Monday, September 6, 2010

Review of The Big Rich: The Rise and Fall of the Greatest Texas Oil Fortunes by Bryan Burrough

As I mentioned in my post about my oil & gas exploration & production reading list, I have started by reading The Big Rich: The Rise and Fall of the Greatest Texas Oil Fortunes by Brian Burrough (also the author of the classic Barbarians at the Gate about the leveraged buyout of RJR Nabisco). The Big Rich is about the explosion of Texas oil money that began in the 1920s, and about the oil dynasties of H.L. Hunt, Roy Cullen, Clint Murchison and Sid Richardson.

One question you have to ask is why were these independent Texas oilmen able to discover - and end up controlling - huge oil fields during the 1930s? After all, this was sixty years after Standard Oil was formed and twenty years after it was broken up in to the Seven Sisters. How could these thinly capitalized independents have had an edge over big oil companies? (And they were thinly capitalized, often spending their last dollar on drilling and then paying their workers in groceries.) The answer is that the Great Depression caused the major oil companies to slash their budget for capital expenditures like exploration, and this retreat left a vacuum for the hungry Texas wildcatters to fill.

I like to read business biographies to learn techniques for compounding wealth. One pitfall, though, is that you are only looking at a slice of the distribution of people who may have tried a certain approach. In other words, no one writes books about the men who risked it all and failed.

Imagine a thousand parallel universes beginning in 1920 where high school dropouts drill exploratory wells in Texas based on gut feelings. There would be oil billionaires in every one of the universes, but unless any of them had an intelligent mechanism for predicting the presence of oil, it would be a different group of billionaires in each universe. In other words, if success is based on luck, you can expect outcomes to quickly revert to the mean.

And if the success was based on luck, you would also expect the oil fortunes to dissipate quickly in a flash of decadent spending and poor investment. Which is exactly what happened, with the exception of one family in the book.

That's why the most interesting character is a third generation member of one of the oil dynasties, Sid Richardson Bass. His father Perry Bass's uncle was Sid Williams Richardson, an oilman and rancher born in 1891, and one of the Big Four in the book.

In 1968, after getting an M.B.A. from Stanford, Sid Bass took control of the family fortune that had dwindled to perhaps $50 million. He brought in Richard Rainwater, a Stanford classmate, to help manage the assets. Rainwater studied the value investing methods of Buffett, Graham, and Dodd, and help transform the Bass fortune into something like $5 billion.

This book missed some of the detailed reporting of the intricate transactions that showed in Barbarians at the Gate, which means Burrough either lost the knack for it or decided to write for a less advanced audience. Overall, I give it 3/5.

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