Mergers and acquisitions are happening, and you need to know details about whether you are an investor or a company looking to acquire or divest assets. Who you have in your corner sifting through the details matters. Having a company like Tounge and Associates look at the details and market and assess the risks is critical.
Jeffrey Tounge (JT) and I had the opportunity to visit about the energy and natural gas market, and hats off to a great veteran and fellow Oklahoma City University MBA student. As a typical go-getting Army Field Artillery Officer from West Point, what you see is what you get. I for one am looking forward to more podcasts, and visiting with JT about deals and getting his opinions.
Follow JT on his LinkedIn Here: https://www.linkedin.com/in/jeff-tounge-45217613/
Check out Tounge and Associates HERE: https://toungeassociates.com/
Thank you, JT, for stopping by the podcast! – Stu
Highlights of the Podcast
00:39 – Introduction of Jeff Tounge and his background.
02:00 – Transition to mergers and acquisitions.
03:25 – Memories of Maine and family business discussions.
04:00 – M&A activity and consolidation in the energy industry.
06:13 – Personal experiences with selling businesses.
07:49 – Importance of planning for business exits.
08:54 – Evaluating oil and gas deals and factors affecting valuations.
11:09 – Impact of equity deals on investors and stakeholders.
12:08 – Resurgence of natural gas power plants.
13:59 – Consumer impact and costs of renewable energy initiatives.
15:10 – Regulatory environment’s impact on the energy industry.
16:28 – Use and limitations of heat pumps in residential heating.
18:14 – Supply of natural gas and LNG imports to regions like New England.
19:41 – Regulatory pressures leading to industry consolidation.
21:38 – Staying current with regulatory changes and industry developments.
22:47 – Jeff Tounge’s academic background and experiences at Oklahoma universities.
25:19 – Complexities of M&A deals.
26:03 – Closing remarks and contact information.
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The following is an automated transcript, and we deny any errors unless it makes us funnier or better looking.
Stuart Turley [00:00:08] Hello, everybody. Welcome to the Energy News Beat podcast. My name’s Stu Turley, President and CEO of the sandstone Group. In the energy space. Right now we have a lot of M&A activity. We have the energy transition. And I always look for experts because I went to Oklahoma State University. I need a little help some time. And I have got JT done today. And he is with Tung Associates. And we’re here on a first part of a series, getting ready to rumble out and talk about some big things. How are you today?
Jeff Tounge [00:00:40] Great. So thanks for having me on.
Stuart Turley [00:00:42] Boy, I’ll tell you what I went from high energy to thanks to. Well, you and I met and had a talk a little while ago. Tell us a little bit about you, JT, and what are you working on at, Tung and Associates?
Jeff Tounge [00:00:58] Yeah, absolutely. My background’s predominately in natural gas. I’ve been in oil and gas for the last 15 years. After my time in the military, went to West Point, did six years in the army, and then jump right into oil and gas, which was a good transition because it’s a very, similar community and culture, which was great, but I found my way predominately into, natural gas and, predominately the northeast. So I’m from Maine and, have been able to maintain a career up here in New England working with utilities, pipelines, LNG operators, that kind of thing. So, I’ve been doing a lot on the development side, building LNG infrastructure, building pipeline infrastructure, CNG, LNG. But about four years ago, I transitioned to, mergers and acquisitions. Yep. And and trying to, continue in the natural gas space in oil and gas space, but also on the M&A side. So helping lower middle market, family owned businesses, small operators that are looking to exit for various reasons. And we can kind of talk about some of those reasons, what the pressure is on the, small operator these days.
Stuart Turley [00:02:00] Yep.
Jeff Tounge [00:02:01] So I’m using my oil and gas background, with a focus on mergers and acquisitions. So helping business owners sell their companies.
Stuart Turley [00:02:08] And, and when you use, sit back and take a look at, you’re a are you a junior? Is your dad also. Yeah.
Jeff Tounge [00:02:19] Yeah. Jeff Towns the second. So I go by JT. My dad is Jeff Towne senior, and he actually, started the M&A practice 35 years ago. Wow. I partnered with him, recently joined as a partner to kind of grow and expand the, family practice.
Stuart Turley [00:02:36] You know, I live, Maine, up in that area. I was there years and years ago when I was a, lad, and, I loved the offshore fishing and all of that area. Yoakam’s restaurant was one of my favorite restaurants, had all of the whaling and everything up in that area. And, I remember sitting there on the old bar stool with my dad who was coming in from, the, the military base, and he would come in from TDY or delivering airplanes around the world. B-47 yeah. And he would come in and I’d sit there, just have I can smell the eggs and the bacon out of that. So I got some great memories of Maine up there.
Jeff Tounge [00:03:25] Yeah. It’s a beautiful state. Nice place to raise a family. You know, you can be in the mountains. You can be on the ocean. But if you want to be in the oil gas industry, you gotta make your way to Houston every once in a while. So I do a lot of traveling.
Stuart Turley [00:03:36] Hey, thank you for your service, by the way, too, because, I got such fond memories. Tell us what you’re seeing in the industry, because your help with the M&A space is just. We’ve seen it from the big boys. I’m seeing it from the little guys, and I’m seeing it midstream. I’m it’s just unbelievable. On the consolidation and and really jockeying for position. But what are you seeing.
Jeff Tounge [00:04:00] Yeah yeah very much the same a lot of consolidation going on. there’s still a lot of fragmentation within the oil and gas and energy services space. So small mom and pop operators, equipment manufacturers, service providers that are pretty fragmented by basin or by region and they’re, they’re having a hard time competing. So first thing is they’re aging out. So they’re at retirement age. They’ve built the business for 30 years. They they don’t always have somebody to hand it over to in the family. I think the transition from first to second generation is only like 30% of companies, and then it just drops out going from second to third generation. So that that generational transition is very difficult. And then just competing. Right. So operating as a small, lower middle market operator, which I’d say is in the 5 to 20 million revenue space, hard to find labor, service technicians, qualified help. Right. You’re competing with large operators that are willing to. Do sign up bonuses and pay more. So Labor’s a major issue. The younger generation is not getting into oil and gas, right. They’re going to financial services. Right. Marketing. So there’s a constrained labor pool. It’s hard to compete against the the large guys. So there’s just a lot of consolidation. And you know, my dad always says, you know, he he lived through the 2008 crash. Right? And folks that had built their business up and saw the market crash, they had to wait another 5 to 10 years before they could exit, before the business was worth what they need to retire. So I think 2020, 2023 kind of spooked some folks. And like if we go into a real recession, I’m going to have to hang on to this asset for a long time for it. And so we saw we saw some folks exiting for those reasons.
Stuart Turley [00:05:46] Yeah, I went and worked for, my father in law and, it was a good, a good time. I learned an awful lot. And what I thought would take six years to get it sold. I mean, what I thought would take a year took six years, and it was worth everything that I went through there. Because at the end of the time when we got it sold, Floyd said thank you. I would not have got it sold without you. Yeah. How cool is that? Yeah. That means, you know, as a son in law, you’re like, yeah, yeah, it was a great deal.
Jeff Tounge [00:06:22] Yeah, yeah. I mean, selling your business is one of the biggest life events you’re going to go through. And especially folks that have been, starting and growing their business for 30 years, they’re working weekends, you know, 80 hour weeks. So it’s it’s a major transition. And, and we like to develop relationships to help them through that transition.
Stuart Turley [00:06:42] You know, relationships in this business are great. There’s some great folks in this business, especially in midstream and natural gas, like Steve Reese and a few the other. Any. Cool. Yeah. So yeah, Steve is great.
Jeff Tounge [00:06:54] Yeah. He’s that’s how I got connected to you.
Stuart Turley [00:06:57] And, I just got to do a live interview with, Steve at, nape. And, next time we need to get you at nape, because that’ll be there. That is a lot of fun there. And, it’d be fun to have the three of us on a podcast.
Jeff Tounge [00:07:13] Absolutely. And, like, some of the ways that we work with, folks like Steve, I mean, he’s helping, natural gas midstream operators grow their business. But, yeah, inevitably, owners are going to consider their exit strategy, and you’d be surprised how many folks just don’t think about it, right? You’re you’re trying to grow your business. You’re trying to get market share. But, that exit sometimes can take 5 to 10 years. And so it’s never too early to just consider it and check in, see what your business is worth to a valuation, see if it’s enough to retire on right. And then you can make plans accordingly.
Stuart Turley [00:07:49] You know, when I for my real day job, besides being CEO, is we take a look at oil and gas deals and then evaluate those. Because looking at the offsetting wells, not all deals are, created equal. Yeah. And so we, my partner, Michael Tanner and I have had so much fun working with great, software and being able to analyze, like, some of the big boy things like Occidental and their, recent acquisition. You take a look at what they’ve got buried over here in their, carbon capture and how that may play in. Somebody may say it’s not a good evaluation, but how do you figure out JT? Other things that may make sense, because you got to know a lot about the industry in order to say, wait a minute, here’s this price. What are some of those kind of things? Does that make sense?
Jeff Tounge [00:08:55] Yes, absolutely. Very industry. Yeah. It’s part art and part science. Right. That’s that’s what, my dad always says. And so we use, you know, very common cash flow models to do evaluation. You know, looking at the balance sheet and in various cash flow models. So that can kind of give you a multiple of EBITDA and that’s like your starting point. And then from there you kind of add and subtract based on the art form of, you know, how well does this fit into the consolidation that’s going on in the industry? What are the other, you know, non tangible assets, that you might have that don’t show up on your balance sheet. So you know, we like to do, you know, a typical cash flow valuation to start. And then we decide, you know, is your company worth more than that for various reasons or less than that. And, and again, where we are lower middle market. So a lot of the times, just having like really well run, business with solid income statements, you’re tracking your gross margin, you’re paying attention to your expenses. Just having a tidy house sometimes can make you more valuable to an acquirer because they they trust your numbers. They know what they’re buying.
Stuart Turley [00:09:58] You know, I’ve always seen. Good. Michael and I on our podcast always have good management, good numbers. That makes an evaluation a lot easier. Yeah. Yeah. And you take, CEOs like, Chris right over at Liberty. Energy. Love him. Love, Toby. Love all the guys that are out there really running it from a entrepreneurial. Even though they’re publicly traded companies, they’re family businesses. I mean, that’s the way they treat them.
Jeff Tounge [00:10:30] Absolutely. Yeah. Yeah. And the valuations, I mean, they do kind of start to zero in across different industries and verticals. But we just saw, Trans-Canada just sold the Portland natural gas transmission system up here in New England, to Blackrock or announced that that was a ten x Ebit, valuation. And then if you look at the equity, equity ran announcement in, in Pennsylvania, Marcellus area that’s come out of about a five and they’re both midstream assets. Right. And they a couple months of each other. So, it can be pretty broad depending on what industry in Berkeley you’re in.
Stuart Turley [00:11:09] It’d be fun to sit back and have you and Michael, talk about equity in a little bit more detail from that aspect because, you know, some of the folks in the feedback we were getting is that they were kind of grumpy, since that wasn’t that an original split out?
Jeff Tounge [00:11:26] It was. Right.
Stuart Turley [00:11:27] And then he brings it back in. You’re coming back in the fall. And then were the investors actually the only ones that got money? It looked like from a surface. Again, I haven’t strip through it. Right. But you know, we’re the bankers and then the management and then you kind of figure out. Yeah.
Jeff Tounge [00:11:44] So and everybody looks at the value differently.
Stuart Turley [00:11:47] Yeah. There are other things in there. And it’d be fun to strip that apart and take a look at that because I, I absolutely respect Toby. I, I, you know, if you sit back and kind of go, was it borderline for the investors? I highly doubt that he would do anything not good for his investors. I mean, that makes sense.
Jeff Tounge [00:12:08] I, I agree, and I think a lot of it has to do with your corporate outlook on fossil fuels. I mean, you know, there are there are large companies that are continuing to acquire and consolidate, you know, standard infrastructure. And then those there are those that are divesting. I mean, Enbridge just bought up Dominion’s gas distribution systems in the US because Dominion was like, we’re moving away from that. We’re getting more and electrification. So depending on what your corporate outlook is on the energy transition, you’re going to value an asset very differently. And midstream is a great example. I mean midstream is a annuity in my opinion. Right. Pipeline gets out. They gets fully subscribed their 20 year contracts. And that thing is going to throw off cash for the next 20 years. So long as you believe that we’re going to continue to need that quantity of natural gas for the next 20 years, which I happen to believe.
Stuart Turley [00:12:54] So I believe, in fact, I’m on the energy realities with David Blackmon, Iryna Slav, and Tammy Nemeth every Monday morning. And, we are talking next week. I’m just now teeing this up. And that is for, the resurgence around the world for natural gas power plants. Yeah. Not not only are they one of the only reasons that we’ve, really changed how much CO2 we’ve reduced in the U.S by 20, I believe 22% in the last few years according to the EIA, which hates natural gas, I think. Is because of natural gas in the world is going back to natural gas. I, I think it’s fabulous.
Jeff Tounge [00:13:42] Yeah. I, I think my experience of the last 15 years is that there was a big departure into the energy transition. Everybody wanted renewables and, green assets. And then I believe they realized that they weren’t scalable, they weren’t profitable. And so a lot of the large investment investors are going back to the.
Stuart Turley [00:13:59] But I’m going to disagree with you. Oh, really? Yeah. And here’s where I’m just kidding. They are, but they are not sustainable, fiscally responsible from day one. Yeah. And Warren Buffett, you know, you and I both know Warren Buffett said you can’t invest in these silly things unless there’s tax subsidies. Well, and do you see this out there where everybody says, oh, it’s a 30 year wind farm? It’s less than an eight year. And I have not found anybody that says the maintenance comes where it’s horribly unprofitable at eight years. And we’re they’re double dipping now. I’m now interviewing, let’s see, Paul Tice today, on the ESG, how ESG investing will, just totally wipe out the global crater, the global financial system. Yeah. And they’re double dipping into the money. And guess who’s getting it? Oh, JT. I’m sorry. The the consumers, they get to pay for it in taxes in Future Valley. I mean, this can.
Jeff Tounge [00:15:10] Increase utility bills. Yeah. I mean, the consumer, the ratepayer always pays, right? No matter who’s putting the CapEx. It’s the ratepayer that’s going to, you know, have the utility bill jacked up over time. And we’re starting to see that. So yeah, I think I think and that’s consistent with M&A. I mean, I think we’re seeing people go back to investing in things that have standard rates of return that, you know, are profitable at today’s interest rates. Right. And you know, so just, you know, fuel distribution like oil, propane, home.he, Hvac, those those markets aren’t going away, right? Because we don’t have a viable alternative, to heat our homes, to, to for transportation.
Stuart Turley [00:15:46] So a couple things. Let’s go to midstream. I jump around a lot because I’m hyperactive. I’ve had about six pots of coffee. You have a split tea for our podcast listeners at home. Besides having great looking hair, JT, I’ve got a flesh colored, and he’s got the whole mane there. I mean, you could be a lion if you were in the lion thing. But you’ve got a split t over your shoulder, if I’m not mistaken, which is a half. It’s a heat pump. If I’m taking a look at it. That’s right. And I’m, I’m okay with heat pumps, but, they’re being oversold and overplayed by the folks that think that they’re actually a good thing. I mean.
Jeff Tounge [00:16:29] As a main source, I’m in Maine. Maine is actually leading the nation in heat pump adoption. Partly because of the subsidies that have been put out by the state. I personally believe because Mainers are frugal and prudent and they like to have multiple heat sources in their home. So I heat with propane and then I shave, you know, on the shoulder months with this nice little electric, efficient heat pump. But really, the reason I like it is because it gives me air conditioning in the summer, right? Which is what most Mainers don’t have. Right? So if you’re a consumer, you’re like, well, I’m going to be able to install this with a major tax rebate. I get air conditioning, which I never have, and I can turn it on on the shoulder month in October and not use my propane. That’s a good deal. That’s a good use. But to run your entire house on this heat pump when it’s zero degrees in Maine, which it will be, and the electric grid behind that heat pump is insufficient to keep up with demand. We’re going to be running straight into a big problem, right? So in New England, to get over 50% of our electricity come from natural gas, right, is a good thing. Yeah that’s great. But in New England natural gas prices in the winter are through the roof because we’ve not been able to build adequate pipeline infrastructure. So like you said, we’re getting hit on both sides. So we’ve got these new new technology innovation. But if the if the molecule feeding this is not reliable, affordable and sustainable, the consumer is going to pay for it in the end. Right.
Stuart Turley [00:17:55] Oh yeah. And correct me if I’m wrong. Aren’t the pipelines coming up from Boston area? And those are that is supplied by the LNG. And even we’ve had some, foreign countries, deliver this past year that were sanctioned against.
Jeff Tounge [00:18:14] Yes. Yeah. Every once in a while, a Russian flagship will show up in Boston to, to bail us out of a cold winter. But, you know, kudos to the midstream operators that are keeping the gas flowing. But the reality is, is that we’re, you know, 600 miles from the biggest gas reserves in the country. In the world. Sorry. And we’re.
Stuart Turley [00:18:32] Paying. I’m sorry. I get just tired.
Jeff Tounge [00:18:35] Of the rest of the country. Yeah. It’s bad.
Stuart Turley [00:18:38] And we’ve got, Nick Doyle Delius out of senex. Who’s there in the Marcellus? A great deliverable, great CEO, great numbers, great deliverable for investors. I don’t give investment advice, but, it’s right there.
Jeff Tounge [00:18:55] Yeah.
Stuart Turley [00:18:56] Yeah.
Jeff Tounge [00:18:57] So from a from an M&A perspective like policy and in the regulatory environment are driving a lot of this M&A consolidation because the small operators again they’re they’re getting regulated to death. Right. So you know, whether it’s EPA or state regulations, we we feel energy choices is, you know, being attacked. Right? They want to get rid of natural gas. They want to get rid of natural gas furnaces. So anybody that’s providing a service into that space is also dealing with an enormous amount of regulations that really only the big companies can survive. So. Wow. You know, it’s it’s driving, a lot of these folks saying, you know, it’s just not worth me running my business anymore. I think I should exit and sell to a bigger operator.
Stuart Turley [00:19:42] You know, I’m I’m enjoying this conversation. I’ll pay you later, but, you know, when you sit back and take a look, regulatory, action will impact consumers and legislation through regulatory action. Legislation through regulations is pathetic. So when we sit back and see the war, I have to admit that the Biden administration is not racist when it comes to energy. They are equally stupid on all energy wind, solar, nuclear. I’m, I’m seeing that it is pathetic. So I’m. I’m sorry for voicing my opinion.
Jeff Tounge [00:20:25] No, I, I mean, I share the same opinion, but you can see it in the development cycle. I mean, it’s just we we can’t build offshore, wind. Right. So we’re we’re blocking LNG exports through Doe permits. Right. That’s on hold. But at the same time, the alternative is, if we can’t burn natural gas, we’ve got to use something we can’t even do offshore wind development because of all of the regulatory pressure. They don’t financially work either, so that doesn’t help. But basically there’s just this kind of uncertainty that’s left by all these policy measures. Hoping and hope is not a strategy, hoping that some energy innovation saves the day and we just don’t see that happening.
Stuart Turley [00:21:05] Well, how is Tung and Associates? Because, you know, we talked about Steve Reese. Reese consulting is so van tastic on the, policies. And. Hey, Steve, if you ever listen to this story, if I’m saying something nice to you. But, I’ll take you to dinner. And and so when you sit back and take a look, they know natural gas. I mean, they audit so much natural gas, they know the regulatory. How do you stay current at Tung Associates for the regulatory, for M&A? Does that make sense? Yeah it’s it’s a nightmare.
Jeff Tounge [00:21:38] It is. Yeah absolutely. So I’ll make one quick correction. It’s it’s tounge associates just like lounge but with a t. Thank you. Well I think it would be helpful for the for the listeners. But I get it all the time. We respond to everything so.
Stuart Turley [00:21:49] Well let me, let me just say I went to Oklahoma State University and so, you know, I have to go. I’m half Okie, half Texas. I’m a Texas resident right now.
Jeff Tounge [00:22:00] So, you know, fair enough. And I got my MBA from the University of Oklahoma, so I actually and I went to Fort Sill, field artillery basic course there. So I, I have a fondness for Oklahoma.
Stuart Turley [00:22:09] When did you get your MBA from Oklahoma City University, 2014.
Jeff Tounge [00:22:14] 2014 to 16.
Stuart Turley [00:22:16] Okay. I got my MBA from the Oklahoma City University as well. Yeah. And I got a four point in it. And it was brutal because at that time they were teaching, a bunch of the jurors doctorates, were teaching the MBA program, and they wanted to run everybody out. Oh, no. So I, I love your school. I get such a low grade at OSU that I had to cover it up with an MBA from Oklahoma City.
Jeff Tounge [00:22:47] Yeah, I’ve never been a good student. I, I, I consider myself a leader through my military experience, and that’s what I bring to the table. But, when it comes to pure academics, I’m not the guy to go to.
Stuart Turley [00:22:57] So neither am I. But I learned after I got out of my undergraduate.
Jeff Tounge [00:23:02] Yeah. And, I mean, I’d learn more about businesses by selling businesses than I did in my MBA. So. But to answer your question, town associates, we consider ourselves generalists. So really, where the M&A expert we can sell just sell just about any company. But, it does help to be specialized in something. So right now, my dad, his background’s in manufacturing, and he has a specialty in commercial lighting. And, so the folks that make LED lights for hospitals, in hospital, hotels and things like that, he’s been in that ecosystem for a long time through a partnership with some other experts. My background in oil and gas, more specifically natural gas. And so when it comes to M&A, if it’s outside of my my area of expertise, I would reach out to Steve Reese or to other experts that are in that space. So like if there was a service provider in the Permian, right, that I was doing a transaction for, I would bring in other colleagues that have operating experience in the Permian. They know what the takeaway capacities are. They know what the challenges are. So yeah, we’re a small group. We’re a boutique M&A firm. But we we provide specialty practice and consulting through a network of experts in the region, and in the industry.
Stuart Turley [00:24:20] You know what? I hope that this is a, the first of the series because I’m enjoying our conversation. And I would like to do a regular series with you on M&A deals that you’re doing. Yeah. And we’ve got a series called Deal Spotlight. And so we would like to, extend this out to other topics and have you come on and talk about a deal, and I’d like to have my, partner Michael Tanner on these calls, because I think it would be absolutely way cool. Yeah.
Jeff Tounge [00:24:51] Yeah. The the deals, the deal itself is always very fascinating because every deal is different. Deal points are critical when. It comes to negotiation and making sure that it’s a win win win solution. And so at the end of the day, it’s not always about the total transaction value. There’s other deal points that are important to to owners and to sellers. And so it’s funny to go back in hindsight and to dissect those and to figure out where the deal started and where it ended up and and for what reasons it went in that direction.
Stuart Turley [00:25:20] JT, how do people get Ahold of you guys and, your website and your LinkedIn and go ahead and let everybody know on the podcast that.
Jeff Tounge [00:25:30] Yeah, absolutely. Tounge associates.com is our website. We list all of our, current transactions and press releases. We do newsletters so you can sign up for that. I’m pretty active on LinkedIn. So Jeffrey Township Town Associates on LinkedIn, like to stay, current on events. And I do a lot of public speaking or trying to do more public speaking at various conferences to talk about M&A, natural gas, and a lot of the energy transition challenges that we’re faced with. So, I’ll, try and keep everybody current on what I’m doing up there.
Stuart Turley [00:26:03] Hey. Well, thank you so much. And and I can’t wait to visit with you again. And we.
Jeff Tounge [00:26:07] Obviously want to.
Stuart Turley [00:26:08] Thank you and get all this all out there. And, when you’re in Oklahoma, let’s go have dinner with Steve.
Jeff Tounge [00:26:14] Absolutely. We’ll do.
