PBPA keynote speaker Bobby Tudor was concluding his talk. He remarked that there are some people—many of them politicians, but some of them just members of the general public—who are just never going to be happy with the oil and gas trade. Said Tudor:
“They’re only going to be happy—or they think they’re going to be happy with you—insofar as the oil and gas business goes out of business,” Tudor said. “We all know that that is not happening. It’s certainly not happening in our lifetimes because the world needs what we’re doing.”
He doubled down on that.
“And in particular, the world needs what was the Permian Basin is doing. So we [his company, TPH] believe that there is a bright outlook for the Permian Basin. It’s likely to be different at the end of the day than all of us are expecting. But you’ve got great jobs, you’ve got great people, you’ve got great companies, you’ve got a great regulatory environment, you’ve got low break-evens. The Permian Basin will continue to be a really, really critical part of what’s going to happen [in the world’s global energy situation].”
Tudor, 60, is a veteran of the oil and gas financial community. And even though he and his company (they are PBPA members) are based in Houston, they are all but fixtures in Midland and Odessa and all parts of the Permian Basin.
He gave his talk on Oct. 1, online, in the PBPA’s annual meeting, handled via Zoom for the first time ever. Four days later, speaking by phone from Houston, Tudor reflected on the occasion and shared some of his own background and his interest in what PBPA does for the industry.
“At our firm, we’ve been followers and fans of the PBPA for such a long time,” he said. “And we’ve been so involved in the fabric of what’s happened in the Permian. And we’ve been committed to our clients whose efforts have been concentrated in the Permian. The Permian Basin has fundamentally changed the dynamic of onshore oil production, globally. We have made it our business at our firm to be in the middle of that. So when I got called by them [PBPA] and asked if I would consider participating and giving a talk, it was a very easy and natural, yes for me, because the Permian has been great to our firm. We continue to be big fans and highly involved with Permian-oriented companies. By the way, it’s not just in the upstream, it’s not just the producers. It’s also all the infrastructure companies and also the service companies as well.”
Asked about his growing up years, Tudor said he was raised in a small town in central Louisiana, called Pineville. He later would make his way to the big city of Houston when he received a basketball scholarship from Rice University. He played four years (1979-1982) in the old Southwest Conference.
A 2013 article in Rice Magazine by Mike Williams gives some insight into the oil financier as athlete and student:
“Tudor had respectable stats even with such formidable teammates as future NBA star Ricky Pierce and Rice coach Willis Wilson,” Williams wrote. “He is 27th in career points at Rice with 1,018, ninth in career assists with 297, and tied for fourth in minutes played at 3,470. He was team captain twice and won the Bob Quin Award, given to the university’s most outstanding all-around senior male athlete.
“’Bobby was smooth,’ said English Professor Dennis Huston, who was faculty master of Rice’s Hanszen College during Tudor’s four years there and counts him among the best athletes he’s taught in 44 years at Rice. ‘He could move with incredible skill between the world of jocks… and the world of the college and of the classroom. All three of them are really different worlds. That doesn’t happen often.
“’What made Bobby a really good student was that he was tremendously articulate. He wrote really well. He thought really well.’”
Tudor played two years professionally, overseas, immediately out of college, in Austria. He held a Fulbright teaching fellowship for one of those years.
He returned to his studies then, back in the States, and finished law school at Tulane, whereupon he joined Goldman Sachs in their corporate finance department in New York City. He married his high school sweetheart, Phoebe, and in New York she went to graduate school at Columbia.
“Goldman Sachs is where I learned to be an investment banker,” Tudor told PBOG. “Goldman’s a great place. The standards there are very high. It has incredible reach around the world. The quality of people you work with is uniformly excellent. I was there almost 20 years and had a really good experience on the whole.
In 1990, when Goldman was looking for someone to move to Houston to help beef up the investment banking business in Houston, Tudor volunteered. He spent ten years there, then moved to London with Goldman. He spent five years there leading their energy business internationally and then decided it was time to do something different. He wanted to do something entrepreneurial.
“So we moved back to Houston and I left Goldman and started Tudor, Pickering, Holt, and Co.,” he said. “So, that’s the [life] sequence. We’ve got three grown kids, two girls and a boy, and we live in Houston. And I have been involved in just a whole range of kind of community and philanthropic stuff in Houston, in addition to TPH.”
In November 2017, TPH merged with Perella Weinberg Partners, which is a more broadly based New York City-based firm. Perella Weinberg did not have an energy division, thought they had “pretty much everything else.” TPH became the company’s energy business.
“But we still operate under the TPH brand, so most people don’t even know that we’re part of a bigger firm,” Tudor said.
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The Basin and the State of the Energy Markets
A Q&A with Bobby Tudor, Chairman of Tudor, Pickering, Holt, and Co.
The title of Bobby Tudor’s keynote address to the Permian Basin Petroleum Association membership, during the Association’s Oct. 1 annual meeting, was “The State of the Energy Markets and the Permian Basin.” His remarks were so insightful and incisive that we wanted to do more than just share them. (And we do share them—all of them, along with his slide presentation—on pbog.com.) We also wanted to learn more about TPH and its connection to the Permian, and more about Tudor himself and his views on the industry. In this Q&A we follow up on key points from his talk and we consider some other angles besides.
PBOG: What percentage of Tudor, Pickering, Holt & Company’s work is oil and gas related?
TUDOR: One hundred percent.
PBOG: So you’ve been along for the whole ride, when it comes to the shale revolution and the Texas Miracle and all of that…
TUDOR: Oh yeah. I’ve got a long personal Permian history. I made a cold call when I was a very young banker at Goldman Sachs on Scott Sheffield, who then was the CEO of Parker and Parsley. And I was Don Evans’ banker when he was at Tom Brown Inc. When we started TPH, which was really at the end of 2006, it was just as the whole unconventional revolution was taking off. So our firm was in at the birth of the shale revolution and we made the Permian a very, very big focus for us. I think we’re the only investment banking firm that does a Christmas party for our clients in Midland. [Laughter]
PBOG: Looking back over all that whole sweep of history there, can you recall a specific moment when something happened and you thought to yourself, “Wow, this is big. This change is big.”
TUDOR: With regard to the whole shale revolution, the answer is yes. I was right in the middle of it because when I was [still] at Goldman Sachs, I was the banker leading the sale of Mitchell Energy to Devon. And Mitchell was really the pioneer in the unconventional world. It [shale] was gas-oriented at the time and it was the Barnett, not the Permian, but I trolled around for two to three years trying to sell Mitchell and making the case that large-scale horizontal drilling and multi-stage frac’ing were in fact, economic. People were skeptical for a very long time until Devon finally bought into it and that turned out to be just a fantastic acquisition for Devon. So, when we finally got Mitchell sold to Devon, in that moment, it was clear, in my mind, that the mainstream upstream oil and gas world was buying into a technology that was fundamentally changed the U.S. onshore business.
PBOG: What about with the international community? Has there been a time when suddenly you realized that the international community is interested in what’s going on here and what’s going on with TPH?
TUDOR: Yes. Early on, in 2011 and 2012, we represented three different Chinese companies and consortiums, in doing big joint ventures in the U..S. onshore business, mainly with Pioneer. So we established ourselves as a real expert on the kind of technical aspects and financial aspects of the Permian, [so much so] that when foreign institutions were looking to get involved, they wanted our help. That was a big, important part of the early growth of our business.
PBOG: During your PBPA talk, you remarked that “Capital sentiment is driven by returns, not by what the politicians say and not by what the media says.” Could you expand on that a bit?
TUDOR: Yes. It’s much easier [for investors] have an “out” where they say, “Well, we are more focused on renewables… or we are worried about ESG issues…” Or whatever. “Therefore, we’re not going to invest in oil and gas…” It’s much easier to say something like that when the industry has had 10 years of poor returns. It’s kind of like someone asks you to a dinner party that you don’t want to go to. Instead of saying, “I actually don’t want to go to the dinner party with you,” You say, “Oh, you know, I promised my cousin that I was going to help him move.” [laughter] You know what I mean?
PBOG: Yes. That brings to mind something else about this whole business of poor returns. We’ve all heard that this year, and maybe a little bit in 2019 as well. But looking back further, over, say, ten years of the Permian’s performance, the idea of “poor returns” has to strike some as a tough judgment. Many would say, “We’ve had a boom going on—this is the place where everything was happening.” So it has to be a surprise to them to hear that we’re not just seeing poor returns now, when oil is at $40, but we’ve been seeing them for a long time.
TUDOR: That’s the problem… that’s the problem. This has not been a happy experience for the capital providers to the business. There’s been a ton of growth. A ton of production growth. And revenue growth. But profitability has not followed that. And there was always a promise that profitability is just over the horizon. “It’s coming, it’s coming, it’s coming.” But ibasically it hadn’t come except for very, very few companies.
PBOG: Is it because—speaking of the publicly traded companies only, for just a minute—is it because they perhaps just did not pay a dividend all those years?
TUDOR: Oh, none of them paid dividends, no. They were reinvesting all of their money back into the business and they were borrowing [on top of that.] They were spending more than they were generating in free cash. So they were borrowing money to do it or they were issuing equity to do it. And at the end of the day, it just has not generated returns.
[Note: The largest of the publicly traded oil companies—the Exxons and Chevrons and the like—generally do pay dividends, and Tudor is aware of that. He was speaking in broad terms when he said that stock-held companies in the Permian were not. Most aren’t.]
TUDOR: Look, there was some money made in the 2010 to 2014 timeframe by some private equity firms, but generally speaking the way they made it was they built a big land position. They drilled a few wells and then kind of sold the dream to the next guy. So they made money, But the assets ultimately didn’t make money, you know what I mean?
PBOG: Yes.
TUDOR: So, that’s the problem.
PBOG: You talked a little bit [at the annual meeting] about Blackrock and ESG [and the dampening effect they’ve had on oil investment] but you also pointed out this whole issue of financial returns, or the lack of them, and at one point you said that one of your friends says, “The industry’s problems are more red than green.” That was a surprise to some of us because we’ve heard so much about ESG and the green movement and some of us feel like that’s holding us back. We don’t get the investment dollar because we’re not “green.”
TUDOR: There’s an element of that, for sure. I’m just arguing that that is not the driver.
PBOG: Okay, moving forward, you also said that “Capital flows have shrunk from [because of] macro concerns around demand and poor returns. Can you say more about demand?
TUDOR: So it’s a global demand issue, right?
PBOG: Yes.
TUDOR: So, basically demand has grown a percent a year, more or less, for the past 40 years, almost uninterrupted. When I say “demand,” I mean global demand for oil. Obviously, COVID put a major dent in that. So demand went from a hundred million barrels to… well… we think we’re going to exit this year probably somewhere around 93 million barrels. And what the market is worried about right now is what happens to that 93, right?
PBOG: Yes.
TUDOR: So, does it get back to 95 and then start to level off? Do we never get back to a hundred million barrels?
PBOG: We’ve heard that.
TUDOR: Right? And so there are people who believe that to be true.
PBOG: Yes.
TUDOR: You know, that seems unlikely to us. But look—it’s hard to predict. And if the truth is that we’re going to level off at 95 million barrels and it starts to slowly decline over time, then that’s bad news for the equity. Now, our expectation [TPH’s] has been that we’re likely to continue to see global oil demand grow, creep up, for another 15 years or so. And then start to level off and then start to go down as electric vehicles start to take more share. And as efficiency in traditional combustion vehicles get better, as efficiency in airline aviation and shipping and in bunker fuel gets better, and as the world getting more focused on trying to use less hydrocarbons and doing what they’re doing.
PBOG: Right.
TUDOR:
And so the question is, have we already reached that level or not? And we don’t think we have at all. But it’s hard to know and there are definitely market participants who are worried about that.
PBOG: Right. We’ve wondered if exports, especially maybe natural gas, can help offset any declines in domestic demand. In other words, if the domestic market wants less oil, maybe because they begin to drive more electric cars, just the same, in the Third World, you’d think that those markets would stay with just traditional oil and gas products. And it seems like there’s a market to export it.
TUDOR: Yes. And there is a market to export it, for sure, and that’s where the growth has been. And that’s where we think it’ll continue to be—in emerging economies. Because, in the United States, overall consumption is likely to continue to drift downward, as it has been doing for some time. And the same would be true for Europe, but that’s not true in much of the rest of the world. And so we would agree with you. But a lot of that is currently doubted by a lot of people. And so I think [that what you get today is] concern about a supply/demand balance issue. It’s a concern that the first time you get oil prices to creep back up into the—pick a number, mid fifties?l—then all those crazy people in the Permian Basin, they’re going to start producing like madmen again.
PBOG: Yes.
TUDOR: And we’ll find ourselves right back in the same oversupplied position.
PBOG: Okay. Jumping to another place here, you talked about investments in the U.S. oil industry, and you made the point that, “If in 2015 you invested a dollar, if you were in a mega cap, your dollar would be worth less than a dollar today. And if you were in one of these Permian [here he meant companies that are not mega-cap and not international, but rather are smaller and operate only in the Permian] you’d have 60 cents on the dollar.”
TUDOR: Right.
PBOG: So the question is “Why?” Were the 2015 prices overvalued? Was that the reason why those assets are worth less now? Or is it because of commodity prices in 2020?
TUDOR: It’s a combination of both. Energy equities do tend to follow commodity prices. And the current commodity price, and the outlook for the commodity, is pretty negative. Most equity investors feel like we’re more or less in a $40 WTI world for a while. So that’s part of it and that was not the view in 2015. Sometimes, as I’ve argued… sometimes we make this more complicated than it really is. It’s all about the oil price.
PBOG: Yes.
TUDOR: And at $40 these companies just don’t generate huge returns… It’s just not an attractive return on capital, at $40.
PBOG: Here’s something that perhaps some people are thinking. It’s the idea that oil industry management doesn’t deserve as much criticism as it has gotten in the past 2-3 years. Some CEOs in oil, in the Permian, have been bashed by the financial media for what they deem poor performance. And yet some of us have thought, “Wait—these companies don’t control the commodity price. The same company, if oil were trading at $60, their CEOs would be geniuses, I mean, isn’t that true?
TUDOR: Yes. But look… The commodity price really, really matters, yes. But what management sometimes teams do, and what they hould get held accountable for, is operating with balance sheets that assume commodity prices going up-and-to-the-right forever.
PBOG: Yes.
TUDOR: Right. So you lever up and then you have a collapse in commodity price and your company’s in trouble. Well, whose fault is that?
PBOG: I guess you’d have to put it back on the CEO. So is it because they should’ve hedged or…
TUDOR: Yes. Hedged… or it could be a question of the amount of debt that you’re wanting to take on.
PBOG: Another thing you said in your talk is that scale is increasingly important—and scale of course also brings with it implications of A&D—acquisitions and divestitures. If you had advice for, say, a small to mid-cap E&P company in the Permian Basin, based on the idea of the need for acquiring scale and the need for efficiencies and so on, what would your recommendations be? They’re the ones facing the biggest uphill situation in this climate, right?
TUDOR: Yes. That’s right. It’s harder for those guys, I think a lot of them are going to find that life is so miserable in a $40 environment. And they could find that they just can’t generate attractive returns on capital. So it could be that they’re going to need to merge into larger organizations. We think a fair amount of that is likely to happen.
PBOG: Is there anything else from your talk that you might want to expand on?
TUDOR: Yes, and I showed this in two of my slides. The economics of the Permian Basin, the best parts of the Permian Basin, certainly, are basically as good as almost anything in the world. And so while global demand may be flattening and maybe even be shrinking, it’s still going to be a hundred million barrels. And that has to come from somewhere. The Permian Basin right now produces just under 5 million of those barrels. So there is absolutely going to be a long-term role for the Permian Basin in global oil production.
PBOG: Yes.
TUDOR: Absolutely. And I shared this in my talk. Because the rock is great, the infrastructure is great, the regulatory environment is great, the talent pool is great. The tax regime is great. You have all the pieces in place for the Permian to be a really, really meaningful player. And that’s why the biggest companies in the world—Exxon, Mobil, Shell and Chevron, you name it–they want to have a meaningful amount of their production coming from the Permian Basin. And they’ve been redirecting capital to make that happen.
PBOG: Which is a good indicator.
TUDOR: It’s a very good indicator.
PBOG: So if they can hold on to their 5 percent, that’s great. And is there anything to say they couldn’t get increased market share to 6 percent?
TUDOR: No. No, they probably can. They probably can.
PBOG: You have been great. Thank you for your time and for your PBPA keynote address.
TUDOR: My pleasure. Thank you and take care.
By Jesse Mullins