Rage Against the Machine – Oil & Gas News Coverage Version

Morning News Rant

Do you find yourself eating your morning granola, hunched over the financial news, stopping in the middle of a paragraph, feeling your eyes glaze over as your BS-meter tilts red in 0.6 seconds, and then looking up at the window to start mumbling like a deranged person to yourself about the absurdity of that business story?

Reading the newspaper and getting upset
Grumpy investor reading the news!

You do?

What a coincidence, because so do I!  That’s so weird!  It’s like we’re twins!

Well, ok, not so weird, because you read Bankers Anonymous and you understand that’s one of our conditions – the daily, and perhaps hourly frustration with the Financial Infotainment Industrial Complex’s faulty depiction of events that affect our lives.

Why do I bring up our common condition today?

I’ll tell you why.

Oil and Gas Drilling
The Natural Gas Revolution in South Texas

I live in South Texas, where the development of fracking fields is in the process of revolutionizing energy production in the US.  I believe the consequences of this process, for everything from renewable energy, to regional job creation, to potential environment liability, to geopolitical and Middle Eastern politics cannot be exaggerated.

As a result, I read what I can about business developments in my regional back yard, both in the local paper – The San Antonio Express News – and the Wall Street Journal.

The local paper’s coverage has its flaws[1], but I want to pick a fight with a story today in the Wall Street Journal.  I have found that of the two papers, only the Wall Street Journal covers the Eagle Ford Shale stories from the perspective of national and international public and private equity firms, and I appreciate this, since it’s missing from my local paper.

I should also say my following rant pertains not particularly to the oil and gas or fracking industry, but rather practically any industry covered by the Financial Infotainment Industrial Complex.

The part of the story where my BS-meter hit red

The WSJ story describes the sale of Texas shale-driller GeoSouthern Energy Corp to Devon Energy Corp for $6 Billion, the largest acquisition of the year in the US in the oil and gas industry.  (Pretty important news, which at least 24 hours after the announcement, the local paper still hasn’t touched.  But I digress.)

What gets my goat is a quote buried in the middle of the story by “Wells Fargo energy analyst” David Tameron.  Tameron says:

If you are private[2] right now and you can sell yourself, you do.  If I’m a buyer and there are a lot of people who want out the door, it’s a good time to be buying.

 

Maybe this quote was taken out of context, and if so, I apologize to David Tameron, Wells Fargo energy analyst, for what I’m about to say.

My interpretation of Tameron

I interpret Tameron’s statement as:

“If you’re selling an oil drilling company, it’s a good time to do that.  Also, if you’re buying an oil drilling company, it’s a good time to do that.”

This is an absurd ‘analysis,’ by David Tameron, Wells Fargo Energy Analyst.

Tameron’s statement goes unchallenged by the Wall Street Journal as the self-serving, churn-inducing statement that it really is.

In the real investing world – not currently occupied by either David Tameron, Wells Fargo Energy Analyst, or the Wall Street Journal reporter on this story – there are attractive times to invest $6 Billion in an oil and gas drilling company, and there are less attractive times.

Most of the time, for real investors, we can not be sure whether it’s an attractive time, or not, to be making a $6 Billion investment in an oil and gas drilling company.  Because it really depends on a lot of unknowable future factors, not least of which are the future input costs and output costs for oil and gas, both of which are volatile.

Some time in the future, we may eventually know whether it was a good time to be a buyer of GeoSouthern Energy Corp for $6 Billion, or not.  The answer may even change a few times in the future, again, because markets fluctuate.

From an investor’s perspective

What I do know, however, is that it’s not simultaneously a good time to buy and a good time to sell.

Wait, I need to be more specific.  For investors in the transaction, it is not simultaneously both a good time to buy and a good time to sell.  From an investor’s perspective, it will end up being a good time for one side, and a bad time for another side, some time in the future.

From the brokers’ and the Financial Infotainment Industrial Complex’s perspective

But the investor’s perspective is not shared by brokers or the Financial Infotainment Industrial Complex.

For financial intermediaries (brokers) who buy and sell companies – or stocks, or bonds, or currencies, or real estate – its always simultaneously a good time to buy and sell the same thing, since this is how they make money.

And for members of the Financial Infotainment Industrial Complex, of which the Wall Street Journal is among the most important and sophisticated, it’s always simultaneously a good time to buy and to sell.  Because transactions create events, which in turn gives them something for them to talk about.  They are not investors but rather cheerleaders.

This Eagle Ford Shale example this morning – like the several or dozens of financial transactions a day we vaguely witness passing through the peripheral transom of our financial mindshare – just reminded me of the different incentives we have when compared to the united front of brokers and the Financial Infotainment Industrial Complex.

The Financial Infotainment Industrial Complex needs to churn a story every day, that’s how they get revenue.

And brokers – represented in this example by David Tameran, Wells Fargo energy analyst – need to try to churn a transaction every day.

As consumers (victims?) of the Financial Infotainment Industrial Complex we get hit with somebody else’s strong bias – the need to constantly churn transactions.

The truth that this does not help us think straight about investing – in fact it undermines our ability to think about investing – is rarely mentioned.

You and me, I guess we know this.  We are, somewhat, occasionally, immune.  But what about the rest of the folks out there, fed the disturbingly wrong, the self-servingly biased line, that it’s always simultaneously a good time to be buying and selling?

Sigh.  Time to finish my granola.



[1] Fine, since you asked, what’s wrong with the local paper?  The local paper only covers the Eagle Ford Shale with three themes. A) Fracking = Lots of Jobs!  B) We need to invest in the roads in south Texas that are being hurt by super-heavy truck traffic!  C) There are plucky wild-catters trying to make money here.  Of these, stories A and B are true as they go, and C is absolutely, totally, and completely misleading, since wildcatters comprise approximately 0.0001% of the activity in the Eagle Ford.  As far as the other potential stories of the Eagle Ford, the local paper does not cover them.  These might include: a) Environmental impacts b) The national and international businesses doing deals in South Texas, and their relationship to high-profile public and private equity firms c) Technological innovation in the fracking process in the past 10 years and d) the revolutionary impact of 90 years’ worth of affordable energy on our lives as well as on the renewable energy business.

[2] “private” in this sense meaning the fact that GeoSouthern Energy Corp is owned privately, it has no public shares outstanding.

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The Allowance Experiment, Completed!

bank of dadLast night completed Day 30 of the “Allowance Experiment,” in which I offered my eldest daughter a daily payment calculated as 10% of her allowance savings, compounding daily.  On day 1, she began with an initial grub stake of $1.  She received $0.10 on day 2 (10% of $1) and $0.11 on day 3 (10% of $1.10), and so on.

By Day 30, however, due to the magic of compounding, the daily payment grew to a substantial $1.44.  At the end of 30 days, she had $15.86 in the money jar.  That’s a pretty good sum for an 8 year old, because she can buy any ice cream her little heart desires, and $15.86 is also approximately 1/1000th of the way to obtaining an American Girl Doll.[1]

With this kind of experiment, one must stop after about a month.  Otherwise – because compound interest turns money into kudzu crossed with HGH crossed with a mutant Godzilla[2] – by 6 months of this I would end up paying her $2.1 million per day, and she would have over $25 million in her jar.  At which point obviously I’d be asking her for a daily allowance.

Plus with $25 million in the bank she could afford to purchase approximately 2 American Girl Dolls at the same time.[3]

Unexpected benefits

As I wrote before, one of the beneficial side effects of the allowance experiment – because I required her to do the daily interim calculations of 10%, plus adding up the totals in the jar – was appropriately difficult math for a 3rd grader.  This is smart parenting.

If her math errors worked in my favor, well that's just good banking practice
If her math errors worked in my favor, well that’s just good banking practice

You know what else is smart parenting?  When she messed up the calculations.  For example, when the 10% number she calculated ended up larger than it should have been, I immediately pointed out her error and asked her to try again.  I was not about to pay any more than I had to.

But what about when she messed up the calculations and it worked in my favor?  What about when she asked me to pay less in compound interest than I should?

Well, let me just say that all’s fair in love, war, banking, and parenting.  I mean, you can take the Dad out of Goldman Sachs, but you can’t expect to take Goldman Sachs out of the Dad, now can you?

Plus, as (my guide to all good parenting practices) Jack Handey points out, kids like to be tricked.[4]

The main point, accomplished

All jokes aside, the point of this experiment was not so much to induce savings or to teach basic math, but to viscerally illustrate the powerful force of compound interest.

I asked her if she understood the way in which money grew at an accelerating pace with regular 10% compounding.  She responded with a wide-eyed, “Yes, it gets really big.”

Good girl, my work is done here.

Please see related posts:

Daddy Can I have an Allowance?

The Allowance Experiment Gets Better

Daughter’s First Stock Investment

Book Review of Andrew Tobias’ The Only Investment Guide You’ll Ever Need

 


[1] That last number is just a price estimate based on gut feeling.  I haven’t looked it up.

[2] “Kudzu crossed with HGH crossed with a mutant Godzilla” is the name of my new favorite funk band.  Also, I’m going to copyright it as a title for my book on compound interest, so don’t even think of copying it.

[3] Again, all prices are just estimates.

[4] From the parenting guru himself: ‘One thing kids like is to be tricked.  For instance, I was going to take my little nephew to Disneyland, but instead I drove him to an old burned-out warehouse.  “Oh, no,” I said.   “Disneyland burned down.”  He cried and cried, but I think that deep down, he though it was a pretty good joke.  I started to drive over to the real Disneyland, but it was getting pretty late.’

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