Nuthin' To Drill
Eric Fry
The Rude Awakening
Crude oil jumped to another all-time record yesterday, in the process increasing the already-considerable wealth of T. Boone Pickens...
"Better late than never" would seem to be a fitting description of Mr. Pickens' financial fortunes. The one-time corporate raider didn't do too badly for himself during the 1980s, when, as president of Mesa Oil, he reaped hundreds of millions of dollars for his shareholders by attempting hostile takeovers of companies like Phillips Petroleum and Cities Services.
But raiding, says Pickens, was never as profitable as simply riding the energy bull market of the last few years. The oil maverick's Dallas-based hedge fund, BP Capital Energy Commodity Fund, has soared 283% so far this year and has racked up profits of more than $1.3 billion since the start of 2000.
"I really needed to win," the 76-year old Pickens explains to Bloomberg News. And win he did! This senior citizen of the oil patch has increased his wealth by more than 3,000% since 1997, finally nosing into the 389th slot on Forbes' list of America's 400 wealthiest people. Pickens says he has paid 75 percent of his lifetime's income taxes since he turned 70.
"He just got lucky," gripes one oil industry consultant. Maybe so, but luck of this magnitude has a mysterious way of repeating itself...which is why we are intrigued by Mr. Pickens' particular brand of luck. He owes most of his good fortune to some extremely prescient - or lucky - calls on the price of natural gas and crude oil. To cut to the conclusion of this tale, T. Boone Pickens believes oil and gas prices are headed higher still...
But first a little history.
In the late 1990s, Pickens launched a tiny hedge fund dedicated to making leveraged bets on oil and gas prices. His fledgling BP Capital Energy Commodity Fund had barely flown the nest before it encountered life-threatening difficulties. The fund suffered large losses in its first two years, 1997 and 1998, trimming Pickens' personal wealth to $24 million from $35 million. But the fund turned the corner in 1999, when it squeaked out a $900,000 profit. BP Capital has been profitable every year since...immensely so. Pickens has seen his personal fortune rise to about $760 million.
"He understands the industry and business like no one else," says billionaire Harold Simmons, one of the BP Capital Energy Commodity Fund's original investors. In 1997 Simmons kicked $5 million into Pickens' hedge fund, only to see the investment shrivel to $400,000 in 1998. "I thought we were going to lose the whole thing," says Simmons.
Instead, as luck would have it, Pickens' fund handed Simmons about $150 million in profits over the ensuing four years. Let's take a closer peak at the DNA of Pickens' good luck...
In late April of 2003, T. Boone Pickens kicked off the Grant's Spring Conference here in Manhattan by declaring, "I don't believe I'll ever see natural gas below $4.50 again." Inventories are extremely low, he explained, supply is falling and demand is holding steady - a potentially explosive situation for gas prices. "If we get another cold winter next year," Pickens predicted, "the gas price could go to $10 an mcf or more...the gas price could do anything, and I mean anything!"
Sure as shucks, the gas price soared above $7.00 later that year, and has only "kissed" $4.50 a couple of times since then. More to the point, the gas price has averaged about $5.60 since Pickens' declaration and topped $7.00 again yesterday.
Fresh from his dead-on prediction for natural gas prices, Pickens issued a second Delphic forecast last May - this time about crude oil prices. "I think you'll see $50 before you see $30 again," said Pickens. At the time, crude oil was changing hands for $41.50, and had averaged only about $36 for the year-to-date. But as we all know now, the price profile of the crude oil market has changed dramatically since then. Crude decisively scaled the $50-mark yesterday and planted its flag at $51.29 before settling in for the night at $51.09.
Pickens continues to up his forecasts. On September 27, he said in a radio interview with Bloomberg News that he expects the price of crude to surge to $60 before it returns to $40. Should we trust his judgment?
Many of the attendees of the May 2003 Grant's conference wondered the same thing, when Pickens' predicted a new era of permanently higher natural gas prices. One skeptical attendee asked the oilman, "If high, and rising, natural gas prices seem so probable, why aren't the exploration and production companies working feverishly to increase their drilling activity?"
The answer, according to Pickens, was that "there's nuthin' to drill." The oil and gas industry keeps poking holes, of course, but they aren't finding very much oil or gas to suck out of those holes. About 1,243 drilling rigs are currently operating on U.S. soil and in contiguous waters, according to Baker Hughes - that's about 12% more than this time last year, and about 40% more than two years ago. Even so, domestic production of crude oil and natural gas has tumbled 5% since 2001.
Proven reserves of U.S. crude oil are close to a 29-year low after falling 3.5% last year. Meanwhile, demand charges ahead. Worldwide oil demand will average 82.2 million barrels a day this year and jump by another 1.8 million barrels next year.
T. Boone Pickens is fallible, of course. But he seems to have a knack for putting himself in luck's path. All else being equal, we'd rather align ourselves with a consistently lucky soul than a consistently unlucky one.
"Better late than never" would seem to be a fitting description of Mr. Pickens' financial fortunes. The one-time corporate raider didn't do too badly for himself during the 1980s, when, as president of Mesa Oil, he reaped hundreds of millions of dollars for his shareholders by attempting hostile takeovers of companies like Phillips Petroleum and Cities Services.
But raiding, says Pickens, was never as profitable as simply riding the energy bull market of the last few years. The oil maverick's Dallas-based hedge fund, BP Capital Energy Commodity Fund, has soared 283% so far this year and has racked up profits of more than $1.3 billion since the start of 2000.
"I really needed to win," the 76-year old Pickens explains to Bloomberg News. And win he did! This senior citizen of the oil patch has increased his wealth by more than 3,000% since 1997, finally nosing into the 389th slot on Forbes' list of America's 400 wealthiest people. Pickens says he has paid 75 percent of his lifetime's income taxes since he turned 70.
"He just got lucky," gripes one oil industry consultant. Maybe so, but luck of this magnitude has a mysterious way of repeating itself...which is why we are intrigued by Mr. Pickens' particular brand of luck. He owes most of his good fortune to some extremely prescient - or lucky - calls on the price of natural gas and crude oil. To cut to the conclusion of this tale, T. Boone Pickens believes oil and gas prices are headed higher still...
But first a little history.
In the late 1990s, Pickens launched a tiny hedge fund dedicated to making leveraged bets on oil and gas prices. His fledgling BP Capital Energy Commodity Fund had barely flown the nest before it encountered life-threatening difficulties. The fund suffered large losses in its first two years, 1997 and 1998, trimming Pickens' personal wealth to $24 million from $35 million. But the fund turned the corner in 1999, when it squeaked out a $900,000 profit. BP Capital has been profitable every year since...immensely so. Pickens has seen his personal fortune rise to about $760 million.
"He understands the industry and business like no one else," says billionaire Harold Simmons, one of the BP Capital Energy Commodity Fund's original investors. In 1997 Simmons kicked $5 million into Pickens' hedge fund, only to see the investment shrivel to $400,000 in 1998. "I thought we were going to lose the whole thing," says Simmons.
Instead, as luck would have it, Pickens' fund handed Simmons about $150 million in profits over the ensuing four years. Let's take a closer peak at the DNA of Pickens' good luck...
In late April of 2003, T. Boone Pickens kicked off the Grant's Spring Conference here in Manhattan by declaring, "I don't believe I'll ever see natural gas below $4.50 again." Inventories are extremely low, he explained, supply is falling and demand is holding steady - a potentially explosive situation for gas prices. "If we get another cold winter next year," Pickens predicted, "the gas price could go to $10 an mcf or more...the gas price could do anything, and I mean anything!"
Sure as shucks, the gas price soared above $7.00 later that year, and has only "kissed" $4.50 a couple of times since then. More to the point, the gas price has averaged about $5.60 since Pickens' declaration and topped $7.00 again yesterday.
Fresh from his dead-on prediction for natural gas prices, Pickens issued a second Delphic forecast last May - this time about crude oil prices. "I think you'll see $50 before you see $30 again," said Pickens. At the time, crude oil was changing hands for $41.50, and had averaged only about $36 for the year-to-date. But as we all know now, the price profile of the crude oil market has changed dramatically since then. Crude decisively scaled the $50-mark yesterday and planted its flag at $51.29 before settling in for the night at $51.09.
Pickens continues to up his forecasts. On September 27, he said in a radio interview with Bloomberg News that he expects the price of crude to surge to $60 before it returns to $40. Should we trust his judgment?
Many of the attendees of the May 2003 Grant's conference wondered the same thing, when Pickens' predicted a new era of permanently higher natural gas prices. One skeptical attendee asked the oilman, "If high, and rising, natural gas prices seem so probable, why aren't the exploration and production companies working feverishly to increase their drilling activity?"
The answer, according to Pickens, was that "there's nuthin' to drill." The oil and gas industry keeps poking holes, of course, but they aren't finding very much oil or gas to suck out of those holes. About 1,243 drilling rigs are currently operating on U.S. soil and in contiguous waters, according to Baker Hughes - that's about 12% more than this time last year, and about 40% more than two years ago. Even so, domestic production of crude oil and natural gas has tumbled 5% since 2001.
Proven reserves of U.S. crude oil are close to a 29-year low after falling 3.5% last year. Meanwhile, demand charges ahead. Worldwide oil demand will average 82.2 million barrels a day this year and jump by another 1.8 million barrels next year.
T. Boone Pickens is fallible, of course. But he seems to have a knack for putting himself in luck's path. All else being equal, we'd rather align ourselves with a consistently lucky soul than a consistently unlucky one.
No comments:
Post a Comment