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Harold Hamm hits back at ‘crazy’ shale claims



One thing to start: Oil prices continue to hover around $40 a barrel, and the “outlook remains fragile”, the International Energy Agency said in its monthly market report yesterday, as surging coronavirus case numbers threaten the recovery of global demand. No wonder Saudi Arabia and Russia are urging other Opec+ producers to stick with their huge supply cuts. On to today’s newsletter . . .

Harold Hamm, one of the shale industry’s most famous figures, was not pleased after Wil VanLoh, one of the sector’s biggest investors, said in a recent Financial Times interview that a shale binge has spoiled US reserves. Mr Hamm called to tell us why he thinks Mr VanLoh is wrong. Mr Hamm’s words, and more from Mr VanLoh’s interview, make up our first note.

Our second takes another look at the IEA’s and Opec’s long-term oil outlooks — and finds them more similar than they first appeared.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Derek

‘The craziest thing I’ve ever heard’: Spat in the shale patch

Private equity boss Wil VanLoh’s comments in an interview with us published this week — especially his claim that operators had “drilled the heart out of the watermelon” and “sterilised a lot of the reservoir in North America” — sparked some debate in the shale patch.

“That’s the craziest thing I’ve ever heard of,” said Harold Hamm, the confidant of Donald Trump who is executive chairman of Continental Resources and a shale oil pioneer, in an interview with us on Tuesday.

He also took issue with a claim by Adam Waterous, head of Waterous Energy Fund, another private equity investor, that just 25 per cent of the shale resource was now viable at $40 a barrel.

“That just doesn’t hold water,” said Mr Hamm, a renowned US oil bull. “If that was the case, oil wouldn’t be at $40 for very long — it would have to increase to have supply.”

Continental Resources chairman Harold Hamm criticised the idea that fracking has spoiled US oil and gas reserves. © Bloomberg

Private-equity investors such as Mr VanLoh, head of Quantum Energy Partners (QEP), had flocked to shale to “flip and make quick bucks”, said Mr Hamm, and lacked real understanding of the sector.

“We call them all hat and no cattle,” Mr Hamm said, speaking of the private equity companies. “We have to get back to people in the business that operate companies through the highs and lows.”

Other US oil executives were more guarded about Mr VanLoh’s statements. In private, though, some endorsed them.

Here’s a look at what else he had to say — lightly edited for brevity — during our interview.

On public vs private companies in shale

Public companies behaved “like drunken sailors there for a number of years, because capital markets just gave them free money,” Mr VanLoh said. “We can run the same operation that a public company does for 15-20 per cent of the cost,” he said. Management teams’ private jets “are only a very small part of it,” he added. “They’ve got managers of managers of managers”. And he laid into the way public companies paid executives:

“The problem is they give all these executives restricted stock. Let’s say a CEO gets 200,000 shares at $20 a share, so he gets a $4m grant as CEO . . . If the stock goes to $15, he still made $3m. He could have lost shareholder value and still made $3m of equity compensation that year. In our [private] world, the management teams have to return our capital plus a preferred return of typically 8 per cent, before they get anything. So every dollar matters. A dollar spent on G&A is a dollar that they’re not sending back to their investor to return capital.”

And he wasn’t impressed with corporate largesse: “As soon as someone builds a building and puts his name on it, short the stock,” he said, referring to the showy expansions of some oil operators. “It’s the kiss of death.”

On investors driving a focus on renewables

QEP investors still wanted hydrocarbons in their funds, he said, conscious of their higher returns. But things are changing. In previous funds QEP set aside 5-10 per cent for “energy transitions” — the company’s term for investments in renewables and companies like ChargePoint, an electric-vehicle charging network. Its latest, fund VIII, launching next month, commits 15-20 per cent to transitions.

“There’s going to be less money flowing into the energy PE space — probably down 50 plus per cent in term of capital available . . . The ones that get it are the ones that are making sure their companies are doing the ESG things the right way. They’re the ones that are going to be doing renewables.”

“At some point in the future, the majority of what we do will be energy transitions,” Mr VanLoh said.

On the shrinking shale sector

On technology, “energy is just so far behind”, said Mr VanLoh. As it catches up, the sector will shrink. “Artificial intelligence and machine learning are going to transform every industry, energy included,” he said. The sector had already reduced by 90 per cent the number of people it needed, he said. “I’ll argue that what ML and AI will do over the next decade is reduce it by another 90 per cent.”

“The need for humans in this space, quite frankly, is going to continue to shrink massively.”

On bankruptcy — the ‘beautiful part’ of US capitalism

After the crash of 2015-16, bankrupt companies were left holding much of their debt. “The thing that drove us nuts, is that the industry never really restructured.”

Not this time, he said. “Go look at all these bankruptcies. They’re wiping the debt clean.”

“It’s gone and the sins have been washed away. The US shale industry is going to emerge healthier than they’ve ever been. The beautiful part of the US capitalist system is bankruptcy.”

(Derek Brower)

Look again: the IEA is as bullish about oil as Opec

In the past week, ES has taken deep dives into how both the International Energy Agency and Opec see the future of oil demand. Despite the threat posed to fossil fuel by the energy transition, Opec’s outlook in particular charted a cheery forecast for crude consumption in the years ahead.

From the assessment of Cuneyt Kazokoglu, head of oil demand at consultancy FGE, the World Energy Outlook (WEO) suggests the agency is just as bullish about oil as Opec. Here’s more from Mr Kazokoglu who gives ES readers his take:

Two conclusions in the IEA’s new WEO, published this week, are worth noting. Both are to do with the future of global liquids demand, including biofuels.

  1. The IEA projection does not show a distinct plateauing of demand, as Opec does in its World Oil Outlook.

  2. The IEA’s outlook for global liquids consumption, once you include biofuels and a calculation to account for their density, in 2040 is slightly higher than Opec’s projection. Both forecasters see total liquids demand hitting about 110m barrels a day by 2040.

The medium-term view surrounding the recovery from the Covid-19 crisis also looks similar, with global oil demand returning to 2019 levels in 2022 (Opec) and “around 2023” (IEA).

Neither forecaster expects OECD demand ever to return to pre-pandemic levels, with all incremental oil demand in the future coming from non-OECD countries.

Between 2019 and 2040, the IEA expects global transport fuel demand to rise by close to 8m b/d — almost a third more than Opec’s 6m b/d.

As for petrochemicals, the IEA expects total feedstock use to rise by 4.5m b/d between 2019 and 2040. Opec expects 3.4m b/d.

What about the supply side?

The IEA expects the US to add 3m b/d of oil production compared with 2019 — twice Opec’s outlook. While production from the former Soviet Union countries will fall in the next two decades, believes the IEA, Opec thinks it will rise by 2.1m b/d in just five years to 2025, implying some scope for Opec+ tensions. Both think the need for Opec supply will fall in the medium term before rising quickly in the long term.

The IEA is, though, gloomy about the oil prospects of Iran, Libya and Venezuela, which only add supply — and then only a combined 1m b/d — between 2030 and 2040. (Cuneyt Kazokoglu)

Data Drill

The oil and gas industry anticipates a cut of 10-20 per cent to borrowing bases this autumn, according to a survey by Houston law firm Haynes and Boone, as lenders tighten credit terms because of the price slump.

A fall of that magnitude would not be as bad as what was predicted ahead of the spring redeterminations. However, most producers are already hard pressed and “not in a position to absorb even a minimal decrease”, according to Haynes and Boone.

Bar chart of Anticipated change in fall 2020* showing Oil & gas industry is braced for further cuts to borrowing bases

Power Points


The IEA, the US Energy Information Administration and Opec all released their latest monthly oil-market assessments over the past few days. Here is what matters and what changed:

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.

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Earnings beats: lukewarm reaction shows prices are stretched




Investors are picking over first-quarter results for signs of economic recovery and proof that record market highs can continue. Stock markets have only been this richly valued twice before — in 1929 and 2000. Bulls hope strong corporate earnings and rising inflation can pull prices higher still. But pricing for perfection means even good results can be met with indifference.

L’Oreal illustrated this trend on Friday. The French cosmetics group stated that sales in the first quarter of the year rose 10.2 per cent. This was a better performance than expected. Yet the announcement sent shares down by around 2 per cent. Weak cosmetics sales were seen as a veiled warning that consumers emerging from lockdowns might not spend as freely as hoped.

Online white goods retailer AO World, a big winner from pandemic home upgrades, also offered a positive update this week. In the quarter that marked the end of its financial year, sales were £30m ahead of forecasts. But even upbeat commentary from boss John Roberts could not stop shares slipping 3 per cent.

Banks are not immune. Their stocks have outperformed the market by 7 per cent in Europe and 12 per cent in the US this year. But stellar Wall Street results were not enough to satisfy investors this week.

JPMorgan Chase, the biggest US bank, smashed expectations for the first quarter. Even adjusting for the release of large loan loss reserves, earnings per share beat expectations by 12 per cent because of higher investment banking revenues. Bank of America earnings also rose thanks to the release of loan loss reserves. Yet shares in both banks ended the week down. Goldman Sachs had to pull out its best quarterly performance since 2006 to hold investor interest.

On multiple metrics, stock valuations look steep. On price to book, banks are now back to the pre-crisis levels recorded at the start of 2020. Living up to the expectation implicit in such valuations is becoming increasingly hard.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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Barclays criticised for underwriting US private prison deal




Barclays has attracted criticism for underwriting a bond offering by the US company CoreCivic to fund the building of two new private prisons, in a new dispute over Wall Street’s relationship with the controversial sector.

The UK-based bank said two years ago that it would stop financing private prison companies, but the commitment did not extend to helping them obtain financing from public and private markets.

About 30 activists and investors, among them managers at AllianceBernstein and Pax World Funds, have signed a letter opposing the $840m fundraising for two new prisons in Alabama, which was due to be priced on Thursday.

The signatories said the bond sale brings financial and reputational risk to those involved and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”.

Activists and investors who pay attention to environmental, social and governance issues have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour. As well as raising ethical issues, many also say such financing may be a bad investment because legislators are increasingly calling for an end to the use of private players in the prison system.

While Barclays is not lending to CoreCivic, activists and investors attacked its decision to underwrite the deal, which is split between private placements and public issuance of taxable municipal bonds. The arrangement is “in direct conflict with statements made two years ago” when the bank announced it would no longer finance private prison operators, according to the letter.

Barclays said its commitment to not finance private prisons “remains in place”, adding it had worked alongside representatives from the state of Alabama to finance prisons “that will be leased and operated by the Alabama Department of Corrections for the entire term of the financing”.

CoreCivic said the Alabama facilities will be “managed and operated by the state — not CoreCivic. These are not private prisons. Frankly, we believe it is reckless and irresponsible that activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space, and potentially dangerous conditions for correctional staff and inmates alike.”

Barclays’ 2019 commitment to limit its work with private prison companies came as other banks, including Wells Fargo, JPMorgan Chase and Bank of America, also said they would stop financing the sector.

Critics said they were not sure why Barclays is differentiating between lending and underwriting.

“You’ve already taken the stance, the right stance, that private prisons and profiting from a legacy of slavery is bad,” said Renee Morgan, a social justice strategist with asset manager Adasina Social Capital, one of the signatories of the letter. “But then you’re finding this odd loophole in which to give a platform to a company to continue to do business.”

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Hedge funds post best start to year since before financial crisis




Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It’s a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

Additional reporting by Katie Martin

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