1 of 8/ Dumb Calls I Made as a Street Analyst, Post #1
I have written two deep dive posts about applying an ROCE framework to the energy sector. Here is a practical example using a terrible call I made on OXY post its $3.6 bn March 2000 Altura Energy (Permian Basin) acquisition.
I have written two deep dive posts about applying an ROCE framework to the energy sector. Here is a practical example using a terrible call I made on OXY post its $3.6 bn March 2000 Altura Energy (Permian Basin) acquisition.
2/ I hated the deal at the time…that was wrong. A sharp, subsequent improvement in OXY’s ROCE post Altura, partly due to good performance on the asset and partly due to the onset of the Super-Spike era, made it a home-run stock in the 2000s after a miserable 1990s.
3/ I recall no talk about China/EM demand potential in 2000. We all expected robust non-OPEC growth. The Euro majors were in a bidding war to have the lowest L-T price deck: $16, $14, $12 forever? At GS I fought for the $17.50 view...yes 2 decimal precision!
4/ Only those old, hanger-on dinosaur analysts thought oil might rise again. They were missing the new paradigm: Oil was dead and would stay low permanently. E&P was a bad, low return business. Some Euro Majors were rebranding “green” to move past oil & gas. Sound familiar?
5/ The fools we thought were running Oxy then had the gall to expect $20+ WTI. They also thought the Permian Basin still had life. WTF? We all knew the US was dead and the only hope for high ROCE was to assume a low price deck and invest int’l or deep water. Acquisitions are bad.
6/ I vividly recall the dinner OXY hosted. Dr. Irani specifically told me, “Arjun, Altura has 850 mn BOE we will produce over the next 10 years. In 10 years’ time, we will still have 850 mn BOE of reserves. There is a lot of low hanging fruit here.” He was right.
7/ To cut this long thread short, by 2004, prior to the super cycle, it was overwhelmingly evident OXY had made a great deal. The super cycle made it a home run and arguably one of the greatest acquisitions in the history of the oil business.
8/ Lessons learned: (1) oil is deeply cycle and the consensus “new paradigm” is often wrong; (2) buying assets from super majors at a trough is a time tested $-making E&P strategy; (3) Oil is critical to human prosperity; its impending death has been repeatedly exaggerated.
PS/The longer version is here: arjunmurti.substack.com/p/dumb-calls-i…
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