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Chapter 1: What is the main topic discussed in this episode?
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Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
And I'm Tracy Allaway.
Tracy, recording this April 17th. Big drop in the price of oil today on the headlines. The growing optimism that I think a ceasefire will endure. Anything could happen. But at least for now, it appears the extreme left tail scenario, like $200 oil, may be off the table.
Right. So I'm looking at a chart of WTI at the moment, which might be a little hint as to our guests that we're about to introduce. But it's currently at around $83 a barrel down.
The hint was that you didn't say Brent.
Right.
Yeah, good hint.
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Chapter 2: What tensions exist between U.S. oil production and gasoline prices?
Yeah, come on. It's a good hint. Yeah, it's a good hint.
Although everyone can already see the headline on this episode if they clicked into it. But anyway, it was at $112 per barrel in March or actually in early April. God, I Time flies when you're talking energy crisis and war in the Gulf.
You know, even setting aside the war, however, there's a lot that I've been very curious about the future of the U.S. oil industry. You know, we were in Alaska last summer, and I think one of my favorite parts of that trip was talking to that company that made the steel tubing for oil companies up on the North Shore, the North Slope. Oh, yes. For the companies up there. The North Shore.
The North Shore of Alaska. Like it's Long Island. You know, the way steel prices were going to affect the break-even costs of American oil producers, et cetera, and the interaction of tariffs and higher services costs, et cetera. And we know that the U.S. produces a lot of oil and it's an exporter, but prices went up. And Chris Wright, he went down to CERO week a few weeks ago.
He was like, please produce more. But as you've been writing about, the rig counts have been going the other direction.
Yeah, that's right. So, I mean, this was also part of the Iran story, this idea that, well, if we get a huge hike in the price, if oil is going to be above $100 per barrel, then maybe we'll see some sort of supply response in the U.S., right? Yeah. It's basically been trending sideways. In fact, the last available data, it fell by three.
And then if you go out even further, you know, it's kind of been going sideways and slightly down since basically 2023. So, you know, we haven't seen a big supply side push. And that's despite a lot of noise coming out from the administration about unleashing U.S. energy and, you know, letting everyone, including your grandma, drill in.
You know, getting it right, it's tricky for all administrations, right? In theory, it's like, oh, yeah, let's produce more. There was a lot of production actually under Biden, but the administration didn't want to brag about it. It's kind of weird.
And then you have an administration that does want to brag about it, but they're like, oh, and now there's a bunch of Venezuelan oil on the market, unsanctioned. So what does that mean? Anyway, here's the other thing. I'm really into the show Landman, and I really just want to talk about it. I knew.
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Chapter 3: How have oil producers reacted to recent price spikes?
Why don't you tell us what's Sienna Natural Resources? What's your business?
Yeah, sure. Thanks for having me on. Yeah, we're just a small independent oil and gas producer. So we operate in the part of the segment called the upstream oil and gas industry. So that is the actual direct companies that extract the hydrocarbons from the ground.
And so, yeah, our business is a little bit different from a lot of the publicly traded companies that you see, you know, the Exxons and the Diamondbacks of the world who are drilling kind of horizontal shale wells. There are many more companies that are much more similar to mine. The horizontal shale game has largely become the domain of very large companies.
I mean, you've got to have scale to be able to operate in that space. We're largely a production company. So the way to kind of think about it is we buy assets that we think are undercapitalized, underappreciated, try to squeeze a little bit more juice out of each producing well and try to get costs down.
Although there are smaller companies that do do drilling and we have drilled in the past and we will likely drill in the future as well, too.
Would you say you're essentially going around and buying odd lots of oil and gas assets that other companies may not be getting the best out of?
Yeah, you could you could say that. I mean, a lot of just as I said, a lot of the assets that we're targeting are just they're just too small. You know, they're rounding errors, you know, on the balance sheets of these large shale companies who, you know, are buying tens of thousands or hundreds of thousands of acres and drilling, you know, two to three miles under the ground.
So it's just we produce the same product. It's just a very different business.
And I'm reading here, it says you started this business in 2018, which I find really fascinating because 2014, 2015, the shale bust was an incredibly painful moment in time, not just if you were in the energy specifically, but also if you were in other parts of the market, like the debt market at that time.
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Chapter 4: What unique business model does Siena Natural Resources follow?
And when I say companies, I mean investors. You know, one of the big reasons you had such prolific shale growth, especially in the 2010s, was compensation. Executive compensation was tied to production growth. And so you had a lot of incentives across the board to kind of grow production at all costs. And, you know, due to, as I said, you know, there have been a couple of shale busts, right?
There was that shale bust in 15 and 16. And then you have another, you know, you've had another kind of shale bust when COVID came along. And along those, they've reformed a lot of those incentives. And so, you know, companies are increasingly rewarded for rewarding shareholders versus focusing on kind of production growth.
You know, this is exactly what I wanted to talk to you about, which is the capital situation, because one of the running themes on our show is this idea that you can have these boom bust cycles that then like leave a lasting scar on the industry. And I think coming out of
the bursting of the shale bubble, a lot of energy producers suddenly decided like, well, we're not just going to spend a bunch of money to expand. We're actually going to pay dividends to our investors. And it's all about capital discipline and being very, very certain about what we're actually spending on and the return for investors.
What's the capital situation been like for you just going from 2018 to now? How hard was it to actually convince investors that you're not just going to spend money in an unconstrained way? And how difficult was it for you to compete with some potentially bigger players who are also fighting for that same capital?
Yeah.
I'll break that into two parts. You know, I think the industry has had to do a lot of explaining and a lot of, you know, there's been a lot of kind of show me, you know, investors wanting to see that there actually is going to be some capital discipline. And I think if you look really over the last two years, you know, we've seen that.
And I think even with this latest price spike, you've seen that. I mean, people aren't rushing to deploy rigs. I because one of the largest private companies say they're going to increase capex. I think for the most part, the industry has been able to attract more capital by actually showing that discipline. I think part of that too is just you've had a lot of consolidation in the industry.
When I was first getting started as an investment banking analyst in 2008, I don't have the number off the top of my head, but it felt like there were 70-80 publicly traded companies And, you know, now, I mean, with all due respect to lots of kind of midsize companies, there's really only about 10 companies that actually matter. Right.
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Chapter 5: What challenges did Jack McClendon face when starting his business?
What actually happens in your business and what are the thoughts that are going through your mind? Like, do you suddenly get a bunch of calls from potential investors going, oh, you know, we're interested in putting some money in the company? Do you start thinking like, well, I need to expand production and maybe ramp up CapEx?
Or are you just sitting there waiting to see what actually pans out with the Gulf situation? How does it all work?
Those are really good questions. I mean, obviously there's excitement, right? Because when a price kind of jumps like this, obviously your costs don't rise in tandem. So that is profit on top of everything. What I will tell you in 2022, last time we had elevated pricing, and that was largely kind of based on the fear of supply loss that never really happened, right?
The, you know, everybody was saying the Russians were going to lose three to four million barrels a day. And, you know, we need so we need prices to kind of stimulate more production. So everybody got really excited. Everybody got to work. You know, I will say for a company our size, we authorized a fairly large capital plan because, as I said, I thought that there was some bite to that bark.
And what happened was, is I authorized everything in May of June when oil was at 100 and then first production came on in August and September when oil was back to 70. So, you know, you had this big rise in prices, a commiserate rise in costs, obviously not as high, but costs go up. I mean, Oil and gas service providers aren't dumb, right?
You know, they see the price of oil go up 20 to 25 percent. They're like, well, you know, your day rate on a workover rig has just gone from one hundred and seventy five to two hundred.
Huh?
Yeah. I mean, it's the service. The service companies aren't dumb. The chemical providers might say, well, you know, this is your you know, this chemical you use, this xylene you use is going to go from, you know, 20 bucks a gallon to 40 bucks a gallon because I know you can pay it because I I have a computer and I can see what the price of oil is as well, too.
So what I would tell you, and these are in conversations I've had with a lot of other people in our industry. I talk to people on the industry on a day-to-day basis. I have friends that work for large operators, large capital providers. I have friends on the service side, friends in private equity, friends in investment banking. I mean, I think everybody is very cautious right now.
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