2013 US crude oil production reached its highest levels in 24 years. FY 2013 oil production was up 15% from 2012. Oil production from hydraulic fracturing, or fracking, in North Dakota and Texas made up 83% of the US oil production growth. Natural gas production has seen an equally incredible rise in production and reserves. US natural gas reserves are at an estimated 2,203 trillion cubic feet or enough to last 92 years. This is up ~20% from just a few years ago. The Frackers is the story of a few small oil-gas companies whose wildcatting CEO’s paved the way for this US oil-gas resurgence, while creating billions of dollars of wealth in the process. 10-15 years ago shale formations were the ugly stepchild of the oil-gas industry. Why? First off no one could figure out a way to effectively get the oil-gas out of the shale. The majors didn’t care about shale formations, but that didn’t stop one man.
George Mitchell’s, Mitchell Energy & Development Corp, was the first company to really believe shale formations were the future of domestic oil and gas production. He started testing hydraulic fracturing techniques in the Barnett Shale back in the 1980’s. He drove his board members absolutely crazy as he refused to give up on trying to get oil-gas out of shale formations. If George Mitchell weren’t the largest shareholder in his own company the board would have surely kicked him out. It wouldn’t be until he reached the ripe age of 80 when he figured it out, and it would change the oil-gas industry and country forever. Mitchell was the pioneer that paved the way for the next wave of Frackers: Aubrey McClendon of Chesapeake Energy (CHK), Tom Ward of SandRidge Energy (SD), Harold Hamm of Continental Resources (CLR), Mark Papa of EOG Resources (EOG), and Charif Souki of Cheniere Energy (LNG). The book tells the story of each person, their humble beginnings, and the role they played in the US oil-gas boom.
It wasn’t Exxon Mobil, ConocoPhillips, or Chevron that pushed to find these huge shale formations and develop technologies to extract energy from them; it was these small independent oil and gas companies led by headstrong wildcatting CEO’s that wouldn’t take no for an answer. These CEO’s created vast amounts of wealth for themselves in the process. Harold Hamm of Continental is now the richest oilman in the country (net worth $14 billion). Not all of the stories had happy endings. Aubrey McClendon and Tom Ward were kicked out of their companies, but their contributions cannot be under estimated. With a $50,000 investment in 1989, Aubrey built Chesapeake Energy into the 2nd largest natural gas producer in the country. Aubrey was seen as very reckless which forced his dismissal, but he is one of eight CEO’s (including Warren Buffett) that produced at least 20% returns annually over 20 years of service.
“Ok great Ian, but what does this book have to do about microcaps?” Good question.
Microcap investing in its essence is always an underdog- bet on the jockey type of story. If you find the right company with the right CEO you can make 2-5-10-50x on your money. These oil-gas men and their companies were underdogs, just like many microcaps, but they figured it out and made a killing. Most of the reading I do is reading business biographies. I love reading how an entrepreneur got their start, what they learned, where they failed, etc. This helps me quite a bit when evaluating microcap companies and management. You will really enjoy reading The Frackers.
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