Good afternoon everyone and welcome to the official last blog of the summer. Yes summer. It’s the Friday before Labour Day, kids are going back to school, the leaves are actually starting to turn, CFL is in week 30 of its 57 week season, hockey players are thinking about returning to training camp and the NFL season kicks off in less than 6 days.
By the way – the AI still needs some work. Apologies to the three-armed man in the picture.
But, it’s the end of summer and I don’t care what anyone says!
Oh and for all of us Calgarians, it’s finally warm.
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 106th 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 flight attendant strike shenanigans or even the teamsters and the rail unions – all of whom delight in holding Canada’s economy hostage and withholding our super important Temu parcel shipments (de minimis still allowed in Canada BTW – sorry American readers).
Yes, 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.
Taylor Swift halftime show this year! There, I called it. What better engagement present could Roger Goodell conceive for the happy couple, Ms Swift and her beau Travis. Once he finishes reading his prenup of course, which odds are is going to be longer than any book he might have ever read.
But I’m going to keep it short because 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.
Kamala Harris and Donald Trump were the nominees for US president.
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.
Then the election happened and the wheels, as they are wont to do, came off. In a hurry.
Volatility came back into the markets as uncertainty about Mr. Trump’s plans for the economy abounded.
Everyone was suddenly an expert on tariffs. In Canada we had an election and Trudeau and the Carbon Tax was out, replaced not by the Conservatives and the Pierre Poilievre rhyming couplet reunion, but by Progressive Conservative wolf in Liberal sheep’s clothing Uber-economist Mark Carney.
US markets fell, rose then fell again and at last count were again rising, driven by 6 or 7 mega caps and AI hype, ignoring the real time damage being done by the magic 8-ball tariff “strategy”.
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). Cash 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 some of their malcontent members from breaking the rules.
Inventories are low but not terrifyingly so. Aside from the US smart bombing Iranian nuclear facilities, 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 trading range between $62.37 and $67.13 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 a new government that seems intent on spending huge amounts of money on defence and “nation-building projects” in the face of American animus. Of course, 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 the tariff war is damaging both its global standing and economy.
Economically everything is slowing but not to recession levels. I now think the US will escape a recession, but stagflation is in the cards, even if all the statisticians will have been fired and we won’t actually know. Canada may escape as well, even though our anemic growth feels recessionary.
On the energy front, everyone is making money but not enough. 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 sending tanker after tanker to Asia. The Liberal government is exploring whether there is a business case for LNG to Europe!
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. Drill Baby Drill!
Which is ironic, because consumption of all forms of energy is still sky-high. Energy insecurity is real. OPEC+ does not 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.
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 to make room for Steven Guilbeault (remember him?) or of there was some pesky separatist movement in Alberta being tacitly supported by Danielle Smith.
She does seem to have visions of grandeur at times…
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 $65 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.
As budgets for the coming winter are getting set, 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 and drilling activity (certainly in the US market) is muted (drill baby drill?), 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 the right equipment and more importantly, bodies, you are busy.
Layered on top of that is the completion of LNG Canada and a number of new, smaller indigenous led LNG projects and the aforementioned completion of the TransMountain Expansion. This increased export capacity has allowed significantly additional barrels to be sent to the BC coast for export (largely to California, but many to China as well) and will 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 maintain and in some circumstances raise their rates and cash-flush producers are paying them. Well, except for CNRL.
The energy sector writ large is one of the few industries that is as yet unscathed by the tariff wars, with products either produced for domestic use or covered under the USMCA. The commodity itself remains tariff and export tax free.
Quality service companies are making money. 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 consumption, lower global capex and a world that is about as insecure about energy as it has ever been. Sell Russia, buy North America.
Look, 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 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 despite the trade war dynamics more US based buyers will be coming to kick the tires in Canada, as Canadian multiples are much more reasonable. International buyers seeking an inroad into the US market may come to Canada to avoid the uncertainty associated with the US market.
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 future Hall of Famer like Shedeur Sanders. Then you’re just media fodder.
How boring was the NFL pre-season? The biggest news was the Travis Swift/Taylor Kelce engagement.
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. Sorry Buffalo.
The Super Bowl this year will be in Levi’s Stadium, which is technically San Francisco, even if it is super far away.
San Francisco is a good pick for he Super Bowl. The food is great, the homeless encampments will have been cleaned up by the National Guard by February and the weather should be decent. There is even a chance the Niners could make the big game
Last year was Mahomes vs the Eagles. Kansas City against Saquon Barkley and Jalen Hurts. Third Super Bowl in a row for Patrick Mahomes and the Chiefs. And as we all know, they finally got stomped. It was a non-game reminsiccent of the 4 consecutive times Buffalo went to the Super Bowl and got their hearts ripped out, each loss seemingly worse than the last. Ouch.
Speaking of Buffalo, I like them this year. More on that later.
Last year I had the Bengals beating the Falcons – clearly got into the edibles on that one.
Clearly, I need to do a better job this year.
Some of the stories I’m following this year are:
- QBs on the move. The QB carousel was in full swing this year with a number of compelling QB switcheroos that may or may not work out (typically not, but what do I know). In no particular order… Aaron Rodgers is taking his game to Pittsburgh where Mike Tomlin needs to win a playoff game to keep his job. I think this would have been a genius move several seasons ago, but it’s one and done this year while they wait to draft a long term solution. Russell Wilson goes to his fourth gig with the New York Football Giants competing with Jameis Winston and super-rookie Jaxson Dart for the starring role. Geno Smith has ditched Seattle for the Raiders – can he continue his career renaissance in Vegas? Justin Fields is off the Jets where I hope he doesn’t get jetted. Giants cast-off Daniel Jones is the starter for the Colts who are now finding out that a first round draft project can really set a team back. In Seattle, newly minted superstar reclamation project Sam Darnold joins the fold – good luck in that division.
- The Drive 4 4. Kansas City is going for their fourth Super Bowl in a row. I’m told this is hard and has only been accomplished by the Buffalo Bills, and not very well at that. The law of averages will work against them but will they have enough Swift/Kelce mojo to annoy everyone and make it back? Don’t count them out.
- Teaching New Coaches Old Tricks. Pete Carroll in Vegas to coach the Raiders. Wow. He is only 123 years old with the energy of a kindergartner, if he had Rodgers as QB instead of Geno I think that would be cool – maybe he can coax minority owner TB12 out of retirement for kicks. Aaron Glenn is the new Jets victim – he seems like a decent choice to be honest. Kellen Moore in talentless New Orleans just seems mean and Brian Schottenheimer in Dallas is the change no one wanted and Jerry Jones is the real coach anyway. Ben Johnson, the former Detroit OC/boy genius is the new guy in Chicago, tasked with rescuing the franchise from wrecking yet another first round draft pick QB. Mike Vrabel gets to rebuild the New England Patriots and Liam Coen is the new coach in Jacksonville – who?
- Dak – Blink if You Can Hear Me. Dak Prescott needs a trade. Jerry Jones is crazy and this team ain’t gonna win. The Raiders will give him a hotel in Vegas to sign with them and play pitch and catch with whoever the top receiver is. Just make it happen already. I watched that “America’s Team” Netflix series – Dallas needs to get its game back. Update – Dallas just traded Micah Parsons, they are so cooked.
- 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. It’s going to be a playoff year, but that could be it. Another Mesler heartbreak. Even if I am picking them for the Super Bowl (just not to win it, sorry Steve).
- Baltimore and Cincinnati. The best shots along with Buffalo to dethrone the Chiefs. Both teams chasing redemption after last season, one for a playoff choke, the other for choking against New England early in the season and missing the playoffs. I’d like to see Lamar, Joe Burrow and Josh Allen win a Super Bowl – any way we can get them on the same team?
- Hall of Fame. Cleveland Browns QB3 Shedeur Sanders is already a lock for the hall of fame, you heard it here first – right alongside Trey Lance and JaMarcus Russell.
Consensus seems to be Ravens vs Eagles. No KC. No San Francisco. No Buffalo. No Atlanta. No Detroit. But I’m not catching the fever. There’s just too much talent on other teams. Someone even has the Jags 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 – Ravens
AFC South – Houston
AFC West – Kansas City
AFC Wildcards – New York Jets, Cincinnati Bengals, San Diego Chargers
NFC East – Washington
NFC South – Atlanta
NFC North – Detroit
NFC West – 49ers
NFC Wild Cards – Philadelphia Eagles, Los Angeles Rams, Green Bay
Wow – those are all good teams. Anyone of them could make a big run, but I am going old school.
NFC – Washington
AFC – Buffalo
Super Bowl XXVI rematch from 1992.
And Washington wins again.
Jayden Daniels wins Super Bowl MVP.
Hope you have a lazy weekend. Back to work in earnest on Tuesday!
