward to. Laissez les bon temps rouler????
Last year was Mahomes vs Mr. Irrelevant – Brock Purdy. Kansas City against the mighty 49ers. Second SB win in a row for Patrick Mahomes and the Chiefs. 3rd win in 7 years. WTAF, right?
Last year I had the Bengals beating the Vikings – clearly got into the edibles on that one.
Obviously, I need to do a better job this year.
This year Brady is in the booth and the two elder statesmen QBs in the league are coming off devastating achilles injuries.
Some of the stories I’m following this year are:
- Five rookie QBs. Three are starting out of the gate. Caleb Williams in Chicago. Jayden Daniels in Washington and Bo Nix for my (at one time) beloved Broncos. One will start soon – Drake May in rebuilding New England and the other? Well, Michael Penix Jr. is backing up Kirk Cousins in Atlanta – he’s in classroom/mentor mode with one of the best and nicest guys in the NFL. I think Bo Nix will have the biggest impact this season but Penix may actually be the long term sleeper of the draft. (Note – JJ McCarthy will have his turn next year).
- The Drive 4 3. Kansas City is going for their third Super Bowl in a row. I’m told this is hard. And that the law of averages will work against them. I have taken this into account in my picks, but would not be surprised in the slightest to see Taylor Swift win the Super Bowl again.
- Teaching New Coaches Old Tricks. The most significant signing of a coach in the off-season was Jim Harbaugh in San Diego with the Chargers. (I know they are in LA, I don’t care). Can one of the most driven coaches ever bring his winning ways to a team that can’t get out of its own way and turn Justin Herbert into a superstar or will the grey sickness of Chargerdom crush yet another rising star? Stay tuned.
- Playing Out the String. Dak Prescott needs to hit free agency. Jerry Jones doesn’t want him. The Raiders will give him a hotel in Vegas to sign with them and play pitch and catch with Davante Adams. Just make it happen already. I am three episodes into “Receiver” on Netflix and I can’t for the life of me understand what they are doing in Vegas. Get a QB! And Mike McCarthy needs to move on. A coach with no contract is just painful. Cee Dee Lamb is a great receiver, but his talent will be overshadowed by dysfunction, downgrades on defense and Jerrah.
- Buffalo Gonna be Buffalo. I feel sorry for Josh Allen. I really do. He is in fact Superman, but he had the misfortune of getting his cape at the same time that Patrick Mahomes got his as well. New offensive weapons and Matt Milano done til December. It’s going to be a playoff year, but that’s it. Another Mesler heartbreak.
- Old QBs that can. Kirk Cousins and Aaron Rodgers are 36 and 40 respectively and are coming off significant achilles injuries that derailed their teams’ chances last year. Both are coming back with what are essentially new teams (Kirk an actual new team and Aaron to a Jets team he managed 4 plays for last year). As you will see below, I have high hopes for Atlanta. Jets, I’m sorry to say, are going to Jet. Sorry Aaron.
- Old QBs that can’t. Sorry Russ. Your time is up. Mike Tomlin is playing for his job. You are riding the bench by week 4.
Consensus seems to be 49ers vs Kansas City. Again. But I’m not catching the fever. There’s just too much talent on other teams. Someone even has the Jets in the Super Bowl. Wut?
Why don’t I do this.
I am going to pick my division winners and wild card teams and we can go from there.
AFC East – Buffalo
AFC North – Bengals
AFC South – Houston
AFC West – Kansas City
AFC Wildcards – Houston Texans, Miami Dolphins, San Diego Chargers
NFC East – Washington
NFC South – Atlanta
NFC North – Detroit
NFC West – 49ers
NFC Wild Cards – Philadelphia Eagles, Los Angeles Rams, Arizona Cardinals
Wow – those are all good teams. I could easily see Bengals/Chiefs and Lions/Falcons in the championship games. So that’s my call.
And the Bengals beating the Falcons in the Super Bowl. 28-3.
Joe Cool for Super Bowl MVP.
Hope you had a lazy weekend. Back to work in earnest on Monday!
