Under the Radar - November 19th, 2024

It should not be surprising that the new administration will be more friendly to the oil and gas business than the outgoing crowd.

On several occasions, the Biden administration was openly hostile toward oil and gas and promised to end the industry and develop 100% alternative energy supplies.

The fact that doing so was impossible for more reasons than we have space to outline never really bothered Biden administration folks.

Energy transition and the Green New Deal were cornerstones of the policy set forth by the Biden team, and little things like facts and physics could not be allowed to get in the way.

We need to have a serious conversation about what is really happening in the oil and gas business because there is a lot more to this story than what you’re hearing from the usual sources.

Let us start with a simple truth: The shift from the Biden administration’s openly hostile stance toward oil and gas to the new administration’s “Drill, Baby, Drill” enthusiasm represents two extremes, neither of which reflects the complex reality of today’s energy markets.

The current situation in oil and gas reminds me of trying to solve a puzzle: Every piece you place reveals two new gaps to fill.

The challenges are significant and interconnected.

Consider the workforce situation. When oil prices crashed, and everyone advised oilfield workers to “learn to code,” many of them actually did just that.

Others found their way into trucking, started small businesses, or found other careers that did not involve long shifts in punishing conditions.

The uncomfortable truth is that most of them are not coming back.

The average oilfield worker is now over 45, and new graduates are choosing tech companies over energy firms.

It is hard to fault their logic.

The equipment situation is not any prettier.

During the pandemic, a substantial amount of equipment was sidelined. Some deteriorated, some were cannibalized for parts, and some simply vanished into the ether.

Replacing this equipment is expensive, and it is complicated by inflation-driven steel prices and persistent supply chain issues.

Finding qualified maintenance personnel for older equipment is becoming its own special challenge.

Let’s talk numbers, because that’s where reality really hits home.

A well that cost $6.5 million to drill in the Permian Basin in 2019 now runs about $8.5 million, assuming you can secure both crew and equipment.

You need sustained oil prices above $70 per barrel at these costs just to break even. Below that, you are essentially converting larger denominations into smaller ones.

But here is where it gets interesting—and where the real opportunity lies.

Enter John C. Goff, a serious operator who understands that real wealth comes from owning tangible assets. In the early ’90s, Goff partnered with Richard Rainwater to build Crescent Real Estate.

They did not rely on financial engineering.

They simply bought quality properties at reasonable prices and managed them well.

The result? They took a $500 million company public in 1994 and sold it to Morgan Stanley in 2007 for $6.5 billion.

In November 2009, Goff reacquired Crescent Real Estate in partnership with Barclays Capital for pennies on the dollar. In December 2017, he purchased Barclays’ interest to once again become the principal owner of Crescent Real Estate.

That is the art of the deal.

Goff is now applying these same principles in the energy sector through Crescent Energy in a partnership with KKR KKR, a firm that knows a thing or two about value creation.

Their recent $2.1 billion acquisition of SilverBow Resources significantly expanded their Eagle Ford basin operations, making them the second-largest operator in that region.

Crescent's approach is methodical and disciplined: it acquires quality assets at good prices, maintains operational excellence, and focuses on shareholder returns.

With shares trading at about 80% of book value, a 3.45% dividend yield, and analysts projecting substantial earnings growth, Crescent Energy represents the kind of value proposition that catches my attention.

The real opportunity in oil and gas is not in drilling new wells.

It is in acquiring existing operations at attractive valuations.

Significant industry consolidation is likely in the coming years, making “Buy, Baby, Buy” a more compelling strategy than “Drill, Baby, Drill.”

This is how sustainable wealth is created in the energy sector.

It is all about staying under the radar and buying real assets at reasonable prices.

It is not particularly exciting, and it will not make headlines like the latest tech IPO, but it is a time-tested approach to building lasting value.

For investors who appreciate the principle of buying quality assets at a discount to their intrinsic value, the current environment in oil and gas presents some interesting opportunities. The key, as always, is maintaining discipline and taking a long-term view.