The fourth installment of my collaboration with Texas Public Radio’s Paul Flahive, tracking the massive SHAKEOUT implications of the current pandemic. This interview includes insights from Gary Sernovitz, who I previously interviewed and who’s book, The Green And The Black – on the fracking revolution – is very good.
If you have a fancy educational background, the tempting thing is to go into a glamorous field, full of smart people with equally good educations. Maybe investment banking, consulting, or a stint with a hedge fund? I tried all that. Because I’m a slow learner, I realized late that there’s got to be a better way. It took me a while to figure out the following: Dirty jobs might be a smarter bet for making money.
What I really wish I could do is invest in my friend Bryant’s business, but I’ll tell you his story as maybe it helps you make money starting or investing in your own business.
Bryant’s Ivy League education initially took him to book publishing in Brooklyn, which – while not as lucrative as other high-status jobs – is definitely full of bright shiny minds. Then a buddy lured him down to the Eagle Ford shale in South Texas in 2007, and he’s been knee deep in the oil field services business ever since.
I took a field trip 30 minutes south of my house where Bryant is currently building a new oil-field services business, called CRU Railcar services.
Railcar cleaning
He and his boss got inspired because they move sand into the oil field in South Texas via rail, and they found existing services to periodically clean their train cars expensive, slow, and unreliable.
Here’s some background on cleaning railcars: Railcars that move the products of the oil and gas business have to be cleaned before being used for carrying anything else and/or before being put into storage. If the railcar previously hauled diesel but will convert to move heavy sour crude in the future, then a professional cleaner has to completely scour the inside of the car. If the car moved propane before but will be retired into a rail yard for storage, the whole thing has to be cleaned as well.
This is a dirty job. It’s also dangerous, scary, and complicated.
During our visit, Bryant and his team of five other roughnecks all wear the company uniform: The left-pocket nametags stitched on nylon with reflective safety stripes give them a look somewhere between an Astros throwback jerseys and a bowling team. It’s the kind of thing his book-publishing hipsters buddies might wear in Williamsburg, Brooklyn, but for them in a totally ironic way. There’s no irony to Bryant’s pret-a-porter style. This job kills.
A Houston Chronicle investigative report in 2014 found the tank cleaning business highly risky, with the main regulatory agency OSHA unable to keep track of cleaning companies or their safety standards.
In reading reports of accidents on the job, a haphazard approach to risk appears common.
Bryant’s attention to detail when it comes to risk, by contrast, impressed the heck out of me.
Bryant walked me through the process he’s created for cleaning fuel cars.
First, they assume the air inside a fuel car is totally incompatible with human life. All cleaners breathe only from oxygen tanks, like scuba divers under water. As a backup, they carry 5-minute emergency tanks in the event of a failure. A spotter stands over a hole in the top of the train car at all times, watching for any signs of trouble. The spotter stands next to a crane for lifting an unconscious body, while an electronic monitor for air toxicity runs at all times. In addition to the spotter, a rescue person stands by, with his own oxygen supply at the ready, in case of trouble. That covers the air problem.
Then there’s the explosion problem. To hack at dried petroleum that might cake the fuel tank floor, the cleaners use a spark-proof shovel. Shovels are just one method.
Train cars arrive in a wide variety of dirty states, having carried any number of oil and gas products. In tests, Bryant’s team has found that only trial-and-error can determine what cleans the cars best. Sometimes a splash of diesel loosens up the gunk. Sometimes a high-pressure water hose that would cut your limbs off works best. Sometimes, he reports, the simple household cleaner Dawn is magically effective.
Seek dirty jobs
Thomas Stanley, author of bestselling personal-finance book The Millionaire Next Door urged “dirty jobs” for successful entrepreneurs. Stanley tells the story of junk-yard owner Richard with his $700,000 annual income and $10 million net worth as the quintessential model to follow. Seek businesses with that might have little to no competition, Stanley urges, because they lack the prestige that attracts the brightest minds.
Many things will determine the success of failure of your new business venture: The cost of materials, your ability to make the big sale at the right time, the difficulty of finding investment capital, your skill in hiring and retaining key people, and of course the sign of the zodiac under which you were born.
But one of the things that could save you – as you screw up everything early in your business venture – is the quality of your competition. In a sense this is just another restatement of the old “bear and the two hunters” joke. You don’t necessarily have to outrun the bear, you just have to outrun your competition. If you can choose a field where the competition is thin, you’ve got a good chance of thriving.
Bryant’s railcar cleaning business is dirty, dangerous, claustrophobic, and complicated. I would not do it for anything in the world. I also have a hunch they’re going to clean up on the competition and make a lot of money.
Note: I reviewed Gary Sernovitz’ book in September, and we did a phone interview back then, which I’ve now posted as an audio interview, Part I – on the big personalities in fracking. Part II – on environmental issues, will follow. I recommend listening to the audio version, but I’ve posted a transcript of our conversation as well.
Mike: Hi, my name is Mike, and I used to be a banker.
Gary: And I’m Gary. I guess I’m sort of still a banker, at least a private equity investor.
Mike: As you know, I read and really enjoyed your book, and I reviewed it on my site. I just want to praise you for doing what I think is my favorite thing, which is taking a complex issue upon which nobody agrees, and everybody thinks the other side is complete fucking idiots, and saying no, we’re not all idiots. We could understand each other. So thank you for doing that. That’s really great.
Gary: Thanks for the praise and clearly, that is not the dominant mode of American discourse, as evidenced by the discussions heading into November.
Mike: Yeah, it’s really difficult to not see the other side as either morons or dupes or evil. And I would say if you just say the word “fracking” we’ve already introduced the idea the other side is one or all of those things. I appreciate you describing yourself as a New York liberal. And I described you as deep in enemy territory there for fracking, and yet you have to both answer for your profession, which is to be investors in energy and in oil and gas and fracking, but at the same time, be a thinking person.
Gary Sernovitz
I don’t know who’s more unattractive, oilmen or Wall Street guys, but every once in a while, I’ll say something mildly positive about a Wall Street guy in some column and people will write inevitably “You’re such a jerk talking about the banksters as if they’re not all evil.” Okay, sorry.
Gary: I manage to work for a private equity firm that invests in the oil and gas business to be the worst of both worlds.
Celebrities of Fracking – Aubrey McClendon
Mike: Some of the interesting parts about your book are combinations of celebrating capitalism, and ingenuity of the shale revolution, and incremental changes. And then part of that celebrating capitalism is celebrating some of the funny and interesting characters who made good off of the thing.
I’m interested in some of those. Some of them I’ve heard some of their names but don’t particularly know them, but I understand they’re rock stars of your industry. I’d love to chat about those if you don’t mind.
One, your favorite seems to be Aubrey McClendon who I guess died after you’d written the book. I don’t think you referenced his death, or maybe you do?
Gary: No, he died in what is not terribly clear ‑‑ whether it was self-inflicted or not, but drove about 80 miles an hour into a highway overpass the day after being indicted.1 Obviously, a lot of speculation on the timing of that.
The late Aubrey McClendon, from a 2011 cover story
Mike: Certainly looks suspicious, as a complete outsider.
Gary: The conclusions most people have drawn ‑‑ but I think there has been no official word from the investigation one way or the other. Not necessarily that there needs to be, but the funny thing about the book is there was an alternate book that was just sort of a straight biography of McClendon that kind of was impractical to write with my job and with need to write ‑ he’s backed by a firm in his later life that competes against my firm in terms of providing capital to oilmen. I ended up putting that to the side.
Mike: There’s a book worth or more of Aubrey McClendon stories?
Gary: Yeah, sort of every chapter you find he’s Zelig of the book. In every chapter he kind of finds his way. There is a small Aubrey biography woven through it unwittingly, just because he is one of the more colorful characters. He kind of harkens back to a different kind of swashbuckling capitalism. Partly he enters the oil business, kind of a wildcatter, and partly he did have a very unusual role just that effectively the company he had, Chesapeake, was thought of as somewhat small, sort of volatile, high risk.
Mike: A wildcatter spirit of a company versus the more corporate people?
Gary: And hold onto your seatbelts when you deal with Aubrey and Chesapeake in general. When the shale revolution started ‑‑ it wasn’t really him, it was another company, Mitchell Energy that started it. So when it started, what Aubrey did was really kind of sort of start this competitive frenzy in successive basins where people would discover oil, maybe we have a shale here in north Louisiana or east Texas or North Dakota on the oil side, or Pennsylvania or Ohio. And Aubrey had thousands of guys knocking on doors, and an unlimited appetite for capital and complexity, and everything that just got billions of dollars.
Then everyone looked around and oil companies pursuing more normal course ambition ‑‑ “Well, Aubrey’s going to suck up all the opportunities!” and so he was the catalyst in these basins for this frenzy. Then ultimately, you know what happened was he kind of didn’t fully grasp ‑‑ no one did, how good this was going to be. So he ended up with a lot more gas and crashed the price of gas. So many basins worked, and successively cheaper prices, and that happened on the oil side, and then also just any companies with too much debt heading into a downturn is always going to be in trouble. He kind of got a margin call on his personal account for two billion dollars.
Mike: I should be so lucky someday. I will be so upset when I get a two-billion-dollar margin call.
Gary: That’s how much he was worth at the peak. I don’t know what the margin calls was for but my net worth went down by a couple billion dollars. Then he kind of got kicked out of Chesapeake because of all sorts of other somewhat old-school CEO perks that are sort of beyond ‑‑
Mike: Sort of pledging shares, right, for his own purchases?
Gary: More like he had the right to buy interests personally in all the oil wells Chesapeake owned, which is a thing ‑‑
Mike: I see, a conflict of interest.
Gary: Yeah, just kind of was not done that much anymore. Then he got backed by a private equity firm and they bought eight billion dollars of properties, oil properties right before the oil price collapsed. The bigger issue facing him was not really this indictment, which is somewhat on a pretty secondary issue, but really was on financial difficulties, and five or six different companies all bleeding cash, and all big debt problems.
Just sort of the world coming in ‑‑ he owned 20% of the Oklahoma Thunder and he had pledged that for a loan. I think maybe it was last weekend [September 2016] for some reason he needed to have the largest collection of Bordeaux in the world. So that’s being auctioned off now by his estate. Somewhat in bad form, and got a lot of bad publicity. He had pledged 20 million dollars to Duke his alma mater.
Mike: I read about that, that Duke said “where’s our 20 [million]?,” and the heirs didn’t find that tasteful.
Gary: Oh, the Duke alumni, the Duke community ‑‑ just say yeah, that’s a charitable donation. It is unclear what will happen, but it is definitely a very 19th century or very early 20th century, Dreiser story of rising and falling and rising and falling.
Mike: Captain of Industry or Robber Baron type.
Gary: Outside the realms of normal corporate America or the norms of it. Obviously kind of very entertaining but did have an impact on it. He was known to be an extremely nice guy.
Mike: Presumably a gregarious salesman type.
Gary: Yeah, he wasn’t cynical. His margin call was on buying – insatiably – stock in his own company, so he obviously believed in it. He was not a dark figure but an irresponsible figure, then left a lot of obviously shareholders, partners, and everything holding the bag, based on sort of a wild irresponsibility in terms of how he built his business.
Mount Rushmore of Fracking – Lucky or Good?
Mike: What I liked about your ‑‑ on the one hand celebration of capitalism and innovation and in a sense “here’s the new shale billionaires” ‑‑ you have a “Mount Rushmore” of four of them, who rose above the others. On the one hand, we have a tradition in the United States of celebrating these people as paragons of capitalism and far-seeing geniuses, of which Aubrey is included with that, with Mark Papa from EOG and this guy Harold Hamm, and I guess George Mitchell, one of the originators of the techniques.
Sernovitz has a “Mount Rushmore” of fracking
But then I appreciate that you also say there’s an aspect of the story which is these guys have just sort of dumb luck combined with bizarre personalities, like you’re describing with McClendon with his appetite for risk and appetite for everything ‑‑ I appreciate it. And then trying to figure out: Are these guys just beholden to their own personalities and limitations and that’s why they did these odd, risky, crazy things, which turned out to be “right place, right time,” at the right scale? Which is obviously huge they all did that.
There’s this awesome passage which I’d also like to read, which is among my favorites of the whole book, which is describing Aubrey:
“Aubrey feels sometimes like seeing the country’s best restaurant critic blissfully eating from a box of day-old donuts. People respect the critic for the sensitivity of his palate, but maybe the man just likes to eat.”
I really liked that.
Gary: That’s brilliant.
Mike: It is really. It encapsulates that we celebrate these capitalists for their amazing talent and yet I don’t know, maybe the guy’s slightly insane and just has no taste at all. It’s just awesome, but of course, I love day-old donuts too. I can relate.
Gary: I think people in the oil business are very fond, and this is probably in any business, “My successes are because I’m smart; his successes are because he’s lucky.” Being in a business one gets a bit more color on who was lucky, who was smart. Most people are some combination thereof. But I think the thing to remember about the entire industry is before the shale revolution the US onshore ‑‑ we had a company in Corpus [Christi] working in South Texas, about drilling wells for 400,000 dollars to find 2 million dollars’ worth of gas.
Mike: Scratch and peck kind of little tiny companies.
Gary: Yeah. And anyone in the oil business, like Exxon, which looked in contempt at the US onshore business as a bunch of losers who couldn’t make it doing big international stuff in Kazakhstan or offshore Angola or Equatorial Guinea. There was a certain very admirable hustle, that kind of never-say-die that kept ‑‑ people shouldn’t have been drilling before ’98 in the US if you think about where were the best reserves of oil and gas.
It was just – globally – it was just the infrastructure wasn’t there to displace it. Then the shale revolution came and suddenly ‑‑ the amazing thing wasn’t just that actually underneath the stuff that these guys were scratching and pecking, as you say, were an amazing volume of oil and gas but actually oil and gas was a lot cheaper to extract than the stuff Exxon was doing.
Mark Papa
It’s one of these stories of “the first shall be last, last shall be first” that really came out of nowhere. And everyone got caught up in it. Then there’s all these micro stores because there’s a lot of basins that have risen. Think about there in Eagle Ford, which is the one closest to you guys. Eagle Ford now is – the most shale wells have been drilled in Eagle Ford. It’s now kind of a mature basin. It was really developed by EOG, gets a lot of the credit ‑‑ Mark Papa.
Mark Papa left EOG in 2013
And kind of was one where it was a stealth play. And then there’s this mad rush for the Eagle Ford. Now the Eagle Ford is kind of considered well, there’s A) it’s drilled up a lot, and some of it’s more natural gas, and some of it’s more natural gas liquids, and it’s not that good. And by the way, if you go to West Texas, the Permian, there’s an Eagle Ford stacked on top of another Eagle Ford. There’s all these thousands of feet of different benches you can drill horizontal wells in.
Eagle Ford is now considered okay, a little mature, maybe some opportunities, but you’re only interested in moving back there if you can’t find anything in the Permian in West Texas and New Mexico. There’s dozens of different kinds of stories of rises and falls and the business ‑‑ there’s not just a lot of amazing oilmen who picked exactly the rise and fall correctly. There were some who were just there in a basin that ended up rising. And there are some that did guess it correctly. There are some who came in too late and ended up losing a lot of money.
Mike: There’s a bunch of things I want to follow up on that. One is the Permian which I don’t know much about but a month ago [September 2016] the general newspaper readership got a sense that Apache Energy had a huge find. I want to follow up on the “genius capitalists” of the thing.
There’s a local guy who I don’t know personally, but was celebrated around the discovery of the Eagle Ford. Suddenly this guy I hadn’t heard of before, named Rod Lewis became a known shale revolution gas billionaire. Part of his legend – and I don’t think he appears in your book, is as a very blue-collar guy checking old oil wells and then ‑‑ sudden success is always overnight and it took 20 years that we didn’t know about…
But you do describe a guy, and I don’t know if you have stories about him or his thing, but you do have a thing that sounded very similar to that, in your book. Terry Pegula, who sounds similarly this blue-collar guy in the business of helping plug old oil wells and then suddenly seems to, out of nowhere, have acquired a massive amount of leases, which is then first worth a billion and then three or four billion a couple years later. Do you know the Rod Lewis story to tell? Local people might be interested. I’ve only heard basically what I just told you.
Terry Pegula
Gary: Petro-Lewis is a very well respected company and definitely considered one of the Eagle Ford’s central private play. I don’t know his story particularly, but Terry Pegula, who now owns the Bills2 and Sabers and the savior of Buffalo was definitely almost like a hoarder of leases.
Terry Pegula and wife Kim
Mike: Clean your stuff out, man. We’re going to call the cops on you. He was that guy?
Gary: Yeah, and would take them from other companies with the agreement that I will plug these wells ‑‑ a natural gas well sometimes can produce for a century maybe, at very low volumes, but it gives you the right, based on the lease, to actually drill beneath it. Even if you have a well producing 50 dollars a day of stuff, it does give you the optionality ‑‑
Mike: Vertically you can go below that existing small-producing well.
Gary: Yeah. He didn’t do that on purpose. No one thought when he was hoarding these leases that there was going – Qatar was going to be in Pennsylvania and eastern Ohio. He was just doing it because he liked doing it. I think also as a car dealer once said to my wife his view, “If it’s free, it’s for me.” People would just give it to him because it took liabilities off their hands. I don’t know the Petro-Lewis story but that’s one of those kind of amazing stories, sort of the wheels of markets and capitalism and fortune and luck and idiosyncratic histories that people like to wrap up sometimes in a more heroic narrative.
Mike: We love the narrative of the blue-collar guy making good. That’s a pleasing capitalist ‑‑ it’s terrible when the rich remain rich. It’s great when the poor suddenly make it rich.
Harold Hamm: Humble, but sensitive, Trump supporter
Gary: That’s why Harold Hamm, hearing him getting offended by “fracking,” he is the single person who’s gotten richest individually off the shale revolution. He is one of 13 kids, a sharecropper in Oklahoma, who barely graduated high school. Never went to college. Didn’t have shoes until he was six. A story out of a different century and now is the 70th richest man in the world. He signed a giving pledge with Bill Gates.
Mike: I think you described him getting into North Dakota because he was one of these losers who had no other chance.
Continental Resources CEO Harold Hamm endorsed Republican Presidential front runner Donald Turmp.
Gary: Exactly. He admits it. He’s a humble guy in some ways. He kind of admits “I couldn’t afford what we were paying” ‑‑ basically you’re paying option value for leases in North Dakota.
And I heard Harold Hamm speak, and he gave a very pro-Trump soliloquy, like 45 minutes long with slides, more of a presentation. He talked about a very obscure argument. I don’t even know what happened, but Trump came to Colorado and also said basically the same thing Hillary said, which is communities should be allowed to regulate fracking in their backyard.
And Hamm’s like: “Forgive my friend Donald. He didn’t know what he was saying. He agrees with me.” Even the word “fracking.” He’s one of Trump’s chief supporters. And he made it clear that if you use the word fracking around him, the conversation is over, because it is an insulting term to describe hydraulic fracturing.
Mike: Okay, words matter and that’s a hurtful word for him.
Gary: Yes.
Mike: Okay. He sounds a little sensitive, but anyway.
Gary: You’d think 70th richest man in the world and 12 billion dollars would make you less sensitive. Apparently, that’s not the case.
Mike: Words have power and he’s a man who can be hurt by that word.
Please see related audio post (upcoming)
Part II with Gary Sernovitz – on the environmental issues of fracking
Before becoming an oil private equity guy, Gary Sernovitz was the next F. Scott Fitzgerald, and authored two novels, Great American Plain, and The Contrarians.
I’m always on the lookout for people who can hold diametrically opposed views in their head simultaneously. Is that why I enjoy Claire Danes in Homeland so much?[1]
Gary Sernovitz, the author of The Green and the Black, brings the perfect profile for diametrically opposed thoughts about the fracking boom, which is probably what we need to explore the oil and gas revolution of the past decade. He’s a self-described New York liberal, who works as a managing director of a private equity firm focused on oil and gas.
He’s deeply immersed in industry research, and he’s a good writer with a sly sense of humor.
He covers the environmental impact, financial impact, and the geopolitical impact of the shale revolution. He also clearly appreciates the capitalists at the core of the story, although often humorously for their mistakes and faults as much as for their tremendous success.
Environmental Impact
Since any conversation about fracking inevitably leads to an environmental fight, its worth noting Sernovitz quickly distances himself from a hardcore industry perspective.
“I believe the scientific consensus that climate change is happening now because of fossil fuels. The evidence for yet more changes is overwhelming. Climate change is a serious threat to human life. While I am more hopeful than most environmentalists that we can address these issues with technology, efficiency gains, and a cleaner energy mix, I believe that continuing to consume energy as we do will have terrifying effects over the coming decades.”
One central point of Sernovitz’ book, however, is that the environmental narrative of the fracking boom isn’t as simple as it’s frequently portrayed. Neither from the opponents’ side, such as was presented in the anti-fracking documentary Gasland, nor from proponents’ side, from industry.
It’s safe to say that each side of that debate considers the other side to be morons, which is never a great place to begin a discussion. Sernovitz is neither a moron nor an ideologue. Rather, he is someone who, while profiting from the oil and gas business and fracking in particular, has spent a tremendous amount of time thinking about opponents’ views.
To Sernovitz’ credit, he dedicates 49 pages to what he calls “The Local Perspective,” by which he means what an economist might call the environmental externalities of fracking. The open frack-water ponds, the worries about local drinking water, the possibility of leakage, the earthquakes.[2]Gasland, he argues, presented a simplified, non-scientific and non-representative propaganda piece about dangers to the drinking water, which is probably not the real big local environmental impact of fracking anyway.
He also dedicates 34 pages to what he calls “The Global Perspective” on fracking, which he short-hands as the “the Al Gore” worry, that the boom in cheap non-renewable hydrocarbons dooms us to a warmed planet and apocalyptic results. To his credit – and in line with my own fears about the biggest environmental impact of fracking – Sernovitz allows that he worries about this too. Our short-term pleasure at being able to drive huge SUVs at affordable pump-prices will be punished by the long-term irreversible damage we do to all living things by not switching to renewable, non-polluting energy sources, and possibly quite soon.
Sernovitz’ articulated environmental hope, and one senses that he’s explored this angle deeply with concerned liberal foundation boards who want to invest with his company but also prefer not to wreck the planet, is that the ‘clean gas’ boom will be an intermediate weaning step away from dirty coal and onto the energy renewables in the future.
But he’s not such an ideologue that he’s sure:
this will happen; or
That the methane emissions from gas extraction wont prove, in the long run, as deadly to the planet as coal’s CO2 impact.
He concludes that we just don’t know enough yet about the methane problem to measure it against other alternatives. Meanwhile he holds out hope that gas isn’t all bad, when compared to its current alternative, coal.
Capitalist fun
Sernovitz clearly enjoys the story of capitalism working – innovation, mistakes, risk-taking, salesmanship, fortunes lost, fortunes won, and surprising global changes wrought, where they were least expected. He admires the pioneering spirit and grit that the early frackers showed. Elements of fracking techniques, including horizontal drilling and using liquids to open up closed shale rock, had existed for decades. But as Sernovitz explains, the right combination of techniques required much trial and error.
One story of The Green and the Black is how this combination of innovations and elimination of errors transformed the US from a forgotten has-been producer of expensive oil and gas into a leading supplier and global driver of far-cheaper oil and gas.
Sernovitz does not settle for the convenient anointing of far-seeing geniuses that many business books do. Instead, he acknowledges the role of extraordinary luck, as well as a we-had-no-choice-with-our-backs-up-against-the-wall decision-making of the fracking giants Aubrey McLendon, Mark Papa, Harold Hamm, and George Mitchell – who he anoints the four members of the Mount Rushmore of Fracking.
How financially valuable?
Sernovitz tries some back-of-the-envelope calculations of the income and wealth effects of the US fracking boom. Between 2007 and 2014, he estimates, the oil and gas industry netted $150 billion in additional income due to the shale revolution. More substantially, however, is the future wealth effect of making shale deposits a viable source of oil and gas. Between usable and estimated reserves, plus ancillary investments in pipelines, gathering systems, and export terminals, the wealth effect of the fracking boom probably adds up to $2 Trillion, according to Sernovitz. Which is quite a lot.
Other facts about the fracking boom also offer a sense of scale, such as the weird one that the size of the Bakken shale in North Dakota would give – at $60 per barrel of oil – a theoretical Nation of North Dakota a per capital oil wealth between four and five times bigger than Saudi Arabia. Whoa.
In my one-time adopted state of New York, where fracking was subject to a moratorium since 2008 and effectively banned since 2015, the technique and subsequent energy boom is a kind of shorthand for capitalist evil.
Where I currently live in South Texas, fracking may not be universally celebrated but even people who did not get rich from the recent boom have a sense that it has meant a huge economic shot in the arm for the region. Criticism tends to be muted, and, politically at least, a non-issue. People don’t need to shout “Drill, Baby, Drill” in South Texas because that’s going to happen anyway and it’s in fact against state law for municipal entities to restrict it. There’s no reason to shout about an activity that the entire political structure supports.
Geopolitcs
Sernovitz would like the layperson to understand not just the financial implications of the shale boom, but also the potential geopolitical changes wrought.
Here Sernovitz strikes a mostly optimistic note. Reduced dependence on frenemies like Saudi Arabia and Bahrain, and independence from more traditional enemies or rivals like Iran and Russia, he argues, makes the shale revolution a geopolitical gamechanger for the United States.
We will have less need to prop up kleptocracies or become partisans in places like South Sudan or Libya if we’ve got options, at a reasonable price, under our own land. This won’t stop the sea from rising and swamping our coastal cities, of course, but it is one less thing to disrupt the world.
Absence of traditional blame narrative
Have you ever had a conversation with a sub-prime mortgage CDO structurer about what he thought he was doing before 2007, creating a weapon of mass financial destruction? No? If you did, you’d understand the story is a bit more complex than the journalistic narrative. The products were not designed to be as toxic as they seemed, in retrospect. For reals, and I’m not being smirky as I write this, the underlying products were designed so that people with an imperfect credit history could buy a house. That was the real product, which we seem to forget. People in the sub-prime mortgage CDO production chain all had their own narrow self-interested job to do, but the underlying idea was not evil at all.
In that spirit, I appreciate Sernovitz’s frustration:
“It sometimes seems as if environmentalists believe that the oil industry’s business is to make carbon dioxide. Our business is to make fuel. Carbon dioxide is the by-product, the vast majority of which is emitted when people consume our products – in ‘your’ wheels, not ‘ours.’”
And then he continues,
“Yes, I believe that there is a moral difference between making money by producing oil and spending money by consuming it. I do not dispute that climate change is more on my conscience that on others.’ But that moral difference is subtle, subjective…”
I also appreciate Sernovitz’ position as a New Yorker surrounded by people who casually hate his industry. He does not have the luxury of unreflective one-sidedness. On the contrary, he is an expert ambassador for the industry living deep in enemy territory.
One of the problems with forming unbiased opinions on complex business topics is that true experts tend to come from within their own industry. And in that sense, may be discounted by critics as self-interested in defending the industry. But if you don’t listen to experts from the industry, you’re probably not listening to the most important experts on the situation.
Of course, at the end, I’m jealous of Sernovitz too.
He writes humorously and from a position of deep knowledge about an important finance topic. He writes about the big picture, as well as the minutia of his industry. He continues to make money with his expertise. Did I mention he’s funny as well?
Basically, I hate him.
Maybe I’ll get up the guts to ask him to do a podcast here.
[1] Is that why I’m still a Catholic despite the ridiculous medieval bent to the Church’s teachings?
[2] Since I finished the book a week ago, earthquakes in Oklahoma have put the “seismic activity” problem of frack-water disposal back on the front burner. Ugh.
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?
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.
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.
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.
In this interview Bryant talks about the difficulty of employing oilfield workers, who often look for trouble.
Bryant: Hello, my name is Bryant, and I presently work for a company that develops and operates frac-sand silo terminals in the Eagle-Ford shale.
Bryant and I spoke about his views working on the fracking world in an earlier podcast but we also spoke extensively about the impact of the Natural Gas Revolution on jobs in South Texas. The first point is that there are a ton of jobs created. The second is that it turns out the work-force can be pretty rough.
Bryant: The extracting of natural gas from the earth does create a lot of jobs, which is something that obviously this country is starving for at this time. You know people tell me, “I don’t want to work as a rig hand.” No, I’m talking complete cities are developing because of this stuff. An oilfield comes in first: you need restaurants, you need hotels, you need rent-a-cars. You start to develop quite a bit of economy — you have an economy wherever this stuff really starts to kick off, and I think that’s good. You need welders. You start to then develop actual skilled workers.
Michael: I went on the site of this company and everything was provided seemingly by something else. There were the Schlumberger signs, the Halliburton signs, the guys guarding the entrance to the ranch that they were drilling on. There was the catering guys. This is being done in an area where it’s basically raw ranchland for a hundred years, and they have to basically import services for everything. It was kind of amazing.
Bryant: Everything, generators, electricians — any time I have an issue with my silos and I need an electrician, it’s not easy. If you need a skilled worker in some of these areas they’re very difficult to come by. Like I said, labor, that’s why the Eagle Ford is so attractive. You’ve got San Antonio, Houston, you’ve got major cities that people are leaving and flocking to these smaller towns, really in the middle of nowhere, and providing all the services needed.
This stuff, fracking, it employs a lot of people that may not have education. It employs a lot of people that have a lot of mouths to feed, that may not have really the education to go and get an office job. I think that’s really important for the world. A lot of people don’t have the opportunities to get the job they really desire. They just need a paycheck. This really helps. I would hate to see all these towns I deal with, all those people not working. We’d have a serious problem on our hands. I mean by just violence, and upset people.
Michael: You and I talked about your earlier job in the Eagle Ford that was with a buddy of yours…Can you just describe for me the part about what it’s like to manage a bunch of guys in an oilfield work environment, and how different it was from what you’d expected, or where you come from?
Bryant: It’s tough. It’s probably the hardest part of my job still to this day. I came from working before I moved to Texas to work in this industry I worked for the publishing industry in New York City for five years. I was constantly surrounded by people that probably like to read a lot of books and keep up with current events, etc. I came into an industry where not a lot of the workers on the ground have college educations.
Michael: What about high-school educations?
Bryant: Not a lot of them have high-school education as well, so it’s very difficult, at least for me just to bridge that gap between office work and someone that’s been driving a truck for their whole lives, and who don’t really understand why there are procedures that can’t be broken, and why there are rules that need to be maintained. They just seem to care about it’s my truck, I want my money, and that’s it or I don’t want to work today because I didn’t get a good night’s sleep last night.
So, it is very difficult. I hate to use the word unruly, but you come across a lot of people that they sometimes don’t really care as much as you’d like them to. Now it also is very difficult in that a lot of these towns you get fired or you quit from one place, you just walk across the street and they’ll hire you immediately to do the same thing you were just doing. There’s such a need for drivers and people with experience. Workers know this. So, they know if they don’t show up because they went out and they blew their check and got drunk, and just didn’t wake up, and they come in two days later and you fire them, they’re just going to walk across the street and get fifteen, twenty dollars an hour doing the same exact thing for somebody else.
That environment is difficult. A lot of companies are trying to adapt, trying to have the medical insurance and 401(k), trying to maybe have a little signing bonus. You have to do things to keep good workers because it’s very competitive. But it is very difficult to manage people in the oilfields sometimes. They can be a little rough around the edges, but that’s why I think managing in this industry actually pays pretty well. It’s not an easy task.
Michael: I’m afraid you don’t have enough tattoos to be running this kind of crew.
Bryant: I definitely change my attitude a bit, depending on who I’m with. If I’m not in the field, you kind of change a little bit. You try to blend in a little more and probably in the vocabulary. I use a lot more oilfield jargon than when I’m probably doing a sales call or some kind of meeting at a corporate level. So again, I think that’s what makes it a fun job for me. You’re constantly a chameleon and you’re in between two different worlds all the time.
A lot of these guys can be pretty irresponsible. They make really good money, so a lot of times they come from places where they don’t make — they come from poorer backgrounds and all of a sudden you’re making twenty, twenty-five bucks an hour, you’re clocking twenty, thirty hours of OT because it is twenty-four hour drilling. This stuff never stops, so you’re making a lot of money. You probably didn’t learn money management much and kind of start getting into trouble.
Michael: Is there trouble to be had in South Texas?
Bryant: Oh yeah, there’s always trouble. I’ve never actually been up to North Dakota. They say it’s like stepping onto the moon, it’s so barren. I do know people that have been up there and they said, “Honestly, you get to some of these places, and the only thing there is, is like a barbecue joint, a trailer park, and a prostitution house. That’s all you need is drinks, and money, and women, and these guys probably stay pretty happy for a while.” There is trouble. There is a lot of trouble.
I used to actually give out paychecks on Mondays instead of Fridays because workers tended not to show up on Saturday. They’d get their money on Friday, they’d go and get drunk, and I’d get a call maybe somebody was in jail, or somebody was drunk, and I really had to just change my rules. I said everyone gets paid on Monday. You don’t go out and get in as much trouble on a weekday. Yeah, there’s a lot of trouble.
Bryant and I spoke of the difficulty of managing the low-end of the labor market, but then he described the other end of the labor market, the scientists and engineers providing the brainpower for the shale play. As much as the story job-wise is mostly positive, I couldn’t help but think of the idea that we’re in the role of a 3rd world country…we provide the low-end cheap labor, and the rest of the world provides the brains.
Bryant: I’m going to tie this into politics a little bit, but you meet all these engineers for the big three: Halliburton, Schlumberger, and Baker, and not a lot of them are from the U.S. You meet a lot of them from India. You know, Asian and South American. It’s crazy. You actually sometimes walk into these offices and it’s like the United Nations. It’s people from all over the world, which is great, I’m all for it, but I think it shows that we are slipping more and more, like everyone has been saying, in our math skills, in our education, period. We have a great technology but we’re not really creating people or educating people to do it. We’re kind of letting it get away.
Michael: So, the high-end intellectual jobs, the engineering jobs, the people inventing this stuff or figuring it out are not necessarily trained here. They train somewhere else and then they get here.
Bryant: This is definitely the testing ground. The U.S. is where it’s happening, but a lot of those times it’s being created by an engineer that’s not from here. You’re getting people from other countries that are seeing an opportunity to come into the industry and make some money. The industry is eating them up. The industry has money to pay for the best, so they’re buying the best minds they can buy to make their work more efficient so they can make more money.
Mike: Hi, my name is Mike, and I used to be a banker.
