Jack McClendon on Why It's So Hard to Create a New American Oil Boom

The White House wants gasoline prices to be lower, and it wants to see American oil companies drill for more oil. But of course, these ideas are in tension. If prices are going lower, why drill more? This tension has only grown sharper since the shale busts of the mid-2010s, as American producers got burned multiple times by prioritizing production over profits. So what now? How do US producers think about the recent oil price spike? How are they thinking about the rising costs of their own production, due to higher energy, labor, and steel costs? On this episode, we speak with Jack McClendon, the founder and CEO of Siena Natural Resources, an independent oil and gas company that primary buys odd lots of wells from other companies. We talk about the long-term economics of the industry, including the central role of capital markets in determining how the industry moves. He also tells us whether the show Landman is realistic. Read more:Oil Tankers Hauling US Crude Via Panama Approaching 4-Year HighThe US Oil Industry Doesn’t Want the Iran War Either Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 0:26Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 1:08Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:49Speaker 02

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• 2:27Speaker 03

  Bloomberg Audio Studios, podcasts, radio, news.

• 2:43Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:49Tracy Alloway?

  And I'm Tracy Alloway.

• 2:50Joe Weisenthal?

  Tracy, recording this April 17th. Big drop in the price of oil today on the headlines, the growing optimism that I think a ceasefire will endure. Anything could happen, but at least for now, it appears the extreme left tail scenario, like $200 oil, maybe off the table.

• 3:09Tracy Alloway?

  Right. So I'm looking at a chart of WTI at the moment, which might be a little hint as to our guests that we're about to introduce, but it's currently at around $83 a barrel down.

• 3:20Joe Weisenthal?

  The hint was that you didn't say Brent.

• 3:22Tracy Alloway?

  Right.

• 3:22Joe Weisenthal?

  Yeah, good hint.

• 3:23Tracy Alloway?

  Yeah, come on. It's a good hint.

• 3:25Joe Weisenthal?

  Yeah, it's a good hint.

• 3:25Tracy Alloway?

  Although everyone can already see the headline on this episode if they clicked into it. But anyway, it was at $112 per barrel in March, or actually in early April. God, time flies when you're talking energy crisis and war in the Gulf.

• 3:40Joe Weisenthal?

  You know, even setting aside the war, however, there's a lot that I've been very curious about, the future of the US oil industry. You know, we were in Alaska last summer, and I think one of my favorite parts of that trip was talking to that company that made the steel tubing for oil companies up on the, not the North Shore, the North Slope.

• 3:58Tracy Alloway?

  Oh, yes.

• 3:59Joe Weisenthal?

  For the companies up there.

• 4:00Tracy Alloway?

  The North Shore.

• 4:01Joe Weisenthal?

  The North Shore of Alaska, like it's Long Island. You know, the way steel prices were going to affect the break even costs of American oil producers, et cetera, and the interaction of tariffs and higher services costs, et cetera. And we know that the US produces a lot of oil and it's an exporter, but prices went up and Chris Wright, he went down to Stierwick a few weeks ago, said, please produce more. But as you've been right about, the rig counts have been going in the other direction.

• 4:24Tracy Alloway?

  Yeah, that's right. So I mean, this was also part of the Iran story, this idea that, well, if we get a huge hike in the price, if oil is going to be above $100 per barrel, then maybe we'll see some sort of supply response in the US, right? But if you look at the Baker Hughes oil and gas rig count. It's basically been trending sideways. In fact, the last available data, it fell by three. And then if you go out even further, you know, it's kind of been going sideways and slightly down since basically 2023. So, you know, we haven't seen a big supply side push. And that's despite a lot of noise coming out from the administration about unleashing

• 5:05Tracy Alloway?

  US energy and, you know, letting everyone, including your grandma, drill.

• 5:11Joe Weisenthal?

  You know, getting it right is, it's tricky for all administrations, right? Every, in theory, it's like, oh, yeah, let's produce more. There was a lot of production actually under Biden, but the administration didn't want to brag about it. It's kind of weird. And then you have an administration that does want to brag about it, but they're like, oh, and now there's a bunch of Venezuelan oil on the market, unsanctioned. So what does that mean? Anyway, here's the other thing. I'm really into the show Landman, and I really just want to talk-

• 5:33Tracy Alloway?

  I knew. This is just an excuse for you to talk about Landman.

• 5:36Joe Weisenthal?

  That's correct. And so I like, I gotta talk to someone who's just out there, independent, small oil and gas company, because I have a million questions about how realistic that is.

• 5:45Tracy Alloway?

  I like it every time we get to talk about Christmas trees of like valves and spools and casings and things.

• 5:50Joe Weisenthal?

  There you go. Well, we really do-

• 5:52Tracy Alloway?

  This is an episode for both of us.

• 5:53Joe Weisenthal?

  You really have written a lot about-

• 5:55Tracy Alloway?

  I have-

• 5:56Joe Weisenthal?

  -the technology of oil production for a long time.

• 5:58Tracy Alloway?

  Well, I wrote one article, and then I think I revisited it. But it had one of my favorite headlines of all time, and one of my favorite ever leads. But the headline was how actual nuts and bolts are bringing down oil prices.

• 6:08Joe Weisenthal?

  There you go.

• 6:09Tracy Alloway?

  And it was about standardization of oil drilling parts.

• 6:12Joe Weisenthal?

  Well, we really do have the perfect guest. Someone who is, um, who's in the game, actual got skin in the game in this space. We're going to be speaking with Jack McClendon, CEO of the small oil and gas company called Siena Natural Resources. Jack, I've wanted to have you on the podcast a long time. So thrilled you're here. Why don't you tell us, what's Siena Natural Resources? What's your business?

• 6:33Speaker 05

  Yeah, sure. Thanks for having me on. Yeah, we're just a small, independent oil and gas producer. So we operate in the, uh, the part of the segment called the upstream oil and gas industry. So that is the actual direct companies that extract the hydrocarbons from the ground. And so, yeah, our business is a little bit different from a lot of the publicly traded companies that you see, you know, the- The Exons and the Diamondbacks of the world who are drilling kind of horizontal shale wells. There are many more companies that are much more similar to mine. You know, the horizontal shale game has largely become the domain of very large companies. I mean, you've got to have scale to be able to operate in that space. We're largely a production company.

• 7:16Speaker 05

  So the way to kind of think about it is, you know, we buy assets that we think are undercapitalized, underappreciated, try to squeeze a little bit more juice out of each producing well and try to get costs down. Although there are smaller companies that that do do drilling. Um, and we have drilled in the past and we will likely drill in the future as well, too.

• 7:36Joe Weisenthal?

  Would you say you're essentially going around and buying odd lots of, um, of, uh, gas, oil and gas assets that other companies may not be getting the best out of?

• 7:46Speaker 05

  Yeah, you could, you could say that. I mean, a lot of just, as I said, a lot of the assets that we're targeting are just, they're just too small, you know, they're rounding errors.

• 7:54Joe Weisenthal?

  Yeah.

• 7:54Speaker 05

  You know, on the balance sheets of these large shale companies who, you know, are buying tens of thousands or hundreds of thousands of acres and drilling, you know, two to three miles under the ground. So it's just, we produce the same product, it's just a very different business.

• 8:07Tracy Alloway?

  And I'm reading here, it says you started this business in 2018, which I find really fascinating because 2014, 2015, the shale bust was an incredibly painful moment in time, not just if you were in the energy specifically, but also if you were in other parts of the market, like the debt market at that time. And there was crazy stuff going on at that time, like people talking about oil going down to like zero. I remember being in a restaurant and well, eventually.

• 8:35Joe Weisenthal?

  Went to negative forty.

• 8:36Tracy Alloway?

  It did go negative.

• 8:37Joe Weisenthal?

  That's a very separate thing.

• 8:37Tracy Alloway?

  But that was different. But I remember being in a restaurant and I was talking to my husband about oil prices at that time and some random guy like overheard us at the next table and got up and said like, oil's going down to, I think it was either 20 bucks a barrel or zero and then just like left the restaurant.

• 8:53Joe Weisenthal?

  That's very, that's a weird anecdote.

• 8:55Tracy Alloway?

  So it was like a very strange time in the oil market and yet you decided to start a shale company at that time. What was the thinking?

• 9:03Speaker 05

  I, I, I'm gonna, I'm gonna correct you quickly and then, and then go back into context. So it's, it's not a shale business.

• 9:08Tracy Alloway?

  Okay, sure.

• 9:09Speaker 05

  We operate largely conventional reservoirs. And so, you know, the way to kind of think about it is shale is what is called unconventional. So conventional reservoirs have much higher porosity and permeability. They are actually much. Better reservoirs from a geologic standpoint. And so for the most part, you'll hear it in the industry parlance, those were the easy, the easy reservoirs to find, right? If you go back to like the 1920s, 1930s, you know, drilling a field like the Yates Field, which is kind of one of the most prolific oil fields, you know, you were basically drilling a thousand feet into the ground vertically and they were getting, you know, 400 to 500 to 1500 barrel a day IPs, you know, so it's just the conventional reservoirs are the better reservoirs. They've

• 9:51Speaker 05

  largely been exploited. So when you say shale company, that's the unconventional reservoirs. And so that was the rock that largely was thought it was impossible to produce. Right. And really until the advent of horizontal development, well, not horizontal development so much as a hydraulic fracturing, it was because the, the pore space was just too small. And so there was no way to commercially extract oil and gas from those reservoirs. We knew the oil and gas was there. We just couldn't get it out. So that's just a little point of distinction there. That's the difference kind of between a conventional and an unconventional reservoir. So most of what we operate is conventional reservoirs. So these are, this is, these are reservoirs that were found, you know, anywhere from 70 to 100 years ago and have largely been exploited, but still have plenty of oil and gas kind of left to,

• 10:36Speaker 05

  to offer. And so just a little bit of my background. So I, I kind of grew up in the shale space. Um, you know, my father obviously played a pretty instrumental role in bringing shale gas and shale oil kind of to mainstream America. You know, I'll remind you back in 2005, and it's kind of hard to believe now that there was a lot of fears that America was actually running out of oil and gas production. I mean, I think it was as, as early ago as 2004, 2005, the country was only producing about five million barrels a day and, you know, importing anywhere between 19 to 20 million barrels a day. And so there was real concern and, you know, really, really some fears of, you know, what happens if? You know, oil runs out and low and behold, we have this shale revolution and one of my favorite

• 11:20Speaker 05

  quotes is never underestimate the ingenuity of the American oil man. And I just think it's a testament to the tenacity and grit and intelligence of our industry, largely maligned by a pretty big segments of the company that do not realize how much this has transformed our country. You know, we've gone from producing, you know, anywhere from five million barrels a day. Now we are, now we're the largest oil and gas producer in the world. We produce more oil than any company in the, any country in the world. And so, you know, it's just, it's kind of gone unnoticed. And so I, you know, I wanted to kind of get out and, and bring that up.

• 11:57Tracy Alloway?

  Sorry, I, I'm so used to saying shale as a byword for US oil production. Like I, I get the distinction between the horizontal drilling and what you guys are doing.

• 12:06Speaker 05

  And that's fair. And the majority of, of oil production in America right now is from shale. Um, you know, the largest conventional fields are largely in Alaska. You guys just mentioned the North Slope. Most of Alaska's conventional, but you know, the, the Permian Basin and, and a lot of the other big shale basins. I mean, that's where the majority of the oil comes from these days. I mean, you know, out of that 13 million barrels a day, you know, at least five comes from the Permian and that's mostly from shale. So it's, I think it's fine to kind of conflate the two, to be honest. Um, that's where most of the capital goes and that's where most of the oil comes from.

• 12:37Joe Weisenthal?

  You mentioned growing up in the business and your dad's role in making America the energy behemoth that is today. Your dad being Aubrey McClendon. One of the things I know about him was that he is a famed map, a huge map collector. And I kind of feel like all oil and gas people are getting really into maps. And I'm, you tilt your camera and I was like, is that map to your, your right shoulder? It looks like Texas, a map of Texas. Is that one of your dad's, part of your dad's map collections?

• 13:05Speaker 05

  No, it's not part of his collection, but I did inherit a lot of his loves. And one of them is, is I also love maps. That's an old map of Texas and Oklahoma, which was Indian territory back in the 1800s. I think, I think that map was, I think this map was made in like 1870. So I do really appreciate vintage maps. And so, yeah, you'll, you'll see that in the back. And, and that, that may be particular to the oil and gas industry as well too, because any good oil man, if you walk into a conference room, they're going to have maps up because you kind of got to know. Where you're drilling and what acreage you own. And as you said, there's probably a lot of that in Landman.

• 13:40Tracy Alloway?

  Well, I noticed you don't have a poster of Billy Bob Thornton in your office. However, I asked this question on behalf of Joe. How accurate is Landman in your experience?

• 13:50Speaker 05

  I mean, there are certain aspects, obviously, that that famous windmill speech that he makes is how a lot of people, a lot of people in our industry feel, and I believe it's the truth. A lot of it is obviously, there's plenty of exaggerations. I don't know too many landmen who have had a gun held to their head from a, from a member of the cartel. There's a lot of truth in the industry.

• 14:11Joe Weisenthal?

  And then going into business with the financial backer of the cartel, which is a little weird. Anyway.

• 14:15Speaker 05

  Yeah.

• 14:16Tracy Alloway?

  Wait, no spoilers, please.

• 14:18Speaker 05

  Yeah, yeah, sorry. I'm an imperfect narrator for that as well, too, because I will admit that I have not watched the show maybe as religiously as other people that have watched it.

• 14:27Joe Weisenthal?

  Actually, there's another element of Landman that I, this is going to be a little bit far afield from oil business questions, but this is something I've heard. And feel free to answer this is with any level of tact or delicacy. I have heard that a lot of the wives of the oil industry don't like it as much as the men do because of the high degree of sexualization of both Billy Bob Thornton's wife and daughter in the show. And that they, the men think, oh, it's like a great show. It shows our industry and that actually there's some gender, families in the patch and the space and the industry, there's some gender divide on the show. Does that resonate?

• 15:03Speaker 05

  You know, as, as I said, I, my, my wife watched two episodes with me and she said, this is ridiculous.

• 15:09Joe Weisenthal?

  Okay, well, then I'm, okay, okay. Well, there you go.

• 15:12Speaker 05

  So, so maybe, maybe that's, maybe I'll just leave it at that.

• 15:29Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee. So, search Barclays Brief wherever you get your podcasts.

• 15:55Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 16:37Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:18Joe Weisenthal?

  Okay, let's talk a little bit of economics. Even before the recent war in Iran, we wanted to talk because I am very interested in just like what's happening to your costs and break evens, particularly in the wake of tariffs, in the wake of ongoing services inflation, in the wake of a big dash for commodities because every there's so much building, data centers, et cetera. Talk to us a little bit about the evolution of your costs as a business in the last several years, but also maybe in the last year.

• 17:47Speaker 05

  Yeah, no, sure. I'm happy to do that and, you know, I won't tell you anything that you guys maybe haven't already heard, but. Costs in general, you know, our, our costs are kind of allocated into two buckets, right? You have your operating expenses, which are kind of fixed and variable costs. Those are the, the day-to-day costs to run a business, whether that's paying your people who are actually out in the field, you know, the cost of chemicals to treat your wells, the prices you pay for electricity to power your wells. And then you have your capital costs, which are, you know, largely tangible and intangible goods, right? So the, you know, the day rate, a cost to drill, the amount you pay to drill a well, um, the amount you actually pay for the, the physical tools and equipment that actually go into a well, you know, that's steel and metal and other human labor.

• 18:31Speaker 05

  What I will tell you is, is since COVID, and, and this is, as I said, not unique to us, is, you know, costs, costs have gone up, um, you know, personnel costs are up. And, you know, in, you know, back in the day in COVID, you know, the salaries went up across the board and, and, you know, as well as I do, once you raise salaries, it's very hard to get those back down. Chemical costs have gone up, utility costs have gone up, uh, you know, so costs in general are up, I would say about 25 to 30% for my business, really over the last five years. And as I said, a lot of that is power, a lot of that is chemicals. The biggest chunk of that is, is people, um, you know, people costs have kind of gone up across the industry.

• 19:13Speaker 05

  Capital costs, tariffs, obviously, have had a material impact on the price of steel and the price of aluminum. Those have largely gone up. What I will tell you though is recently, and this is kind of a couple, a couple of months, there has been some slack in those markets and a big part of that is kind of do what you ident, due to what you identified with the Baker Hughes rig count, you know, with prices kind of hovering in the 50s and 60s with those rising costs. The industry is just not as profitable as it once was at 50 or 60. And so, you know, there was really starting to be some slack in the rig market, some slack in the, uh, the frac fleet market. And, you know, quite frankly, all of that leads to a little bit of pricing deflation. And so generally speaking, I would say costs are up across the board, 20 to 30%.

• 19:55Speaker 05

  Even though recently, especially on the capital side, you've seen a little bit of a decrease and that is largely due to the fact that the price has been depressed and the industry was just not as profitable as it once was. And the other thing I'll mention as well too, and, and this is largely due to efforts of companies like Hemerich, and when I say companies, I mean investors. You know, one of the big reasons you had such prolific shale growth, especially in, you know, the 2010s. Was compensation, executive compensation was tied to production growth. And so you had a lot of incentives across the board to kind of grow production at all costs. And, you know, due to, as I said, you know, there have been a couple of shale busts, right? There was that shale bust in 15 and 16.

• 20:37Speaker 05

  And then you have another, you know, you've had another kind of shale bust when COVID came along. And along those, they've reformed a lot of those incentives. And so, you know, companies are increasingly rewarded for rewarding shareholders versus focusing on kind of production growth.

• 20:51Tracy Alloway?

  You know, this is exactly what I wanted to talk to you about, which is the capital situation. Because one of the running themes on our, our show is this idea that you can have these boom bust cycles that then like leave a lasting scar on the industry. And I think coming out of the bursting of the shale bubble, a lot of energy producers suddenly decided like, well, we're not just going to spend a bunch of money to expand. We're actually going to pay dividends to our investors. And it's all about capital discipline and being very, very certain about what we're actually spending on and the return for investors. What's the capital situation been like for you? Just, you know, going from 2018 to now, how hard was it to actually convince investors

• 21:35Tracy Alloway?

  that, you know, you're not just going to spend money in an unconstrained way? And how difficult was it for you to compete with some potentially bigger players who are also fighting for that same capital?

• 21:48Speaker 05

  I'll break that into two parts. You know, I think, I think the industry has had to do a lot of explaining and a lot of, you know, there's been a lot of kind of show me, you know, investors wanting to see that there actually is going to be some capital discipline. And I think if you look really over the last two years, you know, we've seen, we've seen that. And I think even with this latest price spike, you've seen that. I mean, people aren't rushing to deploy rigs. I mean, you've had one large company, Continental Resources, because of, you know, one of the largest private companies say they're going to increase CapEx. But I think for the most part, you know, the, the industry has been able to attract more capital by actually showing that, that discipline. And I think part of that too is just you've had a lot of consolidation in the industry, right?

• 22:30Speaker 05

  I mean, when I was first getting started as an investment banking analyst in 2008, I don't have the number off the top of my head, but it felt like there were 70 to 80 kind of publicly traded companies. And you know, now, I mean, with all due respect to lots of kind of mid-sized companies, there's really only about 10 companies that actually matter, right? You know, as far as the publicly traded companies go, and the two biggest ones, who have really kind of started to corral the market for shale are Exxon and Chevron, right? And those guys, those guys have massive, massive balance sheet, integrated operations. And yeah, I mean, you just, you know, it's just a little bit kind of different. There's still a cowboy element to it for sure. But yeah, I mean, I think in order to attract capital, the industry has had to show discipline.

• 23:14Speaker 05

  And I think we've done a pretty good job of doing that over the last two years. I mean, the, you know, kind of the days of a million barrel a day growth year over year are largely gone. And some of that is due to geologic constraints, although, you know, I will reiterate, kind of never, never to underestimate the ingenuity of the American oil man. But I think another part of that is obviously due to capital and, you know, you've had, you know, two, three crashes really in the last 10 years. And so, you know, investors, investors really are kind of holding everybody's feet to the fire on that. And then I'll say is kind of, as it pertains to my business, you know, as I said, there are a lot more of my businesses than there are of large shale companies. I mean, this is the business of operating older oil and gas assets, right?

• 23:57Speaker 05

  And like any business, when things are older, they break more. And so, yeah, no, it's, it's, it's difficult and it's challenging, right? Because you have a lot of volatility and, you know, you're dealing with wells where operating costs are higher, right? We move more water, so I need more electricity per well to move more water. Our operating costs are higher. And so you've got to do a little bit more convincing on that cost discipline side when you're raising capital. But what I would tell you is that the pockets of capital that I'm kind of talking to are going to be very different than the pockets of capital that the larger shale guys are talking to. I mean, for the most part, the large shale companies are either publicly traded and so you're talking to, you know, people that invest in public markets or they're large,

• 24:40Speaker 05

  institutionally backed, private equity capital, right? So you have really kind of four to five large energy, private equity backed firms, most of them in Houston and Dallas. And, you know, they wield large sums of capital, kind of in the nine, you know, nine to 10 figure range. And for the most part, That's who's backing shale. You've got to have scale now. It's a consolidation game. And yeah, it's just, it's different from my company where we're largely kind of talking to family offices, alternative investment vehicles, you know, people who are looking to put smaller quantums of capital to work, you know, to, to kind of find a unique way to play the space. Cause really for these larger companies, it's, it's the Permian or bust, right? I mean, that's,

• 25:24Speaker 05

  that's really, that's really kind of the story.

• 25:27Joe Weisenthal?

  This is great because this allows me to bring it back to Landman again, which is that the Cooper character, it seems like his business is kind of like yours. He went around and there were these old wells that were producing something and he's like, there's probably more potential. And then this was like the key thing. He went out to some like small, hard money lender that was based out of Fort Worth and they gave him a good, he gave him a good deal. And then the dad said, there's no way the deal could be that good because I know how financing works. So like, there must be a catch here and there was, I won't get into it. But talk to us about the structure. Okay. So you're, it sounds like you're kind of like Cooper because you're finding these wells for that other people may like be ready to discard. You're going to non PE scale financiers,

• 26:10Joe Weisenthal?

  although his was, um, again, related to organized crime. I assume yours isn't, but talk to us about some of the terms of like, what is it? Like, is it like, you're going to pay me back a hundred percent plus 20% interest until we break even? Like, how are some of these financing deals structured?

• 26:26Speaker 05

  Yeah, no, that's, that's a really good point. I mean, you know, largely what I found is on the equity side. It's, it is similar to traditional private equity, right? Where, but you know, money is invested and then you get money back plus a rate of return. And then you have a waterfall structure, which is based on return of capital. And that can be, you know, either kind of based on an IRR basis or on an ROI kind of absolute return of capital. I've seen it both ways, but that's kind of largely the way that the equity, equity capital works. So it is actually pretty similar to a lot of the traditional private equity firms. You know, on the debt side, it's largely bank capital, which you know, is, is kind of seven to eight percent. And then there are, you know, some of these alternative firms. And so these are more kind of structured credit

• 27:08Speaker 05

  providers. You know, there are some that largely just operate in the energy space. And you know, you're paying 400 to 500 basis points above what you would pay a bank, but they're willing to lend a little bit more aggressively against the collateral, maybe give you a little bit more credit for. Reserves you have that are not currently being produced. Okay. Currently being produced. And, you know, they'll, they'll, they'll ask for a little bit of upside. So whether that's in the form of like an overriding royalty payment. So just think about that as like a, uh, basically just a cut of the revenue. It's like similar to like a royalty deal, deal in music. So for every barrel that gets produced, maybe they get a little bit of percentage. And this is obviously after they've gotten their money back. And so the way the capital works for my business is not all that dissimilar to the way capital works for, for larger businesses.

• 27:52Speaker 05

  Um, as I said, it's just, there's, there's a couple of different ways to play the space, but traditional equity investment is pretty similar to, you know, even the larger kind of private equity investments.

• 28:02Tracy Alloway?

  So when the price of oil starts going up, say we're talking late March, early April, and WTI is climbing above a hundred and then it hits a hundred twelve. What actually happens in your business and what are the thoughts that are going through your mind? Like, do you suddenly get a bunch of calls from potential investors going, oh, you know, we're interested in putting some money in the company? Do you start thinking like, well, I need to expand production and maybe ramp up CapEx? Or are you just, you know, sitting there waiting to see what actually pans out with the Gulf situation? How does it, how does it all work?

• 28:38Speaker 05

  That's, no, those are really good questions. I mean, obviously there's, there's excitement, right? Because, because, you know, the, the, when it, when a price, when a price kind of jumps like this, obviously your costs don't, don't rise in tandem. So that is, that is profit on top of everything. What I will tell you in two thousand twenty-two, you know, last time we had elevated pricing, you know, where, and that was largely kind of based on the fear of supply loss that never really happened, right? The, you know, everybody was saying that the, you know, Russians were going to lose three to four million barrels a day and, you know, we need, so we need prices to kind of stimulate more production. So everybody got really excited. Everybody got to work. You know, I will say for a company our size, we authorized a fairly large capital plan because as I said, I thought that there was some bite to that bark.

• 29:20Speaker 05

  And what happened was, is I authorized everything in May of June when oil was at a hundred and then first production came on in August and September when oil was back to seventy. So, you know, you had this, you had, you had this big rise in prices, a commensurate rise in costs, obviously not as high, but costs go up. I mean, Oil and gas service providers aren't dumb, right? You know, they see the price of oil go up twenty to twenty-five percent and they're like, well, you know, your day rate on a workover rig has just gone from a hundred and seventy-five to two hundred and fifty. Yeah, I mean, it's those, the, the service, the service companies aren't dumb. Um, the chemical providers might say, well, you know, this is your, your, you know, this chemical you use, this xylene you use is gonna go from, you know, twenty bucks a gallon to forty bucks a gallon, because I know you can pay it, because I, I have a computer and I can see what the price of oil is as well, too.

• 30:05Speaker 05

  So, so, you know, what I would tell you, and, and these are in conversations I've had with a lot of other people in our industry. I talk to people on the industry on a day-to-day basis. I have friends at work for large operators, large capital providers. I have friends on the service side, friends in private equity, friends in investment banking. I mean, I think everybody is very cautious right now. You have a president right now who, on the record, demonstratively, on a daily basis, has shown his disdain and hatred for high oil prices. You know, a big part of that is, I think, he kind of sees oil prices as the easiest and most visible way to keep inflation in check, which leads to kind of his goal of getting uh, interest rates down, which is beneficial for a lot of other sectors.

• 30:46Speaker 05

  And so, you know, I, I think, similar to just about every other industry player here, I think we saw prices go up. And, you know, this is not some Chinese super cycle like you had in the early ops, right? Where like effectively you had to, you know, the, the company, the, the country was industrializing kind of in front of our eyes. And so you had this step change in demand growth, which, you know, any oil man will tell you, that is, that is kind of the beautiful increase in prices, right? Versus this sudden, you know, geopolitical-driven supply shock. When prices rise this fast and this high, you know, it's really kind of not beneficial for anybody. And so I think, you know, the, the, the tenor of the industry and the tone of the industry is really kind of wait and see. I mean,

• 31:28Speaker 05

  sure, but, you know, you're, you're gonna have some companies that are gonna look to put a rig to work, are gonna increase CapEx, but, you know, we're just able to pay our debt down a little bit more. And, uh, you know, we're gonna kind of cash flow and I'm, I'm really interested to see, you know, kind of where everything settles out. You know, you obviously had that out, announcement today that Hormuz has been open, but if you listen to the Iranians, they've been saying Hormuz is open. You know, for the last six weeks, you just, you know, you gotta play by our rules and you gotta pay, play by the, uh, you know, the Iranian Republican Guards rules. So I'm not quite sure what has changed. But you know, I tweeted this out a couple of days ago, you know, the market kind of clearly thinks that the war is over and you know, you're kind of seeing that wash today in prices. And so I just, it'll be interesting to see where prices are going to settle out.

• 32:13Speaker 05

  I don't think we're going back to the 50s or 60s. You know, are you going to see, you know, to get back in the landman, are you going to see that sweet spot at 75? Um, you know, that, that would be a better baseline for us than 65 and 60. And so to reiterate what I said earlier, I think the, you know, I think the industry is largely kind of in a wait and see mode.

• 32:32Tracy Alloway?

  So when oil prices collapse, like they seem to be doing today, do the oil service providers start cutting their prices as quickly as they raise them?

• 32:42Speaker 05

  They do not.

• 32:43Tracy Alloway?

  Yeah.

• 32:44Speaker 05

  They do not. You know, you were starting to see some fuel surcharges on some of those bills. I would imagine if you settle back in the 70s or 80s, those are going to kind of go away. And part of that is kind of tongue in cheek, right? You, the operators always play a game with the service companies. So it, it, it, it remains to be seen, as I said, there's, there's just so much noise in the market right now. I mean, I can't remember the last time we ever lived in an era where, you know, a, a, a tweet could move the price of the world's most liquid commodity, five to 10%. And so, yeah, I mean, I, I think everybody's just kind of waiting to see where this will settle out. It's effectively impossible to plan a business, you know, with a price as volatile as it is right now.

• 33:39Speaker 01

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• 35:02Joe Weisenthal?

  Getting burnt seems like just as much as part of the industry is making a lot of money. And you get on both sides in 2015. And then you mentioned the fizzling out of the post-Ukraine boom, et cetera. And then here, of course, the war and the spike was too short to make any big plans. But like, and then you have this president who clearly wants more production, but a drill, drill, drill, but also wants lower prices. And these things are in conflict. Could you see a set of conditions again in which there is real, meaningful expansion of US drilling or et cetera? Or what would it have to take? What would be the constellation of events that would have to happen for like, okay, we're going to really, we're going to really ramp this out again?

• 35:46Speaker 05

  Yeah, that's a good question. I mean, as I said, I hate to, I hate to use round numbers, but that's just

• 35:51Joe Weisenthal?

  Yeah.

• 35:51Speaker 05

  kind of the world we live in. And I think if you saw a sustainable price above 80 over a prolonged period, maybe call it four to eight months, I think you would see a supply response because there's, you know, there are a lot of, there are a lot of shale wells that work at 80 to 90 that don't work at 50 to 60. Depending on who you talk to in the Permian, you know, there's kind of anywhere between five to 10 years of what you would call core inventory left or economic inventory left. That obviously change, that's obviously largely a function of price as well as geology. So a higher for longer price, I think you would, you would, you would see a production response from the industry. Now, you know, do I think we're going to go back to the days of growing one to one and a half barrels a day? You know, I, I don't, I don't think so.

• 36:35Speaker 05

  But could you see, you know, could you see an era where, you know, we're growing 300 to 500,000 barrels a day? Yeah. I mean, I think that that's possible, but as I said, you would, you would need to see prices settle above 80 for a prolonged period of time, I think, to kind of see a supply response. Cause even shale, which, you know, is kind of called a, um, that's a, that's a short, short supply response, right? That's about as short as it gets.

• 36:58Tracy Alloway?

  The short barrels.

• 36:58Speaker 05

  Yeah, it's about as short as it gets, right? I mean, you've got, you know, but it's still, it's still a four to six month response time, right? I mean, cause a lot of the, a lot of the rigs that you saw kind of start to roll off, you know, that's a, that's a six month lag, right? So you had the liberation day tariffs where prices kind of cratered from, you know, 70 to 57, and then we've kind of bumped around the 50s or 60s. But even decisions that get made in, you know, got made in April and May of, of 2025, you didn't really start to see the rig and supply response for four to six months later. And that's largely, that's largely kind of the turnaround time here. And so, you know, as I said, I think, I think you would need to see higher for longer prices for the next couple of months for us to see a meaningful supply response.

• 37:42Speaker 05

  But, I mean, I, and, and, and this is kind of the consensus view of, uh, you know, most of the sell-side oil, uh, research analysts that I follow as well too. But, you know, the, as I said, never underestimate the ingenuity of the, uh, the American oil man.

• 37:56Tracy Alloway?

  Well, setting price aside, one of the things the administration said it wanted to do to get, you know, oil pumping is basically streamlining, you know, environmental review and the leasing process, basically liberalizing the regulatory environment around starting new drilling projects. And I know you're not necessarily specialized in exploring, you know, for new locations, but do you get a sense from your colleagues elsewhere in the industry about whether or not that liberalization has actually, you know, translated into people drilling more or thinking about drilling more?

• 38:31Speaker 05

  Yeah, you know, I mean, I, I, I think it certainly helped. But for sure, I mean, price is an exponentially higher dictator, you know, of whether or not somebody kind of chooses to drill. Yeah, I mean, a- a- as I would say, you know, there's the old saying in the oil patch that, you know, Democrats are actually very good for the oil and gas industry and, you know, but they're anti-industry.

• 38:51Joe Weisenthal?

  Yeah.

• 38:51Speaker 05

  And that Republicans are very pro-industry, but they're actually very bad for the industry. You know, and that's kind of largely a function of some of those regulations. So I'm not going to say that they don't play an impact. I mean, there's certainly is an impact. And you know, to the extent that the, you know, the Biden administration or some of the other Democratic administrations have been more punitive to the industry, you know, that does effectuate a supply response, you know, that is largely beneficial to the industry. But I would tell you, I think for the most part, you know, those regulations matter, but they don't matter nearly as much as what the price of the commodity is and then the cost of the inputs is. I mean, that's ultimately, as I said, that's an exponentially more important factor than,

• 39:35Speaker 05

  you know, whether or not there's 50,000 acres in Wyoming that are now open for drilling that weren't open for drilling.

• 39:41Joe Weisenthal?

  Tell us a little bit more about the politics. You know, as you mentioned, we've observed, everyone's observed this, that actually the oil industry, it's like, why do they hate Democrats so much? It always seems like the price of oil is high under them, et cetera. I understand publicly who's on whose side because of various affiliations, et cetera. But like, how do people talk about politics at a country club in Fort Worth or Midland or something like that?

• 40:06Speaker 05

  Well, I don't belong to any country clubs in Fort Worth. But I, yeah, I'm going to try to use my words carefully here.

• 40:13Joe Weisenthal?

  Yeah, of course.

• 40:13Speaker 05

  But you know, obviously, there's no surprise that most of the oil production in this country is done in Republican states, right? I mean, Texas, Oklahoma, Louisiana, I mean, New Mexico, I guess, is a democratically run state. The parts of New Mexico where the oil is produced are very, very conservative. And so, yeah, you know, I would tell you the politics are tricky because obviously, oil country overwhelmingly supports Trump.

• 40:38Joe Weisenthal?

  Yeah.

• 40:38Speaker 05

  But I also think, you know, behind closed doors, there's a lot of frustration in the industry of, you know, Trump, you know, actively kind of trying to jawbone oil prices down. You know, I think that there are a lot of people that wish that, you know, as I said, I hate to kind of bring Landman back up, that we could just kind of find some happy price equilibrium, right? Whether it's- You know, 70 or 75, you know, not, not 55 or 50, which I think was kind of what they said is their, their target price, but you know, not, not 90 or 95, which is a price that, you know, hurts demand. And so, yeah, I mean, the, the, the politics are, you know, the overwhelming majority of the oil industry is Republican and conservative. But yeah, I think a lot of people are very frustrated by some of the administration's rhetoric and policies over the last year.

• 41:23Joe Weisenthal?

  You know, I noticed on your Twitter profile, it says you're based in Colorado, but you clearly have the Oklahoma roots there. Big fan of the Oklahoma City Thunder, OU Sooners. You say you're a political independent. The senator from Oklahoma just moved to the White House, Mark Wayne Mullen. There's going to be an open seat in 2026. You're going to move back to Oklahoma and run as a independent? Is that a, any possibility of trying to vie for that seat?

• 41:47Speaker 05

  No.

• 41:48Joe Weisenthal?

  An independent oil man is like replacing, I don't know, I could see it.

• 41:51Speaker 05

  Yeah, no, no, no interest, no interest in politics right now. You know, as anybody would tell you.

• 41:57Tracy Alloway?

  Right now.

• 41:57Joe Weisenthal?

  No, no interest in politics right now.

• 41:59Speaker 05

  Yeah, I've got, I've got young kids and, you know, working on growing a business and just politics is, politics is increasingly a, you know, a pretty, a pretty nasty game, especially in a country as polarized as ours.

• 42:10Joe Weisenthal?

  We've noticed.

• 42:11Tracy Alloway?

  You know, you referred earlier to this idea of like, short cycle shale or short barrels from the shale patch. And this is one thing I'm curious about when, you know, given that, again, I'm looking at the Baker Hughes oil rig count, but like, has that assumption kind of eroded, given that a lot of these basins have matured? And also, you know, we spoke about capital discipline before and investor expectations. It doesn't seem like shale is as responsive as it used to be.

• 42:40Speaker 05

  Yeah, I, I mean, I, I think that that's right. And I think that that does have, you know, a lot to do with the consolidation in these basins. You know, the other thing that I'll say too, and this is why the, the rig count, in a certain extent is honestly, it's not as important maybe as, it's still very important, but maybe not as important as it was five to 10 years ago. And that's largely just due to, to the ingenuity of the American oil man. I mean, you, you know, back when I worked for a shale company, this is in 2015, 2016, we were drilling wells in the Permian Basin. And a seventy five hundred foot lateral, which is, you know, effectively like a mile and a half. You know, took anywhere from kind of twenty five to thirty five days to drill. The industry is largely largely doing it under ten now.

• 43:21Speaker 05

  So just the amount of time it takes to drill and complete these wells is just dramatically shorter than it was even ten years ago. And I just, people who don't live in the space, I think, just don't do not realize how much more efficient these companies have become at drilling these wells. And so effectively, you can do more with less. And so, as I said, you know, the the rig count is important, but it is it is less important, maybe, than it was ten years ago, just because, as I said, these these companies can drill these wells so much faster um and get production on kind of so much quicker than they could, you know, even even ten years ago. But, yeah, I mean, I I I would agree with you that I would say on a whole, I think the industry is is probably less responsive to some of these price signals.

• 44:03Speaker 05

  And I think just, I think honestly, just a big part of it is, you know, we've been burned pretty bad, you know, three times in the last ten years. And so it's, you know, kind of one of those, uh, you know, fool me once type anecdotes, I guess.

• 44:16Joe Weisenthal?

  I would never underestimate the ingenuity of the American oil man. But I all, you know, in addition to the engineering prowess and, you know, get it's and it's it's all really impressive. Is that all like? You have to be a little messed up in the head? Like, is that also like, I get the, I get the prowess part, but is there also? You know, in in commercial real estate, uh, I have a friend and he talks about like the sickness that people in his industry have because they're all just like hyper optimists and that nothing can convince them that they can fail. Is that also part of why we should not be underestimating the industry? Because there's something going on in the heads of people like you?

• 44:53Speaker 05

  Yeah, people in this industry have a certainly have a have a high pain tolerance. You know, I think, uh, there was a saying in the oil patch that the difference between an oil man and a smart oil man is the the smart oil man makes his money in oil and gas and then puts it in real estate. You know, it takes a, it takes a kind of a particularly sick individual to to live through these kind of boom and bust cycles. And, uh, Yeah, what you know, what I will tell you, though, is that we are resilient and everybody in the industry firmly believes in what they do. And I think that's a big part of it, right? I mean, you're talking about extracting a substance from, you know, under the ground that literally powers everything in our world, right? I mean, I think there was, I read some, I read some quotas in an article that, you know, without new oil and gas production,

• 45:36Speaker 05

  if we just were to basically shut off oil, all oil and gas, you know, development and production, that, you know, 60% of the world would starve in six months. And so, you know, I think that there is, there's obviously a little bit of, you know, you gotta have a high pain tolerance. But I think the other thing, too, is that everybody in this industry really believes in what they do. And, you know, we, we create and we produce a product that powers the modern world. And so I think there's a tremendous amount of pride in that as well, too. And I don't think you'll talk to anybody in the industry that does not feel just an enormous sense of pride in what we do. And, you know, I think, you know, someone said this to me once, and I firmly believe in it, and they said, you know, Jack, one of the things your dad did that I firmly believe in is, you know, without the shale

• 46:18Speaker 05

  revolution, there would have been a lot more wars. And I really do believe in that because I think that this resource abundance that, you know, we've kind of largely taken for granted over the last 10 years has prevented a lot of conflict, believe it or not, because, you know, America is largely, we're not wholly energy self-sufficient, right? There are different blends of crude. We largely produce one type of oil, which is called light sweet. You don't just produce oil and put it in your car, right?

• 46:45Joe Weisenthal?

  Yeah.

• 46:45Speaker 05

  It's got to go to refinery, it's got to get broken down into kind of various products, and you need different blends of crude oil to be able to do that. So we still do import some crude from other parts of the world, whether it's Venezuela, or the Middle East, or Canada, or Mexico, you know, that's blended together to kind of make the products that power the modern world. But, you know, just, just the fact that, you know, we're not worried or running of, you know, talking about running out of oil anymore, I think is just a, you know, just a tremendous achievement that I just, people don't kind of talk about enough. And I think they should.

• 47:17Joe Weisenthal?

  Jack McClendon, really appreciate talking to you. Really glad you came on Odd Lots. Thanks for indulging our landman related questions and everything else. And let's check in again in six months or a year, or maybe seven years when the 2032 election is happening in Oklahoma and the kids are a bit older.

• 47:35Speaker 05

  Well, thank you so much for having me on. As I said, I love listening to your else podcasts. Appreciate it.

• 47:53Joe Weisenthal?

  Those stats about the increased efficiency of the drilling, et cetera, always like blow my mind.

• 48:00Tracy Alloway?

  They're insane. And the story that I wrote, I guess it was like back in 2016, was actually super interesting to me. And it was literally about like the oil companies getting together to standardize a bunch of drilling components that hadn't been standardized before.

• 48:15Joe Weisenthal?

  Yeah.

• 48:15Tracy Alloway?

  And so even eking out these tiny improvements in cost end up like adding to the overall supply and enabling people to keep drilling even when the benchmark price is really low. I just found it really fascinating.

• 48:29Joe Weisenthal?

  It's a, it is really fascinating. You know, and also it might be a future episode for us to do at some point, which is the production refinery mismatch in the United States and why it is the case, right?

• 48:40Tracy Alloway?

  I meant to ask that question. Oh, I'm kicking myself.

• 48:43Joe Weisenthal?

  You know, like we have all these refineries, but mostly they were built from the era of when we imported a lot of ore, right? And we're producing, then we start producing a lot more. But I think there's like a new refinery opened pretty recently, but prior to that, I don't think like a new refinery had opened in the US like 50 years, some crazy number.

• 48:59Tracy Alloway?

  I always hear different things about this because I hear that story. And then I hear other people say that like, actually, the idea that we can't refine, light, sweet crude, Joe, that's, that's just for you. Sorry. Is actually like a bit of a myth that there is some capacity. So I would be very interested in this topic.

• 49:17Joe Weisenthal?

  Jack, get back on the phone.

• 49:18Tracy Alloway?

  I know. I actually wrote this down in my notes and then just started thinking about Landman, obviously, and completely forgot to ask it. So next time.

• 49:26Joe Weisenthal?

  Next time.

• 49:27Tracy Alloway?

  But there's a lot of interesting stuff coming out of that episode. One of them was this idea that when the price of oil increases, your costs go up too, because all of your suppliers can see that you're making more money and they can ask for more in return. I, you know, that's a little bit obvious, but I'd never really considered it before. And then the other thing that stands out is just that tension from the Trump administration where, you know, you want American oil producers to drill and boost production. But at the same time, you're very vocal about keeping gas prices low. And the industry is very aware of those statements as well. So.

• 50:01Joe Weisenthal?

  By the way, in the last couple of minutes, another headline said Iran would reclose the strait if the US blockade persists. So we'll see what's going on there. But it is interesting also, this element of like, and Jack talked about it, the show Landman talked about, finding that sweet spot. But it doesn't seem like it, like, it doesn't ever seem like it stays. It's a pretty volatile thing. You don't get the sweet spot time for very long.

• 50:26Tracy Alloway?

  No.

• 50:26Joe Weisenthal?

  Yeah.

• 50:27Tracy Alloway?

  Doesn't seem like it. I do think you have to be a particular type of person to be in this industry.

• 50:34Joe Weisenthal?

  Definitely.

• 50:34Tracy Alloway?

  Shall we leave it there?

• 50:35Joe Weisenthal?

  Let's leave it there.

• 50:36Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 50:41Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest, Jack McLendon. He's at Jack underscore McLendon. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashell Bennett at Dashbot, and Cale Brooks at Cale Brooks. And for more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 51:05Tracy Alloway?

  And if you enjoy Odd Lots, if you want us to do a follow-up episode on UBS Refining Capacity, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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