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Hill Vaden
Alright, welcome back to EnergyCents- an IHS Market podcast focus on all topics. That's it on the intersection of energy and finance. This is your host hill Vaden here today with Andy Byrne and Raoul LeBlanc - Raoul has been on this show many times and I'm glad to have him back and Andy I think this is the first time that we've got you so welcome.

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Andrew Byrne
Thank you Hill.

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Raoul LeBlanc
Thanks Hill.

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Hill Vaden
So we are here today to almost do kind of an unanticipated Part 2 conversation to the one that I had last week or two weeks ago with a several weeks ago. I guess with Reed and Karim on oil supply, and as we talked about oil supply, really that the central theme that kept coming back was, you know that there's a hold. The line mentality from these operators, and in some respects from OPEC as well.

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Hill Vaden
As we've gone into a period of more stable prices or higher prices, but there's a supply risk that they could.

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Hill Vaden
Change it all to the to the negative prices and Andy you had published a report to clients this week.

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Hill Vaden
With the reference to the show Temptation Island that a lot of these operators are sitting here with cash flows in a sense, you know, metaphorically, holding hands of you know we gotta, we gotta hold the line looking at the oil.

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Hill Vaden
Will operators specifically and the reinvestment rate being as low, perhaps as we've seen it in decades, and I think you release it. It released a similar report on gas operators as well, I guess. First, before we get into the summary reports is just a gas operated report, which I haven't read, have a.

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Hill Vaden
Have a sitcom reference or a reality TV show reference in there.

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Andrew Byrne
No, I went straight on that one.

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Hill Vaden
Alright, well, you know maybe could you summarize some of the information that we come from those reports and how that's relevant to that supply discussion that we talked about couple weeks ago with Reed and Karim.

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Andrew Byrne
Yeah, for the oil focused E and PS what the study found was in the first quarter. The median cash flow reinvestment rate was came in at 43% so that.

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Andrew Byrne
They're vastly under spending cash flow. Found that 75% of the companies in the group spent less than 50% of their cash flow during the during the quarter, so you talk about solidarity. There was total solidarity, nobody was spending anything close to cash flow. Now this was a lot less than what they have been been doing historically.

00:03:01.730 --> 00:03:01.750 Raoul LeBlanc Uh.

00:03:06.600 --> 00:03:07.150 Andrew Byrne I mean.

00:03:07.800 --> 00:03:13.660 Andrew Byrne Using a cash flow reinvestment rate as a sort of a target spending target for the companies, that's new.

00:03:14.840 --> 00:03:24.350 Andrew Byrne And they've been sort of guiding right now for a long term guidance of 70 to 80% of cash flow. They'll be. They anticipate spending longer term.

00:03:25.620 --> 00:03:32.230 Andrew Byrne And with you know the rest of it as sort of a return of capital to shareholders kind of thing. Dividends and share repurchases.

00:03:33.290 --> 00:03:34.180 Andrew Byrne And so.

00:03:35.190 --> 00:03:45.800 Andrew Byrne Coming off of flash years challenges and then pandemic and everything we anticipated the group spending less than that target range.

00:03:46.460 --> 00:03:53.150 Andrew Byrne We were thinking more of something like 60% for this year. So right now we're running well below that now.

00:03:52.710 --> 00:04:12.390 Hill Vaden And this is really two to three years, maybe longer in the making for you. And I were talking a couple years ago an looking at executive comp. And all these things that were changing as the sector and in some ways what was UN investable were considered an investable, but by others and it seems like executives have really kind of gotten the message.

00:04:13.440 --> 00:04:23.890 Andrew Byrne Absolutely, you know they've totally changed things around. If you want to take a little bit about executive comp, you know back in 2014 that kind of timeframe back then.

00:04:25.370 --> 00:04:26.030 Andrew Byrne The.

00:04:27.340 --> 00:04:57.190 Andrew Byrne A cash bonus objective plans, which are all spelled out in the SEC reporting they were overwhelmingly weighted to just straight volume growth, so management's we're getting bonused they were getting paid for volume growth while now that is completely flipped and so rather than dominating volume growth objectives returns return of capital shareholders and free cash flow are now dominating.

00:04:57.430 --> 00:05:14.460 Andrew Byrne The weightings of their cash payouts so they tell them investors you know we're going to focus on these things. Well now they're getting paid to follow those things so so their incentives are aligned with what investors are telling him to do.

00:05:15.230 --> 00:05:38.020 Hill Vaden Which is a real shift role that you know when I think back to this from, you know, kind of decades ago when you hear these quarterly calls that there was almost a kind of a gunslinger or swashbuckling type attitude with. Because these companies are growing so fast and so furious and all of the metrics books talked about were around things like dollar per acre with all the upside.

00:05:39.480 --> 00:05:43.650 Hill Vaden So all of that undrilled acreage looking at some of these quarterly calls.

00:05:45.300 --> 00:05:52.980 Hill Vaden First quarter of 21. The whole narrative has become one of prudence, and you know, I'm sure there's exception.

00:05:51.510 --> 00:05:52.240 Raoul LeBlanc Yeah, well.

00:05:53.780 --> 00:06:24.440 Raoul LeBlanc Yeah, no I I think you're right. So there's a couple of things that that have really happened at an you know, as Andy points out, they were on their way to this for awhile, but it was a little bit like Saint Augustine, you know, used to say or give me give me chastity, but not quite yet right? So they were they were going to get there right? But they're like yeah, in another couple of years will be there. Well, the pandemic really actually accelerated this process for two reasons. Number one is their basic lines.

00:06:24.490 --> 00:06:55.880 Raoul LeBlanc Yeah, you know, came under control, they are considerably lower this year, but that's like losing weight by amputation, right? It's like, OK, yeah, fine. I just whacked my production and and didn't drill any enough wells last year so that was painful to do. Button has to pay off this year. OK? The second thing is that their capitalist frankly probably more efficient than it will probably set a record this year for capital efficiency because their drilling bunch of du CS and the service sector costs which are rising are still rock bottom from from the downdraft. And frankly.

00:06:55.960 --> 00:07:25.690 Raoul LeBlanc There's a big oversupply of iron, so they got a couple things helping them this year, right, and then the other thing is honestly, of course they got lucky on the price a little bit right? So we started the year an everybody planned on a budget. You go back to November, December. We were actually planning budgets and they were expecting something, maybe high 40s, low 50s fam. All of a sudden. Now we're above 60 version of 65, sometimes higher. That is a lot of incremental cash.

00:07:25.970 --> 00:07:56.640 Raoul LeBlanc And So what, what's interesting is is that they have not chased it. They resolutely refused to bring up their activity level over the course of the first, in almost five months of this year, and not get drawn into that. And that's the actually actually the discipline that Wall Street was looking for. It's easy to be disciplined in 2020, because you ain't got anything. OK, it's a little bit more difficult when the money is flowing in, and you could actually have options, and they have not done it, and it's showing up in their results in the first quarter.

00:07:46.220 --> 00:07:46.740 Andrew Byrne Right?

00:07:46.380 --> 00:07:46.780 Hill Vaden Right?

00:07:56.690 --> 00:07:57.580 Raoul LeBlanc In a huge way.

00:07:58.070 --> 00:08:05.740 Andrew Byrne Well, that's sort of my temptation island reference. That's what that kind of gets too, and it's kind of like the longer we're at this.

00:08:06.730 --> 00:08:10.820 Andrew Byrne High price environment that greater the temptation is going to become.

00:08:11.250 --> 00:08:11.730 Hill Vaden Right?

00:08:11.300 --> 00:08:11.930 Raoul LeBlanc Exactly.

00:08:12.380 --> 00:08:19.890 Andrew Byrne And so for us is like following the pandemic year. Most of these guys have to clean up their balance sheet.

00:08:20.560 --> 00:08:39.100 Andrew Byrne Of the large oil focused guys are only two companies that had strong balance sheets at the end of the year, so pretty much the whole group needed to clean up their balance sheet an so these excess cash flows are going to allow them to accelerate that balance sheet repairs.

00:08:39.700 --> 00:08:46.770 Andrew Byrne And so we're looking at basically half the group Ek sitting this year within the you know.

00:08:47.460 --> 00:08:50.360 Andrew Byrne Healthy balance sheet target range.

00:08:50.980 --> 00:08:51.590 Andrew Byrne And so.

00:08:51.130 --> 00:08:51.800 Hill Vaden Is that?

00:08:52.360 --> 00:09:01.100 Hill Vaden Is that health limited to the oily guys or the gas report or are we seeing system similar repair on those gassy operators?

00:09:01.650 --> 00:09:06.790 Andrew Byrne The need for balance sheet repair is even more dire for the gas guys.

00:09:07.130 --> 00:09:16.290 Raoul LeBlanc But but are they getting there as fast? And I mean we've got six $5 oil. We're still sort of languishing, you know, on the gas prices, not 350, right? It's it's.

00:09:16.840 --> 00:09:28.550 Andrew Byrne Well, there there applying a lot more of that free cash flow to actual debt reduction because they don't have. They hardly any of them are paying a dividend.

00:09:25.230 --> 00:09:25.620 Hill Vaden OK.

00:09:25.550 --> 00:09:25.980 Raoul LeBlanc OK.

00:09:29.240 --> 00:09:29.680 Raoul LeBlanc OK.

00:09:29.850 --> 00:09:43.950 Andrew Byrne So the dividend obligations are are more onerous for the oil guys, so now the free cash flow is going to the debt reduction. But yeah, it's going to take a little longer for some of the gas guys because their balance sheets were a lot weaker.

00:09:41.750 --> 00:09:42.200 Raoul LeBlanc OK.

00:09:44.390 --> 00:09:45.500 Raoul LeBlanc Yeah, OK.

00:10:10.640 --> 00:10:11.070 Raoul LeBlanc Yeah.

00:10:11.140 --> 00:10:12.500 Andrew Byrne Got some some.

00:10:13.260 --> 00:10:15.790 Andrew Byrne Other free cash flow that it could allocate to growth.

00:10:16.420 --> 00:10:22.990 Raoul LeBlanc Well, that's interesting. Yeah, and I was thinking about that. I mean, yeah, you're right, we've got a sort of, you know.

00:10:23.760 --> 00:10:53.500 Raoul LeBlanc A near death experience last year, right and so people are like, well, the best thing I could do is clean up my debt right? And so that's good. Then let's say an our forecast bakes into some degree, a reversion, a slight reversion, not back to growing. You know ten 1215% a year, right? Which they could do, but toward growing 2 to 4%, I think next year. And it brings up the question and what I'd like to get your opinion on this. So I get to the end.

00:10:31.390 --> 00:10:31.670 Andrew Byrne Yep.

00:10:53.550 --> 00:11:25.010 Raoul LeBlanc Of some period, let's say it's the end of this year, the middle of next year, when their balance sheets in pretty good shape. In fact, I may even go beyond, well, no. Let's say it's in pretty good shape to acceptable. So then I have three or four choices of what to do with the incremental cash number one is. I could make my balance sheet bulletproof. OK, I could really go and and store up for the future. Allow me to more flexibility. That's one thing. The second thing is I can start doing dividends. I could start doing normal dividends. Anwar El it might not be able to follow through.

00:11:25.060 --> 00:11:52.760 Raoul LeBlanc Or I could do these variable dividend that people are trying to talk about and get you back Mr Miss shareholder from the top of the cycle and maybe take at the bottom. Or I could buy shares OK and that depends on where my equity is. And then lastly, I could could could go more more for growth. How do you know it's going to be different for every company? But in general how do you see those four or five options as appealing to the companies given where they are and what they have?

00:11:53.130 --> 00:11:57.440 Andrew Byrne Well, it's kind of interesting you ask that because we're seeing it kind of acted out right now.

00:11:58.010 --> 00:12:03.190 Andrew Byrne Is is that there are a handful of companies who already have that clean balance sheet, So what are they doing?

00:11:58.190 --> 00:11:58.640 Raoul LeBlanc OK.

00:12:03.800 --> 00:12:08.810 Andrew Byrne Uh Devon, an EOG both announced variable dividend payments.

00:12:09.890 --> 00:12:13.560 Raoul LeBlanc I think Pioneer is also on the variable dividend train as well, aren't they?

00:12:13.450 --> 00:12:24.220 Andrew Byrne Yeah, they're saying, but from what I recall there saying at the end of the year they'll do a look back and say OK, and they'll do one at the end of the year, so I don't think they're going to be sort of.

00:12:18.650 --> 00:12:19.220 Raoul LeBlanc OK.

00:12:22.540 --> 00:12:22.830 Raoul LeBlanc OK.

00:12:25.000 --> 00:12:29.770 Andrew Byrne You know there there there definitely on that train. The question is when does it leave the station?

00:12:30.840 --> 00:12:32.850 Andrew Byrne On the on the gas side.

00:12:34.240 --> 00:12:42.470 Andrew Byrne Cabot raised its dividend and Chesapeake of all people, initiated a material dividend.

00:12:44.000 --> 00:12:49.460 Andrew Byrne So chest the new Chesapeake. Get this rewire. Your brain has a clean balance sheet.

00:12:48.400 --> 00:12:48.890 Hill Vaden Right?

00:12:50.700 --> 00:12:51.330 Raoul LeBlanc Right?

00:12:51.800 --> 00:12:55.870 Hill Vaden Andy, dividend not a not a special dividend or a variable dividend.

00:12:51.820 --> 00:12:52.520 Andrew Byrne And so.

00:12:54.640 --> 00:12:55.490 Andrew Byrne A dividend.

00:12:56.600 --> 00:13:04.230 Andrew Byrne Not a variable annual dividend, and so you're going to be looking at a new Chesapeake. A disciplined Chesapeake.

00:13:05.300 --> 00:13:29.850 Hill Vaden So what I mean, what do we think about the variable diffident dividend? So you know when I look at companies who you know announced a dividend, there's a real confidence because no one wants to cut a dividend, right? There's a lot of I can go out with it with a variable dividend because I'm not committing to it three years from now, right? Do we see that as a new normal, or do we expect?

00:13:05.370 --> 00:13:06.750 Andrew Byrne So you know.

00:13:17.860 --> 00:13:18.360 Raoul LeBlanc Right?

00:13:29.900 --> 00:13:35.360 Hill Vaden The confidence to increase and turn into two more stable Conan quote real dividends.

00:13:35.540 --> 00:13:53.040 Andrew Byrne Yeah, that's a great question because an I think it relates to in my under my mind. I see it as an option for that excess cash use. If you think your share price is richly if you stare, stock is richly priced.

00:13:53.670 --> 00:14:13.370 Andrew Byrne So rather than doing feeling forced to do a share buyback, which really doesn't add any value because you're buying your overpriced, you can use that cash. You can put it to use, give it to shareholders in a variable dividend instead of buying high what we normally.

00:14:12.360 --> 00:14:15.690 Raoul LeBlanc But how much credit do you think they'll get for the variable dividend?

00:14:19.300 --> 00:14:21.880 Andrew Byrne EOG, when they announced it they they jumped.

00:14:22.480 --> 00:14:24.940 Andrew Byrne Uh, so it'll be, it'll be.

00:14:22.650 --> 00:14:23.140 Raoul LeBlanc Uh-huh

00:14:25.600 --> 00:14:52.770 Andrew Byrne It'll be interesting to see how that works, because it's all been kind of controversial because if you follow Cabot, they've been griping that they've been doing all the right things. They've got to clean balance sheet that generating the free cash flow there, returning it. They've got a dividend their prior to Chesapeake. They were the only one in there in the gas peer group that had to dividend and their their stock was the worst performer of the last year.

00:14:38.510 --> 00:14:38.850 Raoul LeBlanc right?

00:14:54.220 --> 00:14:57.460 Hill Vaden In that I assume is all because of the 100 and gas exposure.

00:14:58.240 --> 00:15:01.680 Andrew Byrne Well that you know they were underperforming all the other gas guys.

00:15:02.380 --> 00:15:03.150 Hill Vaden Hello.

00:15:02.570 --> 00:15:04.970 Raoul LeBlanc Yeah, yeah yeah, it's been pretty interesting.

00:15:03.190 --> 00:15:05.990 Andrew Byrne And they were doing the right thing, but it's the risk trade really so.

00:15:05.920 --> 00:15:37.340 Raoul LeBlanc Which brings up an interesting point. You know at some point, does the does the buyback. I know you've got a lot of evidence, but let's ignore evidence for the moment. But but in in theory that would be teams to meet the answer right? If you're generating a lot of cash and your share price is not showing it, well you can take action, right? If you think you're worth more, you buy back your own company, right? Well over a certain time frame does it? Do you think that? And that's why in my mind the share buyback thing really depends on how the equities?

00:15:27.780 --> 00:15:28.260 Hill Vaden Maybe?

00:15:31.410 --> 00:15:31.430 Hill Vaden Uh.

00:15:37.400 --> 00:15:46.910 Raoul LeBlanc Equities do right over the next eight quarters, let's say and I was just curious, where are equities relative to where they were pre pandemic?

00:15:48.490 --> 00:15:55.150 Raoul LeBlanc And also to wear these companies feel like they should be as a normal company, maybe in a profitable industry.

00:15:49.960 --> 00:15:49.980 Hill Vaden Uh.

00:15:57.610 --> 00:16:00.650 Andrew Byrne Well, you know in the in Cabot specifically.

00:16:01.330 --> 00:16:10.370 Andrew Byrne Everybody else in their peer group really got hammered because their balance sheets were so weak and so you naturally you know those stocks.

00:16:04.810 --> 00:16:05.150 Raoul LeBlanc Yeah.

00:16:06.340 --> 00:16:06.870 Raoul LeBlanc Right?

00:16:10.950 --> 00:16:18.170 Andrew Byrne When everybody thought that they weren't going to bankrupt anymore, naturally those guys rebounded the most and so.

00:16:18.900 --> 00:16:30.090 Andrew Byrne You know they performed really well and so temporarily tab. It looks like it's underperforming everybody else, but in reality there probably there more richly valued than everybody else.

00:16:31.450 --> 00:16:43.540 Andrew Byrne Yeah, the guys are just catching up. It was the same sort of deal with Marathon, who you know they were trading it, you know four or $5 last year. Then they went up to 1212 1/2 this year.

00:16:44.200 --> 00:17:05.550 Andrew Byrne Same sort of same sort of question. All sudden, everything changed and all those companies that were struggling got repriced and that and so you know companies like EOG is in are just like in Cabot situation. They didn't. They didn't quadruple, they didn't double their stock price. You know didn't go up anything like somebody like marathon **** and so there.

00:16:57.490 --> 00:16:57.970 Raoul LeBlanc Yeah.

00:17:04.830 --> 00:17:07.420 Raoul LeBlanc Yeah, 'cause they were the safe choice, right? Yeah.

00:17:07.070 --> 00:17:21.540 Andrew Byrne Right, right? So you know company. Yes, investors, you know, we always say you know you know. How do they get investor interest back in the sector? Well, going from 4 to 12 which should do it.

00:17:22.520 --> 00:17:23.110 Raoul LeBlanc Yeah.

00:17:23.420 --> 00:17:24.580 Hill Vaden Well so.

00:17:25.990 --> 00:17:56.300 Hill Vaden And he mentioned that a comment effective, everything changed and roll one of the things looking at aunties report. You know some of the you know high performing companies today have options and we look at Devon. We look at EOG, we look at Kanako. They've got diversified onshore US portfolios, an implicit in that I think is resilience and we talked some time ago, roll about the fragility of being a single play.

00:17:44.930 --> 00:17:45.430 Raoul LeBlanc Right?

00:17:56.580 --> 00:18:03.710 Hill Vaden Operator but, but that's what investors want it, and they wanted to put together their own multiplay company by buying multiple companies.

00:18:03.970 --> 00:18:13.170 Raoul LeBlanc Yeah, it's a fantasy football team, right? Yeah, yeah, you guys sticking be particularly good at one thing and and I'll take care of my diversification, right?

00:18:04.320 --> 00:18:05.650 Hill Vaden Or are we seeing?

00:18:06.710 --> 00:18:07.190 Hill Vaden Right?

00:18:13.060 --> 00:18:20.880 Hill Vaden And some of these diversified companies in the earnings calls were saying, you know, we got options. We can play the Bakken. We can play the Eagleford. We can play the Permian.

00:18:20.770 --> 00:18:21.210 Raoul LeBlanc Yeah.

00:18:21.590 --> 00:18:28.410 Hill Vaden It is that part of the everything changed story. Or is this you know, should we look for more diversification?

00:18:29.230 --> 00:19:00.180 Raoul LeBlanc I don't think so. I think will continue to see specialization because specialization works right. I mean, you know we talked about this, but if you look at the world champion Bestic athlete ever an you entered their times in the 10 individual events of the Cath lawn. They're in the Olympics. They're last absolute last in the one I looked at was in eight of the categories and bottom half of the two. Then it didn't play his last in point being it is hard to do multiple things well.

00:19:00.230 --> 00:19:06.990 Raoul LeBlanc I think investors will continue to push this. The real deal is I gotta divergence in some ways of of the.

00:19:08.150 --> 00:19:37.480 Raoul LeBlanc The investor doesn't care in its nice little fantasy football portfolio. It didn't care if you die, you didn't care if you get injured and Brandon have to retire. OK, because it's focused on the group, right? But you do and nothing is. Companies need do need options again so that as life happens and something upsets the Apple cart. I mean I think you see that a little bit in the Colorado producers, right? So one of the interesting things here will be whether state level risks start to.

00:19:37.750 --> 00:19:52.440 Raoul LeBlanc Uh arise OK and start to get? Make some gotchas OK. And so even though you might not perform as well as a specialist, you survive, which is another nice nice feature for a company to do.

00:19:38.460 --> 00:19:38.760 Hill Vaden Right?

00:19:53.560 --> 00:20:08.030 Hill Vaden Who in Andy when we're looking at some of the diversity you mentioned before we started recording about the uh, called the deaths of some of the small cap Midcap San. Increasingly this sector is the domain of larger companies.

00:19:53.890 --> 00:19:54.320 Andrew Byrne Yeah.

00:20:09.870 --> 00:20:15.160 Hill Vaden And that will be a mix of both large specialists and diversifies large companies.

00:20:15.560 --> 00:20:19.410 Andrew Byrne Well, it's an interesting sort of thing that happened, you know, since.

00:20:20.060 --> 00:20:38.740 Andrew Byrne Uh, 2014. We've lost 2/3 of the mid and small E and PS in our coverage list an so the demographics have changed in the industry with the large companies being much more dominant factor than it was during the heyday of the unconventionals.

00:20:39.300 --> 00:20:41.800 Andrew Byrne And so you're seeing, you know.

00:20:42.380 --> 00:20:42.990 Andrew Byrne This.

00:20:43.710 --> 00:20:47.550 Andrew Byrne Other trend is the need for scale.

00:20:48.040 --> 00:20:48.500 Hill Vaden Right?

00:20:48.160 --> 00:21:10.690 Andrew Byrne For for fish and sees no capital deficiencies, is core right now you know it's a core objective for everybody to achieve, and to do that you need to have sort of economies of scale, and you sort of saw that just this week in an Oasis in what they did, they they divested their Permian.

00:21:11.580 --> 00:21:15.770 Andrew Byrne And commented that you know it was very difficult to build scale.

00:21:16.820 --> 00:21:17.880 Andrew Byrne And so now.

00:21:16.980 --> 00:21:19.960 Hill Vaden Because they are in North Dakota in Warren able.

00:21:18.670 --> 00:21:19.500 Andrew Byrne You know, and so there.

00:21:20.180 --> 00:21:25.190 Andrew Byrne So now there are back to being a pureplay Bakken producer.

00:21:25.940 --> 00:21:49.470 Andrew Byrne And they had made a Bakken acquisition earlier and so they divest their Permian, which they could well that it was very difficult to build scale for them in the Permian 'cause they had to pay. You know, expensive prices and so here they are saying, OK, we can't. We are one of the largest producers in the Bakken. We have scale there.

00:21:29.490 --> 00:21:29.920 Raoul LeBlanc Yeah.

00:21:50.080 --> 00:21:59.170 Andrew Byrne And we just added to that scale an. So here you have a company being less diversified in order to become a big base in master.

00:22:01.570 --> 00:22:18.560 Hill Vaden And what is it so so that you know the other companies that that we kind of flag there? Yuji Devin. An conaco to pick three, do have that diversity. Is it their size that allow where's their advantage that allows them to compete across multiple plays and plate ways that Oasis can app?

00:22:01.990 --> 00:22:02.300 Raoul LeBlanc Yeah.

00:22:19.540 --> 00:22:20.380 Raoul LeBlanc So.

00:22:19.790 --> 00:22:20.910 Andrew Byrne Well, that sucks.

00:22:21.420 --> 00:22:52.090 Raoul LeBlanc Yeah I would just I would just say one is there big enough that they have some scale in each one of those, right? I think you know any made a point there at the end referred to the kind of base in master concept? OK, and it's the notion that eventually it's going to be dominated by two 3-4 people. OK Anna bunch of little fry, they run around and may do well right for awhile but remember we are in the phase of the unconventional revolution where mostly everything is known.

00:22:27.560 --> 00:22:28.020 Hill Vaden OK.

00:22:52.380 --> 00:23:00.410 Raoul LeBlanc OK, an it's about so it's turning into a efficiency of execution. OK, and inefficiency of execution.

00:23:01.930 --> 00:23:32.920 Raoul LeBlanc Interesting, the small guys sometimes do things more cheaply, but not on a you know a 500 well program over over three years. OK, that's the kind of thing where you're grinding down. You're getting a lot of efficiencies from, you know, standardizing things and and and those kind of manufacturing mode principles. And I think that tends to favor scale. The other thing is to note, of course, that here as the cost of capital may rise for the industry and as it becomes a cost of capital game 'cause.

00:23:33.370 --> 00:24:03.530 Raoul LeBlanc Primary value addition is not by derisking, not by turning $500 acre into $20,000 an acre stuff 'cause it's already you already know. It's either work 20,000 or 500. OK, so that those possibilities are disappearing and that means that it turns into. How can I spend an enormous amount of money to develop all my pods efficiently? Your cost of capital becomes your sort of #1 driver. OK, so bigger is better. So the way Devin and ConocoPhillips guys are competing is partly by.

00:24:03.580 --> 00:24:33.860 Raoul LeBlanc Having a corporate structure which has enough heft to drive down its cost of capital OK, as well as having material positions in each one, I continue to see, you know, big companies with small positions in place sell them out right. Chevron in the Marcellus is kind of a good example, right? Well, you don't want to be OK. I think. I think it's part of the thing that Oasis is thinking is can I be a base in master in the Bakken? Yeah, an. I can't really get the scale. That's what they said, right? Can't get the scale in the Permian and.

00:24:17.050 --> 00:24:17.690 Hill Vaden Tell about

00:24:33.910 --> 00:24:40.060 Raoul LeBlanc Uh, so I'm not going to try the danger of this approach is that you.

00:24:41.450 --> 00:25:09.960 Raoul LeBlanc First, you're now in one asset and every day you're eating that asset up OK, and so you don't have the next plan. OK, and some ways. Then you know if you start to run out of good stuff, you have a real problem, particularly if you have last year you fired everybody in business development and so like, why would I want to do business development? OK, so you know, it's what I call the hunting far more problem, right? All of a sudden you're a farmer and all sudden now.

00:25:11.740 --> 00:25:28.280 Raoul LeBlanc Hunt something and your land is exhausted and you forgot happening. So lots of interesting issues coming up. I think the key thing for them is can I continue to deliver these kind of cash flows that I had in the first quarter? Can I? Can I make a business out of this big cause?

00:25:23.280 --> 00:25:23.690 Hill Vaden yeah.

00:25:30.240 --> 00:25:39.570 Raoul LeBlanc Dilly the fundamentals. Will they have to be at 80? But you probably need to 65 or 70. OK to continue to generate enough yield to attract investors.

00:25:42.720 --> 00:25:46.170 Hill Vaden When we were thinking Andy about kind of.

00:25:46.060 --> 00:25:46.800 Raoul LeBlanc To your stock.

00:25:48.810 --> 00:25:50.380 Hill Vaden Sorry you cut out there for second poll.

00:25:51.500 --> 00:26:00.520 Raoul LeBlanc Uh, can you generate enough yield to attract investors to your stock? You don't need $80.00. You probably need 65 or 70 though.

00:26:01.100 --> 00:26:05.270 Andrew Byrne Yeah, yeah, well it kind of gets to inventory management.

00:26:05.860 --> 00:26:28.770 Andrew Byrne You know, and it's an it's sort of you're shrinking box problem, right? So that if you accelerate your production growth you're going to accelerate your sweet spot exhaustion so you know, and that's what's different now versus before is now you're looking at more of a shrinking box problem versus a rapidly growing box.

00:26:10.560 --> 00:26:11.070 Raoul LeBlanc Alright.

00:26:15.300 --> 00:26:15.980 Raoul LeBlanc Right?

00:26:17.770 --> 00:26:18.190 Hill Vaden Right?

00:26:29.470 --> 00:26:44.350 Andrew Byrne And so, so you're, you've got to be disciplined in your volume growth plan in order to be a long term Basin master where you're not really growing your.

00:26:29.700 --> 00:26:30.330 Raoul LeBlanc Yeah.

00:26:31.670 --> 00:26:32.240 Raoul LeBlanc Track.

00:26:36.770 --> 00:26:37.040 Raoul LeBlanc Yeah.

00:26:45.170 --> 00:26:47.460 Andrew Byrne Well, location inventory organically.

00:26:45.430 --> 00:26:46.040 Raoul LeBlanc Yeah.

00:26:48.160 --> 00:26:48.530 Raoul LeBlanc Yeah.

00:26:48.810 --> 00:27:03.730 Hill Vaden So the other kind of related comment on that that yes, there's a shrinking box of inventory in. I think one of the CEO's and the calls are referred to kind of the position of oil companies today as entering a phase of, I think his words were maturing, demand.

00:27:04.670 --> 00:27:08.260 Hill Vaden Just given kind of the rise of low carbon energies.

00:27:09.540 --> 00:27:13.160 Hill Vaden So we're looking at the business model of these companies. You know that.

00:27:13.730 --> 00:27:20.790 Hill Vaden There's a lot of pressure from investors to quote unquote. Go green. You know, oil companies are good at making oil.

00:27:22.870 --> 00:27:31.770 Hill Vaden What types of given that the relative success we've seen in Q1? Andy, what do you, is the business model built?

00:27:32.420 --> 00:27:34.450 Hill Vaden For kind of long term success here.

00:27:36.010 --> 00:27:40.520 Andrew Byrne Why I would send it differentiate between the E and PS An the integrated?

00:27:41.450 --> 00:28:13.450 Andrew Byrne With the EMP's focusing or their response right now on sort of ESG concerns, and in the context of reducing their flaring, reducing their carbon footprint there carbon intensities sort of managing those kind of things that they control from that side. That's where the E and PS are generally focused on. Now there's a couple of like Oxy and then Berry who are working on the carbon sequestration kind of concepts.

00:28:14.730 --> 00:28:40.240 Andrew Byrne Enhanced oil recovery, but generally speaking there you know the models are sticking to oil and gas. Now the move off to the integrated. Then you're getting a real conversation about how you know about going into the sort of the clean energy space, and they are nibbling on certain things and we have some research around that.

00:28:41.750 --> 00:28:46.550 Andrew Byrne But yeah, it's a sort of a clear question as to what's the right way to go.

00:28:48.030 --> 00:28:53.720 Raoul LeBlanc Yeah, you know any at that. It's interesting. This whole concept is a great question Hill.

00:28:55.390 --> 00:28:56.600 Raoul LeBlanc I would say this.

00:28:57.560 --> 00:29:27.180 Raoul LeBlanc Everybody looks at the pressure on oil companies. To, you know, prepare for the energy transition and to do this and do that in the change and you look at something like the fire engine number one, right Exxon Mobil situation, which I don't want to get into. But the thing I do want to say is that if you look at what the gripe of all of the activist investors is, is you guys have performed terribly OK? You have not made money for many years, and we think the models broken now. I think it's a frankly a.

00:29:27.850 --> 00:29:55.600 Raoul LeBlanc A leap of imagination and well, Spurius really to sort of blame the poor performance of the last five or or seven years on. You know you didn't prepare for the climate transition. That is not not in any way, shape or form their reason for underperformance in the last last six or seven years. OK, those forces have not been big enough, and they will be big enough in the future. But that's not the case. My point is that.

00:29:57.760 --> 00:30:29.040 Raoul LeBlanc If we continue to generate the kind of returns to shareholders that we saw in the first quarter, OK, if these guys continue to have reinvestment rates that are low and that you know. I mean, they just saying weird things. 60% certainly even lower. This is possible in some quarters, probably higher in some quarters, but if you have that. In other words, if you fix your biz model to make money in a way that's completely not related to energy transition.

00:30:29.080 --> 00:31:01.190 Raoul LeBlanc OK, I think it changes some of the demands around energy transition. OK an investors right? 'cause then investors, it's an easy target for investors because you've underperformed an you they think you're not preparing for a future right? It's very different if there's a trade off involved, right? And there's a little bit of what we're seeing now, right. Energies been the best performing sector oil and gas. Frankly, it best promise sector since the first of the year. Yeah, just ignore all the last seven years, right? But if you look here now, you know it is true that people who don't have it in their portfolio.

00:31:01.230 --> 00:31:31.630 Raoul LeBlanc OK or not, enjoying those benefits. OK, and the real question is not what happened in the last five months. It's the real question is, can this thing consistently make money? OK and one of the key linchpins of this whole thing, globally Speaking of whether the energy business makes money, is if the US supply stays under control, and that's where the whole temptation island comes in here. If it remains under control, the rest of the system remains, in my opinion, almost broken in terms of the.

00:31:31.680 --> 00:31:56.920 Raoul LeBlanc A price elasticity of supply in terms of the responsivity, and it's been very much down to the US spoiling the party for the last eight years, and so if that changes the pricing dynamic changes and that means that potentially is people can make money. Now the other thing I'll say in addition to that is.

00:31:57.670 --> 00:32:17.240 Raoul LeBlanc That's tall order because they are on Temptation Island. OK, and we should not forget that all of these companies while they look great. Now an investors may may be happy. The Cabot fate may wait them, which is I did everything you did on my shares are still not happening and maybe I don't want to buyback shares, in other words.

00:32:18.350 --> 00:32:22.480 Raoul LeBlanc They're the only way in EP company as a price taker.

00:32:23.280 --> 00:32:28.630 Raoul LeBlanc Can actually make sure that it makes more money. OK is to make more volume.

00:32:29.200 --> 00:32:59.620 Raoul LeBlanc You don't have any control over product quality or differentiation or pricing like normal businesses, right? So how do you make more money? You produce more OK, and so they are in this prisoner's dilemma. Or, if everybody they're not cooperating, they're not talking to each other about this. They're all just responding to investor demands. But it happens to be the same investor demand and collectively this holding back. If that continues to collectively hold back, they can. They will be set up for probably multi year success.

00:32:46.020 --> 00:32:46.500 Hill Vaden Right?

00:32:59.970 --> 00:33:18.070 Raoul LeBlanc OK, even in a declining demand environment, they will probably set up, but if they blow it OK and by the way, once they blow it once like falling off the wagon, OK, yeah, you screwed up the next several white. There will be another hangover from the base decline impact in some of those other things, right? So where I'm going is?

00:33:18.980 --> 00:33:32.420 Raoul LeBlanc Well, it looks good. Now they are in this prisoner's dilemma. Discipline is not assured. They live on Temptation Island, and both time, balance sheet and price, or working against them in terms of that restraint.

00:33:33.490 --> 00:33:33.900 Andrew Byrne Yeah.

00:33:33.530 --> 00:33:34.970 Hill Vaden Can there be?

00:33:36.000 --> 00:34:03.150 Hill Vaden In the, you know, given all the risks of Temptation Island from from the other participants on the island, that will influence, you know, affect me directly. If everyone else starts getting tempted, does that scale with? If I'm looking at a business in a maturing or declining demand world selling widgets or whatever, I want to scale that allows me to compete on cost and be kind of the best that I can be doing that one thing well.

00:34:03.720 --> 00:34:15.580 Hill Vaden Do investors have investors recognized? The importance of scale in a in a maturing demand sector like this, and if they haven't, do we expect them to?

00:34:16.180 --> 00:34:35.310 Andrew Byrne Oh yeah, I think they do completely. I think everybody. I think the investors are aware. I think the management, Sir, aware that you know it's it's sufficiency sits everything. Roll said you've got to have that lower cost of capital and you gotta have that higher operating efficiencies that capital efficiencies.

00:34:36.810 --> 00:34:40.840 Andrew Byrne That's what's differentiating you now, you know, 'cause nobody's out there finding new place.

00:34:42.500 --> 00:34:49.530 Hill Vaden So alright, you know, just to we can wrap up here and maybe think about the next quarterly calls.

00:34:50.960 --> 00:34:54.730 Hill Vaden The temptation island was the reference that we've come back to several times here.

00:34:56.250 --> 00:34:59.960 Hill Vaden Is anybody going to be left on the island in the second quarter?

00:35:01.020 --> 00:35:05.080 Hill Vaden What were we thinking? Is this what 1/4 does? Not a trend make.

00:35:05.760 --> 00:35:14.720 Andrew Byrne Yeah no, I think they're all going to be living happily on Temptation Island. I think you know second half of the year is when it starts getting tempting.

00:35:15.910 --> 00:35:30.630 Andrew Byrne See what they do, but right now what's interesting is the companies that have the greatest amount of temptation or the cleanest balance sheets and there got the free cash flow. Right now they are opting for that variable dividend and that bulletproof balance sheet.

00:35:32.070 --> 00:36:03.640 Andrew Byrne Yeah, and you know what's also interesting is so how companies are responding it. You're taking EOG on one hand and pioneer on the other. Pioneer made that inventory it creative acquisition in the Permian so enhanced their their base in master status. Where is EOG? Went international with some interesting opportunities so they're doing kind of a contrary. Contrary, an opportunistic kind of approach.

00:36:03.690 --> 00:36:12.800 Andrew Byrne Expanding their opportunity sets set globally, so it's sort of a interesting contrast, and how two companies who have the capacity to do something reacted.

00:36:13.840 --> 00:36:43.560 Raoul LeBlanc Yeah, it just add. I think I agree with Anna. Think we're pretty safe for this year. Honestly, OK, budgets are said. We're going to rock and roll. They're going to love the money coming in, finish their bouncy repair right after we got a pretty bunk bump. Big bump up in in 2022. Honestly, not in terms of growth, but it turns spending because costs are getting more. You know, basic line, slightly higher, fewer du CS, but in general we still have holding line. I'm most focused I think will be OK again.

00:36:43.760 --> 00:37:14.630 Raoul LeBlanc In 2022, most focus on 23 through 25, which incidentally is when if there's an international gap in funding, will start to see right some of those projects not come on from the covid cancellations right? As well as some other delays. So I think that will be the time period where if the interest is going to lose discipline, it loses discipline. I think they need to establish a track record.

00:37:14.690 --> 00:37:23.710 Raoul LeBlanc That tracker it has to be at least six great quarters in my mind, and I think that's what most people think, and so they probably do that here in 2021 and 22.

00:37:24.630 --> 00:37:35.480 Hill Vaden Well, in some respects I could work to the advantage of 23 if all of a sudden you know you need that box which isn't getting bigger to start delivering some volumes to make up for other areas.

00:37:37.390 --> 00:37:38.060 Hill Vaden Alright, well.

00:37:37.570 --> 00:38:05.160 Raoul LeBlanc If it makes the Super 01 last thing, if it meets the supercycle right? If we start getting prices of 85 and 90, that means two things. Number one, it means that the world may actually need a lot more oil. OK, and so that's good. It also means that the NPS then become in the very enviable position of being able to continue deliver my 12% kind of yield, and I'm growing up by another, you know, 10 or.

00:38:05.240 --> 00:38:26.290 Raoul LeBlanc 10 or 12%, right? That's a place that they would all like to be given the realities of the market. Our view is that supercycle is less likely. Anand, at this kind of thing would probably help to put it into it, but one of the investors are clearly doing. And I mean, commodity investors. In particular. It's they're trying to understand the.

00:38:28.040 --> 00:38:45.410 Raoul LeBlanc Long term price or the marginal cost of a barrel that will actually be added. You know if the US system has changed? Yeah, and so that's an important. It's actually important factor, not just in their equity performance and how that does, but in the commodity price formation itself.

00:38:47.680 --> 00:38:48.060 Hill Vaden Alright.

00:38:48.930 --> 00:38:58.910 Hill Vaden That sounds like a great place to to leave it. Thank thank you both for joining me today Andy and Raoul.. Always great to have you in. Andy will come back.

00:38:59.890 --> 00:39:00.360 Raoul LeBlanc Thanks.

00:39:00.180 --> 00:39:00.730 Andrew Byrne Sir.

00:39:01.920 --> 00:39:02.500 Andrew Byrne Thanks so. Raoul LeBlanc Thanks.

00:48:39.750 --> 00:48:40.120 Hill Vaden Bye.