Striking Oil – CrownRock by Lime Rock Capital (EP.428)

When you think of the greatest private equity deals of all time, names like Google, Facebook, Uber, Dell, and Hilton come to mind. After a recent episode of Private Equity Deals, you might also think about 3G's acquisition of Burger King. But I'd bet you wouldn't think about an oil and gas play called CrownRock. Lime Rock Capital created CrownRock alongside a management team with $96.5 million of cash and assets in 2007. Seventeen years later, sold the business to Occidental Petroleum for $12.5 billion. Lime Rock's original investment made 79x its money, a net IRR of 18%, and $7.5 billion in gains, which ranks in the top ten fully exited private equity deals of all time. It also exited a continuation vehicle that generated 3x its cost over the last six years of the deal's life. My guests to discuss the firm and its grand slam CrownRock deal are Lime Rock Managing Directors John Reynolds, Jonathan Farber, and J McLane. Our conversation covers Lime Rock's investment approach and the example of CrownRock. We dive into the initial investment thesis around vertical drilling, the three extinction threats to the business, innovation of horizontal drilling, management excellence, exit options along the way, and the 'forever hold' mindset that allowed CrownRock to compound extraordinary amounts of capital. Take Capital Allocators Audience Engagement Survey https://www.capitalallocators.com/annual-survey/ Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 1:24Ted Seides?

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• 2:06Ted Seides?

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• 2:47Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  When you think about the greatest private equity deals of all time, names like Google, Facebook, Uber, Dell, and Hilton might come to mind. After a recent episode of private equity deals, you might also think about 3G's acquisition of Burger King. But I'd bet you wouldn't think about an oil and gas play called Crown Rock. Lime Rock Capital created Crown Rock alongside a management team with $96.5 million of cash and assets in 2007. Seventeen years later, it sold the business to Occidental Petroleum for $12.5 billion.

• 4:56Ted Seides?

  Lime Rock's original investment made 79 times its money, a net IRR of 18% and $7.5 billion in gains, which ranks in the top 10 of fully exited private equity deals of all time. It also exited a continuation vehicle that created three times its cost over the last six years of the deal's life. My guests to discuss the firm and its grand slam Crown Rock deal are Lime Rock Managing Directors John Reynolds, Jonathan Farber, and Jay McLean. Our conversation covers Lime Rock's investment approach and the example of Crown Rock. We dive into the initial investment thesis around vertical drilling, the three extinction

• 5:39Ted Seides?

  threats to the business, innovation in horizontal drilling, management excellence, exit options along the way, and the forever-hold mindset that allowed Crown Rock to compound extraordinary amounts of capital. Before we get going, I'd like to welcome you to the first edition of Spread the Word Shark Tank. Entering the stage in front of our sharks is my son, Eric.

• 6:04Speaker 02

  My name is Eric Seides, and I'm the creator of the food truck concept design called EB's Bombastic Buns. EB's, meaning Eric's Burgers Bombastic Buns. Now, I have almost zero experience in the business world, but I'm very proud of it. My food truck is designed around different themed burgers, like the seaside munch burger, which is lobster, queso cheese, on a burger patty on a whole wheat bun. This has absolutely nothing to do with the podcast, however, I think you should still be listening. Thank you so much for spreading the word.

• 6:37Ted Seides?

  An important disclaimer, DB's Bombastic Buns is not an actual business, has no products and no website. It was a project Eric cooked up with a few hours of research for his ninth grade entrepreneurship class. That said, he's quite the entrepreneurial dynamo, so I wouldn't be surprised if you hear more episodes down the road, right here, at our Spread the Word Shark Tank. Please enjoy my conversation with John Reynolds, Jonathan Farber and Jay McClain.

• 7:06Ted Seides?

  Guys, thanks so much for joining me.

• 7:08Speaker 03

  Thank you, Ted. I'd love to get a little bit into your backgrounds and how you came to forming Lime Rock. Happy to kick off. I went to the Georgetown School of Foreign Service. Wasn't really finance focused at all. I was interested in international affairs. I studied diplomacy and national security at Georgetown, passed the Foreign Service exam. You're kind of given a six-month break. I was living at home, delivering pizzas for Domino's, waiting to start my Foreign Service career. I had a lot of friends who had gone into the Foreign Service and were not enjoying it. I happened to read Michael Lewis's book, Liar's Poker,

• 7:48Speaker 03

  which I don't think is intended as an inspirational recruitment tool, but it sounded like a really crazy way to spend a few years, learn a lot, sent out some resumes and was hired in the Investment Research Group at Goldman. There was a guy that I went to work for who was an inspirational figure, more for John and I, was hired into the Oil and Gas Research Group and spent the first few years of my career learning that industry. Just became very interested in the idea of becoming an investor, partnering with companies. You learn a lot in investment research. It's kind of a learning curve that flattens out over time. John had joined the group a couple of years after I did on the oil service side.

• 8:30Speaker 03

  So there was a lot of commonality in terms of the themes that we were exploring, the industry pieces we were writing. And even though we weren't covering the same companies, we just thought there was an opportunity to invest in exciting, highly focused, small-cap energy companies at the time. I started thinking about doing this. There were two established private equity businesses that focused on energy. Despite my asking numerous times, neither of them wanted to hire me. The option was simply to set up our own firm. Took me and my wife at the time, took Reynolds and his wife to a beach in Connecticut. And I pitched him on the idea of doing this. They didn't believe me when I told them you could invest capital in these businesses. And then you got to keep 20% of the profits. He thought I was crazy.

• 9:15Speaker 04

  The Goldman experience for both of us, it was a very unique place culturally in the 90s, pre-IPO. It was a unique moment, I think, for research analysts generally. It was the hot decade where if you were in research, you were in the center of the room. You were pitching your ideas to the sales force of Goldman Sachs. The walls were porous in investment banking. So if there was a pitch to a client that was considering raising capital, you were front and center in that pitch. You'd periodically get ideas thrown at you from the merger bankers. What if X and Y were to do something? So your advice was being solicited. All the while, you're digging deep in an industry and learning about a sector and learning about the stocks.

• 9:59Speaker 04

  The culture of the place was such that if you proved you were capable of doing great work, you got more responsibility. It was a very regenerative partnership culture. And I think we've tried to copy a bit as it relates to Lime Rock through time. In the case of that summer of 97, where John hit me with the pitch, my career was in a good place. My personal life was in a good place. I'd just gotten married. The Wall Street Journal, I think, had just named me the top stock picker in the oilfield service sector. I was 27 years of age. We had just taken public Santa Fe Drilling, which was a billion dollar IPO. That Goldman Sachs was the lead manager of. Two weeks prior, Amazon had gone public. No one paid attention to Amazon in May of 97. Everybody paid attention to Santa Fe.

• 10:41Speaker 04

  And for whatever reason, the Kuwaiti government that owned it wanted to go out of its way to tell the higher-ups at Goldman Sachs that I was pretty important on that deal. Things were moving personally and professionally for me. And this guy hits me with this crazy idea that we need to get to the other side. We need to be managing money and investing capital. I thought he was a little crazy at first. I didn't understand the industry of private equity, but John was very clear early on that there was a danger in pursuing the natural trajectory of taking public equity research backgrounds and get into the public equity stock management business. There was just far too much cyclical volatility that you needed to invest through cycles

• 11:23Speaker 04

  with long-term capital, think long-term, not think about the next quarter. Whatever he saw in that moment, the foresight to take public backgrounds that we both had and translate it into an investment-minded private manager, I think was just spot-on. The other thing that was spot-on is the third person in the room that's here. John had worked closely with Parker and Parsley in a merger that they were doing with Mesa Petroleum. We needed to hire people when we're starting Lime Rock, and he said, "You need to meet Jay McLean. He is just a crackerjack with numbers, knows the industry. He'd be the perfect fit for us." And we were joking yesterday as we were talking, John and I were a lot older than Jay when you're 28 and he's 24, and then amazingly, life catches up.

• 12:07Speaker 04

  You know, the years compress a little bit more. We're no longer the old two guys. But yeah, we were 28 and 29 when we started the business. We walked around with a pitch that we wrote together to a number of investors. One was to a private equity firm called The Beacon Group in New York. They had raised a billion-dollar energy fund, and our pitch to them was, "The action's in the small stuff. It's the entrepreneurially-minded, focused companies in oil and gas where the highest returns are going to be experienced." And we felt we were extremely well-connected, both in the upstream E and P sector and the oilfield service sector, to tap into those opportunities. The lights were turned on here in Connecticut in the summer of 1998.

• 12:50Ted Seides?

  Jay, how about your path?

• 12:52Speaker 05

  I started my career at a mid-sized oil and gas company in Midland, Texas, which was very much off the beaten path and became many, many years later, the center of the oil and gas universe. I was in their M and A group, which is where I met Jonathan and all the boys at Goldman Sachs that advised us on a number of transactions that we did there. When they started Lime Rock, they plucked me from obscurity to become an investor, moved up to Connecticut and it's been history since.

• 13:19Ted Seides?

  So what's the strategy that you've pursued over the years since?

• 13:22Speaker 03

  The core concept is something that both John and I really saw firsthand at Goldman. The energy industry was a very tradition-bound industry. Most of the companies that I was covering, supporting the senior analyst, a guy named Don Textor, big integrated companies as well as very large independents. These were mostly companies that were spread across many basins and many parts of the world. And returns on capital for these businesses were not good. And we saw the Canadian oil and gas sector had developed in a faster way than had it happened in the US. It was a very different regulatory environment and capital formation was done quite differently there. You could back smaller companies with 20 or 40 million dollars,

• 14:03Speaker 03

  very much venture capital startup-type financing directly into the Toronto Stock Exchange. That allowed the formation of companies that had management teams that were highly focused on individual plays, individual areas, and just were able to create operational excellence and prove that that was a superior model through returns on capital. And that was the underlying philosophy that we took into Lime Rock. It was putting together a fund, allowing us to back entrepreneurs and management teams that had developed real value-added excellence in individual areas.

• 14:36Ted Seides?

  So as you start pursuing the strategy, somewhere along the way, you come across Crown Rock. What was the investment thesis around it?

• 14:43Speaker 05

  We're talking at this point essentially around the dawn of the shale era in US oil and gas development, which has been a very pivotal moment in period, not just for the oil and gas business, but for the overall global economy, which has substantially reduced commodity prices over that period of time. At the time that we actually made the Crown Rock investment, we had ideas of what would come together. The initial thesis was a pretty simple one. At that point in time, you had a very successful shale development around the Dallas-Fort Worth area and the Barnett Shale, which kicked off a whole new era of horizontal drilling and fracturing, which has just unleashed a whole new resource to be accessible.

• 15:25Speaker 05

  People were looking for the next Barnett Shale all over the country, all over the world. And the Crown Rock team, which John and I knew from prior experiences in the business, the CEO of Crown Rock was previously a CFO at Parker and Parsley, had worked with John over the years on a number of transactions that Parker and Parsley pursued. He had built a management team, very small company, 30 or so people. They had some properties in West Texas and two big ideas. One was, we're going to go find the next Barnett Shale. And we have an idea that it might be in the Gothic Shale. And there's this burgeoning play right in our own backyard called the Wolfberry, kind of on the flanks of a very large oil field that was discovered in the 30s in the Permian Basin.

• 16:10Speaker 05

  And with the new fracturing techniques that they're doing in the gas shales, we think we can extract a little bit more of that oil out of a shale formation below the Spraberry. The Gothic Shale was a complete bust. We lost half of our capital. Then we invested in that part of the play. But the Wolfberry was so profitable so early that it carried those other stumbles.

• 16:33Ted Seides?

  So when you first went into this investment, you had a management team, a couple of ideas. What was the structure of the company and the deal?

• 16:41Speaker 03

  Crown Quest Operating, which was the name of the company that we formed a joint venture with. We took the crown from their name and the rock from our name. The other option was Lime Quest, which we thought sounded a little too Jimmy Buffett-esque. So we decided not to go with that one. They had achieved some success by buying older fields. They had done some transactions with GE Capital where they were provided with capital to do reactivations of existing wells, work over existing fields. They had developed expertise in doing that and had achieved really good results. So they had a positive track record. This was a little bit of a step out in that they were trying to pioneer a new resource play. In this case, the Gothic shale. But we also recognized that the Wolfberry play, which was the company's other area of focus, there were huge in place reserves there.

• 17:26Speaker 03

  For many years, this was known as a promoter's paradise because you could drill a well in the Wolfberry and you always produced oil. It just typically didn't pay out. We also recognized that there was technology that was advancing. We certainly didn't expect it to be as successful as it ultimately was, but that was a part of the investment thesis going in.

• 17:44Ted Seides?

  So as you mapped this out, what was your expectation?

• 17:48Speaker 05

  It was very similar to most investments that we look at on the front end. And we were expecting around a three X ROI over a five year period. That's probably around the median expectation. It was only after living with the investment that our investment thinking really started to evolve over time as we were able to gather new information. It was a long evolution. I mean, we were in the investment over 17 years, but the initial expectations were very prototypical of most of the deals that we've invested in.

• 18:19Speaker 04

  We'll occasionally have moments when you're in the commodity cycles that things bomb out and it's what I call just the green light special. Nobody wants to go near the sector and everything's for sale and it's a pennies on the dollar type of moment. And you sort of know the risk, but you also know there is asymmetry to the upside. And some of our best returning deals through time, early on, we were gifted a collapse in the oil price. We started the business in 1998. Oil prices went from 20 to 10. We had no portfolio and capital to invest. It was a perfect moment to start a business, but there was no element of that asymmetric type of

• 18:55Speaker 03

  The market's bombed out. Time to get loaded up in the Permian Basin. Let's get into Crown Rock. It was a growth story that was operationally driven. So the output really had no element of deep value when nobody else was going near a segment of the sector, at least by my review of how the deal evolved vis a vis other deals that have been sort of outsized in terms of return that we've achieved.

• 19:16Ted Seides?

  So as you start this investment, I presume Wolf Bear starts going well. What happened in those early years?

• 19:23Speaker 05

  Well, the Gothic shale bombed out. That was the big setback. A lot of other private equity firms may have reacted differently in that situation. We committed $75 million. The management team contributed $25 million in properties. So the only primary equity that was ever invested in the business was $100 million. That early stumble was a lot to absorb and take on and really to kind of reassess whether we thought we still had a real company here to invest in. We were also very fortuitous in that we were essentially hitting the peak of the China super cycle around that same period. Oil briefly in today's dollars exceeded $200 a barrel for a period of time. The oil wells that we were drilling right around Midland,

• 20:06Speaker 05

  Texas were insanely profitable. I mean, we were essentially able to recycle capital with the use of leverage in a three to six month period of time, which really carried those early losses. As a result, we were able to recycle capital very fast, plow all of those returns back into the ground. We had an exceptionally good land team. And the only gas business, you have to have landmen that have all the relationships to make sure you have access to the legal rights to the lands that you drill on. And we pursued a very low cost, high return strategy, which is to go out and lease land from individual ranchers

• 20:46Speaker 05

  and mineral owners directly as opposed to going out and buying other companies or existing producing assets, which a lot of our competitors had pursued. And that was driven by the fact that the returns were simply higher. You wouldn't grow as fast by pursuing the strategy that we did, but you would grow much more profitably doing it that way because the cost of entry was much lower. It took a lot of work. It took a lot of time. You were buying lands in really small parcels. It was a building exercise.

• 21:16Ted Seides?

  Walk me through the basic economics of that lease versus buy decision.

• 21:21Speaker 05

  If you were to go buy producing assets, you would effectively get a large base of producing properties that would be earning a 10%, call it 15% rate of return on something. And as a sideline of investing the capital to get access there, you would get some undeveloped land that would have much higher rates of return. In these cases, the rates of return were 100% or more for the raw acreage that was to be developed. So we simply made the decision, it's a lot harder to just to do the super high rate of return stuff. It's a lot more labor intensive. You have to have good relationships on the ground. You have to just be willing to really churn a lot of capital. We chose to go that route very deliberately.

• 22:05Speaker 03

  I just wanted to clarify, this was during the era when we were still drilling vertical wells. These were old style vertical wells, although we were introducing fracking technology into it. The wells are not nearly as prolific as subsequently the horizontal wells. This was sort of the initial phase of exploitation of the play.

• 22:21Ted Seides?

  What did it take to do that labor intensive work for the management team to go find the properties on this supplemental side of the business?

• 22:31Speaker 05

  We had a huge advantage in that our management team all existed and lived in the Permian Basin. They were Midland, Texas guys. Most of the oil and gas businesses outside of Midland, Texas, it's in Houston. A lot of it at that point in time was in Denver or Tulsa or Dallas. But our team was entirely in the Permian Basin. Most of them had lived their entire lives there. Bobby Floyd, who was our chief head of land and president of the company, co-founder of the business, was a fourth generation Midland, Texas oil and gas guy. So they had very deep relationships with landowners in and around. They'd had multiple other endeavors in the Permian Basin previously, so they had a lot of credibility.

• 23:16Speaker 05

  When you go to a landowner and you tell them that you want to lease his property to drill wells, you're basically locking up that asset. The landowner has to have a lot of trust that you're actually going to follow through on your commitments and drill the wells. And we were able to convey, in part because of the local nature of the management team, that we would really be able to follow through on those commitments.

• 23:38Ted Seides?

  In the early years, management teams executing on this, you've got a nice oil price environment to be generating a lot of cash flow. What changed to go from investing as you thought you would, according to the model, and it's working out, to a longer duration hold?

• 23:55Speaker 05

  On average, we had a pretty productive oil price environment throughout the history of the investment. Oil prices averaged about $70 a barrel through the history of our ownership of the investment. But there were three calamitous events along the way that really affected the trajectory of the business. I think the CEO of the business, whenever we talk about those calamitous events, he always likes to focus on the good that came out of those extinction level events. The first was the global financial crisis that occurred really within two years of making that first investment. And in all of these extinction level events, there were a lot of bankruptcies in the oil and gas business. The really good thing that came out of the global financial crisis is going into it,

• 24:40Speaker 05

  oil prices were very high as a result of the China super cycle. Essentially, people were drilling everywhere across the US. I mean, there were 1,800 rigs running in the United States at that point in time. Last week, there was less than 600 rigs running in the US. So there's been a dramatic drop in the aggregate level of activity in the US. But in 2008, there's 1,700 rigs running. It's very hard to get access to oil field services, the drilling and completion services that you need, the wireline services that you need to actually drill an oil and gas well. When everything bombed out as part of the global financial crisis, oil prices fell to $40 a barrel, effectively falling by 2/3 from a recent peak.

• 25:23Speaker 05

  Suddenly, oil field services were readily available, but you had to have capital to do that. Unfortunately for us, we were very, very focused on risk management. We had already sold forward in the financial markets 90% of our next year's crude oil production. So we had a lot of ballast and resiliency through that period. That was a key moment for the company in terms of really establishing credibility with its Partners in the services world that they were going to be a differentiated partner, that they were going to drill through really hard points in the cycle where other of our competitors burned a lot of their suppliers over that point in time.

• 26:01Speaker 05

  So that was a really key pivotal moment. And I think you can kind of point to different pivots that came out of all of those extinction level events that we really lived through.

• 26:12Ted Seides?

  What were those other two extinction events that happened?

• 26:15Speaker 05

  The other two, just before Thanksgiving and 2014, Saudi Arabia and by extension OPEC essentially declared war on shale. They set out to reclaim market share after tremendous amount of shale growth had really cut into the market share of OPEC from the 2010 to 2014 period. And 2015, which followed this announcement was a complete wipeout. I mean, oil prices fell by 50% again. The rig count went from 2,000 rigs to get as low as 300, 400 rigs. More bankruptcies than you had ever seen in the oil and gas business since the 1980s.

• 26:58Speaker 05

  I think in hindsight, we can look and say, a lot of those 2,000 rigs were very unproductive and were not focused on the best resources in the country. And that moment where Saudi said, we can put you out of business whenever we want, really focused the industry to be much more high graded overall in the most productive resources in the US. So there's entire plays that were 400, 500 rigs were running that are completely wiped out and have barely reemerged in the years since. It also really strengthened the focus on the Permian Basin, which is where fortuitously all of our investment was located within Crown Rock. And that proved to be by far the most resilient of the basins.

• 27:39Speaker 05

  You could drill there at that point in time at oil prices below $30 a barrel because service costs adjusted at the same time, too. And it also prompted an acceleration of a big industry shift in the Permian Basin from the vertical drilling, which we had been doing since our founding in 2007. To horizontal drilling, which proved to be effectively a 3X uplift in the productivity of the capital, just capitalizing on that innovation that had already been perfected in other parts of the country at that point in time. And then the last extinction level event was obviously the pandemic of 2020, when oil prices actually went to negative $40 a barrel on a single day for the first time

• 28:23Speaker 05

  in the 150-year history of the oil business. It was by far the most calamitous from an oil price perspective, but again, really forced very substantial operational changes within Crown Rock. Two-thirds of those operational efficiencies that we really focused on and gathered then persisted for the years after the pandemic. So if you can live through these things, which fortunately we were able to, you come out much stronger. But man, there's a lot of up and downs through that 17-year period.

• 28:53Speaker 03

  And I think one of the calling cards of Lime Rock as an investment organization is we're reluctant to use aggressive leverage structures. We used leverage less aggressively, and when we did have leverage, we used hedging aggressively to ensure that we had the capital to continue our drilling program at bad times. So that meant when we hit the global financial crisis, when we hit the shale war versus OPEC, when we hit the pandemic, we had locked in the revenue stream. We were able to spend our board meetings focused on where are there opportunities to add to the acreage position? Where can we high-grade? Where can we pick up locations that are better than our existing stuff? We didn't have to sit there and worry about restructuring covenants with lenders and

• 29:35Speaker 03

  desperately protecting the value of our assets to avoid having to sell at a bad time in the cycle, which is really the cardinal sin in our business from a value destruction perspective.

• 29:44Ted Seides?

  What was it about the management team and organization that allowed you to navigate these crises that come in the sector?

• 29:53Speaker 03

  We use less leverage than many other players, but I also think the team's really, really strong focus on operational efficiency enabled us to do that. Our vertical wells were economic even at the worst of times. That turned out to be Incredibly important. If you just look at the absolute breakdown of value creation in terms of vertical wells versus horizontal wells, almost all the value creation ultimately resulted from the horizontal wells. We wouldn't have had the land to drill those wells on unless we held the acreage with the vertical program. So the efficient vertical program is what allowed us to put ourselves in position to capture the huge value uplift when horizontal drilling took over.

• 30:34Speaker 04

  The management team philosophy was a forever hold philosophy. So if you've canvassed the investment banks that cover the energy sector, the most common refrain about Crownrock is Tim Dunn will never sell it. And I think that was an important distinction relative to the other PE-backed oil and gas deals at the time, and that the mindset was just forever. It's a long-term case. Capital allocation is everything. You marry the best land division in the Permian Basin with the best drilling and operations team in the Permian Basin, and you have a don't worry about next quarter mindset, worry about what we look like 10 years from now mindset. And I think that dials back to the ownership structure. This was not a term sheet that said, hey, under certain circumstances, the management team

• 31:18Speaker 04

  take is X percent of the profits, and above that level, it's Y percent of the profits. It was a mutual ownership structure from day one, where the management team and the Lime Rock team, in parallel, thought as owners of a business jointly and building value through time with really no end date. Unlike, I'd say, just about every other deal that's gone through the system, the attributes of forever hold were pretty central to this deal right from the get-go.

• 31:45Ted Seides?

  How did the idea of that forever hold dovetail with the initial expectations of this is probably going to be like any other deal you do with a five-year hold?

• 31:56Speaker 05

  It was around 2011. I think we really started talking about that more directly between ourselves and the management team. Before that, we hadn't really talked about exit much at all, but we had a successful investment going into 2011. And I just remember calling up the CEO of the business and just saying, most of the management teams Really start thinking about exits around this point in time. You're four, five years in. At that point in time, we're three to four X ROI on the investment. When you go into a deal with the management team, they're always worried that the private equity firm is going to sell the business out from under them at some point in time. The vast majority of the deals that we're in, when we actually exit is because the management team wants to sell more so than us.

• 32:41Speaker 05

  And there's very logical reasons for that. Almost all of their net worth in a successful deal is involved there. They start to get really worried about concentration levels and the like. I think one big advantage that we had in this deal is that our management team was very successful before Crown Rock. They weren't looking for their next dollar to go on vacation or buy a new home. They were very well set up even before that. So they had the flexibility of taking a very long-term view. And when we opened the door to them, that the private equity firm Lime Rock, we're not necessarily beholden to strict five-year terms. And when we get above a three X, we always hit the exit button. I think they started thinking differently about,

• 33:26Speaker 05

  we might not actually hold this investment forever, but we can manage the investment as if we're holding it forever. As a result of that, I think we took very different decisions than many other people would take in terms of how we develop the assets, which ultimately added a lot of value over time. But of course, we didn't have the contractual right to hold the investment forever. But we had a 10-year plus two option year fund, just like most other private equity funds have. We had to do some restructuring along the way to facilitate the hold as long as we did.

• 33:57Ted Seides?

  What were some of those different decisions that the management team was able to make because of the duration of the hold?

• 34:03Speaker 05

  We treated the land as if we were going to hold it forever. And as a result, we always wanted to develop it as if we were going to drill every well on it. And we knew that our cost of capital was high. We knew that the ability to go out and replace that land was effectively impossible. There's a finite amount of it. We had some of the best resource in the entire world. You can't just go out and recreate that land position. And as a result, we drilled the wells in a much more deliberate way over time. As a happenstance of that, also maximize the value for any new buyer that would come in and buy the asset. It didn't necessarily result in the best quarter-to-quarter production growth.

• 34:48Speaker 05

  In fact, it decidedly did not because that was never a consideration for us. It didn't result in the highest near-term internal rates of return on our capital program. But over the life of an entire asset, I think we managed the asset to try to maximize the total amount of profit dollars that would come off of that asset over time. There are distinct trade-offs in there, and you can see how different companies would take different decisions based on the constraints that they face. If you're in the public market, you care a lot more about quarter-to-quarter performance. If your cost to capital is different, you would make a different decisions than the ones we made.

• 35:27Speaker 03

  When you have a drilling unit out in the Northern Midland Basin, you've got several different options to develop it. One of the ways that a lot of our peers adopted was when horizontal drilling was quite early, before we had really refined the well design and the fracking methodology, people went and drilled a lot of one-off horizontals in virgin acreage on drilling units that hadn't really been drilled before. And that was a real help to near-term cash flows. That helped with your quarterly progression on production. But ultimately, that was a mistake because it marginalized the ultimate recoveries from that drilling unit. So the fact that we drilled horizontals to hold the land and then did very few one-off

• 36:08Speaker 03

  horizontals and were able to offer those undrilled units to buyers was a big part of the value creation.

• 36:15Ted Seides?

  As you grew the land base with the original vertical drilling, over time, how did you think about capital structure?

• 36:24Speaker 03

  We tried to keep the capital structure simple. We also had some sales of producing properties. We sold a number of packages early on in the investment to MLPs, to these production-based partnerships that were public, trading at good values. And we were able to lock in a lot of capital, cycle into land over time, and that's how we kept the initial investment in the deal to $100 million while essentially putting a lot more money than that at work over time.

• 36:55Ted Seides?

  So the management team had wealth, but presumably not every employee in the company did. How did you think about, over this long hold period, making sure that the management team could retain the people they needed to to continue their growth?

• 37:09Speaker 05

  Well, ultimately, every employee of Crown Rock was an equity holder. I mean, that was a big part of the overall compensation scheme that we had there. Well over 200 millionaires were kind of birthed from the Crown Rock investment. I think our CEO had a very keen insight relatively early on, which is that if you give someone a piece of equity, they will very often undervalue that if there's not an option to realize the value that's there. Relatively early on, we started offering to buy back the equity from the employees on an annual basis. We would buy it back at whatever our mark to market value was that we reported to our investors. And in the early days, Lime Rock purchased a lot

• 37:53Speaker 05

  of those units back. We were able to invest around almost another $25 million in secondary purchases from various people that retired or other employees that just wanted to realize some level of liquidity. What you find when you do that is almost no one wants to sell. As soon as you offer the ability to sell it back, they can see that it has real tangible value. They could make the election to sell it and realize some cash, but it's very rarely that they would ever actually do that. And the senior management team would never do that, even though we wanted to put more capital to work all the time. It really was great for tying further alignment to the business throughout the entire employee base.

• 38:32Ted Seides?

  So you got through that 2011 discussion about longer duration hold with the management team, and then you hit the 2015 bump. Somewhere along the way, I imagine you guys are sitting back thinking, what did we just do? We had a great result and now it's back. How did those discussions go on your team?

• 38:50Speaker 05

  There was actually reasonable pressures that started to build up earlier than 2015. Maybe they kind of hit a crescendo in 2013 or so. The investment was marked at about an 8x ROI, which is a great investment. It would have been one of the top five investments we had ever made if we had sold at that point in time. You have a small team within a team that's managing this investment, but it's come to represent a large share of unrealized carry. And we have a partnership and other partners start to have a lot of questions like, why are we still holding this thing? What does it really mean? For the people that are working on it day to day, it seemed obvious as to why we were holding it. But that's because we're having, at a minimum, conversations every week with the management team,

• 39:33Speaker 05

  which we did for 17 years, in many cases, multiple times a week. You live with it every day. You're very comfortable with it. But in 2013, there was enough questioning about why were we still holding this investment? That we talked about it, I don't know, two, three hours at a strategy session, going through a very long exhaustive presentation on why we're going to continue to hold an investment market at an 8x for potentially another 10 years, which was the time span that that presentation ran through. And it was really healthy for the partnership to hear all of the questions, alternative cases, to test that continued thesis that was held.

• 40:16Speaker 05

  And I think after that, there was just a much broader organizational buy-in. A big part of that 2013 presentation was we're probably going to get another oil price correction, another recession before too long. What does this look like if we go through another global financial crisis? And so when it actually did occur, when Saudi declared war on shale in 2015, I think at that point, there was already just a lot of comfort with how the investment was performing, that it wasn't a big gut-wrenching questioning of what had we just done when we actually got to 2015.

• 40:51Speaker 03

  It was sort of a seminal moment in Lime Rock history. Jay put together this amazing 100-page PowerPoint. And the idea was, are we crazy to continue holding this deal? That's kind of the cognitive bias that we really had to overcome to achieve what we achieved on this investment. There's an anchoring effect in private equity, like in every area of investing, that is not rational. It's a very real and tangible thing. In our business, that's manifested by people looking at a three-bagger or five-bagger and saying, wow, that's a great deal. We got to sell it. We got to tell the investors about this. This is how you build a big AUM business over time, is you realize those. You don't continue holding and taking risks.

• 41:32Speaker 03

  But in this particular case, Jay was able to put together a deck that was incredibly persuasive. There were moments when oil prices were minus $37 a barrel. It wasn't a happy day for us. And you can certainly think about the offers. We had had a number of tangible offers to sell the business over time. And by the same token, we had consistent confidence that not only were our assets ultimately worth a lot of money, but that the technology was getting better. There was still this tailwind of value creation that was driven by improvements in rig efficiency and frac strategy and the layout of the wells. All that stuff was still getting better.

• 42:13Speaker 03

  So unless you felt like the impairment to oil prices was permanent, and our background as research analysts gave us confidence that that wasn't really the case, it was just something that impacted the whole time of the investment as opposed to what we saw as the ultimate ROI on the deal.

• 42:32Ted Seides?

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• 43:10Speaker 03

  This is not an offer to sell or investment advice.

• 43:12Ted Seides?

  Investing involves risk, including the loss of capital. And now, back to the show.

• 43:19Ted Seides?

  At that crucible internal moment, making that decision, how did that conversation compare to others that you've had in the past or since of similar successful investments that maybe you should continue and re-up for a while or exit?

• 43:35Speaker 04

  There's moments where the market collapses and you just have asymmetry in front of you. And you layer in the bet and the challenge is don't overstay your welcome because whatever created that asymmetry is probably going to present itself again on the opposite end of the spectrum. We owned an oil sands company in Canada, first deal we did. We owned a shallow water jackup drilling company in the Gulf of Mexico in our second fund. Outsized ROIs in both cases. In both cases, within five years of our exit, those companies were bankrupt. It just speaks to the fact that each year we were holding Crown Rock, the technology that was being really ubiquitously applied throughout the industry in horizontal drilling techniques, lateral lengths for the fracs, everything was getting better every year.

• 44:19Speaker 04

  I'm not sure there is an analog to the question you're asking. This was very unique insofar as prices were coming against us at moments in time, three that Jay mentioned, but there wasn't that extinction risk fear. The Crown Rock deal just never had aspects of that risk factor.

• 44:36Ted Seides?

  How did you match the duration of your capital with what you were seeing in this long-duration investment opportunity?

• 44:43Speaker 05

  Well, we had a fund that effectively ended. That fund concluded, came to an end, including its two option years in 2018. So we had to go raise an entirely new fund. I think it might be the largest continuation fund in the energy sector even still. It was certainly one of the big pioneers effectively in single asset continuation funds in the energy sector when we did it. But that was a big six, nine-month process to get that done. Effectively, the investment at that point in time was marked at a 20x. So you really have to give a lot of credit to the investors that did come into the fund. I can certainly understand any investor that sold at that point. Point in time, they'd been in a fund for 12 years.

• 45:25Speaker 05

  They probably had a different CIO through that period and had a different capital allocation objective. So you can't really fault anyone for selling, but I think give a lot of credit to new investors that came in into almost a single asset fund at a 20x ROI to buy into the vision that we had that there was a lot of continued growth yet to come out of that asset. And at that point in time, we were producing a little under 40,000 barrels a day. And we had projections to get well over 150,000 barrels a day if we held it for another five years. We briefly got over 160,000 barrels a day right before we sold the investment.

• 46:05Speaker 05

  So the thesis that we had going into the continuation fund bore out eerily correctly. It was a big effort getting that done. And from there, we had another seven years of runway to really execute on an entirely different business strategy at Crown Rock. In the history of the investment, there's effectively two major phases. One was where we drilled 1,000 vertical wells. And then there was an entirely new phase as we transitioned into becoming a horizontal driller, which was a very different skill set that we had to build within the business. And I think one of many, many great things that the management team did,

• 46:47Speaker 05

  reinventing themselves as a preeminent horizontal driller has to be up there.

• 46:52Ted Seides?

  So you have a management team that executes as vertical drillers, horizontal drillers, do the continuation fund, you make it through COVID. Management team now has a reputation of wanting to hold these assets forever. How do you then decide to ultimately exit?

• 47:06Speaker 03

  There was a couple of factors, Ted, that went into that. For one thing, we were getting close to the end of the continuation fund. I think we had two years left in the continuation fund. We had obviously developed a tremendous reputation for the business, for the management team and the limited partner community. But doing another continuation fund structure at that point would have been a huge exercise. It would have been a massive undertaking. But the bigger factor, at least in my mind, was the phenomenon that I talked about earlier, this sort of continual value creation through technology improvement. We thought it was no longer as real going forward. There's only so much resource that you're ultimately going to recover.

• 47:47Speaker 03

  And we just felt like we were getting closer to the sort of maximum economic recovery point. And that that changed the risk calculus. You had this big asset, you had market risk in retaining it. As we saw come home to roost several times during the whole period of the investment. But offsetting that, you didn't have as much additional upside. The well design, the frac design had unquestionably gotten much closer to their theoretical maxims. We don't know how much yet. And in fact, the degree of improvement in rig efficiency since we sold the investment just over the last year has been greater than people expected. And I just felt like the risk calculus had changed materially in the sense that there was just a lot less upside in the asset.

• 48:28Speaker 04

  And the merger market has a pulse, and the pulse started to beat insofar as there was a lot of interest and a merger wave was soon to be upon us. And there were not many Permian companies like Crown Rock available. You kind of had the numbers in our favor, I think, in that moment in time with, I think, a lot of influence and input from the merger community saying, the big boys are ready to come back and play. And really, almost to that moment, Exxon announces it's taking out Pioneer Natural Resources. So the merger buzz was not lying. There was certainly moves afoot that I think would encourage an owner of our type in that moment to say, there's a window here, not to be overly cliched, when the ducks are quacking, time to feed them.

• 49:11Speaker 04

  And that was just a perfect moment, I think, to begin a process that we did begin.

• 49:15Speaker 03

  The flip side of that was the business had been so successful that we got to a size that very few companies could afford to bid in that process. And the deal that John was talking about with Exxon taking out Pioneer, that took two of our best buyers off the table. It wasn't a big group to begin with. It was a little bit of a white knuckler going through this process.

• 49:35Ted Seides?

  How'd the process play out?

• 49:37Speaker 05

  Early in the year 2023, we had one of those strategy sessions where we got a lot of different views from investment banks. And I think we just came out with maybe an unspoken consensus that we should probably test the market and see what it would bear. We marketed it to a handful of firms that could take down a deal of this size. As John noted, there wasn't many of them. We got a lot of interest. It was competitive. I think multiple firms viewed the business in a similar way, as was manifest by where the bids came out. And we were able to strike a great deal with Occidental, and they were a pleasure to work with and have a great vision, wanted to keep all of the employees to really execute. It was a great addition to their portfolio.

• 50:23Ted Seides?

  I'd love to talk through some of your postmortem on this. What were your main takeaways?

• 50:29Speaker 03

  We put together a simple structure around this deal. I think a lot of people in our world get seduced by complicated structures that have many bells and whistles for different potential scenarios. And we made a cash investment. The management team put in assets. We had an ownership structure, and we were kind of immediately all on the same side of the table in terms of advancing long-term value. And I just think that being able to think about the investment, think about the best ways to grow value overall, without worrying about when we're going to reach this tier of value creation and what that does to the management participation and whether there's some sort of time-limited

• 51:11Speaker 03

  other structure is just really helpful. And it's something that I certainly try to apply to other aspects of other things that I'm doing in life. I just feel like if you have simple incentives that are easily understandable, you can spend more time thinking and focused on the things that are important, as opposed to the fine print in your investment agreement.

• 51:31Speaker 05

  I think their biggest differentiator relative to every other management team that we've ever dealt with is Tim Dunn and his lieutenants and partners had a greater respect for capital than any other management team I've ever met. Most of the time, management teams are so focused on growth and so uninterested in the cost of capital it takes to achieve that growth, they end up making really poor decisions along the way. And there are excellent decisions that this management team made because they knew how costly capital was. They contributed a lot of assets initially onto a big piece of the business right from

• 52:12Speaker 05

  the very beginning. And bringing more capital in creates dilution. They viewed that as very costly to them. And as a result, they developed a number of solutions that allowed them to grow the business probably more slowly than their other peers, but massively more profitably, which allowed the outcome that we ultimately achieved. Frankly, that applies to private equity firms too, in many respects, because you know, there's also a trade off between managing money and accumulating assets under management and growing that way versus staying smaller, exploiting a niche where you have an edge, which is necessarily a more confined space and generating really high rates of return. And I think that's

• 52:57Speaker 05

  part of the culture of Lime Rock as a firm, notwithstanding the fact that we tried to put more money into Crown Rock over time. And the management team there was smart to think, I have this older alternative that's a lot cheaper than your money. That's a lesson that similarly applies in the private equity space too.

• 53:15Ted Seides?

  John, any thoughts?

• 53:16Speaker 04

  The uniqueness and the attributes of the deal in a postmortem sense, we need to be careful not to over read too many learnings and think that they could be applied to the standard deal that comes across an NRGPE firm's desk. There are attributes of the people, the Midland Basin, that you just don't replicate. It's a very special case. And there's probably some danger in thinking there's an application in a postmortem for everything we do going forward, because there's certainly not.

• 53:42Ted Seides?

  Over the 17 years you owned Crown Rock, there were some pretty significant shifts in the industry. You talked some about the shale revolution. And on the other side, certainly the last half, you have the whole ESG movement. And we'd love to get your thoughts on how you see this deal fitting in to those two perspectives.

• 54:03Speaker 05

  Crown Rock as an investment essentially spanned the entire history of oil shale development in the US. The development of gas shales started almost 10 years earlier, but the development of oil shales was essentially coincident with the starting of Crown Rock. 2007, US oil production as a share of global production hit its absolute minimum that we've seen over a 70-year time span. And at the moment that we sold it, it hit a local maxima that spanned 30, 40 years. The tremendous growth in oil production in the US is exemplified in the Crown Rock story. And one of our great frustrations as energy guys,

• 54:45Speaker 05

  not as investors, is this broader notion about whether the shales were a scam. There's been books written about how shale was a scam. And I think much less focus on just how disruptive shale technology has been, not just in the energy industry, but for the global economy overall. In the absence of shales, I'm very confident that the oil price would be $50 higher than it is today. When we look over the ownership history, that 17-plus-year duration for the ownership of Crown Rock, is that if you looked at the E and P Oil and Gas Index, the XOP of independent producers, over the ownership period of Crown Rock,

• 55:27Speaker 05

  where we realized on that one specific investment a 79x ROI, the return on that index was 0.9x. You lost 10% of your money. And people point to that and say, oh, the shales were a scam. But the shales so disrupted the legacy oil and gas business in the US. It just consumed and destroyed a lot of capital, legacy capital that was in the oil and gas business, and was replaced. By much, much more efficient, more profitable shale development over time. I think that is a little lost in the conversation around energy over time about just how big a technological movement this was.

• 56:08Speaker 05

  Thousands and thousands of people constantly innovating, making small changes, sharing that information broadly, ultimately to the benefit of the US consumer, the global consumer.

• 56:19Speaker 04

  The biggest shift, I would say, relating to ESG was more of a LP-related shift where we, through time, had been a very endowment, foundation-heavy LP base. And somewhat coincident with the Continuation Fund, I think there was clearly a divestment movement on university campuses and those that bought into the divestment movement wanted out. Those that didn't certainly had pressures that were less of a divestment type, but more of we're not going to do an incremental deal. So we did have the benefit, I think, of a few endowments that were able to roll into the structure, despite a lot of ESG, non-fossil fuel type drumbeat that was happening on their campuses or at their foundation boards and the like.

• 57:02Speaker 04

  That issue's been most acute, I'd say, in LP interactions rather than day in the life in terms of Lime Rock deal activity.

• 57:09Ted Seides?

  How have you thought about the conversations you've had about the impact of the environment on the space as a whole?

• 57:16Speaker 04

  Mark McCall came on board day one as our Chief Financial Officer, General Counsel, sort of a jack-of-all-trades. We were smart enough to realize there were aspects of running a business that we were less interested in. Mark was recruited into the Department of Energy to run the Loan Program Office at the DOE during the Obama administration. And when he came out of the administration, he came back to John and I and said, there's a growth equity opportunity set that we should be capturing at Lime Rock. And we discussed and debated it, gave him kind of a year runway to evaluate the market that he saw from that perch that he had within government. So how have we dealt with it? We've actually spawned an independent strategy under the Lime Rock umbrella to target growth equity, Lime Rock partner-style deals, but in the new energy economy.

• 58:02Speaker 04

  Team that is dedicated to that in the Lime Rock New Energy business. I think on the core oil and gas side of our Lime Rock Partners and Lime Rock Resources business, we've always held ourselves to a standard in terms of the operations of the portfolio companies or the assets we're managing. But there's clearly more ESG minded metrics that get followed today that frankly wouldn't have been on the dashboard five years ago. I think most inside Lime Rock would argue we were following it. We just didn't have it in a harmonized manner that we do today. I think everybody in the industry has heard the call. This is something that matters today. It's going to matter in the future. The energy transition is real. It's going to take a long time and the strategies coexist for the foreseeable future.

• 58:43Speaker 05

  One thing that is often forgotten is you look back to Paris commitments. I mean, the United States is really one of only a very small handful of countries that has actually lived up to Paris commitments in terms of per capita CO2 emissions reductions. That is primarily driven because of the displacement of coal. Coal consumption in the U.S. is down 50% since 2008, right around the time that we invested in Crown Rock. And 80% of coal reductions have been allowed by the increase in production and consumption of natural gas. The other 20% from other renewable resources, solar and wind and geothermal and others.

• 59:26Speaker 05

  But it's been predominantly displaced by natural gas. When you account for natural gas emissions, the total emissions reduction that has been allowed by the increase of natural gas because of shale development is 2X that of solar and wind. I think we have a lot to be proud of in the oil and gas business. As it relates to that, if that is your number one issue, you should be a very big fan of natural gas in the United States, which the shales have greatly allowed to increase.

• 59:55Ted Seides?

  I'm curious the impact on Lime Rock of having such a successful deal over such a long period of time. And how do you reset the individual investment deal? And on the one hand, you have a 79 times outcome and the next one probably has no chance of doing that.

• 1:00:13Speaker 04

  The market today, it's a little bit of Back to the Future from the days we started the business. There's far fewer people playing the game. The shales brought a rush of capital. The walls just opened, the big buyout shops, right through to family offices, small mid-market firms that wanted to play the picks and shovel side of the shale revolution through oilfield service. That capital's all fled. It just did not perform well in aggregate and it doesn't look like it's coming back anytime soon. So I think the difference today in the market is there's a lot more cash generation happening in the industry. There's a lot fewer players playing the private equity game. And there's, as a result, valuation entry points that

• 1:00:54Speaker 04

  allow for something that didn't exist really in the earliest days, which is cash flow generative, free cash generative aspects of the return coming through dividends. We're weirdly have, I would say, probably one of the lower risk portfolios that we think we've had through time. We own a lot of Permian exposure through the royalties and minerals market. We extended the Crown Rock relationship by buying up the underlying mineral rights in the basin, as well as some other basins. But the risk profile as a result certainly may not allow for 79s to hit the board. But there's an oddity in terms of the feel of the risk of the portfolio in relation to what might be more standard PE return outputs that might fault more on the two and a half, three, three and a half, you know, or your success case deals.

• 1:01:39Speaker 03

  I wouldn't say it's a factor. I don't think people's ROI expectations have been reset by the results on Crown Rock. I think we're very driven by conditions in the industry today. And ironically, that is probably creating an overall lower ROI scenario, but one which on a risk adjusted basis, we think is among the most attractive periods of investing that we've seen.

• 1:02:04Ted Seides?

  I want to make sure you get a chance to ask you a couple of closing questions. What is your favorite aspect of private equity?

• 1:02:09Speaker 04

  Thing that I love about private equity is you have the opportunity to roll up your sleeves, invest thematically, and most importantly, develop long-term relationships with excellent management teams. That's what originally drew me to private equity. That's kind of why I wanted to be on that side of the business. I thought there were great opportunities. It just suited me better to sort of work on establishing those long-term relationships. Almost equate the welcome to the NFL rookie moment for me, first deal I did. These guys would remember it well where the ink was not dry on the deal. Canadian pipeline construction contractor, four weeks later, after putting about seven or eight million dollars into a company, I got a phone call from three of the division

• 1:02:50Speaker 04

  VPs saying, we're leaving or the CEO is leaving, but we all ain't staying. Hightailed up to Calgary for a little sit down. It reinforced the role, the individual interactions, the decisions we take, they matter. You have to take decisions in this industry. Sometimes they're very uncomfortable. That to me is everything about private equity. The decisions you're taking alongside partners and deals ultimately matter much differently than should I sell my Halliburton and buy my Exxon, which was sort of the day in the life before starting the business with John and Jay.

• 1:03:22Speaker 05

  I would just say private equity is not a manufacturing business, at least the way we invest capital. Trying to do the same thing over and over again is really, really tough when you're trying to find really outsized investments. The lack of repetition is really engaging because there's always a new and different problem to think through and solve, and I'm not really good at repetition. I like problem solving. It lends itself to that very greatly.

• 1:03:50Ted Seides?

  What's your favorite hobby or activity outside of work and family?

• 1:03:54Speaker 04

  I'm a golfer.

• 1:03:55Speaker 03

  I love to cook.

• 1:03:56Speaker 05

  I like concerts, live music as much as possible.

• 1:04:00Ted Seides?

  I don't know how you can do all those three together at the same time.

• 1:04:04Ted Seides?

  What's one fact that most people don't know about you?

• 1:04:08Speaker 03

  I am the 1986 Connecticut Monopoly champion.

• 1:04:13Ted Seides?

  What's the trick to being good at Monopoly?

• 1:04:17Speaker 03

  Primary lesson is just to focus on one or two of the top yielding monopolies on the board. You gotta trade aggressively early on to get that position. And then obviously to some degree, there's luck that gets involved, but that's the focus. Getting early access to one or two good monopolies.

• 1:04:34Ted Seides?

  All about boardwalk and park place.

• 1:04:36Speaker 03

  It's all about boardwalk and park place, or high quality acreage in the northern Midland Basin, as the case may be.

• 1:04:40Speaker 05

  Mine's actually very similar, but in a much more sophisticated way. I play really obscure strategy games. I probably spend way too much time doing that. I think they're great for training your mind, think about game theory, which is very, very applicable in our business. It's also very good for conditioning yourself to think about marginals. People on average think too much in terms of averages and not enough in terms of what's the marginal result of this decision that I'm making, which I think tends to produce better decisions. And games are really good at thinking about margins.

• 1:05:16Ted Seides?

  John, in fact, most don't know about you.

• 1:05:18Speaker 04

  Couldn't be more different. 1965, my mother was probably weeks away from her final vows as a Catholic nun. And thankfully, she chose a different path. Rather jokingly, when I eulogized her at her funeral, I said, the Sisters of Charities loss was quite literally my gain.

• 1:05:35Ted Seides?

  What's your biggest pet peeve?

• 1:05:37Speaker 04

  You're a Connecticut resident, Ted, so I drive the Merritt Parkway probably as often as you do. And if somebody's doing 55 or 50 in the left lane, left lane Larry's are my biggest pet peeve.

• 1:05:47Speaker 03

  I can't stand it when people misuse the word fulsome. Folsom does not mean comprehensive. A lot of people in the investment business think it does. And what really ticked me off recently, Ted, was I saw in one of the dictionaries, I don't remember which one, they've added that as a secondary definition because so many people incorrectly use it. So they're incentivizing dumb behavior.

• 1:06:07Speaker 05

  I get really annoyed at people that make bold pronouncements or predictions, but then are unwilling to bet on those bold pronouncements and predictions. I make a lot of bets with people. I think it's very good at honing clear thinking. I have a big log of bets that I made with people, some spanning decades. I just think it's really good to focus the mind. Betting is good. Making bold predictions without being willing to bet, that's bad.

• 1:06:30Ted Seides?

  What's the best advice you've ever received?

• 1:06:33Speaker 04

  The best advice came from my dad. It was when I had a job offer at Goldman Sachs that was $32,000. And a job offer from a European bank that was $39,000. And he said, short-term decisions sometimes have long-term consequences. You can walk across the street to that European bank. When you're working at Goldman Sachs, they'll hire you. You can't walk in the opposite direction to 85 Broad. That life advice, I need to remind myself periodically and certainly have channeled it in different form to my four children. It's quite useful.

• 1:07:03Speaker 03

  One of the early pieces of advice I got from Don Texter, my boss at Goldman, I was hired into the oil and gas group. I enjoyed it, but maybe I was expressing the desire to be more of a generalist or to move into another part of the bank that dealt with multiple industries. He goes, look, the secret to being successful in the finance world is to be the biggest fish in a small pond. That's been a really critical part of my career. I think that's been a critical differentiator for Lime Rock over time, and that was great advice.

• 1:07:35Speaker 05

  When I started at Lime Rock, I felt like I knew a lot about the energy business. I didn't know anything at all about investing. And just one thing that has stuck with me ever since those early days in 1998 actually came from Jonathan, which is to pay a lot more attention to the tails and less attention to the average because it's going to be the tails that really drive performance, both positively and negatively. And just reinforcing the points about thinking about the full breadth of the distribution has really been influential in my life as an investor.

• 1:08:08Ted Seides?

  Which two people have had the biggest impact on your professional life?

• 1:08:12Speaker 04

  Certainly, my father, and John just mentioned another individual, Don Texter, who was a partner at Goldman, hired both of us, spawned our careers, supported our careers early inside Goldman. I think DaVinci had a quote that is sort of pity the pupil that doesn't surpass the master. And I think the Goldman culture was an embodiment of that line, and Texter certainly embodied it by giving us the runway to do what we did inside Goldman in the very early parts of our career.

• 1:08:38Speaker 03

  For me, it's Texter and a guy named Clayton Voydus, who ran Renaissance Energy, which really created this incredible expertise in the Western Alberta. When he got active in the play, it was viewed as washed up. And he just showed that by focusing on an area and developing expertise that others didn't have, you could create tremendous amount of value. I think a lot of those lessons came home to roost in the Crown Rock investment.

• 1:09:02Speaker 05

  Clearly, for me, it's these two guys. I'd never had any ambition as a 24-year-old kid working for an oil and gas company of getting into the private equity business. But thankfully, these guys had the foresight to do that, and incredibly thankful that they asked me to join many, many years ago.

• 1:09:19Ted Seides?

  All right, guys, last one. What life lesson have you learned that you wish you knew a lot earlier in life?

• 1:09:24Speaker 04

  I had a very low drama, no-stress upbringing. And I think when you have that, you assume everybody else has a low drama, no-stress upbringing. And I think when you run a business and you're managing people, I wish I had learned earlier empathy. Everybody's got something going on behind the curtain. I would have benefited early on in managing people at Lime Rock, understanding everybody's life circumstances may not be quite analogous to one's own, and take pride in what you have, but assume others may have something else going on.

• 1:09:53Speaker 05

  I wish, as a younger man, I was much better at accepting constructive feedback. We're surrounded by much younger people in the organization now, and I'm always quite envious of how accepting they are of feedback, even critically. I think they view that as a real tool for improvement. I wish I would have been much more accepting of that. I probably would have improved a lot faster over my professional career had I done so.

• 1:10:19Speaker 03

  I get very wrapped up and nervous about any public speaking opportunity. And I think in the last few years, I've realized that I just don't need to feel that way. And it's become much more enjoyable for me. And I've had a lot of stress over my life related to that, which would have best been avoided.

• 1:10:37Ted Seides?

  Jonathan, John Jay, thanks so much for sharing this very left-tail outcome on Crown Rock.

• 1:10:43Speaker 03

  Thanks, Ted. Thanks, Ted. Appreciate the time.

• 1:10:46Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.