Category Archives: What we read

Book review: “The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters ” – Gregory Zuckerman

“The Frackers” is the story about a bunch of crazy US “wildcatters” who managed to find a way to extract enormous amounts of oil and natural gas from rock formations which were thought (by conventional wisdom) as not to be worth drilling.

They way they achieved it was actually not to invent anything new, but to combine and refine existing technologies (horizontal drilling and fracking) which allowed them to produce oil and gas at competitive costs.

For potential investors there is a lot to learn in the book, among other stuff:

1. Being too early is the same as being wrong. It took a long time to make it work and those who started early often did not have the means to pull through.

2. One of the key innovations was to use less chemicals than before in the fracking fluids. One more example that innovation often means less and not more

3. The guy who had the breakthrough idea with adding less chemicals to the fracking fluid did actually not profit much from his invention

4. Established companies like Exxon, Chevron etc. mostly missed the opportunity because they relied on “conventional wisdom” which said that shale is not relevant. Funny enough, one of the best shale regions (Barnett) lies literally below Exxon’s headquarters. They were sitting directly on top of a big energy source but ignored it and went to Indonesia, Nigeria etc.

5. The most aggresive and fastest growing “frackers” did not produce the best long term returns for shareholders. If you compare for instance the two companies of the main characters, Aubrey McLendon’s highly leveraged Chesapeake Energy against Harold Hamm’s conservatively run, 70% CEO owned Continental Resources, it is not difficult to see which is the better long term concept for shareholders:

For non-US readers like myself it was also interesting to see how the dynamics between wildcatters and land owners play out. Without landowners having a profit stake in the production, getting permission for fracking would be much more difficult. This is maybe the reason why fracking in Europe will never get done as the government has the monopoly on natural resources.

Another thought: I think in the current discussion of how the oil price impacts the US economy, it is not enough to look just at the direct jobs created by the E&P companies. If you assume that in total, the shale boom increased daily US oil production by 5 mn barrels, at an oil price of 80 USD per barrel, around 150 bn USD have flown back into the US economy annually instead of going to OPEC countries or other non-US oil producing countries. I guess fracking had a much bigger impact on the US economy’s revival since the financial crisis than the Fed.

Finally, there is a fascinating side story about the guy who is running Cheniere Energy, Charif Souki. His great idea was to import natural gas into the US and he raised several billion USD to build a huge gasification plant on the gulf coast. He clearly did not see fracking coming and his investment was worthless. Nevertheless, he was able to raise another few billion bucks and retool the facility in order to export natural gas.

This “double or nothing” gamble seems to have paid off. Seth Klarmann by the way, has just doubled its stake in Cheniere, making it their biggest public listed position at around 1,7 bn USD.

Overall, I found the book very interesting and I would say that it is a MUST READ for anyone interested in the oil industry. It is well written and entertaining as well as informative. Highly recommended !!!

Some links

If you’ve got 2 hours time this week, don’t miss Barry Ritholz talking to Bond legend Bill Gross (Part 1, Part 2). HIGHLY RECOMMENDED !!!

The guy who blew up AIG’s sec lending is back as a hedge fund manager

Punchcardblog likes subprime retailer Conn’s

Nate from Oddballl finally goes activist on a small net-net company

Bill Gates released his personal annual report

Greenlight’s Q4 2014 letter including a comment on Citizen’s Financial

Target is another proof that retailers often work not well across borders

Some links

Don’s miss: 122 things you should know about investing from Morgan Housel

A great list of business/investment books from Farnam Street blog

Must Read: James Montier explaining why Shareholder Value is “The World’s dumbest idea”

Interesting panel discussion on Bershire Hathaway inculding Tom Russo and the CEO of See’s candy.

Review of an interesting book called “The Frackers”

A great TED Talk on “Leading like a great conductor” (by the way: There are a lot of great talks on the TED homepage, check it out)

Some links

Great article on the problems at Mc Donalds

Joel Greenblatt talks about his “new” strategy

Great analysis (part 1) of German Online tire company Delticom from Frenzel & Herzing

Damodaran looks at Brazilian Vale and Russian Lukoil.

Alphavulture has analyzed Clark Inc. which seems to be the Canadian version of Carl Icahn

Interesting analysis on the US shale oil industry and the 75 USD oil price (spoiler: Capex will go down A LOT)

The performance of companies, whose CEOs play a lot of golf, does not look so good. What about money managers ?

Don’t miss: Blogging luminaries on Charlie Rose (Josh Brown, Joe Weisenthal, Felix Salmon, Megan Murphy)

Some links

WertArt Capital with a potential German liquidation case UMS AG

Charlie Munger is still in great form at the age of 90 as Jason Zweig’s interview notes clearly show. He doesn’t like Benjamin Graham though……

Great FT Alphaville post why one should be careful with “high dividend paying” securities.

A collection of notes from the recent New York Value Investing congress

Good presentation from Carson Block (Muddy Waters) on activist short selling

Self driving cars: Tesla joins the hype, Google’s real world experience still seems to have room for improvement

Book review: “Only the paranoid survive” – Andy Grove

Andy Grove was senior manager and CEO at Intel for a very long time and was one of the architects of the spectacular rise of Intel as microprocessor powerhouse. The book was written by Andy grove in 1997, one year before he stepped down as CEO of Intel.

He outlines how he dealt with what he called “inflection points” at Intel. An inflection point is in his definition a point where business changes so profoundly that either the business changes as well or the company will be killed by competitors. For Intel, this was the case when in the 1980ties, the Japanese suddenly were able to produce better and cheaper memory chips which were until then Intel’s main business.

Grove managed then to shut down the memory business and concentrate the efforts on the microprocessor business which was until then only a small part of the business. His first person (CEO) perspective is very interesting to read as change doesn’t come naturally to large and succesful companies.

I also found the book especially interesting because Intel is one of the famous cases for a “size moat” in Bruce Greenwald’s “Competition demystified”. Greenwald there argues that Intel’s success in microprocessors was more or less given because they had such a size advantage compared to AMD, their major competitor. Reading the book, I got the impression that Prof. Greenwald greatly simplified this. There seemed to have been several junctions on the way where Intel easily could have went “of course”, such as the rise of the RISC processors or the question at that time if multimedia will be won by PCs or TV sets. For me, one of the lessons o f the book is that Moats, at least in technology are always “weak moats” as the development is just too dynamic.

The most powerful concept of the book in my opinion is the following concept from Andy Grove: If you see someone coming up with a new idea or a competing product, then you should ask yourself the question: Is this a thread to the business if this gets 10 times bigger or better or faster ? His theory (and paranoia) was that if it is a thread at 10x bigger/better/faster than the probability of this actually happening is very big and you have to do something about it. And fast…

If I use this concept for instance for electrical cars, then as a traditional car manufacturer I should ask the question: What if electrical cars have 10 times better reach, 10 times more charging stations, charge 10 times quicker then now ?. Would I have a problem with this ? The answer would clearly be yes.

Grove also observes that you only have a chance to survive such inflection points if you start early, so when the old stuff is still selling well. Once the company is in real trouble, then change is much much more difficult.

The final chapter in the book deals with how Grove thought about the internet. One should remind that this book was written in 1997, but it is fascinating how Grove already identified industries which would be badly effected by the internet. He already was aware that for instance a lot of ad revenues would flow from print into the internet. One should not forget that this book was written a year before Google was even founded !!!

Another interesting aspect was that at that time Apple was considered by Grove a failed company as they did not change their vertical business model to a “Horizontal” one. Clearly , mobile was not on his radar screen at that time. As a final observation: Without the great run up in the stock price this year, Intel’s stock would have been more or less flat against the time when Grove stepped down as CEO in 1998. So even a great company as intel might not be a great investment at any price….

Anyway, in my opinion this is a truly great book. I think both, investors and managers can profit a lot from this book. I do like “first person perspective” books a lot, especially if you can compare them against articles and theories about the same company written by other people.

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