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

Tracy Alloway: And I'm Tracy Alloway. We're recording this April 17th. There's a big drop in the price of oil today, on the headlines, the growing optimism that a ceasefire will endure. Anything could happen, but at least for now, it appears the extreme left-tail scenario like $200 oil may be off the table.

Joe Weisenthal: Right. I'm looking at a chart of WTI at the moment, which might be a little hint as to our guest that we're about to introduce. It's currently at around $83 a barrel, down from $112 per barrel in March or early April. God, time flies when you're talking energy crisis and war in the Gulf. Even setting aside the war, there's a lot that I've been very curious about the future of the US oil industry. We were in Alaska last summer, and one of my favorite parts of that trip was talking to that company that made the steel tubing for oil companies up on the North Slope. You know, how steel prices were going to affect the break-even cost of American oil producers, and the interaction of tariffs and higher services costs. We know that the US produces a lot of oil and it's an exporter, but prices went up. Chris Wright went down to Zero Week a few weeks ago, and he's like, "Please produce more," but the rig counts have been going the other direction.

Tracy Alloway: Yeah, that's right. So this was also part of the Iran story, this idea that 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. But if you look at the Baker Hughes oil and gas rig count, it's basically been trending sideways. The last available data showed it fell by three, and if you go out even further, it's been going sideways and slightly down since basically 2023. So, we haven't seen a big supply-side push, despite a lot of noise coming out from the administration about unleashing US energy and letting everyone including your grandma drill. Getting it right is tricky for all administrations. 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. Then you have an administration that does want to brag about it, but then 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...

Joe Weisenthal: This is just an excuse for you to talk about Landman.

Tracy Alloway: And so I got to talk to someone who's an independent small oil and gas company because I have a million questions about how realistic that is. I like it every time we get to talk about Christmas trees of like valves and spools and casings and... There you go.

Tracy Alloway: You really have written a lot about the technology of oil production for a long time. 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 and it was about standardization of oil drilling parts. Well we really do have the perfect guest someone who is who's in the game actual got skin in the game in the space. We're going to be speaking with Jack McClendon CEO of the small oil and gas company called Sienna Natural Resources. Jack I've wanted to have you on the podcast long time so thrilled you're here what do you tell us what Sienna Natural Resource what's your business?

Jack McClendon: Yeah sure thanks for having me on. Yeah we're just a small independent oil and gas producer so we operate in the 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 Exxons 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 that the horizontal shale game has largely become the domain of a very large companies I mean you've got to have scale to be able to operate in that space. We're largely production company so the way to kind of think about it is you know we buy assets that we think are undercapitalized under appreciated try to squeeze a little bit more juice out of each producing well and try to get cost down. Although there are smaller companies that that do do drilling and we have drilled in the past and we will likely drill in the future as well too.

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

Jack McClendon: 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 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 it's just we produce the same product it's just a very different business.

Tracy 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 it eventually it didn't go to zero 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 is going down to I think it was either 20 bucks a barrel or zero and then just like left the restaurant. That's very that's a weird anecdote. 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?

Jack McClendon: I'm going to I'm going to correct you quickly and then and then go back into context so it's it's not a shale business so

Tracy Alloway: Okay sure.

Jack McClendon: 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 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

Jack McClendon: Right. and really until the advent of horizontal development well not horizontal development so much as 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 offer and so just a little bit of my background so I I kind of grew up in the shale space 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 you go as 2004 2005 the country was only producing about 5 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 lo and behold we have the shale revolution and

Jack McClendon: one of my favorite quotes is never underestimate the ingenuity of the American oil man and

Jack McClendon: [laughter] I just think it's a 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 5 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 want I you know I wanted to kind of get out and

Tracy Alloway: bring that up. Sorry 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.

Jack McClendon: And that's fair and and the majority of of oil production in America right now is from shale 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 that 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 come 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. That's where most of the capital goes and that's where most of the oil comes from.

Tracy Alloway: 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 get really into maps and I'm

Tracy Alloway: You tilt your camera and I was like that 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?

Jack McClendon: No, it's not part of his collection, but I did inherit a lot of his loves and one of them is that 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 cuz you kind of got to know as you said, there's probably a lot of that in in land man.

Tracy 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 Land Man in your experience?

Jack McClendon: I mean, there are certain aspects obviously that that famous windmill speech that he makes is is how a lot of people a lot of people in our industry feel and I I believe it's the truth.

Jack McClendon: A lot of it is obviously there's plenty of exaggerations. I don't know too many land men who have had a gun held to their head from from a member of the cartel. There's a lot of truth in the industry as well.

Joe Weisenthal: going into business with the financial backer of the cartel is a little weird. Anyway.

Jack McClendon: Yeah, exactly.

Joe Weisenthal: spoilers. Please.

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

Tracy Alloway: Actually, there's another element of Land Man that I this is going to be a little bit far afield from oil business clay shows, but this is something I've heard and feel free to answer this as with any level of tact or delicacy. I have heard that a lot of um 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 a great show. It shows our industry and that actually there's some gender families in the patch in the space in the industry, there's some gender divide on the show. Does that resonate?

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

Tracy Alloway: Okay, well then [laughter] I'm okay. Okay, well there you go. So, so maybe maybe that's maybe I'll just leave it at that.

Tracy Alloway: Okay, let's talk a little bit of economics. Even before the recent war in Iran, we wanted to talk because I'm 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, etc. 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.

Jack McClendon: 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?

Jack McClendon: 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 of cost to drill, the amount you pay to drill a well, 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. But 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. You know, personnel costs are up and you know, and you know, back in the day in COVID, you know, 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. 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. You know, people costs have gone gone up across the industry. Capital costs, tariffs obviously have had a material impact on the price of steel and the price of aluminum. Those have largely gone up.

Jack McClendon: What I will tell you though is recently and this is kind of a couple of a couple of months, there has been some slack in those markets and a big part of that is kind of due to what you 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 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% 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.

Jack McClendon: And the other thing I'll mention as well too and and this is largely due to efforts of companies like Kimmeridge 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 this that shale bust in 15 and 16. 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.

Tracy 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.

Tracy Alloway: 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 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?

Jack McClendon: I'll break that into two parts. You know, I think I think the industry is is 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 we've seen we've seen that and

Jack McClendon: 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 who's a 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 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? 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-size companies, there's really only about 10 companies that actually matter, right? You know,

Jack McClendon: as far as the publicly traded companies go and 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 to attract capital, the industry has had to show discipline 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 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 is obviously due to capital and you know, you've had two three crashes really in the last 10 years. So, you know, investors investors really are kind of holding everybody's feet to the fire on that.

Jack McClendon: 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? And like any business, when things are older, they break more. And so yeah, you know, 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 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.

Jack McClendon: But what I would tell you is that the pockets of capital that I'm kind of talking to are 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 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, there'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. Cuz really for these larger companies it's it's the Permian or bust, right? I mean, that's that's really that's really kind of the story.

Tracy Alloway: 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, although his was 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 100% plus 20% interest until we break even? Like how are some of these financing deals structured?

Jack McClendon: 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.

Jack McClendon: You know, on the debt side it's largely bank capital which you know is is kind of 7 to 8%. And then there are, you know, some of these alternative firms and so these are more kind of structured credit 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 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 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. 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.

Tracy Alloway: So when the price of oil starts going up, say we're talking late March, early April and WTI is climbing above 100 and then it hits 112. 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?

Tracy Alloway: 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?

Jack McClendon: That's No, those are really good questions. I mean, obviously there's there's excitement, right?

Jack McClendon: [laughter] Cuz cuz, 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 would tell you in 2022, 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 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. And what happened was as I authorized everything in May and June when oil was at 100 and then first production came on in August and September when oil was back to 70.

Jack McClendon: So you know, you had this you 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 20 to 25%. They're like, well, you know, your day rate on a workover rig has just gone from 175 to 275.

Joe Weisenthal: Huh.

Jack McClendon: Yeah, I mean, it's the the service the service companies aren't dumb. The chemical providers might say, well, you know, this is your your you know, this chemical you use this xylene you're using going to go from, you know, 20 bucks a gallon to 40 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. 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 that 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's very cautious right now.

Jack McClendon: 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 interest rates down, which is beneficial for a lot of other sectors. And so, you know, 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 aughts, right? Where like effectively you had to, you know, the the company 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,

Jack McClendon: 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, sure, you know, you're you're going to have some companies that are going to look to put a rig to work, are going to increase CapEx, but you know, we're just able to pay our debt down a little bit more and you know, we're going to kind of cash flow and I'm I'm really interested to see, you know, kind of where everything settles out. you obviously had that announcement today that Hormuz has been opened, 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 got to play by our rules and you got to pay pay by the you know, the Iranian Republican Guard's rules. So I'm not quite sure what has changed. But you know, I I I tweeted this out a couple of days ago, you know, the 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 what it'll be interesting to see where prices are going to settle out. I don't think we're going back to the 50s or 60s.

Jack McClendon: You know, are you going to see you know, to get back into Landman, are you going to see that sweet spot at 75? 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.

Tracy 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?

Jack McClendon: They do not.

Tracy Alloway: [laughter] Yeah.

Jack McClendon: They do not. You know, you're 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 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 tweet could move the price of the world's most liquid commodity 5 to 10%. And so yeah, I mean, I 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 the price as volatile as it is right now.