The Right Place at the Right Time – and Beyond
Managing Director Tom McNulty discusses the opportunities and challenges of the energy transition.
Being in the right place at the right time is the ultimate strategy. It places opportunities within reach, allows for informed decision-making, leads to timely transactions, and places businesses and experts in the spotlight. And it is tough to accomplish.
The backdrop for the value Chiron brings during the evolving energy transition is rooted in being in the right place at the right time – and beyond.
Location, Location, Location
As the saying goes, “Location, location, location.”
Chiron is headquartered in Houston, Texas – the Energy Capital of the World. Here, you will find critical mass: more than 4,600 energy-related enterprises, intellectual capital, technical expertise, support, and professional services for every segment of the energy industry. As such, it makes sense for the Energy Capital of the World to lead the global energy transition.
Complexities, People, and Perspectives
By its very nature, energy is highly technical and draws upon geology, geophysics, thermodynamics, physics, chemical, mechanical, and electrical engineering. The sum of these elements is a long, complex learning curve.
As a result of the learning curve, energy is a sector in which big mistakes are made, such as those made in Germany where aggressive shutdowns of nuclear power plants have resulted in power shortages because the growth of renewable energy cannot yet keep up with the pace of coal and nuclear’s exit. Setting an ambitious energy transition target is one thing, but understanding it and achieving it are very different.
Closer to home, a concentration of people is propelling the Energy Capital of the World with a level of technical expertise and talent that doesn’t exist elsewhere. As a respected member of the dynamic Houston community, and with offices across North America and Europe, Chiron is well-positioned to be a valuable resource during the energy transition. As reflected in
Chiron’s deal portfolio, our depth and breadth of capabilities is extensive and impressive. We have provided strategic advisory services and valuation opinions to clients up and down the energy value chain, and we have executed a wide range of energy transactions, including mergers, acquisitions, sales, debt and equity offerings, and restructures.
Lack of Definition Creates Opportunity
Ask more than one person to define the energy transition and you’ll quickly see it’s yet to be truly defined. It means different things to different people. In the absence of a globally accepted definition, what is clear is that the energy transition is multidisciplinary, involving physical and financial energy markets, risk management, valuations, mergers and acquisitions, and substantial regulatory, public policy and government affairs elements, among others.
Also debatable is the velocity of the energy transition. The pendulum swings dramatically, with one end of the spectrum predicting everything fossil fuel-related will be eliminated completely and quickly, while the other end of the spectrum maintaining that fossil fuels will remain for decades, while renewable resources become capable of maintaining energized grids in the industrial world. While Chiron does not have a crystal ball on velocity, we clearly see the energy transition creating tremendous needs for financial and strategic advisory services, capital allocation, M&A, and transaction support.
Also unclear is what will emerge nationally and globally in terms of public policy, statutes and regulatory changes, any and all of which might – and likely will – trigger the divestiture of assets and the desire to invest in clean energy, renewable energy, and associated technologies. One of the biggest and least addressed questions is how the under-developed countries will fund and manage their transition after the richer countries take the early steps.
Regardless of how it plays out, the energy transition process will involve elements of old energy and new energy. Chiron is very deep and broad in the core energy skill set, which forms the basis for much that is happening in new energy.
Think of old energy as a building block for new energy. The physics and thermodynamics of energy are absolutes; they won’t change based on decisions made in London, Washington or Beijing. Only when you understand old energy can you explore, engage and think through new ideas, new markets, new structures, new technologies and new opportunities. You have to understand energy. Period.
Today and Beyond: Connecting the Dots
Crude oil. Oil and gas companies can – and will – continue to produce during the energy transition. According to data from the U.S. Energy Information Administration, the number of drilled but uncompleted wells (DUCs) has fallen to about 4,600 from its 2019 pre-pandemic peak inventory of nearly 8,900 DUC wells. The focus on well completion versus new drilling activity during the pandemic significantly ramped up oil production. U.S. crude oil production is up to ≈11.8 million barrels per day (b/d), which is still below its pre-pandemic peak of 12.3 million b/d. Production forecasts for 2022 and 2023 are for record-level highs, reaching 12.6 million b/d next year.
Natural gas. Natural gas has essentially become a byproduct of crude oil drilling, and more than 50% of U.S. wells produce it. Natural gas is the fulcrum molecule in the Energy Transition to a lower-carbon, cleaner-energy complex because it displaces coal. U.S. natural gas production averaged 95.5 billion cubic feet per day (Bcf/d) in January and is forecast to hover around 96.1 Bcf/d in 2022 and climb to 98.0 in 2023, according to the Energy Information Administration. There are about 300 new coal plants under construction globally, and 90% of those are in Asia. And it’s worth noting that the climate debate would be very different if those plants were gas-fired or nuclear and supplemented by renewables. Converting planned and existing coal plants to natural gas is an essential medium-term element of any realistic plan to approach net zero in coming decades.
Renewable energy. Renewable energy is only 12% of the current U.S. supply stack, so there is room for it to continue to grow and become a larger part of the energy supply chain. Solar and wind power have remained resilient during the pandemic, and geothermal energy is rapidly becoming a third key element to the growth in renewables here in the U.S.
Energy Transition. With the energy transition underway, we estimate there will likely be at least $3 trillion in annual capital allocations and deal activity globally – buy side and sell side transactions and capital raising – for many years. New technologies will likely include novel forms of nuclear power, large scale energy storage mediums, new modes of transport and manufacturing, and on and on. A lot of companies engaged in this space are mid-cap and below, and Chiron’s advisory and transaction competencies can work hand in hand with companies in this space.
With a sharp eye on accelerating activity, Chiron is in the right place at the right time – and beyond, with the right people, skill sets, perspectives and connections – and a rare depth and breadth of wisdom to help middle-market companies navigate the energy transition path forward.
Tom McNulty is a Managing Director of Chiron Financial. Drawing on 25 years of experience working across the entire energy value chain, he brings a rare combination of industry, Wall Street, consulting and government experience to bear for his clients. Read his full bio here.
Meet Our Author
Mr. McNulty brings over 25 years of working across the entire commodity and energy value chain.