US Energy Supply, Bottlenecks and Private Equity with Jason Downie

0:00Welcome to the HC commodities podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we return to U.S. domestic energy and private equity. The vibrancy of private capital launched the shale revolution and now moved on to challenges of the bottlenecks in infrastructure, particularly as it relates to opportunities around AI and LNG export. Where is shale today? Where is demand? Particularly around natural gas and what's driving that? And how is private equity fairing? And what does it see as the opportunities within energy and its infrastructure? Our guest is Jason Downey, co-founder and managing partner at Tailwater Capital. An energy private equity firm with 6 billion in capital and 14 years under its belt with

1:02a core focus on energy infrastructure. As always you can really support the show by leaving us a positive review on the platform you're listening on and as always I hope you enjoy the episode. Jason, welcome to the show. Thank you. Happy to be here. So looking forward to this discussion, I guess there's two sides to this coin. One is as a dedicated energy private equity firm talking about the macro themes that you're seeing and I know you've done a big piece of work on that recently so we're going to lean into that and a concentric circles I guess around US and then beyond but also at the same time it's an opportunity for us to kind of check back in more broadly on the private equity side, how lots of changes have been going on, lots of sort of market headwinds and tailwinds out there and so a little bit more broadly on how private equity is fairing in energy and where you're seeing some themes on that side. So let's start very close to home, obviously Shale has been the big story of US energy over the last 15 years, profound and tremendous impacts often I feel slightly overlooked and

2:06it's gone through a rapid maturation in that 14 years that it's been going. Where are we today in terms of Shale and can you give us some context? Obviously there's a lot hinging on Shale and there's quite a narrative out there of oh you know we're in a Shale's turn day we're now in a period of kind of terminal decline or something. Where is your take on where Shale is at? Yeah it's a really good question. We would say internally as if it were a software release, we're kind of in Shale 3.0. Some people would tell you we've kind of been in the seventh inning for a long time. I'm not sure we're even that far but what's exciting and surprising is just the rapid evolution through sustained advantages and advancements and technological innovation and operational efficiency gains have really continued to make Shale relevant and also

3:08find ways to economically produce zones that were previously believed to not be economic at today's current prices and so it's like they say the Permian Basin sort of the gift that keeps on giving. It is on some level that but it is also in big part to a lot of the factors that have led us here through that evolution. COVID was a big help quite frankly because it put a lot of pressure on so we're stopping and understanding how to figure out some real volatility that was unpredictable and anyone's forecast but it got kind of US upstream and midstream for that matter really back on how do we focus on making profits staying alive and using what we've learned to get smarter, better, more efficient and the result is where we sit in three point out which is a meaningfully consolidated public universe. I think we're down 20 or 30 public companies, something like that but it's a big portion

4:11of the reserves are now consolidating into public companies specifically in the Permian Basin. Scale matters when you want to apply operational efficiency. Technological innovation is now happening in partnership with service providers. It's not just isolated internally to the EMP companies. Huge focus on production and production technologies and that evolution so I think artificial lift and things like that. So what you're seeing now is the willingness to then expand and do things to really test the boundaries and it's amazing how quickly it's happening too. So if you take one example as lateral length and well-bores, literally over the last three years people have gone from 2000 foot average, excuse me, two mile average well-bores. That was probably 60% of the market in 2023 to now we're looking at maybe that's

5:1620% of the market and 80% of the market is a combination of three and now four mile laterals and so you're seeing huge improvements and an ultimate expected recoveries which are you know, 90 to 100% improvement on only a 40, 50, 60% capex increase. So it's just a real exciting time for the shale operators and so when we look at that we are emboldened on most levels because it's also unlocking the opportunity to take tier two locations and make them more economic and even explore in other new benches like the Barnette and the Permian and add locations and inventory to ensure US shell basins and at the same time, I know this is kind of a long-winded answer but at the same time they're really continuing to focus on the discipline which is now returning capital through

6:19dividends or share buybacks. The industries balance sheets are as healthy as they've ever been and they're really in terms of being good corporate stewards and aligned with their shareholders it's as good as it's ever been and so I would tell you that shale 3.0 is turning into something really exciting and 4.0 will probably be very focused on how to continue to enhance the technology to lower break evens but also really focus on two additional things which are production efficiencies so really focusing on lowering the decline curve and one which you see companies like Exxon really touting which is trying to use technology to enhance what is the draw radius basically the recovery factor on wells because the shell wells have been very low 10 to 18% recovery factors more on the lower side of that and if you can improve that that's just another big evolution in how shell wells are designed. So it locks through a short

7:26I think it's a really exciting time and it's a very healthy landscape. I do find it fascinating it kind of crammed 50 years worth of capex cycles and innovation cycles and into a decade. It's like 13 years or something it's fascinating and just a couple of data points to pick out you know one is just from our shared notes that the I mean you've gone from break evens of you know the high 40s a couple of years ago to 40 bucks last year which again points to all of those factors you're talking about also what I was just kind of just fascinating and production continues to climb but what is dramatic is that rig counts have almost halved during the last decade and are we using you know the old sort of metric of you know shell growth and all the rest it was rig count I guess in that world of going from two miles to four miles rig count and the consolidation we've seen rig count is no longer a good proxy for the health of shell is that a fair

8:30comment yes I you know I hate to I hate to simplify it that much though because what we haven't seen enough data set on yet is how like what does the decline curve look like for example on a four mile lateral you know so do you do you eventually see some of that roll over require more rigs maybe you do but what I what I also think is interesting is just the the drill spacing unit the DSU design is so much more this cubing of your of your inventory is allowing you to complete so many zones at the same time and I think that's really trying I think what producers are really trying to do is drive as much recovery as they can out of a spacing unit in the first go round and so you know I I guess there's a little bit TBD on that question but I but I do think for for certain you don't need as many rigs to generate the same type of production as you as you

9:33historically have so there's going to be some element of that that is permanent which in case it's also a function of having large produces control large areas right as well right you you can optimize read count and saying okay we're going to talk about bottlenecks and the unlocking of some of those and the remaining of some of those is obviously that's a key opportunity for investors but the next protocol is going to be demand and particularly staying sort of on this on the shale and obviously AI but if if we were to assume that there was no energy transition and demand was infinite are we still looking at the shale shale production in the United States having a short shelf life compared to say the Saudi or offshore production I mean like always there a sense now that actually there's vastly more than we we we we know about our gains through productivity gains through efficiency means that we can get more out of what we know does exist and actually

10:33shale is an ongoing resource from all intents and purposes for the United States kind of what were we at in that that's the $64,000 question as they say I think you know we we were running analysis that would suggest the big surprise that's coming from shale is that you know as we are learning how to drill more efficiently and and produce more efficiently through technology and by the way they're just scratching the surface on how AI is going to be used and again I think you know I think it's going to be a big part of the cost equation managing costs managing trips to the field and things like that so that anything you can do to lower LOEs lowers break even again get you in a position to drill you know tier two or even tier three inventory that that may have not been economic at $65 and 10 years maybe economic at a much you know at a much lower break even and so and so I would I would be very hesitant to rule US shale as out of the market and kind of rolling

11:41over I don't think that's I don't think that's right and I certainly don't think it's taking in you know into consideration the real-time technological and operational you know discoveries and improvements that are that are being made yeah and we like you have we've done a number of episodes on kind of that trilemmar of cost sustainability and security and and and and you guys talk about is cost functionality and externality as we probably can't get into that today but in a world where you know cost and functionality security override other elements you know having a domestic source of sub 40 break even hydrocarbons is pretty pretty powerful element and this obviously all heightened at the moment given we're recording this on day four of literature operations in Iran as you know I guess this is a word on demand and again these are I always find you'll respect this perspective fascinating because you're having to make live calls on this one it's not

12:44just sort of the economic theory of the case it's the financial outcomes of the case demand in general we've just had rice dad on we know energy demand in general is growing the kind of the god of the gap in many ways is AI and you know and we've we've done a number of episodes on AI and obviously what's driving sort of their energy requirements and again you come back to this cost efficiency and sustainability and equation and and there just that the efficiency piece is obviously you know you can't have interruptions in most cases most of the time where's your thesis on AI what energy sources are they going to use and what is that going to do to the overall demand for US energy yeah it's a really really good question and and on some level it's obviously I think there are a lot of people watching it very carefully because if if you just look at announced projects

13:46you get to this sort of quagmire of what is the real what is the real gigawatt demand factor that's coming from data centers how much of this is double counting or even triple counting as people just trying to find locations where they can connect to the grid it's a mad scratch you know scramble that has real political implications because in theory you're directly competing with human beings right and so your political constituents as a as a member of congress is is is now gotten involved in energy in a very different way than it has in a long time this this this this sort of direct conflict with technological evolution and and and so clearly in our opinion there is a a solution that makes a ton of sense when you especially when you figure in sort of this this cost and function equation which is that economics matter so people are going to be looking for solutions that are reasonably priced and they are going

14:50to be looking for reliability right they're going to be looking for ways to get access and make sure that power is ratable and can be there when they need it because of the way they sell these electrons like it's a fascinating business model right they're taking they're taking a kilowatt hour and selling it for somewhere between and buy it buy it for 14 cents and sell it for $3.50 it's an it's an incredible margin profile on what they're really doing with with large language model learning and and and the agent code that goes on top of that but it doesn't work if it's not running so we we do not see a way for natural gas to not be a big part of that solution for at least a decade if not multiple decades the constraints in that model are going to be not supply of gas we think we have ample gas and multiple areas that the constraints are probably either a regulatory or b quite frankly supply chain of combined cycle gas fire power

15:50but even that can happen faster than nuclear in our opinion and in likely cases happen faster than grid interconnects so and and it's interesting to see well let me back up all of the above is what's going to be required to solve the problem but if you want to get to real cost effective and reliability you know natural gas is probably the fastest and cheapest way to get there with the least amount of political you know friction whether that's whether that's Congress or not in my backyard you know permitting factors right so and then on the I'll go back to crude oil too I know it's not as AI related in some markets externally it is it won't be here but you could see it in other markets but there's one thing that it's a very elastic market so let's say we get through this geopolitical price premium that we have in crude right now we go back to mid 60s you know on an inflation adjusted basis oil is as cheap as it's ever been and that's hugely bullish relative to creating demand and and providing for a cost competitive advantage for

16:55the United States relative to powering the industry around what we do and as a result it doesn't surprise us when we look at the IEA specifically you know they've been a million to a million and a half barrels short on their demand projections I think every year for the last nine years I mean they just consistently get demand wrong so we think over time you're going to see the prices are going to trend upward but I we think that's with you know again taking political risk print I mean geopolitical risk premiums out that's probably happening at a ratable pace that's still relatively cheap when a inflation adjusted and you know and we feel like the United States is really well positioned to either provide for our own internal energy needs or export that to our global trading partners that are you know our allies that want surety of supply so it's a really exciting time if you think about structural demand pull so your AI power demand plus LNG export to supply other

18:00people's power needs globally puts a huge structural demand implication on U.S natural gas production that we haven't seen in a long time it's been much more supply push oriented and now you're getting this demand pull which is really exciting because it's it's a longer duration it's less price sensitive and what we're seeing is most of our our counterparties are as good if not better credit rated than the average you know producer in the olipatch so it's a great time to be in U.S. energy in our opinion the energy and resources sector is experiencing unprecedented change to help navigate this change and capture its opportunities APC group launched NCO insights a global advisory network dedicated to the sector providing senior advisors and subject matter experts to investment and infrastructure funds law firms and corporates NCO insights leverages HC groups 20 years of connections in energy

19:01and commodities to give clients the expertise they need when the stakes are high and insight matters learn more at NCO insights dot com it does seem like there's a a bit of a we had Jeff Curry on to about this sort of a a a repricing a big shift towards sticks in the ground I mean if you step back all of these eye eye firms have gone from spending zero on assets to or you know there was infinitely scalable and as Jeff would say to now having to put all this money into data centers you know and sort of a recognition that actually you know real world assets matter and energy is a key part of that and you've gone multiple sources of demand and I think you know there's a recognition out there that there's sort of this potential short term glut although some of that is just seen lots of oil on the water and most of that oil on the water is sanctioned but certainly kind of a longer term gap given the lack of investment has gone in in general into replacing you know reserves are being used up I guess to get your take on it the pushback

20:03on AI goes something like this right which is actually cost of data well multiple factors one is the cost of computer continues to decline these are going to be very expensive assets there's also a obviously your most expensive cost in that equation is chips and energy therefore markets will solve for that and definitely solve for energy so we might see massive gains in efficiency that would offset the need for all this energy and then finally and I don't necessarily see this one is it's probably the weakest of the arguments which is that AI is is an imitation game not a thinking game and actually we're going to sort of eventually once we've knocked out sort of all the boilerplate language in legal contracts you know and a few other things you know it's it's going to settle down in terms of demand and you're right there's this sort of you look out there and if you took a you know open AI out of the equation you get a lot of you know contracts sort of there's a compounding effect I should say is you know what is that figure

21:06in sort of the risk management of some of the bets that are going to be made and I completely agree with you that sort of you know the approach of controlling your own energy sources is probably a smart one you know my instinct is so so this is a this is a this is a great question I think this is also if we can if we knew the answer to this we you and Paul you and I would be able to quit our day jobs but the the the challenge is again and this is where you know this is where it's really hard to estimate so we just looked at a piece of information from a great research house that's called thunder said don't know if you've ever seen it but they've got a great wedge for US gas demand but for the next 10 years and it basically says we're going to do about 30 BCF more a day by 2035 and that wedge has 20 BCF of growth associated with LNG export and quite frankly a bunch of that is on is actually under construction so you can you can underwrite it pretty critically

22:09now the the question that's in the market is how much of that is merchant versus contracted you know and is there some risk to that demand but fundamentally it's astonishing growth over what will become a 20 year period you know 10 years ago was zero today we're doing 17 BCF a day of export where the largest exporter of gas in the world and that's supposed to grow another somewhere between 15 and 30 BCF a day so you you've got that then you have electric growth that is being predicted to grow at about six BCF some of that's electric vehicles some of that's sort of industrial usage and and about 2.7 of that under this guy's prediction was AI well you know middle market tailwater has three companies that are working on L.O.I projects you know so under letter of intent exclusive to deliver gas to supply by the meter power that combined equal about 3 BCF

23:12when fully up and operating so that's not day one that's probably date or year one that's probably year three but maybe year five but that but his projection was on 10 years from now so I would wager that that number is vastly understated relative to all the other projects I know that are also under contract so the question then becomes really I don't think it's today I think it's 10 years from today when those contracts are rolling off and we're and we're redoing them you know how much real demand materialized because all these guys are signing you know guaranteed contracts and and and the reason we get comfortable with that is because the you know the power side of the equation is actually the rounding error and their cost a goods hold I believe or not so it's it's not it's not that's not the problem it's it's you know it's to your point it's the chips and the and the actual infrastructure that's the big that's fascinating sorry they say the

24:14actual the cost of energy for these is a rounding error because you know I mean like you know yeah it would seem to be in all my travels and conversations they're sitting there sort of staring at saying we think the price of chips is going to go down but we think the price of energy is like going to be the key factors whether we turn the turn the key or not depends on where you're getting that energy and when you contract it right so if you're buying it at market from the grid you could you could be in trouble if you're going to build a behind the meter system and you can you're going to go anchor all your gas supply at a fixed rate to run that power it's probably around here and the reason I say that is turn turn around look at I guess the question would be so here's the here's my what keeps you up at night question is what are they actually selling the computing power for because yeah yeah is it just all of us doing smarter Google search rush is it actually going to have a meaningful product to right to it there's not offset by lost jobs and all the rest today just for context if you if you just look at meta Google microsoft

25:21Oracle their credit ratings and market caps compared to the largest e-imptomestic e-imptexon I think right they will they will let 150 p ratios versus x on a poor tenel whatever it is at 17 right there's a there's a lot of work to be done from those firms just well they're also 500 400 300 billion dollar market cap businesses so you know you know and x on by the way not art not not the market's average customer onshore us right so the scale and and you know and and again if you look at Microsoft I mean they've got a cash machine that's not AI oriented so it's been a really interesting dynamic but what what I get worried about is so what we won't do let me say it this way is we won't build we're not going to supply gas to someone without a contract that's guaranteed and we're not going to build power behind the meter without a contract that's

26:25guaranteed and that's not unusual for a midstream or an energy infrastructure player it's just that our counterparty today if we do those two things has gone from you know a producer you know either private equity middle market public or large gap public producer to you know now some of the largest companies in the world that are all technology companies so it's a it's an interesting change but but what what bet I don't want to make it I'm not trying to I'm not trying to pick winners and losers I only want to be with a real project that's getting done with a real customer that signs a long-term contract the flip side of it is I do think it's really important where you're supporting these data centers so and what I mean by that is let's take and we're lucky again being in Texas Texas is predicted to grow like at 15% on power gin requirements so it's

27:26like 36% of the total US power growth is estimated to come from the state of Texas but what's what's even more interesting to us is about 50% of the industrial power demand is predicted to grow from so non AI power demand is coming from the state of Texas and so if you're going to build a power generator even if it's behind the meter plus we have we're supposed to double the population so we've got a we've got three ways to win if you're playing your cards right you just want to make sure you're you know you know you've got the right counterparty got a good structure and then you've got grid interconnection so that you can sell that power back to the grid if if you have spare capacity and so so I don't think all locations are equal there's a lot of conversations out there about this we ourselves are doing in conjunction with the financial times in preparation for the global commodity summer in Luzanne in April a survey of leadership

28:31in commodity trading how AI is being deployed today and what the expectations of the future are because again I think there's you know it's trying to divine and understand what exactly the use cases are and obviously are they are they more leaning into lowering costs are you using a gentie AI to remove some of those tasks and roles in the middle back office or are they leaning into predictive markets and all the rest of it and trying to because obviously everyone with that sort of strange moment again where we know where the world's heading we just don't know how far how fast and what the potential implications could be but you certainly can't afford to not be looking at it so okay fine it's fascinating but so just taking I guess the third leg to this stool of of supply and demand but then is is the interesting bit in some ways which is just taking that whatever incredible amount that was that sort of 50 BCF of increased demand in natural gas from LNG from just ongoing growth and then obviously AI does that and where does that create

29:33significant bottlenecks in the midstream to the need be building and that's an hour great space for I guess our sector yeah I think clearly there's going to be some last mile bottleneck implications well let's just go from the wellhead so as you grow some of that gas growth is clearly going to come from the Permian some's going to come from the Haynesville some's going to come from the Midcontinent obviously the the Barcellus Utica they're constrained anyway so and then and then even the Eagle furthers some some opportunities for specifically some dry gas at the right price and so the good news is that the one thing we didn't say about the Shell revolution that I that I meant to say was we've gone from xxplore right E and the E of ENP to really it's manufacturing right the onshore us oil and gas industry that the ENP players

30:35are now really manufacturers and they are running their businesses that way and they are trying to get more efficient and more focused on process and optimization than at any time in their history and and so we know where the gas is and it's just a function of making sure we are drilling it at a price that makes the economics work and I don't think that's a the good news for onshore us gas is that that's not a ten dollar gas price that's a you know four dollar to four to five dollar gas price all four to five dollar is a generally speaking a healthy rate of return for pretty much every gas shale gas basin in the US and and and and and the sticks are there and the supplies there but but to go to to take LNG export for example up 20 BCF that is going to take some some material

31:37infrastructure in and around those basins and the last mile it's going to take some big storage infrastructure because you can't run those facilities without associated operating storage right my guesstimate is at some point in the future the citizens of Pennsylvania and New York may prevail around the opportunity to exploit the reserves that they have there for their own consumption and and actually build some pipelines to you know the major city hubs in the northeast but we'll see but that that could you know I think Boston's still importing a BCF a day that doesn't make any sense and so you know it would be great if that happened because you you could build some LNG export capacity on on the east coast instead of just the Gulf Coast but we're seeing bottlenecks sort of all across that and again I'm focusing on middle market whereas you know maybe the larger public are focusing on the you know and some of the bigger infrastructure

32:41players are focusing on the you know larger takeaway capacity that that might be intrabasin or sorry interbasin um and and you know so that's not really our cup of tea but some of that's going to have to happen um but you're talking about some some big volume movements to hit hit that gas growth and um it's interesting because we have a little slide in our annual you know meeting it's coming up next week and I would tell you that historically you know their the the public company threshold in midstream was pretty interesting so when when you went from 05 to 2015 we had about 23.5 BCF of gas growth we had 39 go to 76 public companies which was an increase of about 300 billion in market cap collectively and then from 15 to 25 we had another 40 BCF of supply growth

33:49and we we added about 300 billion of market cap but we shrunk from 76 to 31 public companies the massive consolidation. I was going to say that consolidation on the so the producer side has also moved on the midstream piece as well right as as scale has brought its own you know challenges and opportunities is that so and just so um does that mean that the midstream those midstreamers those you know are also having to step down into sort of the mid cap world as well you to solve some of these bottlenecks and also can you just give us a little bit of word on on that lng export capacity you know is where are we at on that you know it's been a proliferation of projects and an acceleration of those projects yeah that's a great question so I actually think the the larger publics are going to focus on they have announced projects right now for infrastructure backlog backlog of around 20 billion by our calculation I think for

34:56for us to handle that the next 30 BCF of growth is probably going to take more cap X than that and so my I would posit that the larger projects for the most part with a couple probably being handled either by large infrastructure private equity or these specialty privates like white water but the rest is going to be might be an opportunity for for private mystery companies to come in and help solve some of this debattlenecking and so I don't know that if that means we'll see IPOs again in midstream I hope I would hope we would because I think that would be healthy for the market but I do think that the big guys are going to focus on you know doing a big construction project as it takes as much time and manpower as a smaller construction project and so you got a focus on bang for your buck if you're going to do greenfield construction and so I believe the the publics are going to try to do it that way but I think it's a great opportunity for private

35:58equity to fill that gap on the lng export side I mean we are sitting at 17 BCF today we have announced projects that I think take us to approximately 27 BCF that's excuse me under construction projects and then on top of that there's probably another 10 BCF of various you know stages of the FID process and so I would tell you that what's under construction is you know virtually 100% likely to be completed so that we think you know kind of you know we're growing by call it another 10 BCF minimum maybe maybe as much as as 20 and you know funder said says says 20 you know we're we see 17 going to 27 pre-easily and and you know again what's under construction would suggest

37:01it's more like you know 32 so I think that happens and then we look at the forward curve on historical you know or the lng arbitrage between US gas prices and really you know Europe and Japan and and that forward curve is you know sitting right at about before again this geopolitical breakout was was sitting right at about eight dollars so the margins still there for US producers to to sell into that contracted structure obviously today you know that that pricing is blowing out because of you know because of you know the Iran war and so we feel pretty comfortable that that's a that's a real solution and so again when you look at this what does the US have it's a great example what the US has that some of the other solutions don't we saw what happened with Ukraine and Russia and the you know the gas supply it used as a threat to Europe where we're seeing now guitars the second largest lng exporter behind the United States

38:09and they are now shut in because the straightest closed straight everyone was so we don't have those risks so if you if you if you think about it the geopolitics of that and the and and you know obviously the you know the contract protections and things you have and the United States you know legal system having some or a large portion of your future gas supply coming from a long-term contract in the United States and our opinion makes a ton of sats so we we do believe that that lng capacity gets utilized and and the United States you know is is you know maintains a leadership position and supplying the world you know affordable natural gas so the real question is how much bigger does it really get so how much more projects reach final investment decision versus what's what's under construction and I think that's probably where you need to spend some time thinking critically about risking this but but what's already in process probably gets built and contracted hello i'm David Hunt found

39:14re-managed director at Hyperion Search founded over a decade ago Hyperion Search has helped organizations from major utilities to startups recruit their leadership teams and key individual contributors to accelerate both their growth and the energy transition our three main verticals are renewable power energy storage and the mobility the energy transition and the talent that delivers it has been our passion since day one to find out more visit Hyperion Search.com or listen to my ladies and clean-tap podcast available on all platforms as you say trying to factor geopolitical risks and shifting sounds is is tough at the moment that's been absolutely fascinating I kind of want to just finish up on I promise at the start I want to recover this so we should and there's so much more to discuss we just don't have time here but more broadly in terms of private equity it seems outside of well there seems a tale of two cities really there's kind of the traditional energy private equity focus firms who are very much out of vogue are have stood the

40:19the test of time and have been doing well for the most part and we're talking US story here their energy transition funds not so much yeah some big bets made on technology when talking technology is not fuels and all the rest of it more broadly though it seems that private equity is having a rather a tougher time yeah you know obviously a higher interest rates we've covered that story in depth but also kind of relatively few target organizations and exits are becoming harder I wonder if you could sort of give us your take on private equity how it's very more broadly you know why perhaps are the more dedicated specialist energy firms are doing well and kind of way you think it's headed that's a really good question I think first of all you're right the last five years have been very challenging to navigate because there was a real push away for whatever reason from fossil fuels and by definition I think

41:20a push away from sort of what I would call a confidence window and underwriting economic outcomes and you know so so investing in energy transition is it was is still and was a much riskier underwriting than a conventional energy decision and then why is that that's because a lot of it was requiring subsidies you know so it wasn't the economics were you know the project economics weren't necessarily standing on their own and you know that just gets you into a different dimension in all cases domestically before you even put you know international you know sort of risk around that supply chains and things like that but everybody looked at it for for the right reasons because I think across the spectrum everyone believes fundamentally that the US should be a leader in doing things better smarter cleaner more efficiently because we we have a track record of that and and and I think all the public firms and all of the peers that that I want more of on the

42:27private side feel like that's the right stewardship relative to capital so so whether or not you fully believe in climate change I think you have a permanent mindset change that that is capital capital needs to be you know following the right procedures demanding the right you know health safety and environmental thresholds around our portfolio companies in our people that there are investors you know demand so responsible investing I believe is here to stay even if energy transition migrates for example so you you tumble that through and so that was a challenge but again if you had if you had said to me five years ago that the magnificent seven were going to be the primary source of sort of thought thought leadership change on whether or not natural gas was strategic globally I would have told you there's no way the technology companies would lead that charge but here we are and then what that has unfortunately opened up you know which is back

43:32into energy private equity's favor is you know what I would call real economics it's like we we have to really know what the cost equation looks like and what the return profile looks like and we have to really know and have confidence in reliability and accessibility and so the core fundamentals of what kind of you know quite frankly drove pure industrial evolution capital evolution you know markets came back into you know the the vogue the spotlight of how we're going to get things done and and so you know I would tell you that most investors that we talked to now for are fully over the transome and natural gases is is a solution that is going to be a big part of the puzzle until we figure out something different primarily either technological efficiencies that require less power like you mentioned earlier or nuclear small modular reactors or other forms of nuclear

44:35power which are also as reliable as natural gas fired power gen but but run cleaner at least from an emissions perspective what whether or not you want that in your backyard that's a whole another story right so ironically between us I mean that if you really want to look at what has been this globally the safest power generation per kilowatt hour generated it's it's actually nuclear so yeah we've done uh we've done uh very well that means the problem nuclear we've we've done back and forth on it right is that it's fantastic it's just you know certainly in the west they take 15 years to build right so unless we crack the sort of the I'm sure we both follow gearing and Rosen's wagon of those guys and so forth and unless we until we crack that we've had out them on a few times the kind of the the fifth gen I think it is all the fourth gen with sort of the the salt cooling systems that don't need to be our hundred atmospheres you know those problems are going to remain and also say we do have small nuclear reactors at the moment because they're on out on out Navy um but anyway that aside yeah um I mean it's just interesting in some ways isn't it

45:39because you know if we were to also cycle back six years ago we we had Edward Chancellor on the podcast and his book Price of Time and you know he's a financial historian who did a lot of work on interest rates you know it was you'd be sat there probably looking over you know uh your colleagues who are in the sort of the the tech vertical of your private equity firm looking quite jealous as they absolutely knock it out the park um whilst energy is is stumbling along and right having to face you know albeit low interest rates real world cost of capital and you know eaking our margins whereas today you know it's the reverse precisely because frankly in my opinion interest rates have gone up to them to be all like normal levels and real cost of capital required you know applies returns reply and that's in some way what's kind of shaking out there's probably in tandem with why capital discipline is returned to shale as you discussed earlier it has to the investors as well and you've got quite a hardy set of energy private equity

46:43investors who uh you know who have got a weather eye on what it really takes to make returns over the long term right so actually probably uh you know in some ways a whilst less uh less cool might be a much uh a sure option than and a more seasoned option than others well you know and I will tell you this there's some other factors too so the capital vacuum that the post-COVID environment environment created whether whether it should have been created or not it it happened and so the flight of capital away from energy it caused a rebalancing on on both the public equity side and you saw that as its percentage exposure of the of the S&P but it happened on the private equity side too but the reality is that is a huge opportunity so our funnel therefore is bigger than it's ever been so our ability to be more selective on you know what our return hurdles are is better our outcomes have been better and our expected forward returns

47:45are are also you know better um quite frankly than than we've seen in a long time so we're we're very bullish on you know on on what the energy landscape looks like from a private equity perspective but the the second piece of the puzzle is also what we talked about earlier um that we're looking you know when we used to look at E&P domestically there was a big wedge of risk associated with exploration and and now what we're underwriting is literally a manufacturing company so they're making widgets they're just drilling locating on set of a instead of a real widget it's a it's a it's a it's a stick in the ground right right so it's um it is a different profile for that underwriting so again the the certainty factor and and what you need to you know contractually to to get to your rates of return is is got less of a risk wedge by definition

48:46and so I think that's been helpful too so I you know it's it's a good time to be in energy in our opinion we're pretty bullish on it but um but the discipline required to you know ultimately around the investment committee decision table has not changed right you still got to be very focused on your underwriting but but at least now we have more opportunities to select from well um it would be great to hear a few words on on tailwater capital and when people should uh when should people should call you let me just explain our business model so we we focus our flagship is energy infrastructure um then we have a fun complex that does not operate at EMP so we're we're helping to finance drilling activity by partnering with operators but we're not backing operating teams and then we have a royalties piece uh as well and underlying all of that is 14 years of data so we are actively harvesting and watching on a daily basis

49:51the data set that is that complete ecosystem so we call this full immersion energy and so we're we're you know behind our little middle market platform we have something like 3 million dedicated acres and 300 operating partners and it's probably close to 50 we have almost 10% of the of the rig fleet running behind our system and so that's just a a lot of information but we're also very careful not to compete with our core customers right we're not you know we're trying to be a solutions provider to yeah at our root to to the counterparties that have problems and the way we define a problem most simply is a bottleneck so there is something constraining the system that capital and infrastructure can solve uh that we go help provide that physical solution by building an asset or buying and growing one to to fix it so so that's the that's providing us with a real I think data advantage and to complement that we do a lot of fundamental

50:55research so we're we we call them white paper so we're trying to put out a white paper recorder and and we we we tell our investors that they have access to those white papers but if they're looking at something that we haven't written a paper on let us know because we'll we want to look at it if they're looking at it we'll we'll do some research on it but you tumble that together and honestly it's just about trying to be good decision makers because in a in a fun complex where you're doing something like 10 to 12 investments you tend to 12 good decisions away from being successful and we're trying to to optimize that process by by really focusing on the fundamentals and being what we call full immersion so we we want to understand the full value chain of energy we're not just doing gathering and processing we're doing storage we're doing last mile delivery of gas to end users we're we're looking at behind the meter power we're managing waste products or or what I would call byproducts like saltwater disposal so it's it's a it's a you know it's a

51:57it allows us to have ultimate flexibility to try to focus on profiling where the where the bottlenecks are and therefore where are the highest rates of return and and trying to to drive capital to those to those areas well fantastic I wish I wish I had enough money to invest well Jason it's been a it's been a real pleasure having you on I look forward to having you on again in the future I think we found out sort of someone who's an update us on what's really going on in in chair and beyond and some fascinating thesis so really enjoyed it and yeah look forward to future conversations all me too thanks for inviting me on happy to happy to be with you today really appreciate the opportunity thank you for listening to find out more about HC group our global offices and our expertise in search within the commodities sector please visit www.hcgroup.global