Josh Young from Bison Investments discusses on Vital Energy and his energy outlook $VTLE (Episode #151)
Josh Young, CIO of Bison, returns to the podcast to discuss what's going on in the energy markets and his recent investment thesis for Vital Energy (VTLE).
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Transcript begins below
Andrew Walker: All right. Hello and welcome to yet another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot. If you could follow, rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have on for the second time. Josh Young from Bison Investments. Josh, how's it going?
Josh Young: Good, how are you?
Andrew: I'm doing great. I'm really excited to have you on. I think we're going to talk oil and energy company today. Depending on the day oil could be up $2 per barrel, down $4 per barrel. It's exciting times, but let me start the podcast the way I do every podcast. A quick disclaimer, just to remind everyone, nothing on this podcast is investing advice. We're going to be talking probably a couple of oil and gas stocks, and then we're going to focus on one, but it's more in the small cap land. Obviously oil and gas stocks come with extra volatility, extra risks. So everybody should just please do your own work. This isn't financial advice. Please consult a financial advisor. And with that out the way, Josh, we are talking February 10th, 2023. I now you cover all things energy, particularly oil. I guess we could start maybe talking about what your views on oil and gas kind of in general are as we sit here and then dive into the company we're going to talk about which is Vital Energy, the ticker there is VTLA.
Josh: Yes, sure. So thanks for having me back on. I think the last when we talked about, and again my own disclaimer I'll try to say where I own stocks. None of this is a recommendation. I may buy or sell stocks at any time. And this isn't an offering. I run a investment management company. I'm the Chief Investment officer and I'm not soliciting for that either. This is just, it's fun to get to do these and I like listening to your podcast, so it's nice to get to come on and chat and hopefully people find this educational and informative. But please don't-
Andrew: I [inaudible] that man.
Josh: Please don't rely on anything. I say for making an investment decision. And please consult an investment advisor and I'm not advising on which advisor that should be. So there's my disclaimer. So, yeah I think it's a very interesting time. I think the last when we talked about was Journey Energy, and I think it was about a year ago.
Josh: And that was, I think Journey was one of the best performing oil and gas stocks last year, which was pretty cool. And it sort of feels like- and actually it was one of the best the year before, but so far it's sort of been a little dicey.
Andrew: You know, it's early, it might- the assets look interesting. It might be one of the best performing for 2023 as well.
Josh: Yes, yes. And the goal of this isn't, I think, to talk about them, but they're really cool. They have their own sort of power generation business that they fit into the sort of classic value model of Good Co, Bad Co. Where ironically the oil and gas assets are the bad CO and the like a hundred percent year over year growing three times roi power generation business, they're growing is the Good Co. So it's sort of cool to get to talk about that stuff, but it's been just such a crazy time for oil and gas in between when we last spoken now oil and natural gas prices have roughly doubled and then fallen by about 50% from peak to drop. And now natural gas is at a price that doesn't make any sense. I just had lunch with a natural gas producer who like, I think they're going from two to zero rigs and gas and oil is, has sort of, it looks like bottomed and maybe is on its way back up. But yeah, just sort of crazy volatility. And like you were saying, it could be any given day if we had done this or was it yesterday, oil would've been down and today it's up, and two days ago it was up. And it's a very, very volatile and very interesting time.
Andrew: Let us just says on Nat gas. So, I'm no Nat gas expert. I do follow a lot of these companies and talk to a lot of them, but I specifically remember in June of last year, I think I even sent you a DM when this happened. I talked to one Nat Gas person and they were like, Nat Gas was at nine, which obviously in hindsight was the highs. And they kept saying, "Look Andrew, I keep doing the supply demand math and no matter what I do, I just don't see how Nat Gas can go down from here. There's just too much demand and not enough supply that can come online quickly enough." And I mean, literally like four hours later, Freeport, which is the big LNG, like two, 2 billion mcf or whatever it is per day of exports, literally four hours later that blew up. And I think that's really impacted the Nat Gas. Sorry, but you said you just talked to somebody who's a Nat producer. They said the price doesn't make sense. I mean, no one knows what the future holds, right? But I hear from all sorts of people, "Oh, Nat gas too low. Freeport comes back online." We get some support inventory draws down. We're still into kind of same issue. And then I hear other people who say, "Oh, we had a warm winter storage is up." I don't see how Nat gas doesn't go to zero or negative over the summer just cuz we've got too much storage. So what are you kind of seeing in the Nat gas [inaudible]? What was your friend you were having lunch with talking about?
Josh: Yes, so in in that context, specifically deploying capital to drill more dry gas wells, especially in the Appalachia. So Marcells Utica, especially Hayesville and a couple other spots where there's very low local realized pricing. I'd argue also in many parts of Canada, although apparently that's a sensitive topic cuz people get very sort of territorial on those sorts of things. But, if you make $2 in MCF on your dry gas, but almost doesn't matter where you're producing it, you're probably losing money on a full cycle basis.
Josh: So they weren't saying that they thought the fundamental price that the actual like sort of posted price at 9X should be higher or lower than the current price. They were saying from a capital expenditure perspective didn't make sense and then talked about a number of their competitors who were at least saying that they weren't going to drop bricks. And so it sort of feels like the battle days for shale with natural gas, where you have this sort of game of chicken or prisoner's dilemma where everyone's sort of, "Hey, on a half cycle basis, my stuff works." And everyone else is going to drop rigs, so it's going to be fine. So generally one thing obviously it's been a warm winter so far and and Freeport has been offline for five months or so longer.
Andrew: Probably longer, yeah.
Josh: No, no, no. But it's been off for five months longer than it would've taken to just actually fix the problem. And so whether that's regulatory, whether that's intentional, whether that's, whatever, there's various different explanations but we're- and that's really significant cuz it was a little over two DCF a day between exports and the actual gas necessary to power their facility. And to super cool the natural gas to essentially, super freeze it to get it to from gas estate to liquid to be able to put on a boat and bring it to your upper Asia. So there's really, there's been some unusual circumstances get where we are, but the fundamental gas traders I know, and the ones I've been talking to for months have all been short gas, basically a hundred percent of this moved down. So they're doing really, really well. At least the ones I know. And I actually don't know any natural gas traders who have been long natural gas pretty much at all over the last six months. They basically just shorted it all the way down. Haven't met anyone that what I mean, I know people that are trading from a retail perspective, UNG or Boyle or one of those sorts of things that own it as a sort of reversion to the mean trade. And so it's sort of this really interesting situation where the fundamentals are terrible if you assume everything sort of continues as is. And then even they're terrible if Freeport comes back on over the next month or so, which is sort of the consensus that looks like. But it does look like there are some producers who are going to cut some rigs and everyone says, "Oh, no one's going to do it." And then when you talk to them one-on-one, they're planning on cutting some, and they might know one or two other people are one or two other companies that are going to cut some. And then the rig companies just reported and the onshore rig companies and they're all saying, "Oh, our rig rates are going up not down, and that utilization's high." But then you can see the posted rig count and the posted rig count's falling both for oil and gas.
Josh: So it's just a very interesting weird time with lots of sort of cross trends. And the way I've navigated it is I have almost no direct pure gas exposure and I haven't really had any for a while. And like the closest exposures I'll have are sort of like the journeys of the world where they have oil and gas and where the gas has represented a very small percentage of their revenue in cash flow and yeah, like their businesses are better at with more cash flow rather than less or better margins than less, but, not that different, at least assuming this lasts, let's say 18 months and not five years or 10 years or something like that. And so I guess the one other factor that's really important from a North American gas market perspective is that there is pretty much consensus that a bunch of export facilities that are being built right now come online. Let's say they're supposed to start coming online in 2024. Realistically, they probably start coming on in 2025 and there's this wall of gas exports that should come on and essentially demand to pull it, to send it to foreign markets that it looks like are, is likely to be in excess of the supply at that time, especially as producers slow down on their development right now in response to low spot prices. So it does seem like the medium term we're sort of setting up for this sort of we've had this swing down. I think it's really messy and uncertain in terms of what happens next. Like I had thought gas would be in a four to seven band, $4 to $7 band, which I thought was conservative and it was way lower than where the spot price was, let's say six months ago. And now, I don't know, maybe it's in a two to seven or two to five band, it's sort of hard to tell exactly where it's going to go and it could be way lower or way higher for a short amount of time if there's a cooler last part of winter or a really hot summer or some other thing happens. Or if a lot of producers stick by their claims that they're not going to invest in money losing development on a sort of direct, x, amount of money spent on drilling and completions leading to y, amount of cash flow being either greater or less than what they're spending over a reasonable amount of time. So yeah, I think it's just complicated and interesting and I think it's going to set up for really interesting opportunities for gas exposure, let's say two or three years out while terrible for sort of near term pricing exposure over the next, let's say six to 18 months.
Andrew: Yes, I'm with you. I just, I look at like the- it just seems everyone's so pessimistic and obviously anything can happen in the near term. Like we've learned that, we've learned that over and over again with commodities, at least I've certainly learned that over and over again with commodities. But I just look at the medium term for Nat Gas, and as you said, you look at all those facilities coming online and you think, oh hey, you know, nobody's really incentivized to go crazy with exploration today with gas at 250 or three, three maybe rigs go online, maybe they come off, but nobody's incentivized to go crazy with drilling. And as you said, I'm looking at Chesapeake's deck kind of out the corner of my eye right now. I mean, I think they're talking about like 6 billion BCF per day of demand coming on by '25. If all of these things open, like that is just a massive, massive amount. And if you're not kind of building the inventory and drilling right now, obviously gas can ramp pretty quickly, but it's just a lot to come online. I feel like the medium term to I guess three or four years away is getting into the longer term, but I feel like it's really positive and you look at the kind of multiples that all these guys are trading at it, see, they seem pretty attractive to me.
Josh: Yes, maybe, I guess the question is how much money does Chesapeake destroy in between now and whenever that happens? And that sounds a little rough given that they're a post reor company and generally I'm pretty defensive of post reor companies except they're just selling right now an asset that they bought. They're selling an oil asset, which is one of their last oil development inventory setup where they could deploy capital cost effectively to earn a positive return and maybe use some of these expensive rig contracts that they have for the Hanesville. And they have some cheap ones, but they have some expensive ones and they're selling it for a third or a fourth of the price that they paid a few years ago at a much lower oil price. So it may be different people, maybe similar people, I don't remember exactly who's still there and who's gone and whatever, but I mean, just as an entity, it seems like they've been pretty good with multiple different management teams and different boards at sort of making the wrong move from that perspective. And so I don't know that, I think you got to give some credence to track record if they just keep messing up. I don't know, I think it's really hard to to bet on them.
Andrew: That's par for the course with most oil and gas companies they say. And I wasn't saying like Chesapeake in particular is interesting. I just meant overall a lot of the Nat Gas names, when you think about that backdrop and the valuations, they look attractive. But I love to hear that there's still plenty of neck- plenty of energy teams out there who will buy high and sell low even when the commodities moved in their favor. I guess that that does transition us we covered the gas piece. If we just want to quickly talk about how you're thinking about the oil environment today. It's been, every morning I wake up and I kind of do the, "Oh, what's happening with stocks, what's happening with energy?" And every morning it seems like oil's up to or down to on news, but yeah, I'm just curious how you're thinking about the oil environment today.
Josh: Yes, so I think, I mean, oil basically is experiencing what Nat Gas in the US is going to experience in two years right now. And so it's just, we're in this like weird transition zone where we had two big, the two biggest sort of market factors for oil and the big swing factors have been Russian exports and Chinese imports. And what we've seen is that Russian exports have basically held in there. And there was news today about maybe Russia's going to export less for a month, maybe that'll be for forever. Maybe they'll be for a month, maybe they're just lying like they have multiple times and they're going to export 500,000 barrels a day more instead of less. But there's news that they're going to export less. But anyway, Russia's basically held in with exports around where they were between oil and refined products pretty close to where they were before the invasion of Ukraine. And so that's very different from what I thought and very different from the consensus. And I actually thought I was being sort of conservative expecting a million barrels a day, less of Russian exports between oil and refined products by this time. And the consensus I think was sort of 2 million barrels a day lost by this time. And it's been zero except for one or two months last year. So roughly zero plus or minus 500,000, but not, the 2 million or whatever. So that's been a really big single factor. And then on the other side, China locked down for live last year and there were many people who were saying that they might never reopen and I always thought that was wrong, clearly-
Andrew: Never. My God, that's absolutely crazy.
Josh: That's like where the narrative for like zero oil came from and where oil was going to be whale oil or whatever. There were these thoughts that we were transitioning to a digital economy. To what, I don't know, I mean, it doesn't make any sense, but just cuz it didn't make any sense to me didn't mean that oil didn't go negative for a day last or two years ago. Three years ago. Three years ago now. Wow. but you know, it's possible for anything to catch on for a little while. And there were, there were a lot of people who are ostensible energy experts with big followings and high bill rates and whatever espousing things like this. And so there was this terrible sentiment, terrible negative sort of view very loudly espoused. And then there was sort of a bull camp that was sort of like, ignore everything. Will's going to the moon right now. And then it sort of leaves you in a weird spot from an oil perspective where China was shut down for a lot of last year. They are reopening and they've sort of gone to a pretty aggressive reopening stimulus setup where they're really trying to get their economy back to where it would've been if COVID hadn't happened and they grew from 2019 until now, they're like trying to sort of rush to get all of that back, to get travel back, to get development on real estate even weirdly as well as they've restarted subsidizing loans and other stuff for real estate, which they hadn't done for a while.
Andrew: Blow out that Chinese real estate bubble again.
Josh: Yes. And so even though they've ramped up their electric vehicle production, which is a big sort of bear case or bear thesis, you hear a lot for oil. Their total number of new gas powered vehicles is going to be higher than I think they've ever had in 2023 it's going to be, I think the record year for new gasoline powered and I think diesel powered vehicles. So, they're going to grow a lot and they might actually be successful and catch up with where they would've been, which is a number that's astronomical, right? Like they should have consumed, it looks like 15 million barrels a day of oil last year, and maybe they consumed 13, maybe 14. There's still some debate. Chinese economic figures are always sort of messy and you know that you get one, there's one measure, but there's three answers for the one measure. It's sort of like, whatever I'm [inaudible]. Right now are they going to consume 16 million barrels a day or 15 or 17? I don't know. But they're not consuming 13 and they have a lot of inventories, but do they have 800 million barrels of inventory or a billion barrels of inventory or 600 million? And how much of that is strategic to be used in the case of a war or a supply shock? How much of that is really truly commercial? There's just a lot of, I think, open questions, but what there isn't a question about, from my perspective, is that they are certainly consuming more oil right now and have so far in 2023 than they've imported by a lot. And again, is it a million barrels a day or is it 3 million barrels a day? That's the open question. And they're getting closer to sort of that 3 million barrels a day of consumption versus imports. And so I think it's just a matter of time before they start importing a lot. There's some preliminary data that they're back in the market picking up oil import cargos, which is I think one of the bigger factors was one of those big oil price moves earlier in the week. And I don't think the headlines picked it up. They always just sort of like make up a story like, "Oh, the economy's not so bad, so oil's up."
Andrew: If you look at CNBC at the right time, like in the morning they'll say oil price is down as as traders assess the impacts of [inaudible]. And then the afternoon they'll say oil prices up as traders assess the impact of [inaudible]. And I'll be like, "God, like you're just-" I know everybody knows it, but it's just making up a narrative to fit what's happening. It always cracks me up.
Josh: Yes, it's really interesting when you know what's actually going on. And again, like sometimes I'm wrong, but a lot of the time they're just making stuff up and it's completely unrelated. So there was an oil price move, I think it was earlier this week. One of the Chinese major companies that imports oil put out, they bought a bunch of oil. And so people saw that turned around, whether it was hedging by the traders or whether it was speculative long or both, or maybe, maybe it doesn't matter either way, suddenly a bunch of people, the paper market started to conform to the physical market. So here we are, there's this sort of messy situation where there's been bad information and bad analysis and bad assumptions on Russia. And I was part of that. Again, I thought I was being conservative because I didn't know. And also Schlumberger went into Russia and picked up the Halliburton and Baker Hughes contracts per some later reports. And I didn't think that would happen either, right? So Russia has Western technology and people from Schlumberger doing the things that it looks like sanctions were supposed to prevent.
Andrew: Really? I didn't see that. That's kind of surprising. I mean, Schlumberger is a big company. They're risking sanctions. I wonder why they even thought the risk was worth that.
Josh: Again, not my information from reading news reports, talking to the reporter whatever. But yeah, Google it. Like it's there and it's wild. And I think it's totally underreported. It's a giant left tail risk, frankly I should probably own buts on Schlumberger. I don't, but I probably should because there's a- whether it's a PR risk or a actual, they get sanctioned or whatever, or they just lose this cash flow that they're guiding to any any of those could end up being like material and people forget. Companies like Weatherford had, what was it? FCPA sanctions that I think essentially bankrupted them. Like Weatherford used to be almost as big as Schlumberger. It was a giant company and they, they got devastated by that sort of problem. So I don't know, there's been almost no enforcement of these sanctions. So again, I thought the supply capability of Russia was going to be down in addition to some amount of sanctions. And it's turned out that the largest oil field services company in the world is actively picking up the contracts of some of their slightly smaller peers who chose to leave the country. Again, not my information per Reuters.
Andrew: I see the, I see a Reuters report from January on this. Yes. This is not financial advice, but the puts sound interesting just because it serves as a energy hedge and I mean, I just can't imagine the risk of sanctions there. Let me ask two que let me follow on with two questions. One, I'm China and one I'm Russia though, I guess just to start with China, like I'm with you every time I look at the kind of like, it's not like I'm doing the best global supply demand curves in the history of the world, but every time I look I'm like, these things are razor tight and it seems pretty obvious if China, this massive economy as they reopen, you mentioned going from 13 to 15 million a day, draw down inventory, it seems pretty obvious with supply demand, pretty tight. China could really pick things up and send energy prices up. But then I look and I'm like, this is a massive market, like the future's curve. There are hundreds and hundreds of traders Bob Rabady has yelled at me when I've said this before, but I'm like, the market should be reasonably efficient where they could at least price in, "Hey, the second largest economy in the world is reopening, can we price in like the future's oil price to some degree of the impact of this?" So I guess my pushback would be like, I'm kind of with you there, but how is the market, like what would- how would the market be missing China reopening and kind of demand ramping up? Is it just they're missing, "Hey, it doesn't impact it like day one it happens." Because they start drawing down on inventories or is there something else happening?
Josh: So first of all, basically put me in the, if Bob Rabady says that I agree with him camp. Just generally speaking, whatever the comment is, odds are, I'll agree with him. I was on a panel with him last year Berkshire related event and that was, it was awesome to get to meet him chat with him a few times since then. Just can't say enough good things. If he says it, it's probably right.
Andrew: I'm with you. I've gotten to know him over the past year and he's a really good guy. He's really sharp and I hope I'm that energetic as I grow up. He is fantastic.
Josh: Yes. Yes. So yeah, I think it's complicated. I think when you look at who the actual participants are in the, the futurist markets, I mean I heard an interview of Bill Perkins who's a very successful natural gas trader who used to work with John Arnold here in Houston. And he was talking about how there's a ton of excess alpha available in natural gas markets because, so, again, he's running a fund that trades and natural gas futures that the divestment movement has gone so far that ESG oriented endowments and foundations and stuff won't even invest in like commodities futures funds. Which again is idiotic. I mean, the whole thing is idiotic and it's sort of terrible to withhold money from development of energy because when there are shortages and when there are price spikes, the people who get hurt are some of the people that supposedly they're trying to help, right? Like the climate stuff is supposed to be to the benefit of poor people who are-would be minorities in the US or western countries who are sort of the least able to represent themselves. Supposedly they would get hurt the most by climate change and various second order effects from that. But they get directly impacted by higher energy prices, right? I mean, you saw there were blackouts and Pakistan, Sri Lanka had riots and food shortages and from implementing these policies. So anyway, so it's sort of- but the point is that there's insufficient capital from a speculative perspective because of ESG. And so you're seeing that in the natural gas market and you're hearing it from some of the participants in it who are actually making more money than they would otherwise because they and their competitors aren't able to get enough money so they can get even the better highest alpha trades rather than what would happen if there was sort of more money in there. And I think that's even more true for oil, which is an even bigger market. There's even more divestment, there are fewer pensions and others who used to just have long oil commodity exposure as a sort of inflation hedge, which is ironic cuz they all missed oil as an inflation hedge over the last couple years, or not all, but almost all. So I think it's just a broken market and I think there's too many people who look at these markets and think that there's some truth in price on a forward curve when in reality you have a bunch of private and some like state owned companies that are sort of routely or mechanically selling into a market and there's just no counterparties, right? Like the airlines aren't really hedging their oil anymore. A lot of other consumers of oil aren't money managers and principles are not hedging their inflation exposure with oil anymore. So you have this sort of market that's broken to some extent and that's probably what Bob was sort of much more articulately and concisely saying. But that's sort of my long explanation of what he was saying, which is I just don't think it's indicative.
Andrew: Yes, no, I could see it, the whole argument that you have more people looking to hedge future prices than probably sell, like you have more producers looking to hedge and lock in the returns than you have buyers. And especially, as you said, all the kind of risk capital comes out. A lot of the natural people are trying to hedge the upside to their buyers of futures maybe aren't doing it or aren't there. So yeah, that don't make sense. One more in Russia and then we can move to the company. We're going to talk about, it does strike me, I'm with you when all the sanctions are hitting, I was like, oh, Russia's going to have an issue keeping up production because it's harsh to import equipment. You've got men who might have gone to the oil fields who are going to war instead, like all this sort of stuff. It doesn't seem to have happened so far, but I do wonder like, eventually you start having demographic issues with getting oil field workers out there and at some point they have to start having equipment issues, right? Like nobody's import aside from Schlumberger, apparently nobody's like really I importing equipment. So I do wonder maybe it hasn't been the same near term problem that everybody was forecasting, but as this continues to drag on, you have to think they're going to have issues with replacing pipelines, equipment, humans, like just everything. I wonder how quickly you start to see a decline. They said they were cutting recently, maybe they're cutting cuz they just can't even keep up production. You kind of similar to what you said with OPEC, they have these targets and they can never keep them. Maybe Russia starts to run into that.
Josh: Yes, again, I was thinking that and given the availability of world-class experts and world-class services and technology I no longer think that. I don't think it's a demographic issue. I don't think they need that many people out in the oil fields. I think they can bring in people from various countries who would be happy to have their skilled workers go to Russia and get paid salary that might be way higher than in their local country, but way lower than what you'd pay in the Western country. I just don't think- I don't think it's that much of an issue. Russia, we always had the view had a lot of spare capacity. So Russia, Saudi had a little, and then UAE, when you rewind to our analysis, I think it was a couple years ago on OPEC plus and their spare capacity issue. So, one of the things Russia's done it looks like is wear down some of their spare capacity. But like as you come down producing 10 million barrels a day instead of 12 or 9 million barrels a day instead of 10, it just gets a lot easier to sustain that lower level. It requires less technology, less efficiency, fewer people. So getting so for similar for Shale where we're at, I think I saw 12.3 million barrels a day, 12.4 million barrels a day for shale oil. That's a lot harder to sustain than the 11 that we were at, let's say a year and a half ago or two years ago. So I think it's just you, you get, and as we, you get closer to the pre covid, what was it, 13.3, 13.4 sort of peak level that we had gotten to, as you get closer to that, you have more and more high decline production and you have all kinds of other issues. It's just- there's sort of a base level that's pretty easy or relatively easy to sustain and then there's a higher level of production that's sort of beyond the sort of base capacity and requires a lot more people in technology and equipment and stuff. So yeah, I hear you. It's possible, but I would say most likely Russia is able to sort of sustain their production around sort of where they're guiding you with that 500,000 barrel a day cut. Which is still a pretty high level relative to the history of Russian oil production. And I think they should be able to get around that. And I don't think their current sort of manpower situation or even their trajectory is likely to affect things. Again, if Schlumberger were to leave the country real fast, that would, my estimate would change. But understanding that they're there, I was shocked when I saw that report. I didn't realize, like I knew they were doing some stuff I didn't realize they stole again, per this report. Well, they didn't steal, they picked up the Halliburton and Baker Hughes contracts. So they basically like are providing, they're essentially the sole oil services provider in Russia and that does change things cuz they have the ability to deliver those services. They're probably making a fortune off of it, their earnings report was very, very good. So yeah.
Andrew: I'm with you. I can't believe because I remember like right when the Russia stuff happened and shell bought some oil from Russia and they were like, "Hey, was at a huge discount. We just refined it and sold it." I remember there was uproar over them buying the oil and they immediately stopped. And it seems like most western companies you don't buy oil from Russia anymore. I can't believe somebody would actually provide the means of productions. It seems just crazy risk, but I don't know, I don't want to comment. Anyway, why don't we turn to the company we wanted to talk about you, you posted a great thesis on it on January 20th. It's on the bison website. I'll include a link to it in the show notes if everybody wants to go look at that. And in the second paragraph it includes a link to Josh's 2023 energy outlook, which we kind of just covered, but you can go see that too. But anyway, the company is Vital Energy ticker there is VTLE. They used to be known as, I think it was Laredo Petroleum, but they changed that recently. So let's just talk about why is Vital Energy so interesting to you right now?
Josh: Sure. So Laredo and now Vital they are a Permian focused publicly traded company that at one point was a multi-billion dollar market cap and sort of a stock market darling. And they over promise and under-delivered, they were sort of one of the worst actors in terms of promising a high oil percentage from shale and getting a lot more gas than everyone expected or than they guided to. They were one of the worst actors in terms of down spacing wells too much. And so sort of overcapitalizing their assets and hurting their ability to sort of maximize their recovery economically. They were maximizing just sort of total volumes. And there was activism firm. I'm not sure if they're still around. I think Pickering might have bought them a Sailing Stone was a large shareholder and they pushed for change in management and- I'll try to be careful about how I say this, but they brought in mid-level management from the old Chesapeake and they're now running the company. So that's who- it's a very weird, usually activism leads to bringing in people who have track records of success.
Josh: And so the stock I think was at a high, relatively did a- I think it was a reverse split, but like relative to the current shares, I think the high was 600 or something.
Andrew: That's right. I'm looking at it. 600 back in 2014, 2013.
Josh: Yes. And now it's around 50 and it went as low as 10, something like that. So I originally got interested in this. I like this setup, right? I like giant assets. Lots of money has been spent. Understandably, some of that money has been lost by some of the problems that I discussed hated, right? Everyone sort of knows that the people who were brought in were not sort of the people that you would've thought would be brought into this sort of asset and this sort of company, this sort of, one of the other investors who I know who owns this they were saying that they sort of won the career lottery sort of. And so they that sort of setup is, is typical for me. Usually I try to invest with people who have done really well, but sometimes there's enough sort of other factors that get something to be compelling enough that it makes sense to buy it even without people who have a demonstrated track record of success. And so I got really interested in Laredo first when a private equity fund that had sponsored the original team who had gotten kicked out by the activists they started to sell their stock in November of 2020. And comps, so similar companies to Laredo like SM Energy, like Centennial Resources, which is now Permian Resources their stocks were up, let's say 500% over the course of a month. And Laredo traded a whole lot that the stock was up 50% over that sort of same November to December of 2020 timeframe. And so these were all over levered businesses. Laredo was different because they had a lot of hedges and so they weren't actually in a position where they were at risk at all, and they were actually actively buying back debt at a discount. So I like that. I'm not saying that everything they do is bad, just they didn't have the same sort of track record as sort of what [crosstalk] And so their, their stock just didn't run because Warburg Pincus dumped, I think it was 20% of the company. It was over- I think it was over 10% of the company over a month.
Andrew: There are three energy companies that I know of now, including this one. This is a third that they had private equity firms dumping shares like crazy at the end of 2020. I don't know if it was margin calls or if it was, hey, like Covid is done or energy's never coming back. But in hindsight, I know people who did it in the moment. It was the greatest trade on earth to just take the other side of that. And I don't know, next time this happens we need to just like poke each other and be like, "Hey, private equity's dumping these things." But yeah, what a fantastic setup up.
Josh: Yes. So actually bought a few options on it too. I should have bought a lot more. These are one of those things where you always like regret it. Cuz I knew, I mean, just the vault was totally mispriced. It was just beyond misprice. And I should have just made it a big position for bison. I should have made it a big position just in the options. It's not really my mandate. But you know, there I could have gone bigger and I didn't, and I deeply regret that, but I did get the call right, which was, there wasn't a Laredo specific problem. And one of the problems with your stock lagging is you end up with people attributing poor share price performance to poor business performance. And again-
Andrew: Start calling and saying, "Hey, do you know something? Is there a whisper? Why is everyone else up 10% of these guys are up 2% is there, did one of their wells dry up? Did they have a operational issue?" Absolutely happens.
Josh: Well that's benign. You had people talking about how they were going bankrupt and were a zero. And were, I mean this is actually sort of a pattern for me. Like I tend to end up in companies where people just like viscerally hate them. Like whether they're like, girlfriend got fired from it, or they lost a lot of money in a bankruptcy or whatever it is. Like, I sort of like these things where people are emotional and you can just like do the math and counting and figure it out. And engineering, it's not, these aren't black boxes. They're asset heavy companies with long financial track records and lots of records that are held by let's say the railroad commission or whatever. Like you can get the information you need on these things to, to really understand what's going on. So people's emotions, I think actually are positive here. They can be very, very negative emotions, but those emotions tend to lead to compelling opportunities. So Loredo got sort of tarred with that because their stock underperformed so much. And people talked about how some of their competitors who were also bad at investor relations and also maybe not run by sort of the a plus students from Harvard, maybe they're run by the C minus students from the local college. Their stocks just did better and they continued to do better and those companies were able to use their better cost of capital. Did you more creative acquisitions? Loredo did acquisitions, which actually weren't bad. A couple of them were a little not great, but overall they got into a very high return position. We'll get into sort of the assets and stuff, this is just answering the- like, what's going on and why in January, 2023 did bison share our investment thesis on Laredo, which now vital. So that's the backdrop. They mess up, they drill a few wells that are long, like two long laterals, frankly, like it's sort of a mistake from what I can tell the drill longer than 10,000 foot oil well laterals, like, it just doesn't, your extra mile if you go to 15,000 feet just doesn't contribute very much relative to the first couple of miles. And maybe even you should only drill a mile and a half wells, but almost certainly you shouldn't drill three mile lateral wells. So they drilled a few and they were terrible and the stock got crushed. Along with oil prices falling and the competitor's stocks falling. And so you look at like the Permian resources, the merger of Colgate with Centennial.
Josh: And that stocks up like 60% or something cent then even though it was a terrible deal, they totally ripped off the public equity holders. It was like one of these weird, like private equity dumping the stock and just sort of a, a messy situation. And the stock's still up 60% and some other companies have done, okay again in that same area. And vital is now, you know, Loredo is down a lot since then because of the few wells, so small amount of money, a small amount of less oil production, but just there's this sort of story around them being bad and about there being some big problem there and therefore- and this sort of just, I think, fed into that. And so you had an operational hiccup. I mean, again, like bad idea to have drilled those wells, they fired their CLO. So that's probably good. I mean, I think technically she volunteered to leave, but should we ask for this.
Andrew: I was just going to ask about the CO. Yep, yep.
Josh: So, good. And actually incidentally, those particular wells are outperforming now relative to the sort of reset lower expectations. So they're less terrible than they would've been. And so basically what we realized was as a stock pulled back, it got to a point where it was trading at a pretty big discount to its producing reserve value. They've been buying all this land in Howard County that's oily. So even though they're sort of tarred as like a liquids rich gas or half gas, half oil sort of story.
Josh: Their development inventory, at least for the next five to seven years is almost entirely oil weighted and very high rate of return with excellent wells other than these three long laterals in sort of their least perspective area within that sort of region. And so with a stock price that sort of got bombed out a narrative that was almost entirely negative, right? Like multiple sell side reports came out shortly before we came out with our staff talking about how they have a low return on invested capital and low capital efficiency and just they're going to be a bottom decile operator and we're looking at the numbers and they're sort of the opposite. And so at least on a go forward basis, so like the negative narrative, like the emotions love the valuation, the valuation is just out of this world. And then they had a lot of oil price upside. And so it was sort of this moment and then they just did the dumbest thing. They renamed the company, they further ESG virtue signal, they added two more unqualified people to their board who were no- I mean like, just like nonsense. And so, and even that, like we can get to why that's maybe less terrible than it sounds. But it was just set up where like just everyone hated it. The stock was down, the prospects were up, the wells were already outperforming, they put it in their presentation or the stock went down more. That was sort of the moment where it's like, okay, like we'll talk about this, this is just, it's inflecting up, it's going to the- we were talking about, "Hey, like do we ever affect stocks by talking about them? Occasionally the stocks go up a lot the next day after we talk about them." And the view here is that this thing is going to go up a lot as they report the results and then show another good quarter after that. Anyway. And so we might as well point at this thing that we bought a lot of stock in and show people a little ahead of what we think is going to be a rerate happening. Anyway.
Andrew: I like it. Let me ask, so one of last things you said in there is people are kind of misinterpreting or misreading the numbers. So just to- you have done way more engineering work than me here, right? I'm just a generalist. I look at the company for half a day, do some comp and everything, but several people ping me and were like, "Hey, isn't VTLE just the high cost producer? So you get a ton of leverage to oil upside, but you know, if oil is soft or something as the high cost producer, it's basically operating leverage. Just, just leverage." And when I was looking through the numbers, I wasn't really seeing them as material higher cost than a couple of the public company comps that I was comparing them to. Can you talk to me about kind of their cost position, I guess is where I'm trying to drive to?
Josh: Yes, I mean that's exactly the sort of narrative that I'm pointing to, right? You can sort of see like Twitter or see whatever random, like sell side analysis. Like Goldman hates them, right? They just, they, Goldman I think never put out a positive. They put out stuff on them, which is weird that they even bother covering them. And I don't think they put out a single positive note or comment about them in like three years. I don't even know if they formally cover them. I just know people forward me comments from the trader or the sales per whatever it is, who's like putting out stuff from Goldman on them and it's always negative. So, that sort of thing versus just look at the numbers. I prefer the numbers and the engineering. There's one other thing I didn't say, which is I'm friends with a private operator who has scale, who has a history with these assets. No, obviously material, non-public information about their current status. But deep history with with understanding the operations, the historical operations of the assets, as well as a excellent understanding of local marketing dynamics, local operational dynamics, service costs, just sort of the whole set of things that are real hard to figure out from where I sit. And it's been just super helpful having access to that sort of insight along with as I was d in this again, to sort of double up on the position in the recent pullback subsequent to the stock going to a hundred something in, what was it, June or or so. After that did even more work and found even more people sort of active in the area who actually had really similar things to say with this private operator who did a full engineering workup beyond, I mean you can look at like the embarrassed stuff, which we cited a little bit. You can look at the company stuff, you can look at the railroad commission and other information that's public on it. But then you can also sort of look at from a holistic perspective, imagine you're going to be a buyer of this based on available engineering and geologic information. And so there's is a lot more that we're not including partly just to protect our- my friends who I don't want to, like, they don't want to be out there with a bison report saying, oh yeah, "Hey, like go buy our competitor's stock." But they own a lot personally and their employees own a lot and they look at this every day and are like, why is this trading where it is? So that was the other impetus and I think it's very important in a sort of battleground type stock to have significant edge. Like you can't just have like, "Oh hey the stock screen's cheap or whatever." Cuz I think it's really easy to get hurt. I think on this, there's a lot of sort of local knowledge and the local knowledge I think is tilted very positive in terms of the intrinsic value of the assets and the cash flows.
Andrew: Oil and gas historically has been one of the scariest places for me to play because in a prior life I was at a private equity fund and I didn't cover energy, but I knew the guys who covered energy and they would like every oil field in the country, every oil field that they accompany they invested in or something, they would have engineering reports, they'd have due diligence and you could literally call and be like, "Hey, I'm looking at this company." They'd be like, I have every oil field that they have modeled out. Like it can tell you what I think their declines are going to be. Be like, oh crap, like I'm just reading the 10K And these guys have every oil field modeled out. Like it's one of the ones where there, there are people who know these things and obviously you've done it, there are industry insiders like you can get a lot of extra data that is not in the public domain and it can be- if you're a generalist, it's a very scary place to invest because as you said, you look at it and you think, oh, this is short. And then you've got a guy who's actually operated in the field who's done the work and he says, "No, there's something the market's missing here." But just, just to summarize, so when I got three messages that said, Hey, these guys are the high cost producers, I didn't really see it in the numbers. You think these guys, you know, there's nothing to worry about with, they are probably just average assets in the Permian Basin.
Josh: So there's different ways to measure it. And by the way, just because you know, let's say the engineering or whatever on something doesn't mean you're right. So like I could [crosstalk]
Andrew: Oh, hundred percent.
Josh: And I could be wrong, frankly, a lot of those guys end up being terrible at picking stocks cuz there's various things that affect share prices and business sale values and so on. So it is important I think to like, it's one of the reasons we actually don't have internal engineers at bison and why we try to - cause what we're trying to do is really understand the overall situation with no bias. And the way that you can accomplish that is to say, I know nothing. And what I can do is meet with people and sort of like vet what they're telling me and vet sort of if they're being honest with me or whatever, and then gather different sort of experts and information sources and aggregate it and sort of figure out from a matrix of different sets of information and sets of analyses what might actually be happening. And again, it's not perfect, right? And there there are aspects of it where maybe you want more information versus less, but often having that more information can yield a worse outcome, not a better outcome for a variety of reasons. So I think it's just important to highlight that it doesn't necessarily, it doesn't necessarily always help you.
Andrew: It's always the guy who's got, "Oh, I've got every single plant that this company has." I've got every single plant model that I can tell you what every unit of production like, it inspires a false confidence and it's really not what matters for the company. Those are, I mean, to put it bluntly, those are always the people who blow up cuz they think they know the company. It's like, "Hey, cool, you've modeled the widget costs down to everything you've completely missed x, y, z that are the actual factors that are impact this business."
Josh: Yes. So specifically from a cost structure for vital, so there's two things. One is what are their operating costs on their existing wells, and then what's the capital efficiency or break even on new wells as they go and develop them. And so from an operating cost on their existing wells, they are a slightly higher than average cost operator. But what you're not seeing when you're looking at sort of some of their competitors is, well one, probably the competitors you're looking at are also high cost operators. So that helps. And then partly there's just- there's some complexity where they sold some of their assets to the old TPG, I think it's now Sixth Street. So they have a sort of complex complex situation where they sold a minority interest and a bunch of their legacy assets at a fairly low price. That was actually one of my least favorite deals that they did. I think Sixth Street probably is getting sort of like a 20% annualized return, fully hedged on having bought producing assets. So that's probably an unacceptably high cost of capital given what was available to them and what they ended up doing with the money. But the cost structure is a little higher. What I think people really mean is that they don't like their capital efficiency. They think Laredo is a bad operator and relative to the money that's getting spent, they think that there's not that much oil that's going to come out of the wells that Laredo is drilling. And that was the big thing for us when we looked at one, the COO got fired or left, two, they shifted their development over to an area that's had much more success even with longer laterals. And three, the actual wells that everyone was so upset about and that caused the stock sell off are performing better than if you sort of modeled out what they were supposed to perform at. So, whether it's to the credit of the operating team at Vital or whether it's just because, they just weren't as bad and they just sort of, they cleaned out on their own or whatever. The actual oil production right now from those three wells on that, I think it was the Leach pad they they're not so bad. So what we saw was this the observable, like what people are going to judge them on going forward, inflecting it was better and then it might actually be much better or it might just be a little better. Again, like these guys, they're not the best at this. And so the expectations I think always need to get set a couple rungs down, they should be the best. I mean these should be some of the best wells drilled in the entire Permian Basin. They're in just a absolute incredible sweet spot. It's really complex geologically, the people that sort of know the rock the best, it's sort of one of those things like we were just saying about the modeling, the ones that know the rock the best actually don't like it, but like the guys that are just like, "Hey, I'm going to go drill some wells and use the best like operating people." That get like incredible results in the area. So it's a really, really good area. And so anyway, just I think their 2023 capital efficiency is going to be better than their capital efficiency has been maybe since pre 2013, 2014. And so I think they're really going to show great capital efficiency and that's going to lead to a rerate in the value of the company, both because they'll be producing more oil and they'll sort of grow out of some of their hedges and frankly some of their hedges rolled off.
Andrew: A lot of their hedges rolled off. Yes.
Josh: Which was another reason to highlight them because usually a hedges roll and the stock goes up along with it. In this case the hedges rolled, they realized pricing at least on oil was going up a lot and the stock went down. It was like, this is not how it's supposed to work. It's supposed to, you know, when you make more money instead of less, you're supposed to have a higher stock price, not a lower stock price.
Andrew: You would think, but you know, we live in a crazy room. Let me ask one silly generous question. You said these guys are operating in the sweet spot of the Permian and you would think the results just based on that sweet spot, based on the assets that it should be much better. But I don't want to put words in your mouth, but maybe the management team isn't the best at kind of sweating the assets, are getting the results that maybe some better peers are. What is it that, what are the little things that make like, "Hey, you and I are operating the fields next to each other. Your field is just producing, 50% more cuz you're a better operator." Because I would think the operations are kind of commoditized and I would think where it really comes in is like, I'm just always coming over budget versus you. But it sounds like they're the possibility that you're- so what are the things that kind of companies do that get better returns from someone else, if that makes sense?
Josh: Yes. So let's not talk about Vital in this context. Let's talk about EOG1. So EOG is known for drilling some of the best wells and the various areas that they operate and the way that they do it. And I've met some of their service providers who love them and the way they do it is not, I mean, look, they do grind their service providers a little bit. It's not like they're like volunteering to pay super I prices, but they're also not the lowest payer on various services. What they'll do is they'll test stuff, they're innovative, they're open-minded, they try to- I mean, I try to do this with stocks, they just try to be open to different sources of information. If you go to x, y, z super major and you say, "Hey, I think you're drilling your wells a little wrong, you should drill them like this." And you're, let's say a drilling rig provider or a fluids provider or a frack provider, whatever, like they're going to tell you about how they're the best and they probably are the best at their organization, but they're like maybe bottom decile, I've read an articles about various ones, I don't want to rag on any of them in particular on this, but but you know, if you're EOG and one of your service providers or a competitor to one of your service providers says, "Hey, I can help you do something different." They'll say, "That's interesting." And they'll look at it closely and if it makes any sort of sense, they'll potentially use that on a few wells or a well or 10 wells or whatever it is, depending on their level of confidence. There're constantly AV testing stuff. So there's a level of sort of like humility and intellectual, it's sort of like a intellectual like curiosity and humility. That's the culture. And so if you have that as your operating culture, you can do a lot better, not just from a cost perspective but also from an operating results perspective. And these are not those guys.
Andrew: I mean, look, that sucks, but the nice thing is you've got some great debts in here. I don't think the valuations or anything have changed too much since you published the piece in late January. And that is also an operating synergy, right? Like, hey, everyone else is trading at four times EBITDA. We're buying these guys at two times EBITDA. I'm just pulling some rough math. But by the way, if like EOG is one you listed, if EOG bought these guys, not only would there be the SGNA synergies, there would be the operating synergies where EOG would probably be buying them at 1.3 times EBITDA or something. I'm just kind of pulling the numbers out. But it does suck when you have a company that is a C or a D in operations. But the nice thing is if you buy an A company in operations, you generally pay for A, if you're at a C, like you can improve to B, and there are a lot of ways to get there. Management can get better, somebody else can buy you. So yeah. Just we have talked a few times about management, and I don't want to disparage anyone, but one thing that jumps out to me on the call, right? They are returning a little capital to shareholders. They're paying down debt. They do a little bit of share buybacks, but they were pretty clear on their Q3 call as the last call they had, they said, "Hey, we have 1 billion in liquidity. Yes, our free cash flow is going to go up quite a bit as the oil hedges roll off and we've got natural." But this, I think they were pretty clear they want to go do some M&A. So I wanted to ask you, I know I think you generally like oil and gas companies that are going out and doing M&A, but I wanted to ask you about this company in particular, maybe not the best management team. Do you like the M&A strategy? How do you think about the M&A strategy here?
Josh: I do not. So I think think companies that have a good cost of capital like that trade at a relatively high multiple versus transaction valuations should do acquisitions. And I think companies that trade at a very low valuation should look at themselves closely in the mirror because they are probably not everyone thinks they're the best operator. If you are a low valuation producer, fixed your valuation. And if it-
Andrew: It might be too long, but I would love to get everything you just said tattooed on my forehead because it was fantastic.
Josh: Yes, I mean, look, like we're- I mean, I'm frustrated. There was another company we're involved with in Canada that we were gearing up to go active on and it just, it's unfortunately we weren't able to yet. Maybe we just won't and they're making some board changes and some other stuff. So quasi successful, but I kind of just wanted to fire out everyone. And you know, this is a interesting, I think, I think Vitals an activist candidate. I'm not saying I will, I'm not saying I won't, it's not something I'm like gearing up to do right in a second. But I think there are tremendous activist candidate, I think they're a tremendous buyout candidate. I think they're a terrible, terrible acquirer here. The valuation would make no sense. They've been an issuer of stock at prices that make no sense. They've created overhangs for themselves through issuing stock to private equity funds. And they're just- no one has confidence in them to run their assets. So, I mean, it's just you got to fix your own stuff before you can go get more or you should fix your stuff before you get more. And to some extent it's beneficial because they're going to have trouble I think buying stuff using equity. And they don't have access, I think to the capital markets from an equity perspective because people don't have confidence in them. So the the flip side is as they improve their operations this year, there's tremendous room for them to show that they are good stewards of capital. And if their capital efficiency goes from $30,000 sorry, yeah, $30,000 per barrel per day to 15 then, they may get a radical rerate in their cost of capital and at that point maybe they should be a buyer. But you know, the idea that, hey, we just drilled a bunch of bad wells and litter share's capital on fire and we're going to go buy stuff. No, you can't. Like that's sort of off sides. And and like I think is like one of the reasons this stock sold off in the aftermath of that.
Andrew: No, that was well said. I look at this and it's a 30% free cash flow yield company, right? And obviously free cash flow and oil and gas, like you've got to consider declines of the- you've got to consider a whole host of things. It's like, look, the simple math is if you're 30% free cash flow to equity, there's no deal on earth you can do that. Risk adjusted is going to be better than buying back your shares or returning capital to shareholders in some form. Like that's just the facts. You can't outrun 30% free cash flow yield to equity. You've either got to go and prove your operations and as you said, get your multiple up by getting people to get to be convinced that you're not lighting money on fire or else you have to sell yourself or just return capital shareholders. Those are the only two options if you're trying to create value.
Josh: Yes, I agree. And I think even their capital budget's way out of whack, they should be spending less money if they were more careful. But again, like there's sort of this empire building, it's sort of the old Chesapeake mentality and it's sort of this deeply ironic, terrible thing where companies that say they're interested in ESG, they end up sort of like doing like virtue signaling stuff on the environmental side. They increase the diversity of their board from a gender and like skin color perspective, which is ridiculous, right? That's not diversity. Diversity is opinions. It's diversity whatever. And like, yeah, it's wonderful also to not have all old white men on a board, right? Like I get that and that is important, but that's not like ESG and then they have horrible governance and they do dumb stuff that destroys shareholder value and is not aligned and egregious comp and all. So I don't know, I think I found that companies that sort of make these sort of claims around sg tend to actually be among the worst from a G perspective, from a governor's perspective.
Andrew: I was going to say the exact same thing. It's like it's the ESG and all that gets focused on the E and the S and there's one board that's really coming to my mind, you and I talked about them offline earlier where the G and I was like, you got- I talked to them and they're like, oh, we care so much about all of this other stuff. It's like, guys, your performance is awful. You're none of you own shares. You're paying yourselves like your kings and you're running a 50 billion company. It's like the G is a zero and I understand you're getting a lot of boxes checked, but it does boggle my mind sometimes and I feel like I'm becoming an old man yelling at the clouds with that. But I a hundred percent agree with you.
Josh: Yes. I mean we need to start the Walker Young activist fund and just start firing EMP management teams one at a time for them to sell.
Andrew: If we do that we might have to fire more than one at a time. Cuz I think there's a lot of opportunity out there. But I do want to ask you just I realize you've been generous with your time and we're running long, but just so there was a lot to cover with Vital, but unfortunately there's also a lot to cover with energy and gas. But you know, we're sitting here today, oil 75, that gas 250, I don't want to go into what happens if oil hits 76 or 74 or something, but just we're sitting here today just kind of what is your Vitals trading about 55? What's your kind of base case mad valuation that people should be thinking about when they're looking at Vital and just thinking about how to look at this thing?
Josh: Yes, so in the report we put out on them we cited actually from friends in private equity who have been studying this closely for their portfolio companies. The a chart showing sort of where transactions have been going from a cash flow perspective and they sort of map from a reserve value perspective, frankly, Vital actually has better reserves relative to cash flow than most of their peers. They're relatively low decline. So people say, oh, shale therefore bad, therefore high decline. The reality is Vitals decline rate. 'Cause so much of their development happened in their history. Their decline rate's actually pretty low. Which means their reserve value is actually pretty high relative to their cash flow. Low decline means higher reserves relative to cash flow. High decline means high cash flow relative to reserves. So, I think at 80 it's probably worth a hundred plus dollars a share. And there's a good argument that transactions on, if it was a private company, it might be at the sell for $150 a share. So equivalent. When you just look at recent transactions, and frankly I would argue they have better development inventory than most of the transactions that we showed in that, in that comp sheet. And that most of those acquirers would love to own core and then extension of core Midland basin assets. So they're in like good zip code. And that I think makes it also easier to talk about. Like this is not, they're not in some fringe area. There are pipelines, there's facilities, there's activity. I mean they're in close proximity to very high valuation businesses that frankly are not drilling wells that are much better and some are much worse. And so I think that's sort of a really important factor. One other important point, I am bullish on oil. I don't think the mid-cycle price for oil is likely 70 or 75 given oil field services cost inflation given just general inflation since the last time we were at sort of a mid-cycle level. So we've experienced a long downturn for oil and gas. The last mid-cycle was sort of, let's say 2007 to 2014, maybe the 2014 time was like high cycle, so 120 or whatever. But you go back and look at sort of what $80 oil, let's say in 2007 translates to today and you're looking at 110 or something just from a, just inflation adjusting those dollars. It might even be 120, something like that. But let's discount that a little. Maybe it's a hundred, maybe it's 90, but it's not 75. And so when you think about it from a mid-cycle basis, just inflation adjustments minus some technology improvements or whatever you get to a number with Vital that's way higher. And if you get into sort of a actual sort of inflation adjustment or even better from a price perspective, there is asymmetry is Vital. That's somewhat unique and we tried to show that showing some of the various stuff and some other stuff. But I think there's a good shot that, let's say at a hundred dollars oil, this thing could be worth close to $200 a share and at $120 oil it could be like three or 400. And there's just insane sort of asymmetry partly because of their debt level versus their, their market cap, partly because of just the nature of their assets and partly because they are sitting on a huge inventory that's mostly unbooked that just requires a little bit bit higher oil to be able to access.
Andrew: But you know, the beauty of this is it's the skew you talked about, right? Because we just laid out, I think you laid out a very coherent short case, very coherent short case for why this is worth a hundred dollars ish per share at kind of the current price for oil. And then if oil goes any higher, like you get that huge torque to the upside. So I just think the beauty of it is, it's the margin of safety, right? It now if oil goes to 50, all is out the window, but you get great torque on the upside. But even if we're just kind of riding the curve that Bob Rabadi would yell at us is not is not efficient. But even if we're just riding that curve, like you've got the the great cash flow up front, you've got the valuation. One last question and then I'll let you go. You just mentioned private equity and I I have to ask here, like we have seen a lot- we have seen not a lot, but we've seen some public market on public market deals I haven't really seen and I kind of thought we'd start seeing private equity coming and taking out things like Vital, billion dollar, billion half dollar check sizes and taking them out. I know there's ESG concerns, but just based on your talks, do you think we're going to start seeing some private equity companies coming in and saying these things don't make any sense. The evaluations are insane, the cash flows are insane, let's just buy them, hedge the whole curve out and milk a 20, 25% whatever IRR at these prices.
Josh: The firms that would do that have promised to no longer do oil and gas investments for various reasons. Private equity, oil and gas is actually seeing outflow similar to public equity. I mean, I still think public equity is sort of way more bombed out than the private equity stuff. Like, I like stuff like Vital because if you try to replicate vital and the private market, it might take a hundred percent premium to the current share price to sort of replicate their current assets. So not that you'd have to pay necessarily a hundred percent to buy out Vital, but if you went and tried to buy equivalent assets and you just look at the going rate for those assets, even if you did it in a few bites, instead of going and buying the one asset sort of as a whole, you know, there's a pretty good argument that's why we showed those comps because that's the actual market for private assets. Those are public companies buying them. But also when private companies go to buy them, it's not like they get a discount because they're a private company, not a public company buying them that's the rate. So if you're having to pay three plus times EBITDA on stuff and you can find something at less than two times EBITDA, it makes up for a lot of the problems and a lot of the issues. So you should see it, but actually it looks like even the private equity funds that are raising money, it looks like most of the ones that are raising money are raising less money than they're returning to their LPs through sales of some of those private companies. So there's one other thing that I alluded to earlier I want to make sure to mention. So on the ESG point, so I don't like it and I would prefer the company not waste money and time and focus on their sort of ESG measures, which I don't think are good for the environment and I don't think they're good for the shareholders [crosstalk]
Andrew: [inaudible] oil and gas company you're never going to rate highly on it anyway. Like, come on guys.
Josh: Right. But also like you can be an efficient operator, which they're not. So like they could improve their environmental performance by being better at drilling oil and gas wells and they're not so it's sort of the like, "Hey, we're not good at this so we'll just like, you know, Virtue signal over here." So I don't like that. What I like is that this sort of Virtue signaling sets them up very nicely for one of the high valuation Virtue signalers to come in and buy them. And there haven't been premium purchases where public companies have bought other public companies at high valuations or high premiums relative to where the the smaller ones share price is. So there's this weird. I talked to a number of the different buyers where they're all worried about being the first one, but I got to speak to business development people at different companies talking to them about their private purchases. It's like really informative and they can talk about their purchases of private companies and it's just interesting to hear they're all afraid to be the first one to go pay a 50 or a hundred percent premium.
Josh: For a stock of a smaller company. At some point, one of them will, and my assessment is it's more likely they'll come in and buy a company that's the only one selling their gas through Project Canary and that has a diverse board and a ESG report and a whatever. And so from that perspective, in terms of making it the smoothest possible for this to be able to get the largest possible premium and for the reasons you cited right from synergies and like operational improvements that are available and from all this other stuff, I think this is sort of, I don't like to own things based on their buyout potential. But this one is really set up nice for that and that's important also. You alluded to a downside case at 50 or $60 oil, this company actually did fine at that sort of oil price and traded at points at a higher share price with a lower oil price than we've had over the last few years. And so I think if oil prices were to fall further, there's a significant margin of safety here, both because of their hedges, but also because where their assets are the low decline rates, I think they're actually set up quite nicely to be a buyout candidate. And if oil prices fell, maybe the stock would get bought, maybe the company would get bought out, let's say 70 instead of a hundred. But there's still, there's so much room from a value perspective that it would be a buyout candidate and it has been a higher valued stock at a lower price for oil materially lower price for oil than we're seeing right now. So I would push back on that a little. I actually don't think that this is sort of the one to look for as a, "Oh, I'm going to short this in case oil prices go to 50 or whatever." I think it's actually sort of a pretty asymmetric, there's multiple sort of margins of safety and downside protection. And the stock has just fallen so much. There's just so much value there, so much oil in their reserves, so much production, cash flow, hedging on the downside. And then there's sort of this extreme right tail skew where, if you get a hundred plus dollar oil, you could see a value that's many times where it's trading. So it is important I think to highlight the benefits, like not everything, almost nothing is sort of one-sided and you and I might hate their ESG initiatives, but there are also positives and incidentally those positives might help in a downside oil price scenario as well as in a potential premium takeout by one of the potential buyers.
Andrew: I like that. I like that. Well, Josh, this has been fantastic. Really appreciate you coming back on the podcast. We'll follow up on the Walker Young Activist Fund and the Walker Young Private Equity Fund where we'll be the only people going out and buying these guys out. But look, you did great work. Again, I'm going to leak to BTLE in the BTLE writeup in the show notes, so everybody should go check that out. But Josh Young, thanks for coming on for the second time and I'm looking forward to the third.
Josh: Thank you very much.
Loved this interview. Thank you!