Odd Lots - How Saudi Arabia Delivered A Blow To U.S. Shale Companies At The Worst Possible Moment

Episode Date: March 16, 2020

Saudi Arabia recently announced that it was engaging in a full-on price war by pumping oil like crazy. At one point, after the move, the price of Brent Crude plunged 31%. This was a body blow to U.S. shale companies, who are already reeling from falling prices and tightening credit markets. On this week's episode of Odd Lots, we speak with Buddy Clark, a Houston lawyer at the offices of Haynes and Boone about why this came at the worst possible time for the industry, and what could happen next.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big. It's a very much. It's a lot. It's a firm. It's a a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com

slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing Corporation Distributor. And welcome to another episode of the All Thoughts podcast. I'm Tracy Alouye. And I'm Joe Wisenthal. So, Joe, we have seen an absolutely stunning drop in the price of oil. That is, to put it mildly, I would say, the stunning drop. I mean... Stunning? Stunning is mild. You know, oil had already been precipitously declining all year amid concerns about economic growth and supply. And then, of course, over the weekend, Saudi Arabia just came out and shocked the world. Yeah. So Saudi Arabia basically said it wasn't going to extend the production

cut agreement that had kind of provided a floor for oil prices for a few years now. Oil promptly fell something like 30 percent over the weekend, which was the biggest fall since the first Gulf War. And it's recovered a bit since then. At the time of our recording, I think Brent, the global benchmark for crude, is trading at $37 a barrel, and WTI in the U.S. is at $33 a barrel. But it is still massively bad news for the U.S. energy sector. Yeah, absolutely right. When oil opened, and so just so that people understand the timing, obviously we're recording this Tuesday, March 10th, but when oil opened this past Sunday, and everyone was watching with their jaws on the floor at that 31% crash.

The only thing that I sort of, that it reminded me of at the time is like when Bear Stearns opened a $2 a share, it was that, like it was just that much of a dislocation that I can't think of anything else sort of comparable in the last decade to seeing that move. Yeah, a huge dislocation in the market, a big surprise for OPEC watchers. But all of that is sort of bad enough for the energy patch, but there's something that makes it even more painful, if you can believe it, which is that this is coming, this oil price drop is coming at a very special time in the energy market. Right around this time of the year, we have something known as the borrowing-based redetermination process or season, which is basically the time in which banks reassess their loans to energy. companies. So those loans are based on an estimate of the value of their oil and energy-related assets. So the fact that they're going to be doing this right after oil fell 30% is really not good.

Right. It's terrible timing because, A, as you mentioned, oil is getting clobbered. And then, on top of everything, because of the volatility in financial markets, there is not a particularly high amount of risk appetite to fund anything, let alone extremely risky energy players who suck the commodity that they sell just plurts 30% a day. Absolutely. And the interplay between the U.S. energy sector and capital markets is a really interesting one. So we're going to dive into it on this episode. We're going to get maybe a little wonky. But it'll be fun. Our guest for this episode is Buddy Clark. He's a partner at the law firm Haynes Boone based over in Houston. He's also the author of Oil Capital, The History of American Oil Wildcatter's Independence and Their Bankers,

which is basically all about the relationship between energy and capital and banking. So he's really the perfect person to discuss this. Buddy, thanks so much for coming on. Thank you for inviting me. So, Buddy, I mentioned that you're based out in Houston. Joe mentioned the massive reaction to the oil price fall over the weekend. What reaction did you see out in the oil patch in Texas? Well, I think everybody's seeing a little bit of shell shot at the moment and waiting to see where the prices settle out. Obviously, it's been a major drop in prices, and that's significant for producers all up and down the value change. as far as their size and debt leverage ratios.

But I think right now people are still trying to hold the breath to see where it's going to fall out. You know, you saw a couple of the larger independents announced they were just going to cut back significantly on drilling capital expenditures. That's probably going to be the theme coming out the next couple of weeks from all the publicly reporting companies. Well, there's a lot of a lot of different moving parts here. obviously the move from Saudi Arabia, according to all the reporting, was precipitated by tension between Saudi Arabia and Russia. I think the reporting called it Saudi Arabia firing a shot in the oil price war. But talk to us about the OPEC politics as it relates to their desire to see carnage within U.S. domestic energy,

which, of course, as everyone has noted, has made OPEC or OPEC plus less of an important entity than it used to be in setting the global price. Well, I guess historically we've seen OPEC do this at least three times in the mid-80s in Thanksgiving of 2014 and now again. I wouldn't ascribe malintent by OPEC or the Saudis to put all the U.S. producers out of business. just their goal to maintain their market share. And if that means they're losers out there, then that's just the way capitalism and the oil markets work.

But I think clearly it has been the revolution of the U.S. producers in the shale field that has triggered this massive influx of production, dramatic increase in U.S. deliverability and made the U.S. number one exporter of oil. That's obviously gotten the attention to the Saudis and Russia as well. So the goal that OPEC had in the 80s and again in 2014 was just we're tired of giving up our market share to prop up oil prices for the benefit of other producers. And they've gotten to that point again because I suspect the Russians did not want to continue to subsidize, not necessarily subsidized, but provide a floor for U.S. producers to continue to produce. and we'll have to now see how this all plays out in the next couple weeks or months.

Hopefully it won't be the next couple of years, but there's really no way of knowing right now what the implications are. So I was looking at one set of estimates earlier today, which said that oil in the low $30 a barrel basically means that almost all of U.S. shale is now unprofitable. That particular forecast said only five companies in two. areas of the country now have break-even costs that are lower than the current oil price. What's your sense of the break-even rate of U.S. shale? Because there's a lot of debate on this topic. Yeah, and there's a lot of different metrics one can use. If you're talking about what is the

cost to go out to acquire the land and to drill and complete and to bring on to production a well, that numbers can be a whole lot higher than those producers that have current wells that are producing. How much does it cost them in the field just to continue to get the production out of the ground? I think the least operating expense for existing production wells that are currently online, I think that cost is lower than $30 a barrel. So it's not like producers are shutting in wells because they can't recover their cost of producing. But the ability of the producers to actually go out and drill wells, even on lands, say they've already sunk the cost on land acquisition,

and now it's just the drilling and completion cost. Those are, that CAP-X is going to be cut back. That's what Diving Back said they were going to do. A number of other producers are starting to pull back from their drilling plans. And that number varies, I guess, from basin to basin, but the lowest I heard was $45 a barrel. So if prices are below 45, over a long term, over the predicted life of the wells production,

then if you can't recover that cost, you're not going to drill the wells. How does that compare either the cost of new drilling of wells or the cost structure of existing wells that are already pulling oil out? How much have costs come down? You mentioned, I think Thanksgiving 2014 or 2015 was when the last time we saw such a dramatic move.

Are the domestic players leaner? Have they got their cost structures more competitive since that time? Yeah, that's a great question. I think one of the number of ways that OPEC underestimated the impact of their Thanksgiving 2014 price drop. They assumed that producers' costs were static and that the technology was static. But in fact, necessity being the mother of invention, the producers in the youth, U.S. kind of took it in stride. They were probably a lot more overweight back in 2014 coming off a $140 a barrel price just a few years before that. It was still $100 a barrel

of thereabouts that summer. So producers had a lot of fluff, let's say, in their overhead and the way they were doing business. But when the price was crammed down, the producers adjusted and adjusted quickly. And not only did they lean on the drillers and other oil field service providers to cut their cost, but they found ways to maximize their drilling efficiency instead of drilling one horizontal well per drill pad. They, you know, developed a six well pad drilling with drilling rigs that they wouldn't have to move by by dozers. They just have caterpillars on the drilling rigs. The drilling rigs themselves were mobile. And the way they were able to get cost down considerably in order to adjust to the new world prices.

What about now? What about 2020? Have we already discovered or invented all the cost-saving measures that are possible to invent? And I would say that the past would be predictive of there's more ways to invent in the oil field industry than you can imagine. And there are people right now thinking of ways how do we cut costs on drilling, how do we cut costs on completion, etc. So while there's not as much fluff, I don't think the industry is going to raise a white flag and say, we're not going to compete anymore. They're going to be looking for ways to cut costs and to compete in global markets.

Yeah, I remember back in 2015 doing a story on this. And some of the energy companies were really creative in cutting costs, like even switching light bulbs and standardizing the nuts and bolts they were using, like actually getting down to the nuts and bolts of their operation in order to save costs. It was pretty amazing. Just on that note, what's the easiest way for an energy company to try to ride out the current route in oil? I imagine cost cutting is one of them. Cutting back on investment is another obvious choice. But what's the sort of easiest or knee-jerk reaction that you would expect most firms to have here?

Well, historically, the first reaction is to lean on their service providers and to cut back on expenditures they don't need to make. For your audience, it's not fully aware of this, oil and gas leases are subject to termination if the oil company doesn't continue to explore and develop. And so if I take a 10,000 acre lease in South Texas, each well I drill may be able to hold 640 acres. But once I stop drilling wells, to the extent there's undeveloped acreage, I'm going to lose that. That's going to go back to the mineral owner. A lot of producers have at this point now in this phase of the shale revolution, most of the acreage that they have is held by production, meaning they're not subject to this. continual drilling obligation.

There are some people out there that if they don't drill, they're going to lose some acreage. And so those are the people that are really faced with a tough decision. Do we spend money on a well that we know we're not going to get a profit on, but it holds our acreage versus do we just let the acreage go? And that is a decision that companies are having to make today. They are looking at that decision. In fact, we know of one company that is deciding to, deciding to, or at least thinking they're going to let thousands of acres go because they don't want to be drilling in today's environment. But most producers, I think, after they've leaned on

their service providers, after they've made some tough decisions, they're probably going to hunker down. It's kind of what we've learned to do in Houston periodically when we've got a hurricane come through. It's better not to leave town and evacuate, but just to stay in place and let the storm, you know, blow over you and then once the storm's gone, get back to work. I think that's what you'll see this industry do. This is not the first curveball to be thrown at the industry by any stretch at the mean. It's the nature of the business. This is a risk-taking business and people are prepared for the risk. There will be definitely some losers, but most people, I think, will adopt the hunker-down mentality and try to see what direction the markets are going before they

make any material decisions. So you're not betting on the Saudis or the Russians or OPEC to deliver a death blow to domestic U.S. energy anytime soon? I would never do that for any number of reasons, but not the least of which is I'm just kind of basically an optimist. Of course, one of my partners reminds me that back in 2014, I think it was in December, I was being interviewed and I was saying, oh, this is not going to be a major problem. It's going to blow over. This is, is not anything that we should worry about. Of course, I could not have been more wrong. It was a major issue that happened in 2014, and this is another major issue, but I don't think it's the death now for the oil industry. Today's show is brought to you by Vanguard. To all the financial

advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality, isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing

Corporation Distributor. You mentioned this risk-taking aspect of the oil industry, and I think that's what a lot of people associate with it. People go out and try to find oil, and some of them strike it rich and others don't. And historically, that's been really attractive to bankers and other types of financiers. Can you talk to us a little bit about that process, especially in recent years? How did Wall Street and investors and big financial institutions become so entangled with U.S. Shale? Well, to finance the Shale revolution required a massive amount of capital, much more than had previously been invested in the industry back when they were drilling, quote, simple vertical wells on a one-off basis. This Shale revolution transformed the need for capital a hundredfold.

And Wall Street, I think, didn't see a lot of other attractive opportunities. This is coming off the financial crisis. And it was a great place to put money to work with the quantitative easing. A lot of money was available. It wasn't too expensive. And if you could get some great returns in the oil industry, why wouldn't you do it? The problem is, once everybody invest in a deal, as you know, the returns start to, diminished significantly and that's been the result here because we invested in the u.s

oil and gas industry we were very successful we were so successful that we've uh kind of shot ourselves in the foot by increasing production as much as we have and we the supply is going to exceed demand that's always going to be a bad outcome for the supplier because prices are going to drop down until demand picks up or the supplies are reduced what happened in call it 22 10 to 2014, that might have been the golden error of the shale revolution. We were coming off that peak theory, peak oil theory that, you know, we're running out of oil. That was being disproven.

But there still was a great demand. You know, China was actively increasing their consumption. It really looked as if there was no end in sight for the golden error. In fact, you mentioned the book that I wrote. I was writing it from 20. 2010 through 2014 and about September, October, I was about ready to, you know, write the final chapter and say how great and successful the oil industry is and how it's learned from all of its past mistakes and it'll never make a mistake again. And then Thanksgiving happened and I had to spend another year digesting how wrong I was and, you know, summarizing the impact that that's had on the industry. and I think we published the book in 2016, and obviously a lot has changed since then.

But the main thing for oil producers, the smaller independence is that the access to capital is becoming severely restricted, and that's going to really transform the industry. It's going to make the bigger players, the majors, the internationals, much more able to compete and get the good acreage. and the smaller independents are just going to struggle because without capital, they can't compete. They can't drill, they can't acquire, and they'll just have to wait until the market's sentiment on investing in the oil industry turns around and then they can have access to capital again. Well, I want to talk about that market sentiment towards oil because it's interesting.

It feels like at any given moment there's some overarching narrative that people will say, okay, this is the new normal. mentioned the peak oil obsession. I remember that very well pre-crisis, a lot of people really bought into that. Recently, even before the economy started turning down and the OPEC moves, there's just been a lot of pessimism about the future of oil from the exact opposite point of view, people talking about electric vehicles and some sort of permanent decline of oil demand. That is just there's a secular shift away from oil period. It doesn't have anything to do with the economic cycle. Do you think that those forecasts or that sentiment will end up being as wrong as the peak oil sentiment was like in 2007, 2008?

That's a tough question, to be honest with you. And I wrestle with that a lot. I think there is inevitably a transition with respect to certain uses for hydrocarbons to renewable energy to the expensive. it can replace it or displace it. On balance, there's always going to be some need for hydrocarbons. The great quote by Sheikh Yomani back in early 2000 that we didn't exit the stone age because we ran out of stones. You know, we're not going to exit the hydrocarbon age because we run out of hydrocarbon.

There's going to be some better invention that just replaces the utility of hydrocarbons. But right now, they're so energy dense and so easy to store that as a, transportation fuel, it really is unsurpassed. And obviously there's a lot of externality costs associated with it. And I think the industry is addressing that. So predictions about the death of the oil industry or hydrocarbon industry are probably premature. It's a long transition period, but I think we are in the beginning of a transition period. So on the topic of evaluating the future price of oil, I wanted to dig into the redetermination process. a little bit more. If you could maybe walk us through how that works, what it means for shale

companies. And anecdotally, I'd be really interested in hearing what kind of prices banks are using for redeterminations this season. I think the last time I spoke to you on this topic was back in 2014, and they were using something like $50 a barrel. And that was considered low back then. I imagine whatever they're using now is probably going to be even lower. Yeah, and that's a, there's a lot in that question to unpack, but just to answer that last question first, right now the banks are resetting their price decks, which is the basis upon which they determine how much they're willing to lend against a producer's oil and gas assets. and we, Haynes and Moon last fall sent out emails to about 25 of the energy bankers, mostly here in Houston.

And that's probably a good sampling of the universe, if not the entirety of the universe, for what their price decks were. We did that again two weeks ago to 25 banks, and we've already gotten some responses before Friday of last week. but as of the price collapse over the weekend, we sent out a new request to all the same banks and saying if you're going to redetermine your price decks, let us know so we can include the more current information and the initial responses we got back from a lot of the bankers where, yeah, hold off, we're still looking at that,

but we're going to come up with the new price deck. So I guess stay tuned on what the new price deck will be. But to back up your question originally is, how is our borrowing basis determined? And just on the most fundamental level, an oil and gas producer borrowing money from a commercial bank is an asset-based loan. But it's a unique asset-based loan because most assets are inventory, floor inventory, or something that's out there and it doesn't disappear overnight.

It doesn't lose value necessarily. And so those asset-based. based loans are done under a different formula, but nevertheless, it's a borrowing-based formula. The reason why oil and gas is different is because the oil and gas is continually being produced and depleting, and producers are drilling more wells and replacing those reserves. And so as that cycle goes through the company's production inventory, the banks will reevaluate not only the total amount of recoverable reserves, but also what value the producers expected to receive for those reserves over the life of the loan, usually

over a three to five-year period. So every six months, because that collateral value fluctuates, the industry has come up with a formula that every six months, banks will re-look at a producer's asset base and say how much they'd be willing to loan against it. That number historically goes up, both because prices historically go up and producers continue to develop and acquire and drill and increase the total number of reserves they have. However, what goes up can come down and producers are going to find that probably a lot of the barring bases across the board at best will be held steady, but more likely will fall down. There are mitigates against that. a lot of producers in large part because the banks required have hedged their production.

And so they've locked in prices on the near term for the next 12 to 36 months. And if they put those hedges on January 7th, whenever the Iran issue arose, they might have $60 hedges on their books for the next 12 months. Those guys are feeling pretty smart. Other people may have said, I don't want to hedge at 60. I want to wait tickets to 75, and those people are kicking themselves. But what the banks do, not only looking at current market prices, they're also going to look at what hedge book does the producer have

because that could support a higher barring base. So not everybody's going to see a barring base reduction, but probably on balance they will. So this might be a stupid or naive question, but why is there a season? Why is there a set time when this all happens at once, as opposed to this just being an ongoing continuing process by the capital markets or by the banks to always be in a state of permanent evaluating their clients, their borrowers? That's a good question. And in fact, banks have the opportunity, as well as borrowers, if they take their collateral's worth of, you know, twice, three times where they're getting the barring base.

They have what we call a wildcard election between each six-month redetermination period to say, I want you to reevaluate my reserves. So the bank say, hey, we're going to reevaluate your reserves. And they're usually going to do that, but they're going to reduce the value. They do it every six months because it's a process. You have to go out and engineer the wells, update your engineering, add new wells that have been drilled, et cetera. So it's not something that you kind of just, you know, check your, your, your, monitor every morning to see what your reserve base, barring base is.

Once every year it's done by a third party, a reservoir engineering firm. And so that's a cost, I don't know, $50,000. So you don't want to just incur that cost every day to get comfort on what your barring base is. And from the bank's perspective, the banks are not giving a barring base equal to exactly what the reserves are that day. the banks are going to discount the barring base to be 65% of the present value of the future expected production from the wells over the life of their production. So there's lots of cushion in a barring base that is intended for the banks to be protected on the downside because the banks are not really getting rewarded much for making loans.

They're getting, you know, base rate plus 2% or LIBOR plus 150. So there's no real reward for the banks to be super risky. And therefore, these barring bases, while they're set just twice a year, they're set with a lot of cushion. And there is this, call it, wildcard option for either the bank or the borrowers to trigger during a six-month period if they think the barring base is off. Buddy, I wanted to ask you about the mix of financing for U.S. Shale as well, because clearly we've just been talking about the sort of reserve. based bank loans, but shale companies also issue bonds and they can also take out second lien loans if they need to. How does that dynamic or that mix of funding end up impacting actual appetite for shale exposure? Well, I would say the options are dwindling for producers to access

capital. The traditional commercial bank loans are there, but bankers are not aggressively competing against one another to increase their market share in this industry. And so new loans are very few and far between them on commercial banking side. The second lien loan market, which was very robust in the golden era of the shale plays, 2010 through 2015, there are still some second liens, but now it's not so much because producers are needing to grow faster. It's because producers are needing capital to survive. And the second lien market is significantly smaller and much more expensive.

The bond market is. for all intents purposes gone. And that's a major story for producers that are facing bond maturities in 2020, 2023. If they're unable to refinance their bonds in the next 12 months, there really is no alternative for them, but to do either out of court or through bankruptcy exchange of that debt for equity. And that's a real problem for those producers that are publicly reporting on bond debt.

And then the fourth avenue of access for capital, traditional capital, is the stock market. And I think the stock market spoke pretty loudly yesterday about how enthusiastic they are upholding equities and exploration and production companies. So what we're seeing now are structured finance loans that are made with, for example, a deal we just closed last week, it has a 10-year hedge. That's pretty much unheard of because basically there's not a lot of market 10 years out. But in order to get the capital, this producer to finance an acquisition was willing to lock in prices for 10 years. The counterparty on the hedge side was willing to do the same thing. And that's a pretty unique structure. Question whether or not that becomes the new norm. We also saw another kind of structure, which is called a drill co,

which is a, I don't want to get too deep in the weeds on that, but it's basically a financial farm out that independent producers used to use in the 1930s, 40s, and 50s. But now instead of a farm out from an oil company, they're getting a farm out from private equity capital company. You know, anytime you say you can't do X, somebody in the oil industry is going to figure out a way to get around it. And if the markets are telling oil companies, we're not going to give you any more money, I will guarantee the oil companies will figure out somebody who will. And it may be a structure that may not be as attractive, but it will be a structure that will work. And capital just has a way of finding itself to the producers. You know, it's not going to be so much dumb money you might have seen

when everybody's jumping in on the bandwagon, it's going to be smarter money, be more expensive, be more structured. But if you have the right project, you have the right rocks, as I say, you can find the money to drill them. When you talk about the, I'm just curious, when you talk about that 10-year hedge and you said, you know, there's not much market 10 years out, is that essentially the oil company agreeing to sacrifice theoretical potential upside in the price of oil and then the lending capturing that upside if we were to see a major rebound in price?

Yeah, although in that instance, the counterparty to the hedge is the one who potentially gets the upside. And the producer is definitely giving up upside by locking in a price today, but if it guarantees the acquisition and the reserves are going to continue to produce well after the hedges roll off, then they're probably okay with that. that. Plus, in the real world, you know, two, three years from now, if the market turns around, they may unwind that whole transaction and put in some more conventional financing on it. Just because you locked in a 10-year deal doesn't mean you actually wait the entire 10 years

and pay it back. There's ways to refinance it if and when it becomes the right decision to do a refinance. If things get bad enough for the shale industry, would you expect some sort of support measure from either the local state governments or the federal government, given that, you know, it's now a bigger part of the U.S. economy. It's a big employer for a lot of people. Do you think that's a possibility? I really don't. I think that the industry, by and large, has been able to, you know, handle these ups and down. Obviously, there's going to be bankruptcies. and there will be so the ownership of these companies may change, but ultimately the hydrocarbons will still be underground.

The oil and gas is not going anywhere. It's been there for a million years, so it'll still be accessible, provided somebody has the capital to drill and produce it. I don't think that there would be much appetite in any sense, except for maybe in Oklahoma and Texas congressman to even float that idea, but it would be shot down by the rest of the country. So I don't think our oil and gas producers are looking for any type of bailout

from the federal government to solve the problems. Buddy, that was really great. Thank you so much for coming on. Yeah, that was awesome. Happy to do it. I hope my predictions about the industry surviving are accurate enough. And I also hope that this current period is, the challenging period that we're faced with is does not last for too long and that we

figure out some answers to it. Because frankly, as I think you all know, the oil industry and what it's done for the U.S. economy has been phenomenal. We don't want to, we don't want to lose the momentum that we've built up with that. All right. Thank you, buddy. So Joe, I really love that conversation. First of all, because it brings up a lot of memories of similar things that were happening in 2014, 2015, which I found really interesting then, but also this nexus between capital being funneled by Wall Street and financial institutions and how it sort of enters the shale industry. I've just always found really fascinating. Yeah, you've been covering this angle for a long time, and I did think it was fascinating hearing him talk about, you know,

the degree to which the shale revolution is simultaneously a technology story and a capital market story. And hearing them talk and hearing you talk about the degree to which these companies were able to innovate so fast in terms of cutting costs after Thanksgiving 2014. But also, even with that, you know, this sort of this 10-year expansion or 11-year expansion that may be coming to an end of risk capital, basically, that combination really just sort of of those two things at the same time, really just changing the entire complexion of the world's energy industry. Yeah, absolutely. And also, the market response is just going to be fascinating to see that play out because as Buddy was describing, there's such a mix of financing options for shale companies at the moment. And each one of those financing options impacts the other. So, you know,

if you take out a second lien loan, you're probably pushing your bondholders further down the capital structure. So maybe bondholders don't want to invest in you anymore. It's a really interesting and complex dynamic. And when you add a 30% price drop in crude to that mix, it becomes even more interesting. Yeah, I really like hearing him talk about the actual details of, I mean, the whole reason we have the discussion because it's the time again for banks to determine their borrowing base. But just the discussion of how they go about that, because I do think it's very easy to abstract away from that and say, okay, oil prices are down and bond yields on junk energy debt are up and that's bad and so forth. But then thinking about the different ways that still companies can

hang on and survive. And, you know, I like the whole like the Texas grit of always finding a way either through technology or new capital structures, even with all these body blows. Yeah, Texas grit. It's that innovation and also the rejection of federal support as well. I feel comfortable saying that because my dad's from Texas and I lived in Dallas, so I get to say that. Okay. Well, this has been another episode of the All Thoughts podcast.

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Bloomberg Surveillance, essential listening each and every business day. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts.