Energy Matters

Saudi Arabia should have a serious international PR problem. But, it doesn’t.

If you are familiar with an instance in which Saudi Arabia has stepped up and provided aid to individuals in another nation in terms of food, safety or human rights, write in, and I’ll make note of it here.

Meanwhile, I am familiar with none.

Meanwhile, U.S. fuel consumers are sending $700B a year to Saudi Arabia for oil (as noted by T. Boone Pickens at Oil and Gas Investor’s Energy Capital Forum in Houston this June 10), and Saudi Arabia owns a large portion of the U.S. gasoline refining and distribution capacity. (To be clear, Pickens did not discuss this topic; he did say he has donated some $700MM of his personal net worth to many nonprofit endeavors, including Oklahoma State University.)

U.S. producers, meanwhile, are not permitted to own, explore or develop oil resources in Saudi Arabia.

American legislators were alarmed when China’s CNOOC Ltd. tried to buy the U.S.’ Unocal Corp. (the bid was eventually lost to Chevron Corp.), saying American oil and gas producers are not allowed such freedom to outright own oil and gas assets in China, thus it would be unfair that China would own oil and gas assets in the U.S.

The U.S. relationship with Saudi Arabia is with one blind eye, and a wink with the other.

(As for Pickens’ comments at Oil and Gas Investor’s Energy Capital Forum, see Boone Pickens On U.S. Ethanol: ‘It’s An Ugly Baby’, a video press conference with Pickens at http://www.oilandgasinvestor.com/Headlines/WebJune/item2872.php, and the story from his Forum comments at http://www.oilandgasinvestor.com/Headlines/WebJune/item2823.php.)

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, www.OilandGasInvestor.com; ndarbonne@hartenergy.com 

A radio news program this morning began with a question: “What do you do when approached by a bear?” The program (aired by KUHT-FM in Houston/National Public Radio) is an eclectic collection of news, essays and narrations. The answer to the question seemed obvious: Stay still and slowly back away.

But the question was concerning bears in the financial markets. Very clever story-writing, indeed.

Most investors, when surrounded by Investment Bears run and scream, the reporter noted. Truth is that those running and screaming are Investment Bears too, due to their behavior.

So what is the best tack, if you’re an Investment Bull surrounded by Bears? Buy. While the bears are looking away, buy, buy, buy.

I remember when Halliburton stock was $10. This was in December 2001/January 2002. I remember when The Williams Cos. shares were $6 in 2002. Warren Buffett made a deal with Williams: a roughly $1B, 364-day loan at roughly a 33% interest rate.

Yes, really. And, the collateral Willliams put up largely consisted of the Barrett Resources Corp. E&P assets for which it had paid some $2.5 billion in cash and stock fewer than 24 months earlier.

Was Buffett onto something? Yes. Either way, he couldn’t lose. He would make a 33% return in one year, or win some E&P assets that surely he knew would one day be worth 3x (at $140 oil and $12 natural gas) their worth at the time. He listened to the bears by ignoring them.

Smartly, Williams’ leadership pulled the company through and paid off the loan early, retaining all the very valuable upside of the Barrett assets.

So what to do when surrounded by Investment Bears? Buy (quietly).

For the full back story on Williams, Barrett and Buffett, use the Search feature at www.OilandGasInvestor.com.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, www.OilandGasInvestor.com; ndarbonne@hartenergy.com 

Finally, something’s happening in the energy industry that is, in fact, entirely about you.

We’re updating the annual “Who’s Who in E&P A&D” printed directory this summer (actually, we’re doing it in real-time now too at www.OilandGasInvestor.com) and we need your information to be sure you’re in it.

The directory is of individuals within E&P companies who are the go-to contact on buying and selling properties. For example: Doug Jacobson at Chesapeake; George Solich at Cordillera; Binney Williamson at Forest Oil; Ann McConville at Providence Energy; Doug Krenek at Chalker; John Walker at EnerVest and EVEP; Leah Smith at Hess; Bryan Dullye at Hunt Petroleum; Steve Herod at Petrohawk; Doug Brooks at Compass Resources; Thurmon Andress at BreitBurn; and Logan Magruder at Quantum Resources.

….and…you!

And your colleagues too! List all of your BD team.

E-mail me for the Get Listed form and/or go directly online at http://www.oilandgasinvestor.com/whoswho/getListed.php and enter your information. Also, e-mail me for a PDF of the current directory.

The 2008 edition will be distributed with the September issues of Oil and Gas Investor magazine and A&D Watch newsletter. It will make its debut Sept. 3-4 at the seventh annual “A&D Strategies and Opportunities” conference at The Fairmont in Dallas and at the encore production of “A&D–The Workshop: Breaking Into BD,” also at The Fairmont. (To register for these, go to www.HartEnergyConferences.com.)

See you there, and see you in the new Who’s Who!

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, www.OilandGasInvestor.com; ndarbonne@hartenergy.com 

Corporate defaults through mid-May are double that of all of 2007, reports Standard & Poor’s Ratings Services. “And market participants are understandably sharpening their scrutiny on the bulge of speculative-grade loans and bonds issued during the record expansion from 2005 through mid-2007.”

As of mid-May, companies had defaulted on almost $19 billion of debt, S&P reports. It expects defaults to continue to grow this year and next.

It reports, “But beyond default risk, the key factor driving credit exposure for many holders of both cash and synthetic leveraged credit is the prospect for recovery. Predicting which issuers will miss payments on which issues can be very difficult when borrowers are rated ‘B-’ or ‘CCC’ and nearing the edge of default. But developing an understanding of what lenders can expect in the event of a borrower’s default may be more feasible—and this is the focus of Standard & Poor’s recovery ratings.”

Standard & Poor’s managing director Bill Chew says, “Since 2002, nonbank institutional investors have substantially replaced banks as the holders of broadly syndicated loans. These institutional holders may not have the same incentives as banks in pursing debt recoveries during restructuring. They may have shorter holding periods, less interest in par recoveries, and, in some cases, may focus on strategies with only secondary interest in debt recovery–such as ‘loan-to-own.’”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com 

The FOMC relented today and kept the federal-funds rate unchanged at 2%. The message is either that the FOMC feels a lower rate is ineffective or that it believes the tide has turned. It is likely that the motivation is the former, rather than the latter. A lower rate is virtually ineffective in stimulating markets, especially when the street cost of money has not been falling in step with the reduced federal-funds rate this year. Banks are enjoying cheaper money but they’re not completely passing that along to their borrowers. 

Also worthy of note on today’s FOMC meeting: Richard Fisher voted against again. He continues to favor a hike in the rate. Meanwhile, the other recent dissenter, Charles Plosser, was won over this time. He, with Fisher, had voted against the last two cuts. Plosser last favored the rate at 3% earlier this year.

Here is the statement today from the FOMC. The statement does not include comment on the discount rate.

“The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending.  However, labor markets have softened further and financial markets remain under considerable stress.  Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

“The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.  Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.  The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com

Executives in the oil and gas industry have been faring well, more so each year. Some started E&Ps with rare private-equity capital in 1999 or 2000, and have since re-entered the game on their own account, not wanting to share the upside. They’ve done more than well, yet many still regret the upside they left on the table in 1999 when oil was $11 and natural gas was under a buck.

And, they continue to worry they will end up in the same scenario, if commodity prices plunge. It has happened before.

Meanwhile, there is Guma Aguiar, a former tennis pro who got into the oil and gas business some five years ago and listened to some wildcat geologists about the potential of the Deep Bossier in Robertson County in East Texas fairly smack between Houston and Fort Worth. (For more, see Executive Of The Year: Leor Energy’s Guma Aguiar.)

He invested in it with family funding (the “friends and family” angel network to which so many successful E&P leaders have turned, including Wolverine Gas & Oil, which made the Covenant Field oil discovery in Utah a few years ago and was a winner of Oil and Gas Investor’s “Discovery of the Year”).

Guma made more than $2B in four years flat. Bring up the story, and some folks are in awe. Some folks shake their heads. They say that many in this industry have worked hard for decades and it’s shocking for someone not even in it to walk away so quickly with so much profit.

Testy, testy.

Is “millionaire” not enough in the oil and gas business? The new measure of success in this business appears to be “billionaire.” T. Boone Pickens writes in his soon-to-be-published autobiography, The First Billion is the Hardest, that just a dozen years ago he had net wealth of under $40 million. He was 68 years old then and had not attained billionaire status yet but has quickly done so this past decade.

Alan Greenspan discusses wealth and happiness in his autobiography, The Age of Turbulence, and concludes in concurrence with most individuals and groups that have studied this matter: “The evidence suggests that rising incomes do raise happiness, but only up to a point and only for a time…The evidence shows it is determined mainly by how we view our lives and accomplishments relative to those of our peers.”

I call this the “blackjack phenomenon.” Several years ago, I endeavored to learn how to gamble better, inspired by a nephew, a student at Texas A&M at the time. After much study and time at the tables, I eventually learned that it is easy to win. But what has one gained when risking only $10 per hand, and starting with $100, and walking away 100% ahead at the end of the evening? A hundred bucks.

The key is in the value of what has been risked, and the net gain is only thrilling if the risk was truly great. If risking $1,000 per hand and starting with $10,000, then the net gain of $10,000 is thrilling and meaningful…but only if $10,000 would have been a truly painful amount to lose as well.

In the 1990s, the goal among E&P executives was to become millionaires. Today, the hurdle has grown to billionaire. And, that forces a higher stake at the table.

Ted Turner told a story at a program hosted by the World Affairs Council of Houston and led by Matt Simmons, founder of energy investment-banking firm Simmons & Co. International and author of Twilight in the Desert on dim future Middle Eastern oil-production capacity. Turner said that when Turner Broadcasting stock (this was pre-merger with AOL) rose to a point at which he realized he was a billionaire (on paper, at least), he went home that day and told his wife, “Honey, I’m a billionaire.” She (this was pre-Jane Fonda) said, “That’s nice, honey. Hey, the kids need baths and dinner is….”

(Truth is, though, Ted Turner was only a half-billionaire, owing half to Mrs. Turner.)

Greenspan continues, “Happiness depends far more on how people’s incomes compare with those of their perceived peers, or even those of their role models, than on how they are doing in any absolute material sense.” He references a study of Harvard grad students. When asked if they would rather make $50,000 a year if their peers made less or $100,000 a year if their peers made twice that, most chose $50,000/year.

The game of finding one’s own risk hurdle is great fun and challenging, at the blackjack table and in energy-industry profit-making.

Don’t forget to have fun.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com.

The seventh annual A&D Strategies and Opportunities conference will be Sept. 4, presented by Oil and Gas Investor and A&D Watch, at The Fairmont in Dallas. Sign up now at www.HartEnergyConferences.com.

And, sign up too for the encore A&D–The Workshop, which will be Sept. 3, also at The Fairmont in Dallas.

About the Conference:

A&D Strategies and Opportunities, now in its seventh year, is a must-attend industry forum for in-depth discussion of trends and developments in the current A&D marketplace, and outlooks for the coming year.Although oil and gas producers are flush with cash flow, debt and equity markets are wide open to them, and oil and natural gas prices are stronger than ever, A&D challenges remain—in part because buyers are so well-funded and potential sellers don’t believe the markets have peaked. What’s got the industry abuzz this year? A weaker U.S. dollar is creating a buying advantage in the U.S. for non-domestic producers. The like-kind-exchange financial tool is being used more frequently. Well-capitalized private-equity-backed companies are increasingly competitive for assets. Unconventional-gas acreage costs continue to rise, and unconventional-oil plays are emerging on the scene. And, the E&P MLPs are down but they’re not out.These developments and more changes in the North American A&D landscape will be among topics discussed at the seventh annual A&D Strategies and Opportunities, which will emphasize practical, immediate and profitable information for A&D professionals. A&D Strategies and Opportunities is designed to assist corporate and asset buyers and sellers in achieving best-practice deals that draw upon all of the tools and resources available now in the A&D space. You will learn successful strategies from leaders in upstream M&A—how to’s, do’s and don’ts—and based on their actual transaction experience. And a bonus every year: A&D Strategies and Opportunities is well known as an excellent environment for networking and gathering market intelligence—a competitive advantage for both buyers and sellers.About the Workshop:

A&D—The Workshop is an encore program being presented by Oil and Gas Investor and A&D Watch a second year, in conjunction with the seventh annual A&D Strategies and Opportunities conference, a must-attend industry forum for in-depth discussion of trends and developments in the current A&D marketplace, and outlooks for the coming year. A&D—The Workshop is a half-day instructional program preceding the full-day conference, and is designed as a tutorial overview of the upstream Business Development space for newcomer professionals on BD teams and firms that provide services in E&P mergers and acquisitions. Attendees will hear the Business Development 101 basics on current upstream M&A trends, reserve analysis, negotiating skills, networking, screening acquisition prospects, land and legal due diligence, and tricks and traps. Attendees at A&D—The Workshop may participate in the half-day program, the full-day conference or both.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com  

Many blame Alan Greenspan for the plethora of subprime mortgages that the U.S. economy is weighted under today, and he readily admits in his autobiography, The Age of Turbulence, that he knew subprime lending was occurring and that he let it happen.

Why? To super-paraphrase his remarks on the subject, Greenspan believed that it was better to let the overheated lending system make 7 bad loans while 93 good ones went through.

Protection of property rights and property value is one of the greatest incentives for Americans to be involved in U.S. politics and policy, and is core to the continued success of this country. The more citizens who have property to be concerned with, the greater their combined voice in elections, tax issues, policy domestically and abroad, and neighborhood matters, such as whether a government-owned property in the area will be used for a school or a prison.

Greenspan writes, “Of the nearly $3 trillion of home mortgage originations in 2006, a fifth were subprime and another fifth were so-called Alt-A mortgages…I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk…”

“But I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.”

He adds that great good has been gained too from growing minority ownership of property in the past decade. “By 2006, nearly 69 percent of households owned their own home, up from 64 percent in 1994 and 44 percent in 1940. The gains were especially dramatic among Hispanics and (African-Americans), as increasing affluence as well as government encouragement of subprime mortgage programs enabled many members of minority groups to become first-time home buyers.

“This expansion of ownership gave more people a stake in the future of our country and boded well for the cohesion of the nation, I thought…

“Even in a digital age, brick and mortar–or plywood and Sheetrock–are what stabilize us….”

Also see The Greenspan Chronicles II: The Net Good Gained From Subprime Mortgages, Alan Out-Takes: More Notes From The Greenspan Dinner and Valentine’s Dinner With Alan Greenspan: Nuclear! Plus, Iraq And ‘Are We In A Recession?’.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com  

Maurice Storm, founder and chief executive of Crow Creek Energy II, spoke at “Energy Capital–The Workshop: Starting and Building a Successful E&P Company” in Houston this week, hosted by Oil and Gas Investor. Storm is on his second successful start-up, and he was a lead in the sale of Barrett Resources Corp. in 2000 to The Williams Cos. prior to founding Crow Creek I.

Here is some of his advice:

–   If you just have “C” players (on your management team), it’s really not going to go well. There’s a lot of work that’s going to need to be done. You’ll be spread too thin. In most start-ups, you don’t have the capacity to hire professional management. You’ll have to do it yourself, so your core team must be experts in their work, focused and committed.

– To hire a chief engineer, you’ll have to offer a big option position, so whoever runs engineering should be someone who can take on most of the work himself. The engineer is probably the key piece to your team, as much as it (loathes me) to admit that. (Storm’s academic and industry background is that of geologist.) Private equity will back a business plan without good engineering. Engineers are considered the watchdogs of the oil field. The biggest problem is that top engineers are in high demand. You’ll be giving them a big piece of your company (so choose a hard-working, committed engineer).

– Keep good track of your assets. Everything you do for this start-up is so you can sell it, and you’ll need good data on all of your assets when you put them up for sale.

– Getting the wrong partners is a huge problem. Having to part ways with a partner can be incredibly disruptive and incredibly expensive.

– In evaluating deals, you can’t do everything; you don’t have the money.

– Get a high-powered financial guy on the team. You can get by with just a senior accountant but be careful to not give him CFO-level dollars and equity. One day, as you grow, you’ll need a CFO and you won’t be able to afford the senior accountant and the CFO.

– You probably don’t need a business-development guy. Most of you can probably drink and play golf all by yourselves. That probably wasn’t fair. No, that was fair. (Storm was head of business development for Barrett, so he’s done lots of BD on the golf course.)

– Managers shouldn’t meddle in other areas. The landman shouldn’t tell the engineer, “You fraced it wrong.” When this happens, then “it’s on,” and the fight spills over into a distracting melee. People need to respect each other.

– You’ve got to keep weak people off the team.

– A good team will cost. Bigger companies have tired of seeing their best talent flee to start-up E&Ps where they’re getting a piece of the action, so they’ve upped their offerings to these individuals. Your offer has got to be about more than money. Offer them freedom from excessive management.

– Avoid bringing into the group the “fearful, worrying types.” These are people who freak out suddenly about being on their own — outside the haven of the large, corporate entity. They weren’t ready to leave. These people can really be a headache.

The Start-Up Workshop was videotaped and a DVD will be available soon. E-mail me to request a copy, as well as a copy of the special report, “Starting Your Own E&P Company 101.” The Workshop presentations are also online, at www.HartEnergyConferences.com (click on “Past Presentations”).

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com  

Here are some new words for your start-up E&P dictionary:

– Ginormous (say “gi” like “giant” and “normous” like “enormous”): This is the description of your start-up’s profit potential.

– OPM: This is “other people’s money” and what you want to use, although respectable co-capital will want you to put in a significant bit too. What is a “significant” amount? It is a figure that is sizeable to your own net worth. It may not be $50 million, but it is a figure that is sizeable relative to your own personal worth.

– Speed “Start-Up” Dating: This is the activity of visiting with practically anyone for at least a minute or two about their own background, in your pursuit of a good management team to fill out your start-up executive suite. If you find yourself engaging in this activity unabated, you are rapidly on the road to forming your own start-up.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, www.OilandGasInvestor.com; ndarbonne@hartenergy.com