Sunday, January 26, 2014

Review of The Frackers by Gregory Zuckerman

It's funny - a copy of The Frackers (The Outrageous Inside Story of the New Billionaire Wildcatters) probably would have been worth a billion dollars if you'd had it in 2000. Or 2005. Now in 2014 it is not profound but worth reading to get a sense of how the onshore oil & gas industry has gotten where it is today. Some themes:

  • What does an oil company have on its walls, especially in conference rooms: modern art or maps of shale plays? The best oil and gas investors that I know have their walls covered in maps. When I was following GMXR, I had maps of their acreage on my wall. I wouldn't invest with someone who owned modern art or attended Art Basel.
  • The ever present recency bias, which makes it hard to imagine things being much different than the status quo. For example, Aubrey (and many of the others) knew that technology was going to allow them to drill this incredibly prolific rock. They participated in and saw everyone else engaging in a huge land rush to lease acreage. They must have realized that everyone was going to be drilling at once (during a narrow window of time) to hold (HBP) the leases. Why didn't it occur to them the effect that this would have on price? 
  • Tom Ward (of Sandridge) and Aubrey born were three days apart in Oklahoma. In his January letter on luck and timing, Howard Marks mentions that the Microsoft, Sun, and Apple founders were all born 1953-1956 and that "all four founders of [M&A firm] Wachtell, Lipton, Rosen and Katz [were born] in 1930-31". As he says, "The bottom line is simple: it’s great to be in the vanguard of a new development. Talent and hard work are essential, but there’s nothing like getting there early and being pushed ahead by the powerful trends in demographics and taste that follow." Exactly. The problem for value investors is that they aren't going to get to relive Warren Buffett's life by buying Coca-Cola. For one thing, the demographics are against it.
  • Also related to timing: Aubrey gets started during an oil bust. One of the conclusions of Big Rich is that wildcatters flourish during oil busts when the major oil companies create a vacuum by slashing spending.
  • One reason Chesapeake ended up with a humongous land position is that they used a higher price deck (i.e. set of assumptions about future prices of natural gas). The great quote from The Shipping Man about who does deals/wins auctions applies: "[H]e who is the most bullish on the market, or has the lowest cost of capital, or has some other personal motivation for doing a deal, or ideally all three, wins the ship," or in this case, leases the land.
Giving it a 4/5 because it was a quick read.


Stagflationary Mark said...

Why didn't it occur to them the effect that this would have on price?

In my opinion, best question in all of economics!

Ever see Force 10 from Navarone?

They need to blow up a dam. The demolition expert gives them the explosives. They place the charges. They detonate. Nothing happens. As you can imagine, they are not all that happy with the demolition expert at this point.

Meanwhile, we see the demolition expert commenting on the apparent lack of a result. He says that these things take time. He basically says that you can't expect a dam that big to fail instantly with only a modest amount of explosives applied.

This is how I see the recent rise in interest rates. Just because nothing bad happened instantly doesn't mean that something bad won't happen. These things take time! ;)

As in Japan after their housing bust, I do not believe that our economy is in any condition to handle 3% interest rates. Time will tell.

CP said...

Interest rate spikes are rally-enders.

CP said...

" (2) The guys who "hit it big" started working for themselves at a very early age (most had own companies by 25), worked harder than anyone else (6 am to midnight days not uncommon), took a lot of risks (technology, geology, land leases, borrowing, etc.), and made rapid decisions once the game was "on". They also had supportive wives. The men on the field that made the actual breakthroughs (i.e. in fracking mixes) were not the company owners and did not enjoy the upside of ownership."

CP said...

Finally looked this up!

"Force 10 blows holes in the dam and it explodes while Miller (Edward Fox) and Weaver (Carl Weathers) look on."