Big Digital Energy

0:00 Welcome Clyde. This is a special edition of BDE that I've been wanting to do for quite some time. It's a bit more in my wheelhouse. I still get asked questions about refrax and relative

0:13 permeability, but spent the better part of the last 25 years dealing with the

0:20 circus that has been public EP equities. And I've got a guest today who has been at the forefront of all things EP investing on the public side, Mark Viviano with with Kim Ridge. But I want to

0:34 interject here first, the obligatory safe harbor. This is not investment advice and nothing should be construed as such and what we discuss. And there is no reliance on anything that we discuss

0:50 from an investment perspective. But Mark heads up public equities at Kim Ridge. Welcome, Mark maybe start us off with. a little bit of personal history background and you're ramped into the

1:04 wonderful world of energy public investing. Yeah, sure, and thanks for having me, Mark. Always enjoy our conversation, so I'm glad we get to do this one on the record, but other people hear it.

1:18 Yeah, it was not a direct route to EMP investing by any means. I graduated college, 1999, and went to a small liberal arts school in upstate New York called Hamilton College I graduated with an

1:31 economics degree, which qualified me for pretty much nothing coming into school. I ended up, my parents, I grew up a little north of New York City and I knew if I got a job in New York, which

1:45 most people went after Hamilton. I'd end up living at home and just at 21 wanted to go out and do something different. And a lot of the guys that I played basketball with at Hamilton were either

1:55 from Massachusetts or we're gonna be heading out to Boston after graduation.

2:01 decided to spend a little time out in Boston, and here I am 26 years later in the same city. Not intentional by any means. Interviewed for two jobs at a college. The first one was a Putnam

2:14 Investments, and it was essentially a call center job. So when your grandmother called to find out what her balance was and her savings account or investment account, you'd pick up the phone. And

2:25 I remember during the interview process, they showed us the little red button that you pushed when you went to the bathroom So it could time you how far, how long you're away from your desk and

2:33 pretty quickly realized that probably wasn't the route I wanted to go. But my roommate's brother worked at State Street Bank, which was one of the biggest employers in Boston. And they were hiring

2:45 for entry level positions, which was essentially custodian banking for the investment management industry. That sounds a little more interesting to me and a little closer to what I ultimately wanted

2:54 to do. So I took that job and it took me about two weeks to realize I was fascinated by the investment management industry, but I didn't want to be in the back office reconciling people's accounts.

3:05 And so tried to do everything I could to bolster a resume that was a little incomplete at that point. I went back to school and night took classes at BU, ultimately got a master's of science degree

3:19 from BU, and then I did the CFA program simultaneously. So there was a few years in my life that were pretty miserable, but it was really about learning the functional aspects of the investment

3:29 industry that you don't really learn with a liberal arts education. And about two years into that job at State Street, I got a call from a headhunter that was looking to place somebody in a position

3:40 at Wellington management in a role they called client administration. And kind of a glorified name for was essentially the back office of Wellington. So probably more of a lateral move that I wanted

3:52 to make at that point, But it was moving to. You know, a smaller firm that just did investment management got me out of a very big bank where I was always just going to be a number. And so I took

4:04 that job. I still remember the first week of that job telling everybody in my group, I was going to ultimately move over to the investment side at Wellington and they all laughed at me and they said

4:12 nobody ever glows that. So the deck was stacked against me, but you know, at that time the firm was still growing significantly. To put in perspective when I joined I think Wellington was about

4:22 500 billion in assets today. It's over a trillion. So over the course of my career it doubled again. And back then they had a very unorganized, if you want to put it that way, investment research

4:37 associate program where a portfolio manager analyst would put their hand up and said like some help and then they go out and do a search for investment research associate, which was the entry level

4:48 job. And now it's a much more formal program but back then it was a little haphazard And so after about two years on the operation side, which was kind of the minimum requirement before you could

4:59 interview for internal positions, a number of research associate positions opened up. And to say I wanted to be an energy would clearly be disingenuous because I interviewed for every position that

5:11 was available, including the macroeconomic team, the fixed income team, the retail team, so essentially covering Walmart, Target, et cetera And got pretty far in all those processes, including

5:24 the final two for the retail job and didn't get that. It was pretty bummed, as you could imagine, after going through these four to six month interview processes and getting turned down each time.

5:35 And about two months later, the energy job opened up. And I think they said 160 people applied for that job, and I'm not gonna pretend that was the most qualified of the hundreds of people. But

5:47 the two people that I would be working for, one of which, the head. Energy analysts at the time that covered the integratives and the refiners was a gentleman by the name of Nila Shandavia, and he,

5:56 I worked on his accounts on the client administration side, so at least he knew my name and would call me once in a while when he wanted to know how much cash he had in the account. And then the

6:05 junior guy on the team was a gentleman named Greg LeBlanc, who I actually got to know because there was a kind of after work Wellington, informal Wellington basketball program, we used to play

6:14 basketball a lot in the north end. And so what you soon realized is being able to distinguish yourself amongst 160 applicants is really helpful when you have personal connections. And I just had

6:25 that point in my career needed somebody to open the door crack and give me a break, and I was very lucky and fortunate. And then you think about the timing. I joined the energy team in 2004. And

6:35 to be honest, I was like hitting the lottery because from 2004 to 2008, we were the highest revenue producing team in the entire firm. And so I was just the junior guy riding coattails, but it was

6:45 a great experience. But yeah, that's how I got to be where I am today. And none of it was intentional or mapped out. Yeah, I mean, that was heading into the world famous super spike of 0405.

6:59 And there was pretty meaningful pivot going on. I recall I was on the sell side. I think I was, you know, Wellington was a regular stop on my marketing swings through Boston. And, you know,

7:12 really deep and solid team, but there was a lot of,

7:19 it was very high rate of change because you had, you know, the Barnett, as I look at it, was really the grandfather of it all. And then quickly, Fayetteville follows. You've got Marcellus,

7:32 Hainesville, et cetera. So,

7:35 you picked the perfect moment, or maybe it picked you. And it seems a little more appropriate. It's never let go I'm making that transition. and, you know, trafficking and

7:52 ENPs, what was really the framework, the mindset, as it relates to, you know, to valuation, what mattered and what didn't in terms of how you guys were picking stocks? Yeah, I mean, it was,

8:04 it's a great question, 'cause, you know, I was able to live through what that transition was from conventional to unconventional, and, you know, I had a pretty interesting vantage point. The

8:13 first role they gave me was, you know, you think about from 2004 to 2006, oil went from 4D to, let's say, 80. And when you double the oil price, all of a sudden there's business models that

8:23 become economic that were, you know, largely dismissed, and for our coverage universe, it was anything outside of North America. And so the first role they gave me is, they said, okay, why

8:34 don't you go pick up at the beginning informal coverage of internationally MP, and international MP at that time, as you remember, was the Wild West, right? It was mostly aim-listed companies in

8:44 London, or on the TSX or in Australia, assets all over the place. The first stock I ever recommended, it's a company called Dragon Oil, had assets in Turkmanistan. And you think about being in

8:56 your early 20s, trying to judge geopolitical risk in a place like Turkmanistan that I couldn't find on the map six months earlier, tells you kind of what it was like being thrown into the wolves.

9:05 But that was a challenging environment because what you realized is it was all probabilistic, right? Most of these companies were early stage, maybe had an appraisal well, but a lot of it was

9:17 exploration driven and it was really just about how many shots on goal you had, how do you risk the acreage and then what's reflected in the stock price. And what you realized is pretty early on is

9:28 these should be pretty small positions and somehow diversified into a basket. And the reason I say all that is because when the unconventional came around, kind of later that decade, you can

9:38 realize why long-term energy investors were so excited because you had this repeatability.

9:46 and geological de-risking that we just never had before. I think there's two reasons why shale valuations were what some people think were excessive early on. I think one, it was the repeatability

9:59 that you would put on something that looks more durable than drilling one well every year, and then just the idea that you're just de-risking the entire investment early on, once you get to, let's

10:11 say, 100 wells in a play, you could pretty much predict what the outcomes were going to be on specific type curves, and so it really fundamentally changed the way all of us invested in energy.

10:21 What we didn't realize is, you were going to kill the Golden Goose because it was so good that the commodity prices would be under significant pressure and the marginal cost curve was coming down,

10:30 and so there's always this debate, what would you rather have, a resource repeatability and a low commodity price or the inability to add supply and a high commodity price, and unfortunately the

10:40 answer is these these companies are more clever to price and volume. probably the main reasons that the energy sector has been such a porous sector for maybe two decades now. It's created a lot of

10:53 derivative benefit for other industries both in the US and globally, but there was an obsession when we shifted from the gas phase, post-hanesville and Marcellus and

11:11 basically killing gas from the supply side because the industry was so good at executing at least and bringing on reserves and volumes and outgrowing what the supply to man balance required and then

11:28 shifting into oil. But there was a tremendous amount. I think the number was between 2010 and

11:42 maybe it's a 2010-2020. snapshot, pre-COVID, for sure. But the amount of cheap debt that was readily available to fuel kind of the drilling machine. And companies were routinely, as you know,

11:60 outspending their own cash flow to the

12:02 tune of 10, 20, if not more. And that almost seemed like

12:09 a reason to accord a premium valuation, because you were chasing purely physical growth as a proxy for value. And when I started covering the sector back in the 90s late, you know, we were just

12:24 seeing glimmers of the transition from what I call the geologic driven model of conventional to the engineering driven model of unconventional. But you know, where's the economic value was the first

12:35 question I asked and everybody kind of looked at me like I had three eyes and, you know, well, you know, you get into these convoluted discussions of economic value is really hard to measure

12:46 because GAP is the framework and ENPs have two different accounting constructs and on and on and on and on just trust us. And so there was a fair bit of skepticism, but it was a lot easier when you

12:59 didn't have to go through the variety of kind of asset profiles that you do in conventional. Yeah, no, that's right. And yeah, I think you make a good point that people overlooked it sometimes.

13:10 But it really was the intersection of the technological breakthrough with shale at the time of very low interest rates and capital availability. Because that number from 2010 to 2020 was about 300

13:22 billion of negative free cash flow that was used to raise production volumes. What I would consider kind of an artificial price signal, because companies were willing to outspend. And a lot of it

13:35 did have to do with the evaluations that were put on these companies early on. We had painted us the anti-growth. investors. But I always say, it should be a function of the valuation. I mean,

13:45 early on in shale, you think about the gas companies 2010 to 2013, those companies were trading at 10 times either or higher. They had to grow, right? Because they had a growth multiple and were

13:57 rewarded for it, at least in their share price temporarily. What fundamentally changed, and you remember this, in 2017, 18, 19, those multiples essentially got cut in half where you went from

14:07 trading kind of future development down to maybe PDP value, and yet the companies were continuing the same business model. So the reason why we, when I was at Wellington and other large

14:16 institutional investors started speaking out to these companies was they didn't change the business model despite the fact that the macro environment and the valuation regime had changed dramatically.

14:26 And that's something that I think companies struggle with is that reflexivity between financial markets and operating business models that's really, I think, tough for them to judge as investors,

14:35 we live it every day I heard Aubrey say. One time it was at the IPAA symposium in New York and he had a very pointed message about, look, we did our jobs too well in gas. And this was on the cusp

14:53 of, I think it was

14:55 2012. We were focused, I was on the buy side at that time, we were focused heavily in moving from the emerging investment thesis and the Eagleford to the

15:08 only real game in town of any investible size. If you remember in the wolf camp was down in the southern middle in basin, which is now the forgotten stepchild of the play. And so Aubrey made the

15:24 point that look, we're going to do it again in oil. And my somewhat conventional or traditionally oriented technical mind said, The low-coil molecules are a hell of a lot harder to move through.

15:39 Nanodarcy, poor space, then gas, but lo and behold, what drove all the growth between,

15:50 what global demand growth between 2010 and 2020 was purely a function of what we were doing with unconventional oil here in the US. And so there were obviously those same types of incentives to grow

16:04 into your elevated EBITDA multiple And so those were the behaviors that we saw. But the market was increasingly telling these companies in this sector, I think we what peaked in 2013

16:21 as the SP energy

16:25 as a waiting in the SP 500 was 13.

16:30 What is it today? 28. 28, we haven't gotten our heads much above, five in the last decade or at least since the OPEC surprise of Thanksgiving 2014 and it seems like the market has been beating the

16:45 industry boards and CEOs over the head with this somewhat less than subtle message but those behaviors are still out there and I guess how much of it is a function of I know you've you've long been

17:02 messaging the need for obviously consolidation and much more of it

17:11 you know how much is it is it a function of just you know self-interested actors in a highly fragmented industry still today yeah I mean there's a lot of reasons energy trades where it is but you know

17:25 the the biggest challenge I think is just the commoditized business model in a commoditized revenue stream you know early on in shale as you remember different plays

17:37 delineated at different times. You had catalysts, you had significant movements in that asset value relative to each other. And as we get to this maturation of shale, all the companies are

17:49 converging on the same business model. And then that becomes that you can arbitrage valuation multiples between the same companies. And so there's not a lot of room for multiple expansion. And so I

18:00 always say the only way you get premium multiples in equity markets is a scarcity premium. You know, let's take NVIDIA as the ultimate example, right? There's one company that can give you

18:10 exposure to AI GPUs so they can trade at any multiple you want. EMPs would be the opposite in the spectrum. You know, two companies operating right next to each other with the same model and the

18:21 same capital return strategy. It's really hard to differentiate and so they converge. And I think the challenges we have too many public EMP companies, you know, we've said roughly, you know,

18:35 rule of thumb, put a finger in the I think half of them still need to go away. And how do you do that in an industry where there's not a lot of job coming up, right? I mean, the old days you

18:48 could go out and start a new EP company because there was plenty of capital availability, particularly from the private equity side of the business. And then funding for the entire industry has

18:57 gotten a lot more challenging. And so I think most CEOs and increasingly board members, I mean, one of the things we hear is that board members are often the impediments because there isn't another

19:06 job for those board members if they sell the company. And the CEO tends to be properly incentivized through change of control, but directors don't have that same type of financial incentive. And so

19:17 you have a lot of impediments that are often social around, you know, who's gonna run the company, who's gonna represent the board, where does the company gonna be headquartered? Despite the fact

19:25 that you can often have two companies operating next to each other, where everybody from the outside perspective understands that they should probably merge and capture those synergies So it's a

19:33 challenge. I think we're getting there, but we're just getting there too slow, given. given the lack of interest in the public equipment. So from a point of reference, when kind of in the salad

19:44 days of the mid-2000s, into the late 2000s, roughly how many publicly traded kind of pure play EP companies were there? Yeah, we peaked out around 80, kind of 80 to 85, and that's kind of

19:58 everything above one billion. There's always got some noise at the bottom, but we don't really look at

20:04 those. Which would add significant headcount, but yeah, there's - Meaningless in the grand scheme of production. Yeah, and the aggregate capitalization of the sector as it exists today is a

20:16 fraction of a fraction of one of the Mag 7. Yeah. Right, so. But so we still have between 35 and 40 of those companies today, that would be above a billion dollars. And like I said, I think

20:27 that needs to get cut in half again. Yeah, and is the,

20:33 I don't want to say irrelevance, but the the historically low profile of the sector within the broad market is that, you know, is that from a big institution standpoint, you know, I've got my CIO

20:48 and I'm the energy PM. I'm not taking any kind of outsized risks with, hey, we've got to really ramp up our participation in the sector. What is the institutional, I guess, inertia here? How

21:06 would you describe that? Yeah, I think the data tells an interesting story, right? So we cut and slice the institutional ownership data every way we can. And I think it tells you what's going on

21:17 beneath the surface. One, you just take the five largest active managers in the space. So let's take off anger or BlackRock and state's here for a minute as they're just replicating the indexes.

21:27 But you think about the Wellington's capitals, T. Rose Fidelity, JP Morgan combined those with the five largest active investors in US energy.

21:37 Their ownership of energy is generally tracked the benchmark. So what it's saying is they're not really taking outsized best one way or the other. But what the biggest change has been over the last

21:48 called 15 years has been the composition of that ownership. And you go back to 2007, so let's think about that as the peak before everything crashed in 2008 when energy was 13 of the SP. Only about

21:60 a third of their holdings were in the top five largest names in the index And, you know, those are household names, Exxon, Chevron, Conoco, slumbers, EOG. When we look at the data more

22:11 recently, it's generally right around if not north of 50. And so what that's telling you is that when they do come back to the sector, they'll buy an equal weight, but they're just buying the five

22:22 largest names. And that suggests to me they look at it as a beta bet and not an alphabet. And by that, I mean, they want exposure to the commodity, in case, you know, war breaks out somewhere,

22:32 there's some inflationary pressure That causes oil to go up. And and oil can often have an inverse relationship to a lot of things in their portfolio. So they're hedging that risk out by just saying

22:42 I don't really have high conviction. I don't know but I should at least own Market weight of oil and within that own names that will will not hurt me right though. They'll generate a track the beta

22:53 And and I think the other component of that is you think about the resources on the buy side Folks like myself that had been doing this for a long period of time most of those folks have left right

23:04 either voluntarily or involuntarily I mean, I guess I'm a glutton for punishment having done this for so long over 20 years But most people go on and do another sector or they retire and so if you're

23:14 a portfolio manager one of these large institutions and your Energy analysts is you know new to the job, or maybe you even don't have an energy analyst So you're really gonna go Invest in that small

23:24 mid-cab name with some hair on it that you know if you get the geological Perspective wrong could really blow you up relative to that beta bet and so I think that has been a fundamental shift and why

23:37 we're seeing a valuation spread grow between large and small, which is, I think you either have to be in the index or not. I mean, it's almost binary at this point. And these small mid-cap

23:47 companies that are not in the SP 500, I think have a really challenging future. Yeah, I heard one former IR peer colleague that I used to market with when I was on the sell side, he said, and

24:06 this was about another career choice, screenwriting, he said, you know, it's not really a career, it's an event. And I think those that are out on the outside looking in from a market size and

24:18 relevant standpoint are, you know, back to being events or, you know, that when I ran money for about a decade, it was increasingly more difficult to say because of our deeper knowledge of the

24:35 asset class, we pretty much came at it from an industry framework. We had, we understood technically at a useful level what, how to profile and evaluate assets, both in terms of their physical

24:54 characteristics, but also in terms of risk, because it is a quirky, unique asset class And I think what you just said about the buy side having the attrition of expertise and just perspective on

25:12 this unique asset class, I think that is played out on the sell side as well. And so, has there

25:22 been an attempt or an effort to maybe rely more on the sell side because of your own in a house? I'm not talking you about you specifically as you're sitting here with 25 plus years.

25:34 and the gray hair to prove it

25:39 is how how is that you know that kind of relationship changed and what is it today between the institutional investing community and and how they you know how they value and work with research on the

25:54 sell side yeah I think it's a good point that's probably underappreciated that you know your typical asset manager looks at energy at you know sub three percent of the market you know and increasingly

26:06 with until more recently probably an over a burden of ESG concerns and kind of this view of terminal value risk and so why are we investing resources in it when you think about hiring

26:20 you know more seasoned investors and

26:23 so I think it's been a combination of hiring very junior people that are inexperienced with the sector and then relying on the sell side where you do have a few you know my gray hair counterparts that

26:33 have equally long, and their ability to survive, I think, speaks to the perspectives they probably have and can share with the buy side. So yeah, I think there's not a sense

26:46 of, the buy side's not insecure about the lack of resources and energy, because they just don't think it's relevant today. I think what's going to change is the next cycle, and we can debate when

26:58 that is, you know, three years from now, five years from, I don't know, but there'll be a time where energy is out performing again, and we saw this a little bit in '21 and '22, and then

27:07 there's a scramble. There's a scramble for talent, knowledge, experience, but today there's a degree of complacency out there on the Bison. Yeah, and with your earlier point about, you know,

27:16 the

27:19 vast majority of institutionally impactful or significant capital is going to be in those top five names. And so,

27:32 either in-house or from a broker. I, you know, there's real, the

27:38 cost benefit of someone potentially having an edge on Exxon is that that's almost an absurd thought to have. And so there is a little more, I don't wanna say autopilot, but, you know, you're

27:54 staying in with very tight guardrails and liquidity and, you know, you know, the quality of the institution, the one thing that Arjun Marchi talks about a lot is the need to have a fortress

28:05 balance sheet. So all those companies have fortress balance sheets. So you're not gonna get hurt in, you know, in the cycles that we've seen where, you know, we've seen repeat chapter 11s and

28:20 the somewhat

28:22 humorous term, chapter 22s that companies continue to have multiple lives have multiple lives. So I want to You know, you guys have maybe it's a good time to talk about the transition from

28:39 Wellington to Khmeridge, which I think has a unique profile and maybe give, you know, the folks out there a kind of a basic primer on Khmeridge and then we can take it on the public side from there.

28:55 Yeah Obviously,

28:59 for a significant part of my career, I thought I was going to retire at Wellington and that's why I stayed in Boston as long as I did. It was a great firm, but fundamentally, everything changed if

29:10 you think about 2018-2019 and the view towards energy and how uninvestable the sector had become and, you know, it was joke. It was pretty obvious to me because I knew a lot of the portfolio

29:22 managers for significant period of time and they'd still come by my office. I mean, I think part of it they were lost on the way to the bathroom or something, but do we come home to my office and

29:31 they. They first told me to cut my hair and then they'd tell me they were never going to buy my stocks again. And so it was a pretty glaring

29:41 decision that I had to make, which was, do I stay at a place like Wellington, which, you know, I'd been there for at that point, 18 years, thought I was going to retire there and do something

29:51 different besides energy that was just increasingly becoming irrelevant, or leave and find someone that believes like me that there was going to be money to be made in energy over time. And that was

30:02 not an easy decision by any means. But I did have kind of two views. One, you don't have a lot of competitive advantages in public equity markets. And one of them was I did have, you know, at

30:15 that point, 16 years in one sector and all the experience and reputation and relationships that can come with that. And so felt like giving that up at that stage in my career was really sacrificing

30:26 the only and the competitor with the banditite had, and then two. I did have this simplistic view that there was going to be money to be made in energy because of the transition, not in spite of it.

30:34 And by that, I just mean in a highly sickle, capital intensive sector, when you have impediments to capital flows, which we were seeing through the ESG, returns on a go forward basis should be

30:45 higher. And that was kind of my view. But we had to figure out a way to make money in public energy, which had been, as you know, a graveyard for most investors. And when I sat back and thought

30:55 about it, I thought there were really two impediments to making money in public energy. One was the underlying volatility, right, the underlying volatility of the commodities and then kind of the

31:05 amplified volatility within the equities. And the challenge we had at Wellington is, you know, outside of one hedge fund, everything we did was kind of evergreen long only. And what that means is

31:15 essentially, you know, let's say you have an endowment or pension that decides they want to invest in energy. And you go through that process and they approve the investment The next day you're 100

31:26 deployed in the fund. With no real thought around is at the right entry point and then you're just riding the volatility up and down until they call you up when they and say we'd like to take our

31:35 money back and, you know, informably, what happens every time you have a 30 drawdown in the sector. And so in a sector where it was hard enough to make money, there wasn't the right degree of

31:45 alignment with your underlying LPs or clients. And what I was always envious of when I was at Wellington was the private equity model because I thought not only were they stealing all the assets from

31:56 the public market, and I say steel, obviously, tongue in cheek, but they had the right or proper alignment. And it was essentially a called capital model, which is you could be opportunistic.

32:07 And so you just raised a capital commitment. And when the opportunity arose, your LPs delivered the capital on call, and then you were able to deploy opportunistically in the sector. And I thought

32:17 that's what the public markets needed. The challenge, obviously, was nobody had really done that model in the public markets before. So that was one thing I was focused on The second thing was,

32:26 um, the lack of responsiveness from what I would consider or call value destructive management teams. And if you think about it, Wellington, almost any company we were invested in, we were a top

32:38 10 shareholders just given our size. And that meant we had a seat at the table with the boards and the management teams. And so there was plenty of, you know, what they would call engagement. But

32:48 that engagement essentially was me sitting in a room across from a CEO or a director, advising them on what that I thought they could do to maximize shareholder value And they're really good at kind

32:57 of nodding and complimenting you and telling you how smart you are. And then you leave that meeting and nothing ever changes. But what I did see is when an activist got involved and kind of later in

33:08 my career, the only one really left doing it was Elliot. We had two big investments when I was at Wellington alongside Elliot. One was MPC marathon petroleum company, the other one was HESP. And

33:18 it's funny that when Elliot got involved, all of a sudden on a weekly basis, I was getting calls from the, from either the management team or the board, asking us as large shareholders what we

33:27 wanted. And so the responsiveness to that engagement changed dramatically. And so if I thought about it, well, how do you make money in energy, one, you need to better structure that as

33:34 alignment, and then two, you need to have activism in the toolkit to be able to catalyze change and really get that degree of receptivity. So that's your starting point. Then the next question is

33:45 why Khimridge, you know, I knew Ben Dell and Neil McMahon, as you know, those are two of the three founding partners of Khimridge going back to 2004 So I talked about it, 2004 was when I got the

33:55 job as a research associate on the energy team. And Ben and Neil were actually the number one ranked II analysts in the integrated oils and EMP at the time. They joined Stanford Bird Scene from BP,

34:07 they had come from the industry, had more kind of a technical, operational, and MA background, which for somebody like me who was new to the sector was great because they were able to teach me a

34:16 lot and, you know, the first research ship I ever went to London in 2006 was actually with Neil So I'd known those guys for a long period of time. They went off and founded Cambridge in 2011. And

34:27 the thesis there was essentially, we're writing research about all these emerging shell plays. Why don't we actually just go out and invest as principals instead? So they incubated Kim Ridge

34:37 originally within Stanford Bernstein, and then for fun too, they went out and started as an independent firm. I lost touch with them completely for, let's call it seven years. Didn't even really

34:46 know what they were up to. And then Ben came knocking around late 2018 to early 2019 because they actually recognized the valuation opportunity was on the public side. They were directly investing

35:01 in resources, particularly in the Permian and the entry price versus the public market that gap had widened considerably. So they said, well, let's just buy public equities to get the same

35:10 exposure, but recognize that they would be giving up the golden goose in private equity, which is control. So they said, what's a way to get control the public markets its use of activism? So

35:20 they started running a series of activist campaigns, PDC being the most notable in 2019.

35:26 And we were a top 10 shareholder at PDC in Wellington. So you think about how we got reacquainted was Ben came around for our support in PDC.

35:35 And we ended up voting for Kimmridge. A lot of what Ben and Kimmridge were saying about the need for change at the company and the industry resonated with us. But they ended up losing that vote by a

35:46 small margin. And the reason why is 'cause they couldn't get the passive vote. And for PDC, it was roughly 40 of the shareholder base was passive And at the time, and still today, Wellington

35:56 sub-advised the Vanguard Energy Fund. And so I had an interesting perspective on that vote

36:01 because Vanguard would call its managers. And the view was we were their energy manager. And so they wanted to get our perspective on any activist campaign. And so I was the EMP analyst and

36:11 covering PDC. So they called and I went through all the reasons we were going to support Cambridge. And they said, OK, we understand why you're going to support Cambridge. We're not going to

36:19 support Cambridge 'cause we don't know who Kim Rijez. They're a private equity firm, and they have no track record of being aligned with long-term public shareholders. And so they lost the vote,

36:30 ended up getting a significant amount of the changes they wanted at PDC anyway, if you remember, they merged with SCR, not too long after, but I was having drinks with Ben in late 2019, and we

36:44 were kind of recapping the activist campaign and just catching up on the sector, and what came out of that conversation was I needed a platform to do what I wanted to do, which was help reform the

36:55 industry and get a better degree of receptivity for management teams, and he had the platform to do that, but what he didn't have is somebody with the relationships and reputation in the public

37:05 market, and we kind of left that conversation thinking there's probably something to do here. Two weeks later, kind of around Christmas time, at least over text, we had a Agreement and principle

37:17 and mid-January, I gave my notice to Wellington and joined two weeks later, the beginning of February, 2020. And when you think about that timing of kind of what I was walking into with the whole

37:28 world changing with COVID, a couple of weeks later, sometimes ignorance is bliss. But that's essentially the backstory of how I joined Cambridge. Yeah, it sounds very familiar. We did it on a

37:37 much smaller scale fund. I was managing back, starting in 2007 And the fund was structured, it was long short. It was heavily EMP concentrated. And our public thesis was, we're going to combine

37:57 the best asset exposure across the place with the best public vehicles. And a lot of these, like the Eagleford and then the Permian at the time were still very embryonic And so you're taking some.

38:15 relative measure of geologic risk, if you can think about just, it's certainly not the type of geologic risk that you're taking in conventional, but you know, unconventional had a lot of nuance,

38:33 particularly plays like the Eagleford, both from a reservoir physics and a

38:40 geologic standpoint So taking big concentrations in single relatively illiquid stocks was a bit dicey, but we, you know, tried to do our best underwrite at a technical and industry level of depth

38:56 that, you know, we didn't we didn't lever our funds, but we had the flexibility and the direction long short that we could be, but we also set up a provision where up to 50 of our committed

39:13 capital could be invested in privates. whether those were pipes or pure private equity, and because of our smaller size, we were mostly doing opportunistic conventional stuff. But I always believe

39:27 from a research and due diligence standpoint, there's no difference in the assets across public and private There obviously, as you pointed out, over time can be pretty outsized differences in

39:43 valuation. But giving an investor

39:51 the opportunity to participate in things on the private side, it was an accounting nightmare, as you can imagine. But I think the thesis was sound from your certainly research perspective. And it

40:07 held a lot of logic for me.

40:11 And I think it gave us more bandwidth on our intelligence and research as well. But back to the kind of the emergence of activism, I remember for most of my cell side and bi-side career, both

40:28 hostels and kind of activist campaigns were always somewhat dismissed for, in my mind, not terribly sound reasons, but now I think you've seen, at least I've perceived it to be, you've seen a

40:49 much more blunt and candid communication between the investment community and the NP sector, both in terms of how,

41:01 when you listen to Q and A on conference calls or just the kind of the mainstream analyst and PM community has been much more pointed, And it's taken us a lot longer to get there just because of some

41:17 of the value-destroying behaviors that went on for well more than a decade. And so it seems like the activist role has found it's ideal spot from a timeline perspective. And so how would you

41:38 characterize

41:42 the perception the activist is pretty kind of bare knockeled, sharp elbow to, you know, I've kept up with the

41:55 announcements that Kim Rich has made. But I think what runs through what's out in the public domain is that there's, you know, there's a concerted effort to

42:10 first affect change within the existing. company in the existing governance structure, and then that progresses to, you know, pushing harder for, you know, changes that you clearly see from a

42:27 maximizing value creation standpoint.

42:33 It sounds like there's quite a bit of runway in your mind. Otherwise, you know,

42:39 this is not this is not a very kind of long next career path, but it sounds like there's still plenty to do. Yeah, I mean, I think there's two necessary ingredients for us to be successful. One

42:51 is a frustrated shareholder base, and anybody that's involved been involved in energy for the last two, five, 10 years is probably extremely frustrated.

43:02 And then two, management teams that either make value destructive decisions or aren't properly incentivized or motivated to maximize shareholder value. And unfortunately, that's been the DNA for

43:14 the sector for for too long. I like to say this is a sector that really is good at resource capture. If you give them resource, they'll delineate it, they'll get the land, they'll capture it.

43:27 Value capture is something very different, right? Because that often creates or necessitates being more dynamic about when you buy, when you sell, looking at valuations between public and private,

43:39 arbitraging those. This industry is much more challenged because most of their incentive structure is just get bigger, right? Just get bigger, grow your production, merge, who regardless of

43:51 the counterparty, just get bigger. And that means you get paid more, that means you run a bigger company, you have more private jets. Just the incentive structure for bigger versus more valuable

44:01 has been a fundamental challenge to the industry. And so when you're an activist and you have frustrated shareholder and you have companies that are in focus on value creation but there's a there's a

44:12 was a runway of opportunity. And then the question is, how successful can you be? And one of the things that we fought early on when I joined was the track record of activism and energy hadn't been

44:25 great. But I think that challenge was a lot of those were generalist investors that were activists first, energy investors second. And we obviously took a different track, which is let's take

44:36 somebody like myself who's an energy investor first and have never done activism And see if that playbook works a little bit better. And there's not much competition left. I mean, if you look at

44:46 who's active in the space today, it's us and Elliot. And I don't think it's a surprise that both of us have technical resources, direct invest directly on the private side as well. Because you had

44:58 a lot of generalists that came in and didn't understand how to navigate the commodity cycles and didn't understand really the kind of differentiation on the resource base Unfortunately, sometimes

45:10 activists are like a carpenter with a hammer finding a nail. They seek out underperforming companies with poor management teams, and that's fine as a starting point. But ultimately, we'll end well

45:21 if you don't have the assets right. And we start at the opposite end of the spectrum, which is we'll start with asset base and then ultimately try to figure out where those asset base is undervalued

45:32 and mismanaged. But if you don't get the asset right, as you know, in the sector, you're kind of dead in the water to begin with Yeah, I've often said that, you know, we go through these

45:42 extreme air pockets like we saw in the mid-20s and certainly what beset the industry and COVID and followed on for several years. We're still kind of reeling from

45:56 things like

46:06 GNA shrinkage, cost reduction, all of that But when you bring the consultants in to do the reorg restructuring. from an overhead standpoint, I often ask, well, the new organizational model is,

46:20 at least on the surface, streamline, you've got different functional structures or whatever the next, latest, and greatest is, I would ask people, well, is it the right portfolio for this

46:33 organization? Is it the right asset portfolio? Has anybody taken a look at the fit of the organizational structure, function, and capability relative to the asset base? And there hasn't been, in

46:49 my view, from a leadership standpoint, just a general observation. I mean, we both knew much more than I, but we've both been active managers, portfolio managers in this space, albeit. public

47:07 equities and, you know, physical assets are just inherently a liquid. It's, you know, they're, they're different kind of friction points, but it's really the same philosophy, in my opinion,

47:22 is that in this space, there's a disconnect between how executive management teams or has been is changing, look at the asset portfolio. And a lot of it is driven by, well, we got to get bigger.

47:41 And so the notion of something that I've acquired or I've discovered and am now developing may not be a win. Is there, you know, is there a real signal that ought to be thinking about changing the

47:56 portfolio in an active fashion? And there, there's just, again, my general observation is, there hasn't been enough proactive. um, portfolio shifting and, and kind of reallocation that I think

48:13 should be front and center as really the driving, the driving mindset of management teams in this sector. Yeah, no, you know, the way I categorize it is kind of top down versus bottom up. And a

48:26 lot of management teams get caught up in managing their portfolio top down, which is, all right, do I want to be gas or oil or do I want to be in four basins or a single base? And to me, it has

48:38 to be more nuanced than that. What assets do you actually own, right? And the way I always have thought about investing is it's bottom up. What are the organic opportunities that you have? Where

48:47 can you deploy capital

48:52 and where they sit on the cost curve? And that's something, when we talk to companies about managing their portfolio more actively, that's usually the sticking point is we're looking at a bottom up

48:59 and just saying, well, these assets are front end of the cost curve and these are tier two, tier three assets. And if the market's there for you to sell those today, you should be selling them,

49:07 because that's the value creation opportunity. Where does they just look at it holistically about, where do we wanna be positioned as a company? And it's a challenge, because as you know, most of

49:19 the people running these companies in the industry today or engineers or come from some technical background. And yeah, I don't think you have enough financial influence in some of these boardrooms.

49:28 And so we try to be a voice to the CEO or to the board and let them understand the perspective of your shareholders who ultimately own the company and how they think about value maximizing. Yeah,

49:40 and you come, you're fluent in their language as well, or highly skilled from a conversational perspective. You may have never run a reservoir simulator, drilled a well, but on location, but at

49:59 the same time, there really is a credibility bridge there

50:07 and some recommendations and advice that are critical that maybe there's not as much perspective or judgment. Hey, you're publicly traded entity. You have shareholders. The end game here is to

50:25 maximize value. And a lot of these things that the industry had

50:32 gotten to the rhythm of doing was almost 180

50:38 from real value creation. I used to conjecture about things well. If globally demand for the product is growing, I don't know, 2 a year, why does everybody need need to grow 30. That sounds like

51:00 a real capital bonfire waiting to happen. Yeah. No, I mean, you bring up a good point and, you know, kind of, when I think about, I talk about why Cambridge and one was, you know, the

51:15 ability to use activism in the toolkit, but, you know, the other is the structure and think about things more from a private equity structure when we invest in public equities. And the third would

51:24 really be the in-house technical resources because, you know, I do think credibility matters when you're trying to convince companies that they should be going down a different path. And, you know,

51:34 we have a technical team out in Denver around 30 or so individuals, geologists, engineers, landmen, and a lot of what we do from a research perspective, but also from an engagement perspective,

51:47 has the full support of that technical team. And we've had instances where, you know, we'll have a call with our technical folks with a public company's technical team. And that provides a

51:57 different level of credibility than if I was just at Wellington a second. economics major, looking at my Excel spreadsheet, you could understand why that'd be a little more challenging to try to

52:05 convince a company that you understand what's right from an operational perspective. Yeah, I covered this on the sell side, I covered the stocks in Houston, and I covered them in New York. And I

52:17 knew where I was more effective or could have those meetings that would get down into layers of the organization, talk about operations, talk about reservoir, talk about geology. And those were

52:32 always, I'll tell one little anecdote here. We, I think we were the first to start to use the base and level data to develop the typical well. And I'll, I remember it was when Anadarka was

52:46 running something like 68 rigs in the freestone, just machine gun drilling verticals and tight gas. And Bob Allison had,

52:58 done an interview for Platts and we were running headlong into the collapse that happened in

53:06 2002 or 2001 and gas prices in industrial demand because we had brought on such a tremendous amount of supply coupled with demand destruction and all those things coincided. I mean, gas closed

53:23 December 31st of 2000. I think it was 10 spot 00

53:29 and there were

53:31 half a dozen notables at that time in the MP sector that put on these really attractive collars when they announced in the start of 2001.

53:35 But

53:43 we had been analyzing based on the data that was available at the time, you know, you could do a tight East Texas gas. Well, you do a Gulf Coast. Well, you could do a handful of other basins.

53:54 And Bob had said in that Platt's article has said even if gas goes back to two bucks, we're gonna, you know, it doesn't affect our activity. So we challenge that with our rudimentary analysis and

54:07 we're running out, you know, a lot of different models and variations and sensitivities on FD and LOE and things like that. And it made absolutely no sense to continue at that level. So what we

54:23 were ultimately trying to do because I worked for a shop that was dominated by OFS research and OFS banking was, let's not miss this next air pocket like happened in '97, '98. And so we were just

54:38 trying to put a number on what kind of rig reductions we were going to see and walking it all the way back to how should or how would a rational ENP player behave given a radical dislocation in prices.

54:58 So

55:00 during that time, we got a lot of audience with heads of operations, engineers, production, drilling, et cetera, which was quite illuminating at the very beginning of all this. So just a little

55:14 detour sidebar there. Well, if we're gonna do sidebars, I have a good Anadarko story for you.

55:21 So I talked about in 2006, they gave me coverage of

55:26 International MP, and I guess I didn't screw it up enough that in 2007, they promoted me to an analyst. And so that was my formal coverage. I did International MP and refining. And then in 2009,

55:36 they decided to give me all of North America EAP as well. And so my biggest recommendation kind of mid

55:47 2010 in the kind of depths of Deepwater Horizon was that we should go all in on Anadarko And this is when the oil is still spewing out. And so I still remember June

55:59 2020, 2010, were increasingly becoming the largest shareholder of Anadarko, and they couldn't cap the well. My birthday was in June, and I was trying to get some time off that weekend, and I was

56:10 sitting at the beach, but back then they had a live feed, if you remember when they were trying to stuff the golf balls down the hole to block it, and it was unsuccessful. And so I come back that

56:20 next week, and the stock's down 20, and the view was, if you remember, the oil was gonna spread to Europe, and so we're gonna take down BP, and then Halliburton and Annadarko. That was Matt's

56:31 view, as I recall. Yeah, so it's dark days, anyway. We had a senior portfolio manager at Wellington who had a house, a summer house in Nantucket, and Jim Hackett had a house in Nantucket. And

56:44 so he comes to me, kind of in the depth of this, where I'm assuming I've screwed everything up, and I'm gonna lose my whole career over betting on the ability to cap up.

56:55 And he said, I was at church in Nantucket, and I saw Jim, and he was praying really hard. I don't think that's a good sign.

57:03 And he'd just sit there and he'd say, Of all the kind of analytical inputs, the degree of prayer was never on my checklist, so I didn't feel really good. Somehow it all worked out, and we made a

57:12 lot of money on the stock, because that was pretty close to the bottom. But if you think about harrowing times in a career, mid-June 2010, it was probably the hardest time with my Nant career So

57:21 let's look ahead, and I think we're getting close to wrap up. But one of the things we talked about last week offline was technology related, and we'll take it from the standpoint of we talked a

57:39 little bit. I'm keenly interested in this whole at least perceived arbitrage of taking undervalued guests like Waja and matching that with compute AI data center demand. and why there hasn't been

57:56 more actual ground-breaking movement on that.

58:03 Help me through how you think about that. Yeah, I mean, I think it's a unique opportunity for this industry to play a role in such a transformational technology like AI. We, as an industry, have

58:14 what Silicon Valley needs, be abundant fossil fuels on demand 247. The question is infrastructure buildout and then revenue splits. And as we've just learned with this industry, it can move slow.

58:32 You often need first movers. And I

58:37 really point to the risk aversion of boards.

58:41 Technology relies on merging technology, relies on moving fast, taking risks,

58:49 being willing to and kind of move on and this is an industry that can do that well in the field but in the boardroom it really struggles with that degree of change. And so my sense is what you'll see

59:01 is you'll see a couple outliers that take the lead and then you'll have fast followers. This has always been an industry of fast followers. Unfortunately sometimes it's a little like lemmings

59:10 falling off the cliff but oftentimes it can be a positive and so you're going to need to see some companies move fast, create a template for what that revenue sharing and kind of capital deployments

59:25 should look like. My sense is you might see it more on the private side before you see it on the public side because they're more nimble or more financially incentivized to create value and then the

59:34 public companies will come behind. So I think it's just a matter of if, sorry, when not if because the natural synergies between emerging technology that needs kind of 247 delivery of energy in

59:52 this industry that has had the ingenuity and the resource to be able to deliver that needs to come together. I wish and you probably wish it was faster, but I don't fear that we're not gonna get

1:00:04 there. I think the natural competitive advantage of AI in this country is gonna be energy. I think we have finally an administration that recognizes

1:00:16 that and so it's just a matter of time And when every million barrels a day added and the Permian adds another four plus BCF a day and that geoar continues to rise, it just seems kind of the perfect

1:00:30 intersection to take advantage of an arbitrage. Maybe there's some long memory about multiple compression related to the fact that maybe I decided to diversify in having my own drilling company air,

1:00:46 pressure pumping services provider, the type of diversification that I think has consistently been frowned upon, but this is a bit of a different strategic animal, if you will. Yeah. Yeah, no,

1:00:59 I think revenue diversification without capital intensity is the key to the sector. So I don't think the requirement's gonna be for the EMP companies to invest a significant amount of capital. It's

1:01:12 really just gonna be having a different revenue stream that maybe looks

1:01:16 lower at times, but more consistent and durable. And I think within a framework of a large resource base, having a percentage that has a different driver is actually gonna be a net beneficiary.

1:01:30 And being able to tell that story, I think about the integration between technology and energy is only gonna help bring investors back. So I'm quite optimistic when I think about the growth of the

1:01:41 country, the role that energy is gonna play in that. I think it's all positive. Right now, we're just dealing with some concerns around your turmoil prices and obviously others driving most of the

1:01:51 volatility on the gas side. But when you look out three to five years and structurally how well positioned the US EMP industry is in a maturing resource base and a rising marginal cost curve, I

1:02:02 still think the US shale industry and particularly the companies that are going to have inventory at the front end of the cost curve are the net winners of all of this. Which is operating on against

1:02:12 a backdrop of a structurally constructive or positive macro outlook.

1:02:18 It's just more patience required. Yeah, energy investors aren't patient by nature. They're just wondering too many times. So there'll be some pain before the payday. But for those of us that have

1:02:32 done this for a long period of time and have durable capital, quite excited about the opportunity over the next three or five years. Yeah, and if people are paying attention to the

1:02:43 energy news releases.

1:02:46 you're gonna get busy or are busy right now with more of

1:02:52 Kimmeridge's brand

1:02:54 of activism. So it's exciting to watch. We could go on for much longer than this, but I wanna be respectful of your time and let you kind of ramp down into the holidays

1:03:12 and enjoy the weather in Boston Yeah, the kids wanna wait Christmas, so if they're happy, I'm happy. But yeah, every year I live in Boston, now it's been 26 years, I question why I do it and

1:03:25 spring comes and somehow I stay another year. So, but thanks, Mark, for the time. Always enjoy our conversations and I have a lot of respect for what you guys are doing at Collide and Digital

1:03:38 Wildcat are so happy to be part of it We appreciate it, love having your voice. Like I said, at the outset, this is something that's been rattling around in my brain that I wanted to do. And

1:03:49 hopefully, those that aren't immersed in this stuff on a day-to-day basis that may be working in the industry are curious about how it all works and how people think about it from an investment

1:04:01 standpoint, because ultimately, at the end of the day, if you're working for a public company, you're getting incentivized and paid in the equity and why it's important to focus on the ultimate

1:04:13 objective and that's what public companies are essentially mandated to do is to maximize shareholder value and the NP sector is no different. It's just been through a really bruising decade plus and

1:04:26 to see someone who's been in the trenches doing this and being consistent with it, that that's the end game is, I think, extremely valuable and gives our folks on collide our community numbers. I

1:04:41 think registered on the platform. This will go out in channels beyond that, but

1:04:47 10, 000 or more, and these are hardcore industry practitioners who are living and breathing this industry on a day-to-day basis. So I think this is a good learning curve experience for them as well.

1:05:01 So, well, thanks again. Hope you have a great Christmas. I'll be spending part of it in Arizona So my weather may be a little bit better. It certainly won't be a white quest Christmas, but I

1:05:14 only need

1:05:16 to drive it to Flagstaff to find some snow. All right, well, we all need Mark and Happy New York. Good to see you. Same to you, man, and we'll talk soon.