Deep Basin Oil Price War and Its Implications - [Invest Like the Best, EP.160]


This episode is brought to you by coffin. I've become very interested in the best software tools in investing and when I asked twitter for the best Bloomberg Alternative. The overwhelming winner was an excellent new product called Coif and it's a web based platform that you analyze stocks. Etf's mutual funds and other asset classes in one place. I've been using everyday to track. What's going on in the market? And I think if you try you will to. Cohen has a ton of high quality data powerful functionality and clean interface. The best part is that it's free you can sign up at. Www DOT COIF in dot com. That's K. O. Y. F. I N. Dot Com. Hello and welcome everyone. I'm Patrick o'shaughnessy and this is invest like the best. This show is an open ended exploration of markets ideas methods stories and of strategies. That will help you better. Invest both your time and your money. You can learn more and stay. Up-to-date AT INVESTOR FIELD GUIDE DOT COM. Patrick Shaughnessy is the CEO of o'shaughnessy asset management. All opinions expressed by Patrick and podcast. Guests are solely their own opinions and do not reflect the opinion of o'shaughnessy asset management. This podcast is for informational purposes. Only and should not be relied upon as basis for investment decisions clients of Shaughnessy asset management positions in the securities discussed in this podcast. This week. I'll be recording immediately releasing a series of conversations on business and market reactions to the spread of Corona virus. The conversations will be on oil and gas corporate credit and the reaction within the venture capital community. Today's conversation is with Matt Smith Ian Singer and Coby Platt of deep bass capital along short energy specialist. We are investors debasement and they were guests on the podcast last year. We discussed the new price war in the oil markets and the impact that it might have on equities and especially on the US oil producers we cover commodities markets equities and geopolitical considerations globally. Please enjoy gentlemen. We're GonNa talk about what the Hell's going on in oil and gas markets over the weekend and the beginning of this week. It's been probably a historic. Maybe the last thirty years most significant big event in oil markets. I thought to begin. We could lay very broad picture with Kobe. Describing in the most basic terms. How much oil is produced in the world in terms measured in barrels? Maybe a part the supply. Where does it come from? And then pick the demand you know. What are the major sources of demand? And where does that come from because that will help us explain what happened with OPEC plus over the weekend? So just laying the framework for the global oil market. It's roughly one hundred million barrel a day market about thirty million barrels a day on the supply side come from OPEC and then the other major producers are the US and Russia US actually surpassed Saturday Arabia and Russia last year. Now is the largest producer of crude oil on in the world and in terms of talking about the global oil market an bucket at one hundred million barrels a day. That's important to note that it's that's total liquids so that includes things like biofuels and gels things that aren't necessarily black crude then on the consumption side that crude oil gets turned into products that are used in industry by various consumers. The main focus for the economy is is gasoline us but there's jet fuel and then there's a host of fertilizer different types of manufacturing processes that rely on hydrocarbons both is a feedstock and as a process element for construction or manufacturing and things like plastics. So obviously the price of oil is very much a function of supply and demand. Can you just at a high level describe? What kind of supply-and-demand shocks we've seen from the virus and from this increase in supply from OPEC some some a general idea for what happened in the last couple of weeks on the consumption side the nano a CD. So China India Brazil have been some major consumers of oil demand growth over the last decade or more and China has been incredibly important engine for that demand growth since the start of the year consensus expectations in the market. Were for roughly a million barrels. A day of of demand growth. Most of that was expected to come from China and the Nano CD. In the middle of January we started to get the headlines about corona virus and the market went through the process of of effectively assigning and trying to understand the magnitude of the demand shock. We could see very quickly that China started a slow refinery runs. China imports crude oil and then runs about fourteen million barrels a day of that crude through refiners and then exports the product into the global market. So when they shut down refinery runs that immediately. Sorta started this backlog to build in the system of the roughly fourteen million barrels a day of of refining capacity in Ron's in China early estimates and sort of the best. We can gauge right. Now they cut three to four million barrels a day of that capacity almost immediately and what that did was caused a surge inventories because the oil was already on the water was already headed to China and so the the oil basically had to go somewhere and it wasn't going through the refinery at it showed up inventory. The situation remains very fluid and now because the virus is spreading its frankly getting more difficult to assess from the demand side so when it was isolated to China was fairly easy to tell what the demand impact was now that it spread to Europe and the US and really the rest of the globe because it so decentralized it's it's much more difficult to understand both the magnitude and the duration of the demand impact. We estimate that it's roughly three to four million barrels a day. So as as you've gained some demand back from China you're losing demand in places in other parts of the world and so right now you know as best. We can gauge that. That seems like a fairly even offset. Sorta keeping that demand loss at the three to four million barrel day level movie described. What happened this weekend? What led up to it sort of the major players Russia Saudi Arabia. Maybe what the world expected and why this was such an unexpected outcome. Maybe even for you guys OPEC has provided the role of swing producer shock absorber in the market for the past forty years and most recently starting in two thousand sixteen OPEC and some non traditional members like Russia banded together to effectively try to provide a floor in prices for the oil market demand. Growth has actually been fairly robust up until last year and it was really just as situation where the new technology and unconventional resource in the US was providing a huge new source of supply to global market so OPEC came together in two thousand sixteen and effectively attempted to put a floor under prices and cut supply to the global market. Russia was on board with that which was fairly historic at the time that it's fairly rare for OPEC and non-opec members to come together. It has happened in the past but but it's rare and they embarked on this rebalancing regime sort of fast forward to to where we are today and trying to respond to this demand. Shock OPEC convened last week and the expectation was they. Were going to try to cut supply again to try to offset some of the demand loss. I think when OPEC and non-opec came together in two thousand sixteen at the time it was viewed as this was going to be a temporary solution to the market that specially the non-opec participants weren't GonNa never envision that they were gonNA need to cut for four years or longer to to kind of bring about this rebalancing and so fast forward to last week and it appears based on reports that Russia. Basically threw in the towel and said look. We can't continue to subsidize the market the way we have and basically create a transfer payments a US shale producers and given the magnitude of this demand. Shock there's really nothing we can do anyway so rather than cut production and by the way Russia didn't say we WANNA raise production. They just said we're happy to extend the current deal which was re solidified at a at an OPEC meeting in in in December last year. But we're not really interested in nor do we think it'd be effective to try to cut even more here. That was a surprise and the ministers left Vienna on Friday night and the next big surprise was that Saudi effectively offered huge discounts on their crude. Oil is priced one month in advance for shipment or at least four auction to their buyers and that was a clear signal to the market that Saudi was going to effectively engage in a price war with all of non-opec not just Russia but Russia's obviously caught up in Madison in. Can you describe what you saw most immediately as the knock on affects of this activity this past weekend in equities obviously most specifically in oil and gas related equities but the entire market was down? Seven plus percent on Monday alone wasn't just energy companies. It wasn't just banks so from your perspective focusing on those sectors but looking more broadly describe what you saw and what you think the important impacts that this move this weekend will have equities. The pieces of the puzzle started coming together as Kobe described several years ago. When you know OPEC refrain from constraining. The market supply number fourteen and at the time the statement was made about letting countries produce to the capability of their resource and November. Fourteen was really at the same time as us. Shale started truly demonstrate its productive capacity and deliverability. It was a time when capital efficiencies meaning. How much crude per unit of capital spent could be extracted? And of course you know the. Us Show Patch had been as we've discussed before over capitalized by a lot of debt and equity in the preceding eight or nine years when OPEC laid out a lack of action in November fourteen and then the US started to go through a period of stress and then some moderate distress in the latter part of fifteen in early sixteen which quickly turned around and heeled investors injected about thirty plus billion dollars of fresh equity capital into the show patch in the first second quarter sixteen and then as sixteen went along really renewed interest in the space with some fresh investor capital all with the hope that OPEC would ultimately bail them out which OPEC blinked in the fall of Sixteen. And of course they brought Russia in with them on in this historic packed and over the last couple of years. They've been trying to work out this year. Trains tour solution but all the while energy equities have been dealing with the gravity of a very clear picture that will is fundamentally well-supplied and all the while as we've progressed up until even January of this year when oil was well supplied. When you take away political frictions such as Venezuela such as Libya such as Iran? The picture was already a well supplied. Range-bound picture with increasing all around you political into January. And if you look at how oil trade between and how energy equities traded between the so many killing in early January the Iran retaliation for that and then that period between that detente that started to occur after the Iran retaliation and win corona virus became very clear to the market about potential demand. Destruction will had already started to really fall given the idea that it is well supplied at the time with including political tensions and with the building very large amount of spare capacity and so there is a. There's a kind of a long history of energy equities not working when there's abundance burke passivity which is the case and so there's been little to bring enthusiasm to the sector and then when you start to think about the mounting concerns over a demand crisis on top of an oversupply situation and then the market loses confidence in the cartel that controls a third of the global supply market plus Russia. It's a cocktail that provided the market with unmitigated fear of holding securities lever to energy over the last couple of days. And I would describe the last forty. Eight hours is quite fundamental if you think about companies stratification by their leverage by their survivability of twenty dollar fall in crude but sloppy and you know many investors have been hurt maybe maybe permanently impaired by that but on the side of this assuming that OPEC Russia don't blink as they did in the fall of sixteen and assuming the US government does not meddle in terms of bailouts. There's the opportunity to actually have a much stronger. More consolidated industry that I think would usher in a period of investable in more capital efficient. Better scaled operatorship among us. You'll companies and I'll defer on building on that idea. One of the principal reactions is what does this mean for. Us energy production and US shale. Most specifically I think if he asked the random market participant they would they would guess that. Shell producers require a decently higher price of oil to be going concerns certainly relative to Saudi Arabia. Maybe also Russia so talk a bit about the your initial reaction to what's going on in the shale patch and maybe build on what that said about the longer term viability of this so that it doesn't become a stranded asset class. I think that seems to be the principal. Fear that supply and demand are two problems investor. Appetite is third problem and to say nothing of yes G. Consideration so it seems like an incredible amount of headwind you know. What are you seeing? This initial reaction. The cost structure of shale is starting to be pretty bifurcated where there are producers who have economies of scale in their operations and in their assets and have moved operating and capital cost structures to place that actually can compete with greenfield projects globally. And then there's another class of shale that really can't and not class of shale has been incrementally adding debt over the past two years while they've been bullied by some reasonable prices but still the lower their their marginal costs produces but capitals been available. And so I think what we saw last really two days and even before that was the market starting to to really sort people by where their marginal costs were. And I think what we're GONNA end up with on the other side pending a reversal in OPEC plus policy or a zero interest loans. To distressed energy companies will be bankruptcies of those high cost producers and or such impairment to their liquidity profiles that they have no they have no capacity drill and they'll shrink in the magnitude of ten to twenty percent a year whereas the strongest shale producers can move into a maintenance capital level or small growth level quickly and they'll be able to survive through the next two to three years if that's what it takes for underlying supply demand to to fix itself so the when we look at at cuts that are likely coming in some have already been announced Occidental. Petroleum just cut their dividend ninety percent and shaved twenty five percent off of their budget. Three or four other producers have already announced reductions in activity and capital for the year. We expect a lot more. It will take time for those to impact production and twenty twenty because wells that were drilled and completed over the last six months will contribute to the production for the next six months so it will take something between six and twelve months for these activity cuts to hit volumes. Will probably start to see a gradual decline in US volumes by the end of this year. And then we think that there could be a decline in the negative five seven hundred thousand barrels a day by the end of twenty twenty one but there are some resilience sees that can come. Service cost aren't static and that do have some baseload activity. You'RE GONNA ASK FOR PRICE CONCESSIONS TO KEEP activity in the field and and some of those things will will help capital efficiency and it is ultimately better for a energy corporation to try to maintain its capacity level even in a low price environment because it still EBA and when they're falling from both prices and then also volumes. It's a further impairment to their capital structure so they are incentivized to try to to keep their production up as much as they can while preserving capital. What are the other important? Knock on effects that you think matter you mentioned twenty five percent sounds a cap ex budget cut from Occidental. I'm sure others will do something similar. Who are the recipients of that cap ex is it other companies just in the services space and energy? Are there other industrials? How are you guys thinking about how this might impact the broader market? Most of the capital that are upstream companies are spending move through energy services companies from the large-cap Integrated Services companies. Like somebody Alberton as well as all the small and mid cap pressure pumping land rulers and other ancillary. You know well well site service companies but it goes. That's kind of the easy easy answer. There are if you think about the local operations and communities that surround all these well site operations you have all the services that support the people who are involved the jobs involved in in greatness great American industry so they're actually substantial knock on effects of what has happened and I would say it's it's difficult to measure other than you can see the economic benefit and measure economic benefit of what the renaissance has led to in terms of prosperity and lower energy prices for US consumers. Over the last ten years and I mentioned there are a group of shale companies that are going to have impaired. Capital structures and their loans and debt are held by banks that are going to feel the impact of of potential bankruptcies again barring a historic intervention by the government. So there's a knock on effect to that as well and I think during the Super Tuesday discussions in Houston was noted to be one of the fastest growing metropolitan areas in Houston is pretty tied to the energy industry and you asked about service companies. There's midstream companies two pipelines. That are going to have distressed tenants on on their facilities and again at the knock on effect that goes through that is tough to quantify but but Darren Kobe. I'm curious how you describe this concept of a price war. A war implies people are fighting over some specific outcome. I'm curious how much you think. This is all motivated by say Russia and others trying to hurt. Us Shale producers versus motivated by their own internal interests revenue or otherwise and sort of what constitutes the end of a price. Where what what? What does victory mean in this context? I don't know that the answer's the same for all the different actors involved. I think what's created this opportunity in some ways is the accelerated demand drop that occurred because of the corona virus and I think the Russians probably saw an opening to recalibrate the market in the midst of a severe but temporary imbalance. I think Russia has been and and really the entire OPEC. Plus Alliance has been sort of annoyed by the stubborn resilience of Shale. And there's an opportunity or a window here to create so much price havoc that it forces a capital reckoning on the space. I don't know that the Saudis are in that camp. I think there's different priorities there. But rather than engage. In a long protracted price war I think the Russians saw an opportunity to do something fairly strategic and create enough short term pain to rebalance the market pretty quickly. I think the Russians have seen how. Us Energy Independence and abundance have given particularly the trump administration sort of free rein to really engage in a sanctions war globally without thirteen million barrels. A day of crude oil coming from the US. I don't think you get to sanction the Iranian regime into possible regime change. I don't think you get to eliminate a million barrels a day from Venezuela or sanctioned the Russians the way that they have and so and this is sort of getting at the point that the other guys just made but the US is now a net exporter of petroleum. Total petroleum now crude oil but when you include products and kind of everything in a in a hydrocarbon sweet as in liquid form the. Us is a net exporter. So low oil prices don't mean what they used to me at the same time. Us gasoline expenditures are only like two percent of disposable income in nineteen eighty six percent so the benefit of low oil prices for the consumer probably isn't doesn't mean as much as it used to and now you're talking about a sort of a structural drag or a headwind on the macro economic backdrop of the US and so. If Russia gets undermined both of those things and potentially even recapture some strategic influence in the global geopolitical landscape. Now is is a really interesting time for them to pursue this kind of strategy. I think Saudi has an entirely different set of priorities and frankly has been very clear and credible about what they have wanted to do. And they've said all along we're not gonNA cut unilaterally we're not gonna just carry the burden alone and when Russia came to the meeting last week and drag their feet in was clear that you know there weren't going to participate in Toronto cuts. Saudi had no choice. You know I think we saw a glimpse at the market for distress companies. That should not be capitalized with debt. Who Have you know? High costs and should as assets be consolidation candidates or. Shut down entirely in sixteen got. We're we're effectively saved by the late. Sixteen OPEC deal. And you know we've talked in the past about systematic fundamental analysis about taking bottom up well by well build up so these businesses and rendering in a low variance pictures of what companies are capable of producing within their the constraints of the balance sheets and companies. And and you can use various price decks to do that. And we've been obviously can dynamically working with our models to try to understand. What what this means that? I I think without Sherry an explicit price forecast. I think what we've learned are a couple of things one. Us Shale will be quite a bit more resilient in terms of the production output at the current mid thirties low thirties price stack than the market. Probably or APAC or Russia in particular believed when it took these actions over the weekend. We need to stay here for three to six months at least potentially to effect the change in very late twenty and twenty one and so the market should not expect that these actions can be short lived and have the outcome of tightening the market that I think against dynamic the situation but that the market probably believes and then the second point would be all of this gets muddied if the US decides to step in and bail out the tarp or other vehicle distressed energy companies and companies that cannot access capital. It'll have the inverse effect and after six to twelve to eighteen months. We'll be in an even worse situation in terms of supply because it would be once again. Somebody blinking and not allowing the markets to work and not allowing boroughs come out of the market at a low price. Would it be fair to summarize kind of all that is we need price discovery real price discovery in the oil markets to have a healthy global ecosystem? And these various forms of blinking. Whether that's backstopping through you know interest free loans or a renewed deal between OPEC plus that although that would effectively only prolong the same problem that we're digesting right now. That's right but with the foundation being that this technology that's allowed us to produce as much as we have almost thirteen million barrels liquids out of. Shell we're not going to unlearn it. And so for any incremental five and ten dollar move in crude oil the US has a significant capacity to produce incrementally and so that knowledge and as much spare capacity has been created by the various political ends being sought as I mentioned Libya Venezuela and Iran. The market should not expect. The the crew price has significant unmitigated upside as in previous cycles because we know the crude is abundant. And so what we're talking about. What what levels. What levels does a healthy market exists? I think that's what we're the markets trying to discover free and clear of any subsequent interference just to capture the motivations you referenced the Saudis having quite a different set maybe of calculus than the Russian case. The you laid out. Could you summarize kind of the key driving variables I know? For example that oil revenues are huge percentage on on the what the percentage is but sort of the market share of revenues in. Saudi Arabia are disproportionately large oil space. Just walk through their calculus a little bit. There's a lot of uncertainty there and a lot of it has to do with the volatility within the political regime and the goals and visions of the economic transition that Saudi is trying to pursue. Obviously they're deeply tied to the old oil world and it'll be very difficult for Saudi to completely ever divorce themselves from that but they have very ambitious broad economic objectives and and social objectives that require a high oil price to smooth the transition. There's been a major political consolidation. That's occurred in Saudi that continues to occur there were there were two high. Ranking Saudi officials family members in fact of the king and the and the crown prince who were detained on treason charges on Friday and so power continues to be consolidated within Saudi. They have about five hundred billion dollars in reserves. They're probably GONNA run. You know the current oil price will run a deficit of or the have drawn those reserves by thirty to forty billion dollars this year so they have a pretty long runway to to sustain themselves in a low oil price environment. If this turns out to be not the targeted surgical strategic price. War that that I think both sides or all sides believe is unfolding so it's really sort of balancing the ambitions in moving off of a traditional hydrocarbon based economy to one of more diversification with a robust service sector. I think a big part of the IPO of Aramco was bringing Saudi into the fold of the of the global financial market and providing some transparency that a decade ago five years ago was unheard of but at the same time. I think the regime struggles with with that transparency and that was made obvious in a very painful way with the death of Kashogi so there are a lot of moving parts. I think I think the Russian motivations frankly are more clear and I think given the political uncertainties and maybe even potentially the the the fragile nature of the Saudi Regime Ohio prices better than a low oil price and they were prepared to cut supply by as much as eight hundred to eight hundred thousand two million barrels a day in order to to try to sustain something of a of a moderately oil price. What's your take on the impact that some of the major quality and other factor exposures that you guys think about in the portfolio through all this. It seems to us that you guys are already mentioned it. There's been sort of resorting. Ranking of higher and lower quality balance sheets in the patch and certainly looks like higher quality or at least very bad quality are doing very poorly in this period of time. What other considerations are you looking at now doesn't have to be quality? Things like valuation things like trend are fascinating in markets like this. What are you seeing inside of the energy space in factors space? I think what's interesting about the factors that energy has sort of looked like the rest of the market. When you really break it apart and growth has had a a very strong year versus what you would define as traditional value and growth energy. You know we. We look at pretty strictly. As dead adjusted cash flow growth predigested share and even in the downturn that adjusted cash flow growth accrues to people that are judiciously using their balance sheet for higher returning projects and so in the market is falling apart. Growth winds incrementally versus bad balance-sheets by themselves in so leverage is obviously at a very tough time. All Year and precipitously difficult time in the past two or three days and log. Growth inside of energy has not absolutely outperformed in terms of a relative performance versus the other factors. That held up quite well. So I think that's been just sort of interesting to watch because energy is not really considered to be a growth industry but inside of it perform select in many ways that the rest of the market has been performing and fundamentally it makes a lot of sense the inverse of that on the value side without really going into great depth. Because I know I know we're a little short time but price to book which is one of the primary pieces of the valuation prices. Sales is another price to cash flow. Price earnings order the universe. Edp earnings yield. We spent a Lotta time internally talking about this but book value of energy companies should not be relied on period. It's determined once a year it's set at a price tag. That's often ludicrous not realistic. It doesn't stress test the model at all. And so you know if you look back for instance you know value just price to book and Energy the last twelve months. It's been pouring acid class. But you started look impairments. Were degradation the book value. Most of those companies have maturely written down their book value because the resource was not economic. Because there were aggressive bookings of wells to be drilled after the five year rule ended when you start to really include proved undeveloped wells and reserves. Most of those have been written off because the companies can't sustain their current plans. Let alone five. Plus your plans and these impairments take book value and throw it out the door so numerous companies. It looked like they were point to point. Four point. Five Preston Book are now zero price to book or negative pressure book. And so we've sort of think about value. Numerous ways that asset value but not net asset value using some unrealistically high priced act. But what's what's that asa value using a downside price deck. What's the margin? Look like without her exceptions with you know. Heavy risking of what has to happen to achieve that we think about NASA value on the current for price curve. And of course we're running it. Thursday. We run last Friday. And you're running obviously different price deck Monday and Tuesday and oftentimes. That answer doesn't change like book. Values impaired through through time because it becomes fixed to the end of any given year. And so I I think we we've steered clear of trying to use the market's traditional definition of value to look at it in our own perspective. You know free cash flow yield but not free cash flow yield this year because the company's not spending money and starting its assets because it doesn't have high return projects to pursue but sustained free cash flow on a multi-year basis because the company's resource or its projects and toll bridges in the case of midstream support free cash return of capital shareholders. Yeah it's a really really interesting nuance take on value. And obviously you're preaching to the choir on on using book value just about anywhere but in energy. It's especially interesting to hear. The last set of questions I have are more on commodities markets. Something we haven't talked a whole lot about today just like the actual trading of these underlying commodities. They look like to you who the major players are in this space you know whether that speculators traders and or airlines hedging cost of their input we describe a little bit of what goes on in those markets just because obviously that's a key component of what's happening here as well. It's a great question. I think just sort of going back to the initial topic of the size of the overall market right one hundred million barrel a day global market is massive but the way prices goverry works in commodities. Is that the market prices. The marginal molecule so a one percent divergence between supply and demand while it may be a rounding error to most people is the whole ballgame in commodities. That's why storage. And that's why a swing supplier like OPEC is such an important participant in the market because they absorb those imbalances when those marginal molecules are required by the market when demand is strong or when those marginal molecules need to find a home. One supply exceeds demand. The major actors in the commodity market are really physical arbitrageurs of value so participants in the market who have physical supply or are physically short. Like airline a refiner who require the futures market for hedging for the purposes of running their business basically creating stability and muting some of the volatility and the midstream? The Way I think of midstream is is sort of the market or that sits between the wellhead and the consumer who is effectively providing logistical services in delivering the molecule Through the system and to the to the user and so those actors are participating in the market every day to arbitrage molecules in this case barrels and find a home whether it be in storage your burner tip effectively for these molecules what. The market is attempting to negotiate or navigate at the moment is what the heck are we going to do with his onslaught of supply? That is imminent. It's not here today. But it's it's it's coming and the market is attempting to re price to incentivize building of storage which starts in the onshore market. It's the cheapest storage in the world and then moves into the floating market in in periods of extreme distress. So Twenty fifteen. Twenty sixteen most recently when supply exceeded demand by significant level and you exhaust or the market works through the majority of the onshore. Storage then tankers. Fill up with crude or product and literally. Just sit on the water and wait for the demand to catch up to absorb those barrels so in that environment which is kind of what we've seen this week you start to get really pronounced movements in the shape of the curve and that shape of the curve of the futures curve and in the case of crude oil provides that incentive that economic incentive to price for storage and what we saw immediately yesterday as the market digested the information that we can very quickly and efficiently was the crude oil curves moving to price floating storage as early as you know overnight really on Sunday and today and yesterday. There were tankers being booked just for that purpose again. Not because of the the surplus. That's occurring right now but ultimately sort of what's coming in the in the next two or three months you guys are all about the resolution of uncertainty providing ultimate price action that reward your positioning in the portfolio. I'm curious maybe one answer from each of you. What uncertainty what set of uncertainties is most interesting to you in light of this recent change in energy market so another way of asking. The question is what are you watching most closely that you don't know the answer to that is going to impact where things go in the energy sector globally the commodity market globally. What are you watching carefully before this afternoon? When an article came out that the United States might bail out jail companies with zero interest loans which might gravitate to the high end of that that list. It was one of the company's going to actually do in response to to very severe but unknown duration price war and the spectrum could be wait and do nothing until there's more information in the first quarter earnings aren't until May and so. They could just wait or they could do something much more. Drastic like Occidental did today and cutting its dividend ninety percent and reducing its capital budget by twenty five percent the majority of companies have yet to explain exactly what they're gonNA do and there isn't one hundred percent guaranteed good strategy because there's so many complexities and and there's extreme path dependency For for how this plays out and how information is gathered so I'm really interested to see how corporate strategy changes in the midst of all of this with the N. on the regulator or government interference with the capital markets. I'd like to see how that plays out. Obviously it really changed the course of things in in two thousand eight and nine and could significantly. 'cause a duration problem for the oversupply that could otherwise be fixed in a short period. Time if you know without government interference. I'm actually on that in that. Same Vein. I'm interested in in seeing if if they will let it play out this time and they they mean OPEC they means non-opec if these market constituents who have taken strong positions last a week can withstand. What's about to happen? Which is a period of very low prices there is a healthier supply and demand balancing aside as we pass through the awful period of virus and whatever that brings with demand and we try to be agnostic to periods like this periods of exuberance periods of severe fear and distress. But as an American. I'm interested in letting the process leading capitalism play out here because I actually think all parties are benefiting aside and I am skeptical if there is political and economic will among all the parties involved in what started Friday in his happen in this week. One last question for you guys which is investor appetite. So I mentioned earlier that that's seems to be yet another challenge facing the space even if there is this nice acutely painful in the short term but healthier in the long term rebalancing as you guys have described that there just isn't enough appetite from private equity investors from public equity investors from investors to provide the capital to this part of the economy just because the returns have been so bad and there are yes. G. Pressures that seem to been conjured out of nowhere very quickly in the last couple of years to divest or avoid companies in the sector. So last question is what do you make of the long term real investor demand debt and equity for energy? I think energy companies have had a hard time demonstrating what value is and what value creation is and and. I think that not not only if they had a hard time demonstrating i. I don't think that they know exactly what investors want to see from it. And so over the last few years I think. Energy companies have actually been given bad advice on what value-creation means and they've changed their strategy to gear towards what investors were telling them but it wasn't even what investors wanted and specifically in the last two years have been a strategy shift from just production growth to free cash flow generation sometimes in under-investment state just to generate free cash flow and not really value creation. And so when you come into a place where the identity of an energy company and how they demonstrate value is is already in question they've pivoted to a strategy that investors wanted but didn't necessarily make sense and wasn't rewarded and then that moves into an environment like we're in today where the price equation underlying. All of this has been totally decimated. It is a very difficult situation. I think at the end of the day. Oil and Liquids Hydrocarbon. Demand is not going away for a very very long time. And the marginal cost to produce the world's demand aside from what's happening right now is higher than where we are at today and so we do need companies that can efficiently and cleanly develop energy assets. And we want those companies to be leaders on the environmental side and the State of Texas. Actually put out a very interesting report about you. Know The the flaring of gas in Texas as an environmental concern and in reality Texas. The largest producer of oil in the United States is flaring less gas per unit of barrel per barrel of oil produced. Then basically any other oil producing country in the world and so from an environmental perspective and something that I think ultimately investors should really think about is we want US companies producing energy because they do it much cleaner and more responsibly than than a lot of other countries and at some point that will be important to think about and there will be structural tailwinds to the sector from a price perspective if we do let the duration angle playout and hopefully on the other side to companies will have a much clearer sense of how they create value and they'll stick to that that strategy versus trying to pivot to the flavor of the day. The that was really will set. So I don't have that much but I think the prevalence of moral hazard in the sector has upset folks for for a decade or more much like it has any other time. It became systematically destructive and moral hazard. It's proliferates throughout the entire chain. And I would point to some things we focus on which is how do you. How do you fix it? What what could you do? Better in. Farrah's we've talked about identifying winners and losers and often winners are the most capital efficient companies with responsible scale operations responsible? Because if they don't have if don't do things well like captured their gas. It's more expensive for them to operate if they spill oil or have a water problem. It's more expensive for them to conduct business if they don't treat people well. There are libraries. And if they don't think about returning capital shareholders and and corporate governance. It's not typically something that we would invest in any way because the economics don't make it as pure business and vice versa. On the on the in terms of the week companies we also try to understand and exploit and but the idea of moral hazard is something that you know. I think goes all the way up through the chain if you were to tie. Bankers and capital markets teams compensation to the paper that they would have sold to investors in highly levered energy businesses that with assets that didn't support the leverage you. Some of this could have been avoided. Some of the pain that is caused street harm could have been avoided. That's typical of almost all industries that go through a period of technological renaissance overcapitalization maturity. And then the true winners and losers are found in. We're we're going through a difficult period for the capital markets in terms of understanding winners and losers are and if if the system works the way it should those winners of which are clear. Couple dozen in each of upstream midstream. You know half a dozen or so in services. Those businesses will prevail. They'll consolidate the weaker peers and they happened. Also be the most responsible and efficient organizations in the sector just like has happened in the life cycle of other sectors. And and so it you know we actually think there is a a beautiful period of investment in dispersion in the energy sector for a long time to come and certainly opportunities in commodity space. The way we're talking about the upton or guys. I really appreciate doing this on such short notice. I'm doing a couple more of these this week. I was really looking forward to this. One upon of nuance onset. Interesting stuff here so so thanks so much for the time for everyone Patrick your again to find more episodes of invest like the best go to investor field guide DOT COM forward slash. Podcast IF YOU'RE A book lover you can also sign up for my book. Club AT INVESTOR FIELD GUIDE DOT COM forward slash book club after you sign up to receive a full investor curriculum. Right away and then three to four suggestions of new books every month you can also follow me on twitter at Patrick Underscore Osieck S. H. G. If you enjoy the show please leave a quick review for us on itunes which will help more people discover invest like the best. Thanks so much for listening

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