Chuck Yates Needs A Job

0:21 All right, this is kind of crazy. This is literally like the first time you and I have met. Yeah. And I think, in a weird sort of way, we're almost the same dude. Yeah. I tore my Achilles.

0:32 Sorry about that. Sorry about that. It's been 22 years. I got publicly fired,

0:38 and all that, and we've been doing oil and gas stuff. Yeah. So, really long time. It's been a great journey, and you've had a great journey too. Yeah, been a little bit of a wild one, but -

0:50 It always is. Yeah, it makes it fun. Doug, thanks for coming on. So, this is really cool. I always use this as a little device on the podcast, but there's a lot of truth to it. My mom's

1:02 really smart, but she has no idea who you are. We're a lot of the audience does. So, tell me real quick who you are. Okay, so, you know, I'm from Pascagoula, Mississippi. I grew up in the

1:17 public school system Mississippi. And, you know, I was just probably like anybody else growing up, just didn't know exactly what I wanted to do, but I always had this interest in the oil industry.

1:30 And so, I go to Mississippi State to get a petroleum engineering degree. I was a third generation engineer, both my dad and my grandfather graduated from Mississippi State, and it worked out

1:42 really well for them. And I always knew that I wanted to be involved in the oil industry. And, you know, one thing led to another. And I got a job with slumber Jay out of college, became a

1:54 directional driller in the deepwater Gulf of Mexico, which is a fabulous experience, learned a ton. And it really put me in a position to succeed on Wall Street, because, you know, after I got

2:07 my MBA from Rollins College in Winter Park, Florida, which is a lovely place, by the way, and I went into the financial My former father-in-law. was at Rollins for a while. He had morphed from a

2:19 professor into building information systems for colleges. So he kind of goes someplace and put himself out of a job after two or three years. And yeah, I never got to visit, but I heard Rollins

2:30 was gorgeous. It is, it's fabulous. And it's basically, you know, North Orlando, it's just a, you know, great spot. And then, well, you know, what I realized when I got my first job out of

2:41 MBA school was that it's a real advantage actually having hands-on experience in whatever industry that you're covering because most people don't. I mean, you know, most of the analysts that I

2:53 competed with on Wall Street, you know, had, you know, business degrees or finance degrees or math degrees or what have you. But I was actually a person who drilled hundreds of wells and lots of

3:02 different conditions with lots of different people. And it really, you know, prepared me, you know, for Wall Street So

3:12 I go to the bus side, spent about six years, but in the end when I was reading the book and talk about the talked about the book that to me was kind of like one of these key things cause normally

3:23 you can't get to the buy -side unless you've done harvard MBA Stanford MBA whatever and so being able to get to the buy side how did that happen so when when I graduated from MB I still had five

3:41 different offers and they were from really good companies like IB M and Humana and A T and T and actually took the job offer that paid me the the least which was at Sun Bank Capital Management because

3:53 Our I thought I'd be good at Managing money and I was really attracted to the quantative and evaluation side of it and I thought I'd be passionate about it and I felt like if I could find my Passion

4:04 then I would look forward to going to work every day and so I had a summer internship in a in and they hired me and I was really lucky because the the company that hired me which was Sunbank Capital

4:15 Management, which is now part of

4:17 truest, had a guy there who was a lead person by the name of Tony Gray. And you may say, well, I don't know who that is. But Tony Gray, when I was working at

4:29 Sunbanks, had better 10-year performance numbers than world-renowned Peter Lynch, according to the Wall Street Journal. And so I just so happened to go to work at Sunbank under the tutelage of one

4:37 of the best investors of his time. And I met a speech at Rollins College several years later and somebody asked me the question I said, I think I probably learned 90 of what I needed to know about

4:47 value in stocks and managing money in my first job, even before of kind was That? out it seek you did or campus on interview come just they Did. Florida in Sunbanks left I

4:59 the thing that, 'cause that seems to be the big pivot in your life right there. It was a big pivot. And it's not obvious and necessarily easy going from the oil industry in the Gulf of Mexico

5:15 But Rollins had a great network of

5:20 alumni and they reached out and so one way or another, I got the job and then they hired me and I couldn't believe how lucky I was. I was working with a great group of people, a fellow by the name

5:30 of John Race hired me, was a mentor for me for many years. And then I show up at Sunbanks and I'm going, Oh my gosh, these guys are complete rock stars. I learned a ton. And it really positioned

5:41 me to succeed And I think what happened next was once I started talking to a lot of these sales side analysts, they realized that not only did I have an MBA and a CFA like everybody else, but I

5:53 drilled lots of wells and lots of different conditions and knew the industry from the ground up. And so then the sales side started calling me, but I wanted to stay on the bus side and I planned to

6:03 stay on the bus side. But one thing led to another and I went to camper in Chicago and then I went to Putnam in Boston, which was another great break for me because I ended up managing the energy

6:13 fund there, which was the fifth largest energy fund in the world at the time. So, you know, five years removed from drilling oil wells in the Gulf of Mexico. I had one of the best buy side seats

6:23 in the market managing Putnam's energy fund. And, you know, I never really planned on leaving. I really liked Boston. I liked the community. You know, Putnam was one of the probably top 10

6:32 firms in the United States at the time. But then I got a call from Wall Street and the guy who was the number one oil analyst on Wall Street at the time, a guy named Brian Jacoboski suggested that

6:43 maybe I come and replace him. And I said, well, I don't really want to leave the buy side. I love Putnam, love Boston. It's a lot of fun. I think my natural area of ability is in managing money.

6:53 But one thing led to another and I ended up going to New York. And for the next 15 years, I ran Morgan Stanley's global energy group out of New York and then here in Houston. And then I took a year

7:04 off in 2008, which was a good year to take off

7:10 from what I was told. And then I moved to Fairfield, Alabama, and Evercore, ISI, Ed Hyman hired me, and I ran their energy group until the second half of 2021. So that's kind of my career in a

7:22 nutshell, yeah. Yeah, no, the stuff at Morgan Stanley was fascinating. We were talking about this before we started recording. I still can't believe we'd never met anybody. I knew Tom Langford.

7:34 Yeah, yeah. Now, at Caney Anderson, kind of late, I joined in 2001. I

7:42 mean, our second fund was240 million, you know? So, man, if we created a company worth60

7:50 million, that was a big deal. Right. So, we weren't really calling Morgan Stanley to help with a sale, but yeah. So, who are the other bankers that were around there? Robert, Steve Tropper

8:02 was around there. Who else was on the team? Steve's great. Jerry Shredder was another one Tom Langford, Mike Dickman. Bob Maguire, Joe Pirella,

8:14 whom I'll leave an out. John Shepherd, another Houstonian. Well, you know, Jean Shepherd was my first boss at Stevens. Yeah, John's older brother. Yep. Yeah, and Jean wanted to become a CFO

8:27 at Brigham and now runs Brigham, I guess. Dan Ward, who's still at Evercore. Okay, yeah. So, really kind of a, you know, we all started in Morgan Stanley at

8:39 the same time. They were on the banking side John Lavoy and Phil Pace were on the research side, but they've all had fabulous careers and have all been kind of, you know, primarily type bankers

8:48 throughout their career. I texted Phil last night, said you were coming on and he said, please ask him how a Mississippi State lost to a very mediocre Texas AM team this year. Well, unfortunately,

9:01 we've had our kind of our worst team gosh, 30 or 40 years. But I think Coach Lebe, you'll get it back on track. I'm a

9:09 believer. But man, it's a, that SEC is a rough neighborhood. You know, I'm a, I'm a rice owl. And so our one claim to fame is there is one college team that has played Alabama more than once

9:21 and never lost them. We're three and O against Alabama. And I'll get this stat wrong. It's, if you expand it to include something like Auburn, Georgia and Arizona state where I know against that

9:36 group. Oh my gosh. Yeah. So that was a, but so you get to Morgan Stanley and the first big call super majors. Yeah, so I get to Morgan Stanley. Like I said, my teammates were John Lavoy and

9:52 Phil Pace. You know, I kind of always regard us as equals, even though I was the head of the energy group and they tasked me with kind of building the energy group out So we did that. We hired

10:04 analysts in, you know, in Europe and India and Japan and China and Latin America, you name it. So we built this global approach to the energy sector. And about three years in, you know, I wake

10:17 up and I'm the number one rated oil analyst on Wall Street at the age of 36. And so it kind of occurs to me that, oh my gosh, there's a lot of people around the world who must value my research. I

10:28 wouldn't be the number one oil analyst And so maybe I should use my platform to try, in effect, change because I maybe ranked the number one guy again in the future, but I may not. And this may be

10:39 my only one shot. Political capital is very fleeting in the world. Yeah, it is. And on Wall Street, as you know,

10:50 your picks and your ideas or your resume, and they get scrutinized, and if you make a misstep, it can stick with you for a long time And so in late 1990s and 1998. the old industry was not doing

11:04 that great. SP energy had gone from 28 of SP 500 in 1980 to 14 in 1990

11:14 to 4 in 1998. So my industry led by my companies, BP, Exxon, Shell, Chevron, etc, had gone from 28 to 4 of SP 500 in less than 20 years. And my view was that SP energy could go to 1 to 2 of SP

11:30 500 in less companies changed their ways and got back on the right track. So what did they need to do? Well, we thought that the reason that the sector had deteriorated, which was the biggest

11:41 deterioration of any sector in the market at the time, was because of misguided capital allocation, and that companies needed to be more judicious with their spending. And they needed to be more

11:53 focused on growing value as opposed to growing production And so that

11:60 was the key problem back in the '90s. it was. It sounds familiar. Yeah, it does sound familiar. We're going to talk. We'll talk about that. We'll start talking about the pledge in a few minutes.

12:09 So, so at the time, I just said, I want to use my platform, but I've got to come up with the thesis that'll stand up to a broad intelligent audience that hopefully will affect change. And so for

12:22 a year, I worked on my report, and when I finished in February of 1998, my report was a full eight pages, and I kept it really short and succinct because I wanted everybody who was involved with

12:33 the oil industry, whether it was boards, corporates, employees, investors, regulators, anybody who cared about the oil industry, I wanted them to be able to understand my report. And I figured

12:43 if I had it short and concise and had all the right points in it, then we might be able to strike gold with it. So I published a report in February of 1998 called the Era of the Supermajor, which

12:54 is where the phrasesupermajor came from. And in that report, I basically just said that I outlined the problems which the industry deteriorate in relation to the rest of the market. And I just said,

13:05 we've got to manage capital in a way that's more competitive with that, which investors can get in other parts of the market. Coming up with the problem and any industry or any company is easy.

13:16 Coming up with the solution is much more difficult. And so what we proposed was that we said that we think that the companies that have superior scale and globalization are gonna have the best

13:24 returns valuation and share price performance in the market And so we proposed that majors combine and become what we call super majors at the time, which again, it's just a phrase that we create.

13:36 It wasn't even a phrase at the time. And these companies were gonna have similar quality assets, similar corporate cultures, similar functional and geographical scope. And we thought if we put

13:47 them together, then they would be able to dominate the competitively advanced investment opportunity set in the future and they would be the best performers in the market. So Chuck, if you think

13:57 about this, for a 36-year-old to basically come out and say, We think the whole industry is going in the exact opposite wrong direction and that it should turn around and not only should turn around,

14:08 but it should go in the direction that I specifically indicate in my rapport. You can imagine that there's going to be a lot of pushback because a lot of folks would say, well, maybe we haven't

14:18 done so great, but why does Doug think that he has the secret answer? Well, let me cut you off Just real quick to set the stage and maybe we should queue up like glory days by Bruce Springsteen

14:31 because we're so old and talking about it. I don't think people necessarily today realize how different investment banks were back then. I mean, this is pre-glossed, Stiegel. So I mean, you were

14:45 the research guy, but at the same time, I mean, you're almost the head investment banker too I mean, that that felt investment banking research were much more combined. back then and the stuff.

15:00 And so this is, today you can kind of say that from a silo and research and the corporate finance bankers can say, well, that's my crazy research. It doesn't matter. But back then it was like -

15:13 So prior to 2003, you're right. Research and banking

15:19 were separate, but they were more connected. Simultaneously, at Morgan Stanley and I was happy about this, they ensured that if I had material non-public inside information that I was restricted

15:33 from commenting or writing or what have you, I think we had a very effective compliance procedure in place and I was happy about that. But you're right, there was more collaboration prior to

15:45 2003 at all investment banks. But they didn't have any control over what I said or did. And so if the area of the super major made them happy, then it did. But if it didn't, it didn't. And like

15:56 you said, Chuck, I mean, if it didn't, then I was on my own with it. And so we published this report. And so you can imagine that there was a lot of pushback because there was a lot of investors

16:05 that, that, you know, you kind of thought that this idea that you should sell these companies unless they adopt this new model was gonna hurt their share price performance. And the big oils were

16:15 basically saying, you know, we have, we manage these companies in the way that we have because we've been successful over time, but they weren't successful at that time You know, we also had to

16:26 believe that the FTC and the regulators were gonna allow these gigantic companies to merge and create some of the biggest companies in the world. Standard oil too. Yeah. Well, and the other thing

16:36 is back then, it was very routine.

16:41 I won't name any names, but I actually heard a conversation just happened to walk into somebody's office and

16:49 they were on the phone. but CEOs would go, You're son of a bitch over there and research is saying this. I'm never doing business with you again, and click. So, I mean, there were real

17:00 repercussions for you actually sitting there beyond just people might not like it. I mean, it was - I mean, it took a lot of millions of dollars of fees to more than - Well, a lot of people

17:11 thought it was a great career risk for me to take to basically come out and say that my entire industry and every one of its companies is going in the exact wrong direction. And I have the correct

17:22 answer. And the reality is that if I wasn't right about that, there's no question that my career trajectory could have taken a hit. And yeah, I probably could have lost my job. But what we found

17:34 out pretty early on was that the bus side really embraced my thesis. And they basically said, you know what? We're probably not going to see this industry recover if we keep doing the same things

17:45 that have led this big decline in performance. Embraced my thesis, they started to ask the companies, you know, why is Doug wrong? They said, I think we don't agree with everything that he says.

17:56 I mean, he's right about some things, not right about others, but I think he may be on track on this. And then with the big oil companies, most of them had to publicly dismiss my position until

18:08 the day they basically came out and announced mergers they just had to. And there wasn't, and this was public too. And so I would go to a lot of these analyst meetings and a lot of these meetings,

18:18 some of the CEOs would throw a spear at me here and there or an arrow here and there and mock me a little bit. But I thought that they didn't understand the seriousness of the threat. And at that

18:31 time what was happening was globalization was starting to unfold. We were starting to see the follow the Soviet Union into the Cold War and all these countries were now being more connected to the

18:42 rest of the world. Why does that affect the oil industry? Well, because most of these countries had these gigantic oil companies internal. that were sapping state resources and then needed to

18:51 privatize them. So once these privatization started, we were going to have all these new competitors in the market and to sit by oddly and not really notice that and not put a strategy in place with

19:02 which to defend your company would have been problematic. And so the oil companies, I think, knew all along that something needed to change to make them more competitive because of the external

19:15 changes in the global arena. And the other thing that was interesting, Chuck, at the time was that the Wall Street Journal, the Economist, and the Financial Times really embraced my thesis. And

19:27 it wasn't, you know, because they were beholding to me because they weren't. We agreed on some things, we disagreed on others. But what I found was that because the buy side really embraced the

19:36 era of the super major and the media did too, they really started to do the work for me at one point. And then I went on The Lewis Rookager Show, which you may remember Wall Street week, way back

19:47 when. Single. single greatest comedic moment in the finance world is, you know, he got in effect fired by PBS. They canceled the show or they replaced him or whatever. And then he went over to

19:60 CNBC, what, like six weeks later, the opening of the CNBC show was, as I was saying, before I was so rudely interrupted. I love Ray Kaiser, the little elves that would always vote at the end

20:13 Yeah, it was great. And he had a huge audience. Like on Friday night, millions of people watched that show. And it was amazing how, after I did that show, so many people called and said, Let's

20:23 investors, called and said, Well, let's talk about this a little bit more. And so one thing led to another, it started to gain some momentum. The conversations that I was having with CEOs, they

20:33 didn't tip their hand ever to me before they announced mergers, but the conversation started to shift a little bit. And the reason why was because it had become the most topical narrative in the

20:43 sector. And then when I would go to meet with investors, this is all they wanted to talk about. And so we had some momentum. And then in 1998, one of the things that really kind of pushed us over

20:54 the edge, and I didn't predict this, was the Asian economic miracle kind of became an Asian economic crash. And what I mean by that was that between like 1990 and 1996, these Asian tigers had GDP

21:07 growth of like 8 annually. Their stock markets were going through the roof, but there was a lot of problems under the surface in real estate markets and stock markets. The tie-bod eventually

21:15 collapsed They devalued greatly stabilization. And I think in 1998, those countries, which were driving oil demand at the time, had declined in GDP of like 32. Well, guess what happened to the

21:26 price of oil? Well, the price of oil declined significantly because demand declined considerably. And the VINs and the Saudis had this disagreement over who the low cost producer was. So we headed

21:36 into 1998, almost identical to the time that I published here, the super major with the price of oil declining of companies.

21:46 had a little bit of a shorter fuse. They didn't have as much time as they wanted to. And that kind of led to a fairly meaningful catalyst. I didn't predict it. It just kind of happened. I became

21:54 a power technology banker back then because I was sitting there in Stevens and Gene had left to go to, had left to go to Prudential and work with Sandy Vaughn. I don't know if you remember saying

22:06 that, had left and Howard House and - I remember Howard, yeah. Yeah, had gone there and I was kind of stuck at Stephen's wild story. At some point, I will be beyond the trauma so that I can tell

22:22 the story of, 'cause naturally I would have just gone with Jean to Prudential. Goldman gave me an offering. Goldman wound up yanking my offer back during that. Yeah, that's a great story. That's

22:33 like a three beer story.

22:41 I so I and it. But anyway, about done shaking now if I'm just know don't became a power technology banker. The internet was taken off. great internet analyst. I was like literally sitting there,

22:50 it probably wasn't even Google. It was probably Ask Jeeves or Yahoo or something, just hydrocarbons and internet. And I found, I was finding companies in the energy business that were using the

23:02 internet. And so that's why I ran around and did for a while. That was, that was my take on the super major. That's what's getting. That the hell out. So anyway, all this momentum started

23:13 building The oil price was lower and we wake up and six months after I pull up your seer, the super major in BP and Amaco announced their combination. It was a50 billion merger. It was the biggest

23:23 merger in the history of Wall Street. And what was important about that merger was that BP paid a 25 premium for Amaco and their stock went up like 20 by the end of the year, which basically

23:35 validated my thesis that these mergers would be cheered in the stock market because they would create economic value Sure enough, BP basically comes out. follows the super major doctrine and says,

23:45 we're going to cut costs. We're going to invest underperforming assets. We're going to improve our returns on capital by 50, basically everything that I was asking for. And so if you're another

23:55 CEO watching this happen, you kind of come to the conclusion that, Oh my gosh, there may be real economic value to be created. And maybe I should move because first move or advantage is everything.

24:06 And one of these gigantic merger phases. So within a couple of months, even before BPM and co-closed next on and mobile combined, and then we saw BPM and co-arco. And then we saw Elphin to towel

24:17 and then Chevron and Texco and then Conoco fill up. So maybe leaving somebody out. But over a three year period, we saw the most significant strategic transformation in the oil industry going all

24:26 the way back to 1911 when they broke up to standard oil trust. And so it all happened very quickly. It was a, you know, fabulous ride for me and for the companies. And, and at the time, a lot

24:35 of investors said, well, you know, this will be a flash in the pan and the companies won't stay But what we saw was that in the 10 days following the mergers, the value of the companies rose by

24:45 like the50 billion, but because they stuck to the super major doctrine and the value-based model, SP energy adds another500 billion by 2008

24:56 SP energy, which had gone from 28 of SP 500 in 1980 to 4 in 1998, rose to 14 of SP 500 by 2008, the biggest move of any sector in the market because they stuck to the model and it was a great time

25:12 for shareholders and investors. And so a lot of people would say, Well, that wasn't the only thing that was happening during that 10-year period, Doug. It's not just because of the super-major

25:21 call, and they're right. It wasn't the only thing that was happening. And you know, guys would point out that, well, the oil price was rising because China was doing so well and this and that,

25:30 but my response would be, well, if we hadn't had combined companies, if we hadn't had greater capital discipline, It won't price mine out of risen in the first place 'cause there'd be more supply

25:41 on the market and what have you. So the truth is probably somewhere in between. I'm not taking credit. Spike the football, dude. Yeah, you have tough permissions. Spike the football. Well,

25:49 there

25:53 were a lot of things going on at that time and I was just happy that the industry found the key to prosperity. They stuck with it. And we went from four to 14 of SP 500. And so it was the fabulous

26:04 time in the whole industry during that decade So how much, I've always wondered this in my career 'cause like we were saying, I did private equity. And if I built something to500 million or billion

26:15 in size, I just sold it. So I didn't have a lot of interaction with the public buy side and public companies so much. How much of this is the investors want something and the CEO reacts, responds

26:33 to the incentive and does that right? versus how much is the CEO dictating to the buy side, you should be looking at it like this. 'Cause I've, just from the outside, I've always sat there and

26:48 said, CEOs are the smartest investors in energy. 'Cause they take cash and they reprice their options every time they can, and they give the market whatever they want, but that's probably two-some

26:59 plus. So Chuck, it's a dance. It's a dance, and investors have access to what has worked and led to prosperity and the other 10 sectors of SP 500 and what has not worked. And CEO sometimes, not

27:13 so much. And so,

27:16 I was kind of, I guess, a middleman or a catalyst in a way because I was both. I guess I had credibility with the oil companies because I used to be a slumber Jay person. I had credibility with

27:27 the investment community because I used to manage the big energy fund at Potnium or what have you and then my cell-side experience. And we're all trying to get to the right answer. It's just that

27:36 sometimes we don't know exactly what it is. And so it's really kind of a team effort. And a lot of the things that I had in my research were because of conversations that I had with some of my

27:46 smartest clients in the world, whether it's in New York or London or San Francisco or what have you, and that's how these ideas I think get formed. I mean, it really is, in my case, it was

27:58 really kind of a team effort. But in the end, you have to go with one specific thing You can't be ambiguous, and you have to prosecute it, and you have to have courage about it. Well, and I'd

28:08 say this at the risk of alienating my audience, so you can just claim it really quick. But to some degree, business is business. And one of the things I've found, you get raised private equity,

28:23 you're talking to CIOs of institutions, and you learn a lot. Oh gosh, yeah. And you totally learn multiple things one, business is business. So lessons learned here. can be applied here. And

28:36 the other thing you learn is that, believe it or not, the accountant's got it, right. Net income actually does matter. You know, for all the, you don't get it. EBITDA, growth, PUDs and all

28:48 that sort of stuff.

28:51 EMP is not that unique. It's not that different than other businesses. And fundamentals kind of really do matter. So Chuck, you're absolutely right about that. And one of the pushbacks I got,

29:02 you know, really all along, whether it was with the era, the super major or the pledge is that Doug, you two mayopically focused on full cycle returns, like return on capital and economic value

29:11 added and market value added and what have you. And the reason that I was somewhat stubborn and unwilling to change is because these full cycle measures drive valuation for all 85 sub-sectors of SP

29:24 500. And so I can prove that. And so for us to say, it doesn't apply to us and energy, That means that the market is setting valuation. in energy, in the four sectors of energy, big oil, oil

29:38 service, EP and refining and marketing, using different financial metrics than the other 81 sectors of SP 500. I just don't think that's realistic and it's not really best backed up by the math.

29:48 And so I think that our industry has to use financial metrics that connect intrinsic value because there's tons and tons of evidence that that's what drives share prices in the market. And that's

30:01 what investors care about And investors are always looking for the best opportunities and the best areas in the world and they have lots of different sectors and markets around the world to choose

30:10 from. And so we have to be competitive and I'm happy that our industry is competitive right now. Well, and I pull my hair out on that because people don't realize that investing is a relative game.

30:23 I mean, I've talked to people, oh my gosh, I can buy PDP at PV 18 these days, versus PV 10. Yeah, I can buy Apple stock and it doubled last year. I can buy Bitcoin. And it did this, and

30:39 I gave a speech at the IPAA Private Capital Conference, and

30:45 I was doing what I kind of do. I always say something flamboyant, and to start something off, and I basically said, I was brought here to talk about the future of the energy business and how we

30:57 can do, and I said, This year, we actually have a shot because everybody else sucked. I think this was, I forget what year it was, but it was the year where cash was the greatest investment.

31:12 Everybody was negative, and I go, The fact that technology sucked way worse than us, we got a shot. I made the whole point of being relative, and I think what my opening line was, Thank you for

31:27 the IPAA, having me come speak about the state of the energy market. I went to the Saurus so that I could come up with numerous synonyms for the word shit.

31:41 That unfortunately was the Bloomberg quote. Right, yeah, Los Angeles and Keynes just. You can't say that sort of stuff. I'm like, but that's not what

31:52 the speech was about. So to our investors every day, walk into the office and compare business models and value propositions against other alternatives of the areas of investment And so it is tragic

32:04 that our industry went from 28 of SP 500 to 4 of SP 500 between 1980 and 1998. It is also tragic that between 2014,

32:14 I'm sorry, between 2008 and 2016, our industry went from 14 to 6 on its way to 2. But we have to arrest that periodically. And the era of the super major helped to do that. And also the pledge

32:29 which we'll talk about in a minute and help to as well but yes, it absolutely matters how. well, companies are managed and how they're performing in other sectors, because investors can leave our

32:41 sector and go to theirs in a heartbeat. And that's what they do all day, every day. So that's kind of the era of the super major. And so then after the era of the super major, because we authored

32:52 the concept, we basically advised on every transaction during the era of the super major, except for one, because it was our concept. And so that put us in a position to do these privizations

33:04 around the world. Yeah, the privatizations were fascinating to me, 'cause I didn't, I mean, I was basically sitting there having nothing to do with it. So everything I know about them, I read

33:14 them in the Wall Street Journal, right? So at the time, as we talked about earlier, globalization was a phase, and part of globalization was these governments around the world were trying to take

33:26 these oil companies off their balance sheets, because they were bleeding cash And so the thinking was, if we can privatize these companies and they can compete in the market, they'll be much more

33:35 efficient. And instead of draining government resources, we'll get a dividend from them. And so because we were in basically the premier league of strategic advisors, having advised on every

33:45 transaction, except for ExxonMobil, during the era of the super major, we won most of the big mandates. And the first one was with Sinopec in China. And Tom Langford and Carlos O'Rvide and I

33:55 worked on that. And it was the first joint venture between Morgan Stanley and an investment bank in China, which was called CICC Unfortunately for us, the head of CICC was a guy by the name of

34:05 Levin Jue. His father was Jue Ranji. He was the premier of China at the time. And so that kind of underscores how important privatizing Sinopec was. 'Cause it was the biggest company in China and

34:15 maybe the biggest company in Asia. And it would serve as a blueprint for their privatization process for all the rest of their industries. And so when we looked at Sinopec, we got, oh my gosh,

34:25 this company has fabulous market shares. We can't wait to get into it. but then we found that there was like ninety companies that were kind of disconnected there was no management information

34:33 system the balance sheet was a mess and petroleum policy in China had to change or we are no other company could could take Santa Fe public over a couple of year period we were able to work through

34:44 all those issues we we had a restructured company that we thought would perform well in the market and one of the keys there was we got BP Exxon and chevron to purchase sixty percent of the equity

34:54 owner on the equity offering and what that did joke was allowed me to go to investors around the world Say Hey I've got three thou smartest oldest investors in the energy sector in the market

35:04 investing in this idea so therefore it must be a pretty good idea it was a pretty good idea of a casino pick ended up being a ten bagger ten bagger over the next decade and today is the fourth largest

35:14 a company and in Asia and so my Chinese friends used to tell me that I was an honorary Chinese

35:21 for being one of the the principles and in that transaction it was a lot of fun so the the one of my favorite jokes that no one ever laughs at so for free you don't have to as what's the traditional

35:33 greeting in the Chinese Army I Dunno General I Enjoy your Chicken and I years after you have a chicken named after you

35:41 but the the the the the story I found just crazy in the book Is You're there you eat at a restaurant where literally you get to pick you did this is crazy walk into a restaurant sinopec pack the

35:54 restaurant down you know down restaurants they on firing ranges down bowling alleys they owned United Police departments fire departments and back in those days it wasn't uncommon for those businesses

36:07 to be gripped onto the oil company cause it was a govern agency at the time it wasn't a company and wait we had to remove all that stuff but you're right my first trip to a mobile owned Montgomery

36:16 Ward back in the day so we were doing that did I think exxon owned a typewriter company or something didn't know I remember what a typewriter is Yeah So yeah, so we walked up to my first meeting in

36:27 1997, we walked into this restaurant and it was like a pet smart. I mean, they were like cages of birds, um, cages of, you know, birds and aquariums of fish. And you, yeah, you could pick

36:36 whatever you wanted to eat. And I said, well, okay, I'm going to go with the flow here. So I ended up eating a brown snake and, um, that's so brave. How was the, so you see, you got a shot

36:47 of something. Yeah. I think it was plain juice from the snake. Spleen juice. Yeah. I've never had a spleen juice. That's what I was told. But you know, like I said, I was going with the flow

36:54 and, yeah. So anyway, it was a lot of fun and it was a hard, it was a hard transaction. Oh my gosh, we spent a couple of years over there. So a lot of, a lot of, a lot of board meetings and

37:04 the board meetings were always interesting because first of all, the translator had a hard time understanding my thick Southern accent and then he had, and then he had to translate it into Mandarin

37:15 and then had to come back to me. And so what would ordinarily be a two hour board meeting was like, you know, a six hour meeting and it was draining. Trying to understand everything and read body

37:23 language and what have you, It was very successful and like I said sound effects the fourth largest company in Asia and so it's just been it's been pretty good for that touch on the Venezuela and and

37:34 maybe do that compare and contrast Venezuela to Norway Cause I don't know that there's anything we can do about Venezuela in a day unfortunately Yeah it's such a cautionary tale so so so Norway was a

37:46 pretty easy transaction a main great assets modern as corporate governance strong management team and it was it was Morgan Stanley's first real piece of business in Norway and we wind just because we

37:58 were the the Strategic Advisor of Choice after the era of the Super major and after we did all these other things and so no Norway was Super successful because they had this great mechanism whereby

38:12 that the government could raise all this money and then put it in their sovereign wealth fund their sovereign wealth fund would grow and guess what their sovereign wealth funds the largest in the

38:18 world today largely based on revenues they have gone from there all industry is two trillion dollars and it's really the envy of every other sovereign wealth fund in the world. So Santa Pec, I'm

38:29 sorry. So Stedwell was an interesting transaction, but it wasn't complicated. We also took Conoco public and you say, What's the big deal? Well, at the time, it was the largest IPO in US

38:39 history. And, but that wasn't overly complicated as well. But Venezuela was, we really had our eyes on the prize with that one. And so we'd go to Caracas and we were trying to get the company and

38:52 get the government to understand the benefits of privatization and the primary benefit. And I still remember the presentation that Tom Langford and I made to the Board of Pedovacia in the summer of

39:03 '19, I think it was '97, was we basically said that we can privatize 13 of your company and pay off all the debt of the government of Venezuela, which was27 billion at the time. And so you go,

39:13 well, Doug, that's a no-brainer. Who wouldn't do that? But if you also remember, that was around the time that the Saudis and the Venezuelaans into a disagreement. over who was a low-cost

39:24 producer, and the vans were basically saying, We're going to overproduce our quota, and not only that, but we're going to raise production from 32 to 64 million barrels per day, and we're going

39:32 to sell this oil into the US. market, which unfortunately was a market closely guarded by the Saudis during the previous couple of decades. So the Saudis kind of warned the vans, and then at the

39:41 failed 1997 November OPEC meeting, everybody, there was kind of a flood of oil in the market. They were all priced declines and declines considerably. You may say, well, why does that affect

39:52 this peta vase of potential privatization? Well, because they had an election that year, and the incumbent president or the current president, a guy by the name of Caldera, had pardoned Hugo

40:01 Chavez from prison a couple of years earlier. Well, what's the point? Well, then Hugo gets to run for president. And because the decline in the oil price had wreaked havoc on the Venezuelan

40:11 economy, Chavez wins the election. And shortly thereafter, from what I can tell, the Venezuelans put in place, the governance policies that the Castro's used in Cuba between 1959 and 1961 and the

40:25 rest was history and companies and investment bankers like ours were told thanks, but no thanks. And so I think back on Venezuela and, you know, like I said, Norway has a two trillion dollar

40:38 sovereign wealth fund. It's the envy of every other sovereign wealth fund in the world. We always joke that Venezuela was Norway on steroids And so instead of having a two or three or four trillion

40:49 dollar sovereign wealth fund, the Venezuelans today have150 billion of debt that's in default. And so it's really unfortunate because it would have affected generations of Venezuelans. Venezuela

40:60 would be one of the most wealthy countries in the world today or certainly in Latin America and the Americas period, but it all came down to governance and whether or not they continue to be a

41:14 satellite of Russia and Iran or China as some believe. remains to be seen but it's just unfortunate I made of lawsuits are twenty five years chuck they've lost a third of their population and it's

41:25 twenty five years I mean they were what the third richest KM country in the in the Americas back when that started and the path that could have been an amidst twenty five year Chug depending on who

41:37 you Ask largest oil reserves in the world now then again it depends on how you calculate or what have you but it's really six of one half a dozen either of the other it could have been Norway on

41:47 steroids and it could have a gigantic sovereign wealth fund and never much standard much greater standard and quality of life for for their people yeah the fortunate it it's really unfortunate so the

41:59 second biggest fan to the podcast behind mom is a guy on twitter called nineties random and at nineties random is a refinery days ago we Gotta talk are now okay cause cause you crush that one too I

42:15 did a golden age of refining so so Alzheimer's or listen to this podcast will remember old timers like me that getting into the two thousands refining was arguably the worst business in the global

42:25 economy companies had rarely earn their cost of capital in the previous decade or so but because returns were so poor and because accompanies were strapped our analysis which really did go refinery by

42:37 refinery around the world ned up all the capacity based on every single refining project planner and construction worldwide suggested that OH my Gosh starting in two thousand and three demand growth

42:48 is Gonna exceed capacity growth by three or four to one margin if that happens and utilization rates and margins are going to go through the roof and so we waited and we waited wait until the time to

42:59 pull the trigger in two thousand and three I issued a report called the Golden age of refining which is where the phrase golden age of refining it came from and I suggested that any homage to the

43:10 Golden triangle I mean, Beaumont, Port Arthur, and. No, it wasn't. It was just like the year of the Superbait Drive just trying to get everybody's attention. Yeah, exactly. You were a social

43:20 media influencer before we had 'em. Or maybe I wasn't with your taglines, I like this. Well, I just wanted everybody to, because it was such a terrible business at the time, I wanted people,

43:30 and I was a number one analyst on Wall Street, and so if they would listen, I could have a platform, and so people would listen to me. And so what we said, we were quoted in this Oxford Energy

43:40 Review paper saying, 2003 will be a good year in refining 04 and 05 and 06 will be the best three years of the past couple of decades, and 07 will be the best year of all. And you may say, and so

43:51 people just kind of laughed at me. They said, Theres some crazy, this is a terrible business. But we thought we had done the work that others had, and we thought we were right about it. And so I

44:01 pushed it. The Wall Street Journal quoted me saying, By every refining stock you can, that's not gonna matter which ones you own. And so that too was a career risk,

44:10 2003, the refining margin was 304, it went to 5, then it went to 7, then 10, then 12. Choke, would you believe that the earnings for the refining stocks went up by a factor of 40 or 50 by 2007?

44:26 So anytime you have a sector where the earnings are missed that badly by Wall Street, you can expect that you're going to have a parabolic move in the stocks and the average refining stock or the

44:35 average large refining stock, which is kind of what I care about, rose by a factor of 1, 700. It was a 17-bagger. And so you may say, well, gosh, that's probably the best call in the energy

44:47 sector that decade. It's probably the best call in Wall Street that decade. Like how many groups go up by 17 over a four-year period in which the SP 500 only rose by 55. The other thing that was

44:58 fun during the golden age of refining besides the fact that we kind of had this model that we didn't think anybody else had was that because we were regarded is the guru in the refining sector and

45:08 these. refining companies were flush with cash we were obviously the the obvious farm with Me as late analysts to raise all the equity for Valera Thirty six and Marathon Petroleum predecessors and so

45:21 all the A lot of the equity we raised then to buy refineries at that point and ripley represent the cornerstone refineries that those companies have today so spent a lot of time with the CEOs of the

45:32 refiners not only you know erase raising money but playing golf and going to hunting camps and and you know they they manage capital effectively and I didn't really lose my objectivity because they

45:45 were doing things that were aligned with shareholders but love spending time with the Tom O'Malley and Jack draws dick and Bill Gree he and and and the and the whole crew back then and then more

45:56 recently the the management of the refining and marketing companies has been amongst the best in the energy sector too whether it's mark leisure and Greg Garland Phillips sixty six or my cat again at

46:05 Marathon Petroleum juggled has done a fabulous job too and so there were great stocks during the golden age of refining they've been great stock since then but it's because these management teams have

46:15 committed to the value base model and they haven't flinched AM I making this up cause of being a degenerate alcoholic at age fifty six a lot of the memories gone but I want to say that the the CEOS

46:29 from kind of like the late nineties all got run off and they all got replaced by CFS those that where all these CEOS came from I wouldn't it felt natural that there would be more capital discipline

46:42 with I wouldn't say that was true in the refining Sector I mean refining sector has always had CEOS who balance spending and distributions and realized that this could be a tough business in for a

46:53 long time and they they managed it like tomorrow is going to be a more difficult day than today and so I wouldn't say that's necessarily okay definitely not the case in refining and marketing and at

47:03 one company

47:06 may have chuck but you know they they these are You know, really smart guys who were upstanding with integrity that

47:16 they were amongst the best capital managers in the energy sector during the past two or three decades. The list I mentioned. Do you remember Copano? Bagley. They wound up being an MLP and they

47:25 were, in effect, natural gas pipelines and stuff. We looked at that deal when it was private

47:35 and this is crazy 'cause this goes, and this goes to refining and leverage and margins. They had all make-hole contracts and basically a make-hole contract is where

47:52 you pay fixed price for the natural gas and whatever liquid you get you sell and you get your share of, you know. And so anyway, we looked at that And we did month by month to look at the. In

48:09 effect the refining margin of the natural gas and there are I think it was one hundred and thirty six months of history we had to look at there are only five months where they had actually lost money

48:21 on a on a gross margin basis three of the five had come in the last five months and so we're sitting there and literally if you doubled margins it was a twenty five bagger and if it if it ran as is we

48:38 lost all our money right I mean that was the end what was so funny about it is Danny wine guessing are looking at that we build this big model and we start playing with it and we were not as smart as

48:51 you we should have probably gone to every natural gas processing plant in the area and see what the capacity was what switching costs would ban we do we just play with that model we went to Bob

49:01 Sinnott we sat down we were talking about we go okay Bob Reversion to the median we make a reversion to the mean we make Yup ten times our money twelve times our money and bobcats let me tell you a

49:13 little story chuck my grandmother used to get up every morning she would make a piece of toast and then she would walk her dog for a mile and one day she died and she didn't get up again she didn't

49:24 eat the toast again she didn't walk them out with her dog you don't have to revert to me scattered OH okay what we wound up passing an egg cap just crushed that's an interesting analogy know the boys

49:39 at the VA boys at those are those type of stories Yeah so so crusher on a refining and marketing which kind of leads US into oil price it does and so the other for the final point on the golden age of

49:52 refining was by two thousand and seven the stocks had risen by a factor of seventeen and the street had kind of which is just unheard of in the public markets while it is it is odd that so obviously I

50:04 had something that other people didn't and I thought I did But nobody had made any money in refining in the previous 20 years. And so you're always lonely when you come out with a call like that.

50:13 And you hear the snickering and what have you, but it worked out fabulously. But by the middle of 2007, everybody on Wall Street, he was still employed, had to turn positive, meaning at the

50:23 beginning of the golden age of refining, I had competitors who kind of laughed at me and said, not only is he wrong, but I'm going to put a zero dollar price target on some of the stocks he's

50:31 recommending. True story, never seen that on Wall Street before Anyway, the stocks go through the roof, the street gets on the trade. But by the middle of 2007, we downgraded and we said, you

50:41 know, the party's over. Supply is going to exceed demand. Utilization rates are going to fall and they declined by 75 in the next year. Now, I didn't call the financial crisis in 2008, but it

50:51 didn't really matter because our work suggested that that it was kind of game over for those stocks. But it was a great time, the golden age of refining. And then in 2008, you know, the year

51:01 started like any other year, we were living been used to an over a memorial. and the investment banks were at all time highs, didn't seem to be any real problem in the market. And so during that

51:14 year, you might remember that the oil price started probably around65 per barrel, but it seemed to increase every single day. And I raised my price forecast and I raised it up to around95 per

51:26 barrel, but it just kind of kept going up in my face. And I think by around March, it was probably 110. I had one competitor with a150 price target Another one with 200, there were whisper

51:36 numbers of 300. And so it was time for me to change my forecast. And I think within Morgan Stanley, there was a saying, well, he's got to align with the bullish consensus or, you know, he may

51:45 not have an extremely long career here left at Morgan Stanley, but I stuck to my guns. And the work that I did suggested that we were going to build inventories by like two million barrels per day

51:56 in the second half of 2008. And in that scenario, I didn't think that the oil price was going to keep going up. Instead, I thought it was going to fall, But there was a lot of pressure for me to

52:04 - Change because I was a number one all analyst on wall street a lot of everybody internally and a lot of investors externally read my research and governments did as well and so instead of turning

52:14 positive whenever been the street was seemingly rising oil price forecast every day I doubled down and said the market's gotten more negative and the thing that I thought would bail me out in the end

52:23 was number one I had data that I didn't think anybody else on wall street had that was demonstrating that we were destroying demand once the oil price got to one hundred and ten and we were already

52:32 will pass that number one number two I thought that once supply and demand reasserted themselves and speculators exited the market their will would be broken and they would get out of that trade like

52:44 rats jumping off a sinking ship the hard part there was I didn't know exactly how long that would take I thought I would be vindicated in the end but every day the oil price went up matthews got

52:54 shorter a Morgan stanley needless to say and so one thing led to another and around may of that year Morgan Stanley said you know oil is very important. We have a huge oil business here. It's time

53:09 probably to part ways. And I said fine, because we'd be kind of grown apart and I was ready to move on my house for it's already for sale in Houston. And so it was kind of an amicable agreement I

53:18 was ready to move on. So I ended up leaving Morgan Stanley, I think on August the 8th of 2008, which Oh, by the way, it was three days before the all time peak and the oil price at 100 or so on

53:29 August the 7th for the first time. And only time in my life, I put110 oil flat in a model. Yeah, I remember that all too well. So I left Morgan Stanley three days before the all time peak and the

53:43 oil price at 147. And I ended up being right. Demand did start to crater in the second half of the year. Speculators got out of the trade as quickly as they could. We ended up at37 per barrel by

53:55 Christmas. And would you believe that the oil price ended up averaging98 per barrel that year? And so I missed it by about 3. And so.

54:04 I was on the beach in Alabama which is okay with me at the time but I got vindicated ally missed about three percent and I'm glad I stood my Ground and had the courage to to stay with what I believed

54:16 ended up being right in the end Sir So I'll go first but I did want to ask about those because obviously reading that a part of the book hit home and you know I'd gone through a divorce kind of two

54:31 thousand and fifteen to two thousand and seventeen and that was My Gotta get right in the head time you know spent a lot of time with my priest guarding out on everything not trying to be an

54:44 evangelical here that's oK by it I've got it out a whole bunch read every burn a brown book paid for more therapy than the gross national product of a third world country and all and so you know when

54:58 I Have Whatever it was April Twenty Seventh I think at twenty Twenty and I Hate Chuck we need to let you go because of performance and me saying well pretty sure I didn't cause minus thirty seven oil

55:11 but okay gas whatever I actually was in a really good spot to handle it and and plus I'M just kind of by nature self deprecating stuff right chuck yates needs a job as a podcast and when we were

55:26 talking about it and it was well let's work on the story as I will you're fired me the story is Pretty clear I'm happy to happy to abbey to say that I don't I don't need a story my What My One kind of

55:37 funny thing and then in the negotiation on leaving and Kane started off and said well we've just had such a good run here chuck that we we just want you to know no matter what happens in this

55:51 settlement agreement we are willing to waive any non -compete agreements any oils or minus thirty them I was like, well, guys, I appreciate that. Just so you know, my starting point is I'm

56:02 willing to take a lifetime ban from the industry. So, you know, you're big. But I kind of just, I lay all that out and I've talked a lot about it. But I'll admit, I mean, it's still, there

56:18 were, there were nights I was bombing, you know, and we were in the middle of COVID and I was, you know, we had the kids going back and forth So, and my ex wife has asthma and we didn't know

56:29 really days, whether that was a comorbidity. And anyway, she's a great mother. So, so anyway, I was being really good about, so I was alone by myself a lot in Richmond. And there were certain

56:40 nights it got to me. Yeah. Did it get to you? No, it didn't. I was ready to move on. The firm and I had grown apart. Like I said, my house was on the market several months before I left Morgan

56:53 Stanley. I just needed to find a way to exit I wanted to move on to other things and I remember the advice. Lee Raymond gave me the former chairman of exxon who as I was one of my favorite people

57:04 spend time with the mycareer found him to be very kind Humble respectful always valued his opinion and he just said till everybody know for a year now and I thought about that and I said that's good

57:14 Lee now Lee always said didn't say much but always had a lot of wisdom always valued it and emma friend Bilberry who eventually became CEO of continental resources he said he said doug is fine advice

57:25 but you're not going to be the fair haired child forever and so I sounded like pretty good advice as well and so when I left Morgan Stanley I had oil companies and hedge funds and private equity fund

57:36 reach out to me and I just needed some space for a little while and you know been retired or semi retired the beach in Alabama's in fairhope which is lovely place by the way is a good place to get

57:48 some space but a year later I get a call from from Adham and had evercore and he says I want you to come run my Energy group from New York and I said how about fairhope And he says, How about New

57:59 York? And I said, Ed, do you want me to come work for you or not? And he said, Well, where's Faro? Where's Alabama? And he said, Well, don't worry about it. I said, Listen, if I can

58:06 become the number one oil analyst on Wall Street again for Evercore, your investor, your clients won't care where I am. And so I went to work for Evercore in

58:18 2009. And at that time, the industry was still doing pretty well following the era of the super major. They were still managing capital effectively. Then the shell boom happened And so between

58:27 2010 and 2014, companies were amped up there spending again. They were spending like eight times what they were distributing to shareholders. And typically, when you see that in a cyclical

58:37 industry, whether it's materials, industrials, technology, what have you, it's going to precede lower returns, lower valuation, and a train wreck in the stock market. And so between 2010 and

58:49 2014, companies were spending money willy-nilly. It was clear to me that there was a lot of value The return on capital for the industry him with oil at one hundred and ten was a full seven per cent

58:59 october of that year I was set to make my annual visit with the with the Saudis in in in the Kingdom and So I took ten of my largest institutional investors to the Middle East and far she went to Abu

59:12 Dhabi and Kuwait and Qatar and then we went to Saudi Arabia as well it was pretty clear to me in October of two thousand and fourteen that the Saudis were not happy with the the rate of growth in US

59:23 production they were not happy with the market share of that they were losing and net if they had to defend their share at the expense of price they would so we come back we do a conference call with

59:34 investors about a month before the the famous November two thousand and fourteen meeting we say OpeC is not going to cut production which was directly oppositional to what the head of OPEC was saying

59:44 may we revise his and ahead of OPEC is is wrong in his public statements and the Saudis are going to let it ride and next thing that happened was what's called the Thanksgiving Day Massacre which was

59:53 when it became clear that OPEC wasn't gonna defend price and they didn't and they all price basically collapsed. And so in 2015 and 2016, so I was

1:00:04 sitting there and we had signed a PSA to buy something like literally three weeks before. And I remember, 'cause I'm sitting there with, I may have still had a blackberry at the time. Probably.

1:00:18 And I'm sitting there with the blackberry lowering a turkey into a deep fryer to make. And I'm watching oil just plunge. And you know, my joke for years after was, it's normally my Dallas Cowboys

1:00:32 losing on Thanksgiving day that runs turkey day, that year it was the Saudis. Yeah. It was awful. And the whole point was, I was kind of losing credibility with my call because I didn't really

1:00:45 understand these EP models where you just spend and grow production, even if your return zone capital declined. And so I started being called a fossil or a dinosaur and being told I didn't get it

1:00:56 and this and that. And I didn't get it. I didn't understand how this was gonna lead to positive outcomes for companies or shareholders. And then obviously when the oil price declined, 15 and 16

1:01:08 rolled around, 150 US EMP companies go bankrupt. In 2016, I think with oil prices of75 per barrel, the US energy industry had a 3 return on capital So obviously, we were right that the

1:01:21 investments weren't leading to value creation. But at the same time, even though we were facing dire straits and the route was on, it was an opportunity for me to use my platform again to try and

1:01:32 affect change. So 2017, I'm the number one oil analyst on Wall Street.

1:01:39 Everybody's getting my research around the world. If they weren't getting it, that was pretty easy to find. I mean, I had lots of research in the market I did monthly conference calls, et cetera,

1:01:49 and went up proposed at the time. as the remedy was the pledge for greater capital discipline and enhance corporate governance also known as the pledge and I said if companies do three things and are

1:01:59 no exceptions for any company it will lead to great prosperity in the industry and will get back on track the three things are number one we want companies to keep their spending at low levels even at

1:02:08 the price of oil rose what happens if the price of oil rises we can't take the money and go spend it you have to return to shareholders number two we want companies to start using performance measures

1:02:18 at the business unit and the corporate level that Tattoo intrinsic value return on capital employed found with me the is found with made me want to tell that CEO pay so again a basic coming out saying

1:02:28 the industry needs to go on one hundred and eighty degree different direction and we would prefer that you use a smile because it lead to great prosperity unfortunately heading into two thousand and

1:02:38 seventeen the refiners were pleasures they had adopted the model Conoco Phillips was a pleasure chevron couple of others we get to the end of the year and guess what happened Jug and the pleasures we

1:02:50 had eight of them or 80 of the top 10 performers out of 30 in SP energy. So the buy side had embraced the model. They were purchasing the companies that were following the model and being pledges

1:03:04 effectively, and they weren't buying the other ones. Some people said, Well, Terris, you just got lucky. Well, guess what? They didn't happen again in 2018. They didn't happen again in 2019.

1:03:14 So if I'd have come to you in 2017 and said, Chuck, I've got a call that's gonna deliver to 80 of the top 10 performers in any sector, in any market, anywhere in the world. You just said, Dug,

1:03:25 that's highly improbable. I'll take the other side of the trade and how much money can I put behind it? But that's exactly what happened. And so what happened was, is I prosecuted the pleasure

1:03:35 movement. And I did it every month and people were getting tired of me. Pleasure fatigue had set in, corporates were tired of me, investors were tired of me, but we were all gonna fade into

1:03:43 oblivion unless we had change And so we kind of woke up in, you know, 2020 and we said, you know, I most of the whole industry has kind of adopted this pleasure value based model the ones that

1:03:57 aren't activists campaigns in their stock and so they're going to eventually conform to the value based model and as it is time to call off the dogs and become positive on the energy sector meaning

1:04:06 I'd been negative mostly from two thousand and fifteen to two thousand and twenty but everybody was doing what I thought was a key to prosperity they were performing in a superior fashion in the stock

1:04:15 market so it was time to say pat him on the back and say let's go we're ready to succeed so November nine of twenty twenty rolls around and my associate Chazelle who was outstanding and I put together

1:04:28 a sixty page upgrade note you say sixty pages oH my Gosh but we wanted everybody to know and understand that we were turning positive he wanted to be crystal clear that we thought was downed by energy

1:04:40 stocks and so we said we want you to double or triple white the energy sector which is an unusually bold call for nationalists to make and so on the day of the upgrade the release the Report November

1:04:50 Night of Twenty Twenty and You're going to care why do you keep mentioning that date well because the stocks rose fourteen percent on the day of our upgrade and which is the third or probably the

1:05:01 second or third best move in forty years number one number two would you believe that November Night of Twenty Twenty was the exact day of the bottom in SNP Energy Vs SP five hundred that's Crazy and

1:05:14 My Thirty five year career that says I know it gets better so then a month later the Gaza Crude Chronicles who do an excellent work in My Opinion near Consultancy Collins I dug this is a little creepy

1:05:27 but we're going to tell you anyway but the day that you upgraded the energy sector was the lowest point in SMP Energy vs the overall market going back to when record keeping started nineteen eleven so

1:05:40 check the likelihood of somebody doing that is about the same as you getting struck by lightning twice in your life not that I want you to get struck by lighting, you know, once in your life, but

1:05:51 it was holly,

1:05:54 but it was holly, holly improbable. But what mattered to me, I mean, that's, it's flattering that the market went up 14 the day that we upgraded them. I'm glad that we were close to the bottom.

1:06:03 But what mattered to me was that the companies had adopted really the same model that we used during the era of the super major. And as they prosecuted it, they were awarded the stock market, SP

1:06:15 energy tripled off the bottom. It was the best performing group in SP 500. Like I said, we went from 14 of SP

1:06:25 500 in 1998 to 6 in 2016 when the pledge started. And I think at the bottom, we were around 2 of SP 500. And they've had fabulous performance since then. And I think they're going to stay with the

1:06:38 value-based model. And I think for that reason, it's reasonable to be optimistic about the

1:06:45 sector. Let's shine a big flashlight. on the Shell Revolution cause I can make various cases one you know cause we were doing this a Lotta times we you know we were five guys rusty pickup truck we'd

1:06:60 lease anchorage we did early stage assets we'd draw the first horizontal well in accounting and you would do that and inevitably that well would have a return on capital of zero if we were lucky if we

1:07:13 didn't lose money on it but you could see that man we can get the well costs down fifteen percent if we do use fine mesh sands instead of you know larger prop and mo Kay great we can do this and so

1:07:30 you know you will get into it and you'd have kind of let's say fifty million dollars into it and you talked yourself into yeah the capital I spent got a zero percent rate of return but going forward

1:07:46 I'm going to drill seventy five one hundred per cent right return was because of what I learned and sometimes I didn't turn out to be true sometimes it did so I hate to be kind of Pollyanna here if

1:07:60 you will but there was an element of that share the the show Revolution I think there was also an element of hey we bought all this acreage and if you look at what we paid for it it's not worth what

1:08:14 we paid for it but at least the D and C costs going forward are positive rights return so let's do that and then you get draw a bunch of these wells and the other thing is you couldn't stop right rye

1:08:25 signed up a RAG and you're running and then at some point you go well at least the see the completion costs right are positive rates of return and it created kind of a downward spiral and you're being

1:08:35 graded on Ebay da so it's let's just create more ebay dot the expensive returns

1:08:42 if you had to kind of rank one is hundred percent Pollyanna everybody I thought they were doing what was right and all that and ten was enron level fraud what would you say about the shale rub know so

1:08:56 I manage at times at the end and that's a that's a really good way to think about it Chuck I I think everybody had the business model that you described and they thought that they were correct in

1:09:07 thinking that productivity would increase and increase significantly and that returns would improve in the future but didn't really happen and you know the Saudis became frustrated around two thousand

1:09:18 and fourteen because earlier in the decade that they thought these guys are drilling through their best prospects like hand over fist as quickly as they can the best prospects are confined to twenty

1:09:29 counties they're going to run out of money at some point and the reality is was that in by two thousand and sixteen drumroll please the industry had three per cent return on capital at seventy five

1:09:42 dollar oil and that's not all related to to the shell Extravaganza but we did have one hundred and fifty companies go bankrupt during that period so the business model that you describe makes tons of

1:09:54 sense and I think everybody employed it is just unfortunate that we drilled through so many great prospects before we had productivity level that would have led to competitive returns on capital to

1:10:06 that which investors can get in other sectors but because we didn't investor sold energy and they bought everything else inside and again we went from fourteen per cent of SNP five hundred to two and

1:10:15 a half so no I don't I don't think it was Pollyannaish amended this is a an industry that's in a very dynamic that that has lots of great engineers and we figure things out but there was a lot of

1:10:28 money being thrown at you know kind of questionable drilling prospects before they knew what the performance history was really likely to be known those prospects in the other thing that was crazy as

1:10:41 someone can sit in the front row looking at it I mean the difference in economics between a B factor of 13 and that's basically for mom. That's kind of the shape of the curve, higher the B factor,

1:10:53 the sooner it flattens out. Right. But, you know, a 13 B factor and a one B factor, literally could be night and day. That's no question. And, I mean, they're coming online at such high rates

1:11:07 and screaming down, reasonable engineers can go, that's a 13 B factor, you know So I was actually happy at the time that my key companies, the ones I focused on most, Exxon, Chevron, Conoco,

1:11:22 Phillips, et cetera, were basically saying, we're not jumping into this head first. We're gonna wait until we can justify the investments

1:11:35 and the returns. And so, you know, the street didn't love them for a while because they weren't, you know, drilling it up as quickly as they could,

1:11:45 the technology to mature enough whereby they could visualize the positive returns and it worked out great for them. I mean, Exxon and Chevron and Conco Phillips were thought to have been late to the

1:11:56 game, but they were just astute to the game. This is a great quote, and

1:12:03 I'm gonna get it directionally, right? If you looked at the average oil well from 2012 to 2017,

1:12:13 I think, the average oil well IP, and let's use that as a proxy for quality of well, was up 30 and 40 each year. Every year, year over year, it was going up. And in 2018, it was up 20. If you

1:12:32 removed Chevron and Exxon drilled wells from that 2018 calculation, the average well in the United States was up minus 3. Wow And so this continued growth. of Wells getting better was really just

1:12:46 chevron and Exxon and deciding to put good acreage. And we talked about that in the book, it was called The Red Queen, which I took from the Allison Wonderland book. You're running faster and

1:12:55 faster just to stay in the same place and sure enough, that led to consolidation. And so now, the shale portfolios that the big oils that the big oils have are pretty good and they've obviously got

1:13:07 fabulous technology. And so they're in a much better position. It's just unfortunate for the industry that

1:13:16 what the Saudis said at the beginning of the decade, that these guys are, they're burning through these prospects before they fully understand the productivity of the technology may have been true.

1:13:24 Yeah, no, I think that's right. I think the other big thing that happened in there, and this is what I was a victim of, is in 2019 across our portfolio, we had generally paid for all our acreage.

1:13:38 So this isn't a perfect number, but it's cousin of, we spent931 million.

1:13:44 And if you looked at the year end reserves at 2019, our, and that was basically all drilling and complete costs. If you

1:13:55 loaded in our reserve forecast, we had drilled 31 rate of return wells. Now, the unfortunate thing was given what we had paid for the acreage, we probably needed to drill about 45 to make it worth

1:14:09 it and to make me still have a job But the second part of the shale revolution that I think people miss is number one, it was just a lot of first time you're using technology, horizontal drilling,

1:14:22 fracking, it's just hard to tell what you got. So we got wildly optimistic about it. And then second, where when you're testing a new sand, you have to hit it with

1:14:35 everything to figure out what the reserves would do. And then you can optimize costs Spacing was actually the exact opposite. If you thought. It should be eight wells. The industry should have

1:14:48 drilled four. But we were all worried about leaving oil in place. We didn't know.

1:14:55 And so it's the total opposite mindset of, you should have stepped up and, 'cause what we found is doing spacing, there were actually, because of reservoir dynamics, you would think if you

1:15:07 thought it was eight and you drilled eight wells, you thought the worst you did is maybe I spent two extra wells But I'll still get all the milkshake out. I got eight straws in there. I put all the

1:15:17 milkshake. We found sometimes if you put eight straws into the milkshake, you didn't get the milkshake out. Right. That you literally at four, you would get the whole milkshake out. That's right.

1:15:27 That day you didn't, and so that was, that was kind of the crazy part too. I think we have figured that stuff out now. It seems like it. And you know what's important about all this is, you know,

1:15:38 when we think about the future, You know, so the shale revolution has happened. When I think about the industry going forward, I'm delighted that the companies are focused on returns on capital

1:15:51 and distributing cash to shareholders, by the way, just like the other nine sectors of SP 500, because that gives us a seat at the table, which is what we want. And you say, Well, what about

1:16:01 the oil price? Well, in the book we talk about, we think it's probably going to be around 80 to 85 over the next five years or so. But the way we get there is going to be very different than it

1:16:10 was during the past decade What it looks to me is if, you know, demand is going to be fairly healthy over the next five years, may grow 800 to 1 million barrels per day per year, but what's

1:16:19 different is that with shale and the latter antings, it's not going to provide, the North America is not going to provide 100 percent, or it's not going to accommodate 100 percent of demand growth

1:16:28 during the next five years or 10 years, you may say, Well, where's it going to come from? Well, it's going to come from countries that we probably have somewhat mediocre relationships with. The

1:16:37 only countries that are left that can provide the oil would be Russia, Iran, Iraq, Venezuela, Saudi Arabia, UAE. it's a meme we have better relationships in others Brazil make a contribution

1:16:47 Guyana etC but an implausible have maybe have a higher risk premium in the price of oil in the future but we're in a transition where it where it kind of a a pivot I'm not saying that shale production

1:16:58 growth isn't going to be positive because it will but if you just take the eye or the eye a number of it's it's not going to be fifteen to seventeen per cent like it was five years ago it's probably

1:17:07 going to be you know three four percent at best based on those numbers so so the industry is in A I think in a really good position of course the commodities apt to cooperate but what I'm most

1:17:19 encouraged about is is how competitively the industry is managing capital and you I think that the chairman or CEOS and of exxon and chevron and Conoco phillips and so many other companies are you

1:17:32 know as good as any management teams we've seen over the past two or three decades and it's going to be a positive outcome I'm really encouraged about where we are right now yeah the air we could sit

1:17:43 here and talk for the rest of the day is it still scares me that doesn't feel like any geopolitical risk wars are factored in to the price oil. 'Cause I mean, you start messing around with something

1:18:00 in the Middle East. 20 of the world's oil comes offline for the reason. And I think the issue here, Chuck, is that when you look at supply and demand for 2025, it looks to me as if supply is

1:18:11 gonna be over demand and we're gonna build inventory as almost every quarter. And you may say, well, tell me something I don't know. That's the reason the market went from 90 to 70 through four

1:18:20 months ago, probably. The market was probably discounting that. But I think what the market is saying is, we're not gonna be tied enough during the next 12 to 18 months such that if there is a

1:18:31 disruption in one of those countries that we can't replace it, I think that's what the market's telling us. I think it's probably right. And so I think that that's why the energy trade has kind of

1:18:39 been so-so this year at best Yeah, interesting. All right, close us on fishing.

1:18:49 It was funny, I was finishing up the book last night and I did not see that being the second to the last paragraph. But the book has a dual meaning title, if there's such a phrase, can't deny it.

1:19:02 So somebody said the other day, Doug, you always found yourself kind of at the epicenter of these pivotal events in the industry and their history. You can't really deny that they happened. That's

1:19:14 one meaning. And the other meaning is that in

1:19:19 2018, myself and my captain and my son and his four of his friends were fishing these big blue water tournaments on the Gulf Coast, Nurse III. There's one in Mississippi, the Mississippi Gulf

1:19:32 Coast Billfish Classic. There's one in Alabama, the Orange Beach, Fish and Tournament,

1:19:39 what's it called? But anyway, and then the best one I think is. in Destin, Florida, the Emerald Coast Billfish Classic. That's the best one. There's 92 boats. There's2 million in the pot.

1:19:50 Some of these boats are 100 feet long, over10 million. They bring in these rangers from Costa Rica and Panama. Big money everybody wants to win. And so my boat's called Cantonayat. That was the

1:20:04 name of my boat. It was a 48 foot Viking. And we were competitive in most of those tournaments And so between my captain and some of the captain info and some of the work that I'd done with the data

1:20:16 science providers that are always hanging around with these fishing tournaments, we decided to go 140 miles south of Destin to a remote place called Lloyd's Ridge, which is almost due west of Tampa.

1:20:27 And so if you're thinking about the Gulf of Mexico, we're in the middle of the Gulf of Mexico. Great. But we thought based on the work that we had done that we would find a great rip there and

1:20:38 there would be fish enough we showed up there and it was live. And so we first, when we first got there, we caught a blue marlin or white marlin, a couple of y'all of Fintuna and what have you,

1:20:49 but we didn't catch the one that we wanted. The next day, we came back to the spot.

1:20:55 Giant blue marlin jumps into our spread. We get everything off the back deck, get the fish on the boat. Based on the calculation for blue marlin, we thought she was 750 pounds. And so if you have

1:21:07 a 600 pound blue marlin, you're gonna be in the hunt So we go back to Destin, this is a Friday night. The scales are closed. And so we have to let our fish sit out in the hot sun in July in Destin

1:21:19 for like, you know, 18 hours before she gets weighed. So she was gonna lose some water weight. But anyway, we weighed it. We won 700, she weighed 6992 pounds. And second place boat, which I

1:21:32 think was from Biloxi, third place boat was from the British Virgin Islands. Their fishes were smaller So we ended up being the champions of the. Emwell Coast, Bill Fish Classic. And so with the

1:21:44 rewards ceremony, they gave us a standing ovation. We were in USA Today, we were in Marlon magazine, we were in all these radio and TV stations across the southeast. Some people said it was like

1:21:54 an amateur running the masters, but we didn't think that at all. We were always in the hunt. We knew exactly. How old was your son? He was 17 or 18. Oh, that's awesome. Yeah, my kids were 17

1:22:01 or 18, but they knew what they were doing, they were pros. And sure enough, once we won the tournament, which again is the most high profile blue water tournament on the Gulf Coast, they all

1:22:12 became local legends and then they got jobs on boats and the Gulf Coast and the Bahamas all the way to Bermuda. And so I ended up having to sail Cantonite because they were doing all the work. And

1:22:24 I didn't want to do it and I didn't know how to do most of it. And so now I have a smaller boat, but it will always be bound by the experience. And Cantonite was the name of our boat. And it was a

1:22:35 fabulous time. Oh, that's so cool Well, you know what's so funny.

1:22:42 and this is gonna come off as insulting, and I don't mean it that way. Reading the book, I'd kind of lived through a lot of the stuff, so I sorta knew where it was going. I got to that chapter,

1:22:51 had no idea where I was going. I was assuming you won the tournament because you wrote about it, you know? But yeah, no, I definitely had old man in the sea running through my ad, 'cause it's a

1:23:02 fabulous story. But Chuck, if you think about it,

1:23:07 winning a tournament like that requires a lot of preparation and insight and experience. And blue water fishing is a lot like ballet, as I talk about in the book, everybody's got a role, everybody

1:23:19 has to be great at it, or you're not gonna succeed. And, you know, most people give a lot of the credit to the angler, and the angler has to keep pressure on the fish and he has to work with the

1:23:30 captain. But there's four other guys, there's another guy who's turning the chair And then my son Todd was the wire man.

1:23:40 I never was really comfortable with that. And what the wire man does is that when the fish gets close, he kind of gingerly allows him to get close. And, you know, there are stories of the fish

1:23:49 thing to boat and then bolting and pulling the wire man over into the water into 10, 000 feet of water. So never to be seen again. So I never really loved my son Todd doing that, but he was, he

1:23:60 was skilled at it and the annuity was doing, but mistakes happened obviously. And I had my two bigger kids who were there to gaff the fish. And, and you have one shot at it And, you know, sure

1:24:10 enough, when Todd got the fish close, they put the hooks in him, pulled him on the back deck and the celebration erupted needless to say. But it was a, it was a fabulous experience, but we knew

1:24:19 what we were doing and, and we didn't think we were underdogs. We thought, we deserve to be there. And we know what we thought. If we kept fishing those tournaments, we'd, we might have showed

1:24:28 up in the winter circle again. That's so, that's so awesome. We didn't care how many boats we were fishing against. That's so awesome. So, but can't deny it, get it anywhere, Amazon Amazon

1:24:38 Barnes Noble. And it's done pretty well on Amazon. I've been very, very flattered. And like you said earlier, Chuck, I think a lot of people in the industry and on Wall Street will find shades

1:24:50 of their own journey in mind. Yeah. Nah, definitely a great read. And big shout out to Sean Mar for putting us together. Sean's great. Yeah, he's a good dude. Yeah, he really is.

1:25:03 You're welcome Chuck and I appreciate your help with this and really enjoy spending time with you. Yeah, it's been fun.