Yet Another Value Podcast - Josh Young from Bison Investments discusses on Vital Energy and his energy outlook $VTLE

Episode Date: February 13, 2023

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).   Bison's VTLE thesis: https://bisoninterests.com/content/f/vital-energy-is-deeply-discounted  Chapters  0:00 Intro  3:15 What's happened in energy stocks since Josh's last appearance  5:45 Discussing the outlook for nat gas  15:10 Josh's current outlook for oil  24:30 Is the oil market properly reflecting China's reopening  29:30 Can Russia keep up current production levels?  34:35 VTLE overview  51:00 Breaking down VTLE's assets a little further  57:35 What are the little things that energy companies do to improve operations  1:01:20 Has VTLE earned the right to pursue M&A?  1:07:00 VTLE's base case NAV valuation  1:11:30 Will private equity ever step back into the energy space?

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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? Good. How are you? I'm doing great. I'm really excited to have you on. It's, you know, I think we're going to talk oil and an energy company today.

Depending on the day, oil could be up, $2 per barrel down, $4 for 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 capital. land. Obviously, oil and gas stocks come with extra volatility, extra risk. So everybody should just please do your own work. This is in financial advice. Please consult a financial advisor.

And with that out the way, Josh, we are talking February 10th, 2003. I just, you know, I know 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 VE. ETLA. Yeah, sure. So thanks for having me back on. I think the last one 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 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 one we talked about was Journey Energy and I think it was about a year ago. 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. You know, it's early. The assets look interesting. It might be one of the best performing for 2023 as well. Yeah, yeah. And the goal of this isn't, I think, to talk about them.

But, you know, 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, 100% 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 troth, 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 in gas and, you know, oil 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, what was it yesterday? Oil would have been down and today it's up and two days ago it was up. And, you know, it's a very, very volatile and very interesting time. Let me just say on Nat Gas. So, you know, 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 9, 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. year. 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, two 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 NAC gas story. But you said you just talked to somebody who's a NACAS 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, NACS too low. Freeport comes back online. We get some support, inventory draws down. We're still in the 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 NAC gas doesn't go to zero or negative over the summer just because we've got too much storage. So what are you kind of seen in the NAC gas land? Or what was your friend who you were having

lunch with talking about? Yeah. So in that context, specifically deploying capital to drill more dry gas wells, especially in Appalachia, so Marcellus Utica, especially in Hainesville, 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 because people get very sort of territorial on those sorts of things. But if you make $2 in MCF on your dry gas, it almost doesn't matter where you're producing it, you're probably losing money on a full cycle basis. And so they weren't saying that they thought the fundamental price, that the actual like sort of posted price at NYMEX 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 breaks. And so it sort of feels like the bad old days for shale with natural gas where you have this sort of game of chicken or a prisoner's dilemma where everyone's sort of hey on a half cycle basis my stuff works and everyone else is going to drop rig so it's going to be fine and i so generally one thing obviously um it's been a warm winter so far and it was and freeport has been offline for five months or so longer no no no but it's been off for five months longer than it would

have 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, you know, and that's really significant because it was a little over 2 BCF a day between exports and the actual gas necessary to power their facility and to super cool the natural gas to essentially, you know, super freeze it to get it to from gaseous state to liquid to be able to put on a boat and bring it to Europe or Asia. So, you know, there's really, there's been some unusual circumstances to 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 100% 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, you know, 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, the free port comes back on over the next month or so, which is sort of the consensus it looks

like. But it does look like there are some producers who are going to cut some rigs. And, you know, 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 that are one or two other companies that are cut some. And then the rig companies just reported. And, you know, 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. So it's just a very interesting, weird time with lots. of sort of cross currents. 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 and cash flow. And yeah, like their businesses are better at with more cash flow rather than less or better market. margins and 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, 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 as 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 from medium term, we're sort of setting up

for this sort of, I mean, we've had the swing down. I think it's really messy and uncertain in terms of what happens next. Like, I thought gas would be in a four to seven band, four dollars to seven dollars 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, you know, 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 parable for sort of near-term pricing exposure over the next, let's say, six to 18 months. Yeah, I'm with you. I just, I look at, like, it just seems everyone's so pessimistic. And obviously, anything can happen in the near term. Like, we've learned that over and over again with commodities, or 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, maybe rings 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 debt kind of out the corner of my eye right now. I mean, I think they're talking about like six 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 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's they seem pretty attractive to me yeah maybe i guess the question is how much money does chesapeake destroy in between now and whenever that happens. And, you know, that sounds a little rough, given that they're a

post-re-org company, and generally I'm pretty defensive of post-re-org 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 setups 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 Hainesville. 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 bet on them. That's part for the course with most oil and gas companies. And I wasn't saying like Chesapeake in particular is interesting. I just meant overall a lot of the NAC 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 energy teams out there who will buy high and sell low even when the commodities moved in their favor.

I guess that does transition us, you know, we cover the gas piece if we just want to quickly talk about how you're thinking about the oil environment today. You know, it's been every morning I wake up and I, you know, kind of do that, 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 just curious how you're thinking about the oil environment today. Yeah. So I think, I mean, oil basically is experiencing what NACAS in the U.S. 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 it'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 two 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, you know, the two million or whatever. So that's been a really big single factor and then on the other side China locked down for a lot of last year and there were many people who were saying that they might never reopen and I always thought that was wrong clearly ever my god that that's that's absolutely crazy I mean 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 into what I don't know I mean it doesn't make any sense, but just because 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's sort of a bull camp that was sort of like, ignore everything, oil'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 have been if, you know, 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, I mean, they've restarted subsidizing loans and other stuff for real estate, which they hadn't done for a while. Blow out that Chinese real estate bubble again.

Yeah. 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, you know, they're going to grow a lot and they might actually be successful and catch up with where they would have been, which is, you know, a number that's astronomical, right? Like, they should have consumed, it looks like 15 million barrels of oil last year. 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, you know, the, whatever, I'm going to go there. But they, So 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 three million barrels a day? That's the open question. And they're getting closer to sort of that three 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 cargoes, which is, I think, one of the bigger factors.

It 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. If you look at CNBC at the right time, like in the morning, they'll say, oil prices down as traders assess the impacts of Jerome Powell's remarks. And then the afternoon, they'll say, oil prices up as trade. assess the impact of grow pals marks and i'll be like god like you're too i know everybody knows it but

it's just making up a narrative to fit a to fit what's happening it always cracks me up yeah it's really interesting when you know what's actually going on um 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 was earlier this week uh one of the chinese major uh companies that imports oil put out they they they bought a bunch of oil. And so people saw that and turned around, whether it was hedging by the traders or whether it was, you know, speculative long or both or it's 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, you know, here we, and also Schlumberge went into Russia and picked up the Halliburton and Baker Hughes contracts per some Reuters 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. Really? I didn't see that. That's kind of surprising. I mean, Schlumberjay is a big company. They're risking sanctions. I wonder why they even thought the risk was worth that again not my information uh from reading news reports talking to the reporter uh whatever but yeah i mean google it like it's there and it's wild um so and i

think it's totally under underreported it's a giant left tail risk frankly i should probably own boots on slumberjay i don't but i probably should because there's a whether it's a PR risk or a you know actual they get sanctioned or whatever or they just lose this cash flow that they're guys hiding to any, like any of those could end up being like, you know, material. And people forget, I mean, 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. There was a giant company and they got devastated by that sort of problem. So I don't know, there's been almost no enforcement of these sanctions. But, you know, 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. I see a Reuters report from January on this. Yeah, not financial advice, but the puts sound interesting just because it serves as an energy hedge and I mean I just can't imagine the the risk of sanctions there let me ask two quite let me follow

on with two questions one on China and one on rush now 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 could really pick things up and send energy prices up. But then, you know, I look and I'm like, this is a massive market. Like the futures curve, there are hundreds and hundreds of traders.

Bob Rabadi 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 futures 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 uh 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 um so first of all basically

put me in the if bobrabati says that i agree with him can't um so just generally speaking whatever the comment is odds are i'll agree with them uh i was on a panel with them last year at Berkshire-related event, and it was awesome to get to meet him, and chat with him a few times since then. Just can't say enough good things. If he says it, it's probably right. 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 grew up. He is fantastic. Yeah, yeah. So, yeah, I think it's complicated. I think when you look at who the actual participants are in the futures markets. I mean, I heard an interview of Bill Perkins, who's a very successful natural gas trader. He 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, you know, again, he's running a fund that trades 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, you know, 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, you know, would be minorities in the U.S. 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, you know, second order effects from that. But they get directly impacted by higher energy prices, right? I mean, you saw there were blackouts in Pakistan, Sri Lanka had riots and food shortages from implementing these policies. So anyway, so it's sort of, but the point is that there is 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 just, you know, 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 because 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, of private and some like state-owned companies that are sort of rotely 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, you know, 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 that's probably what Bob was sort of. 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. Yeah, no, I could see it. You know, the old argument that you have more people looking to hedge future prices and 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 are doing it. aren't there. So yeah, that don't make sense. One more in Russia, then we can move to the company

we're going to talk about. You know, it does strike me. I'm with you. When all the sanctions started hitting, I was like, oh, Russia is 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 the sort of stuff. It doesn't seem to have happened so far. But I do wonder, like, you know, 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 imported, aside from Schlenberger, apparently, nobody's like really important 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 because 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. Yeah, again, I was thinking that. And given the availability of world class experts and world class services and world class 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 a 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, you know, when you rewind to our analysis, I think it was a couple of years ago on OPEC plus and their capacity issue. So, you know, one of the things Russia has done, it looks like, is wear down some of their spare capacity. But like as you, 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, you know, getting, so for similar for shale,

where, you know, 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 get, and as we, you get closer to the pre-CO, 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-declined 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,

But I would say most likely Russia is able to sort of sustain their production around sort of where they're guiding to with that 500,000 barrel a day cut, which is still, you know, a pretty high level relative to the history of Russian oil production. And, you know, I think 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 Schoenbergier were to leave the country real fast, that would, my estimate would change. But understanding that they're there, I mean, 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, the, 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 because they have the ability to deliver those. services. They're probably making a fortune off of it. You know, their earnings report was very, very good. So, yeah. I just, 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, it 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 know, you don't buy oil from Russia anymore, I can't believe somebody would actually provide the means of productions.

Like, 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 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 VT-L-E. 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? 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 overpromised and underdelivered. 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 then they guided to. They were one of the worst actors in terms of downspacing 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 from, I'm not sure if they're still around. I think Pickering might have bought them. 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 are 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. 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. That's right. I'm looking at it. It's 600 back in 2014, 2013. Yeah. 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 the 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, 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 have thought would be brought into this sort of asset and this sort of company. There's 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 set up 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, but 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 I look for. And so their stock just didn't run because Warburg-Pinkus dumped, I think it was 20% of the company. It was over, I think it was over 10% of the company over a month. There are three energy companies that I know of, now including this one, this is the 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's 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.

Yeah. 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 regret it. Because I knew, I mean, the vol was totally mispriced. I mean, it was just beyond mispriced. And, you know, I should have just put the, I mean, made it a big position for Bison. I should have made it a big position just in the options. And it's not really my mandate. But, you know, 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, they're calling in and saying, hey, do you know something? Is there a whisper? Why is everyone up 10% of these guys are up 2%? Is there, did one of their wells dry up? Did they have an operational issue? Absolutely happens. Well, that's benign. You have people, talking about how they were going bankrupt and we're a zero and we're, I mean, there's actually sort of a pattern for me. Like I tend to end up in companies where people just like this really

hate them, like whether their 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 accounting and figure it out. And the engineering. I mean, like 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 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 Laredo got sort of

tarred with that because their stock underperformed so much. And, you know, 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 were run by the C-minus students from the local college. You know, their stocks just did better and they continued to do better. And those companies were able to use their better cost of capital to do more accretive acquisitions. Laredo 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. So they, and we'll get into sort of the assets and stuff, but just, you know, this is just answering the like, what's going on and why in January 2023 did Bison share our investment thesis on Laredo, which was now vital. So they, 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 to 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 thrushed, along with oil prices falling and the competitor's stock's falling. And so you look at like the Permian resources, the merger of Colgate with Centennial,

and that stock's up like 60% or something since that, 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 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, Laredo's down a lot since then because of a 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, you know, 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 COO. So that's probably good. I mean, I think technically she volunteered to leave, but, you know.

I was going to ask about the CEO. Yep. Yep. So, you know, 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 have been. And so basically what we realized was as a stock pulled back, it got to a point where I was trading at a pretty big discount to its producing. reserve value. They'd 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, you know, half gas, half oil sort of story, 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 stuff talking about how they have a low return on invested capital and low capital efficiency and just, you know, 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 had two more unqualified people to their board who, 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 and the stock went down more. That was sort of the moment where it was like, okay, like, we'll talk about this. This is a, this is just, it's inflecting up. It's going to, 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. I like it. Let me. Yeah. So one of the last things you said in there is people are kind of misinterpreting or misreading the number. So just 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 comps 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, you know, it's basically the operating leverage. 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? Yeah. I mean, that's exactly this 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've, Goldman's, I think, never put out a positive. They put out stuff on them, 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, whatever it is who's like putting out stuff from Goldman on them. It's always negative. So, you know, like that sort of thing

versus just look at the numbers. I prefer the numbers and 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 understanding the operations, the historical operations of the assets, as well as an 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 diligent in this, again, to sort of double up on the position in the recent pullback subsequent to the stock going to 100 something in, what was it, June or so.

After that, you know, 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 Enderis 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, you know, there is there's a lot more that we're not including, partly just to protect are 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 competitors stock but they own a lot personally and their employees

own a lot and you know they 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 screens cheap or whatever because 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. Well, I guess 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 a company 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 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, you know, if you're a journalist, 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 has, who's done the work. And he says, no, there's something the market's missing here. But just to summarize, so when, you know, 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, you know, probably just average, average assets in the Permian Basin. So there's different ways to measure it. And by the way, just like just because you know, let's say the engineering or whatever on something doesn't mean you're right. So like I could

be wrong. Frankly, a lot of those guys end up being terrible at picking stocks because 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, because 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, you know, 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 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. 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 and 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 because they think

they know the company. It's like, hey, cool, you've modeled the widget costs down to everything. You've completely missed, you know, X, Y, and Z that are the actual factors that impact this business. Yeah. So, 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 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. You know, 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. So, 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's 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, you know, whether, whether it's to the credit of the operating team at Vital or whether it's just because, you know, um, they just weren't as bad and they just sort of cleaned out on their own or whatever, um,

you know, the, the actual oil production right now from those three wells on that. I think it was the leach pad. Um, they, uh, 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. You know, 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 model. And 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, you know, use the best like operating people. They get like incredible results in the area. So it's a really, really good area. And so anyway, just I think, I think these, 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 re-rate 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. A lot of their hedges rolled off, yeah. 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. So yeah. You would think, but you know, we live in a

crazy world. Let me ask one silly generous question, right? 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, 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 or 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 field next to each, the fields next to each other, your field is just producing, you know, 50% more because 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 there's the possibility that you're, so what are the things that kind of companies do that get better returns for someone else, if that makes sense? Yeah. So let's let's not talk about vital in this context. Let's talk about EOG. So EOG is known for drilling some of the best wells in 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 high 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 XYZ super major and you say, hey, I think you're drilling your well's 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, you know, maybe bottom desicile. I've read an article is about various ones. I don't want to rag on any of them in particular on this. 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. They're constantly A-B testing stuff. So there's a level of sort of like humility and intellectual, it's sort of 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. I mean, look, that sucks. But the nice thing is you've got some great decks in here. I don't think the evaluations or anything have changed too much since you published the piece in

late January. And, you know, that is also an operating. synergy, right? Like, hey, everyone else is trading at four times EBDA. We're buying these guys at two times EBTA. I'm just pulling some rough math. But by the way, if like EOG is one, you listen, 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 EBDA 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 out of C, like, you can improve to a 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 jumped 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 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, you know, maybe not the best management team.

Do you like the M&A strategy? How do you think about the M&A strategy here? I do not. So I 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 are the best operator.

If you are a low valuation producer, fix your valuation. It might be too long, but I would love to get everything you just said, on my forehead because it was fantastic. Yeah, 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 everyone. And, you know, this is, this is interesting. I think, I think Vital's 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 the second. But I think they're a tremendous activist candidate. I mean, 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 there's just, no one has confidence in them to run their assets. So, I mean, it's just, it's just, you've 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 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, or sorry, yeah, it's $30,000 per barrel per day to 15, then, you know, they may get a radical re-rate 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 lit our shareholder's capital on fire and we're going to go buy stuff. No, you can't, like, that's sort of off sides. and like I think is like one of the reasons the stock sold off in the aftermath of that.

No, that was well said. You know, 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 is no deal on earth you can do that risk adjusted is going to be better than buying back your shares or returning capital to share. shareholders in some form like that's just the facts you you cannot run 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 yeah I agree and and I think even their their capital budgets way out of whack they should be spending less money if they were more careful but again like there's sort of this hire a 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 hire, they increase the diversity

of their board from a gender and like skin color perspective, which is ridiculous, right? That's not diversity. Diversity. Diversity is diversity of opinions. It's diversity of 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 destroy shareholder value and is not aligned and egregious comp and all that. So I don't know. I think I found that companies that sort of make these sort of claims around ESG tend to actually be among the worst from a G perspective, from a governor's perspective. 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 I, there's one more 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 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 100% agree with you. Yeah, maybe we need to start the Walker Young activist fund and just start firing E&P management teams one at a time, force them to sell and, you know. If we do that, we might have to fire more than one at a time because 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 gas. But, you know, we're sitting here today,

oil 75, Nat 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 vital trading about 55? What's your kind of base case NAB valuation that people should be thinking about when they're looking at vital and just thinking about how to look at this thing? Yeah, 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, a chart showing 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 Vital's decline rate because so much of their development happened in their history, their decline rate is actually pretty low. So 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, you know, I think at 80, it's probably worth $100 plus 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. It's 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, you know, extension of core Midland Basin assets. So they're in a 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,

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. 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 cycles, 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 100. 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 know, 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 with Vital that's somewhat unique. And we tried to show that showing some of the Envera stuff and some other stuff. But I think there's a good shot that, you know, let's say at $100 oil, this thing could be worth close to $200 a share.

And at $120 oil, it could be like $3 or $400. And there's just insane sort of asymmetry, partly because of their debt level versus 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 higher oil to be able to access. 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 shortcase, very coherent shortcase for why this is worth $100-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? 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 efficient. But even if we're just riding that curve, like you've got 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 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, you know, billion dollar, billion a 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 percent, whatever IRA are at these prices. The firms that would do that have promised to no longer oil and gas investments for various reasons. Private equity oil and gas is actually seeing outflows 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 in the private market, it might take 100% premium to the current share price to sort of replicate their current assets. So not that you'd have to pay necessarily 100% 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 and 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, you are, 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 that I want to make sure to mention. So on the ESG point, so I don't like it. 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. And you're never going to rate highly on it anyway. Like, come on, guys. 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, you know, they're not. So, you know, 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

smaller ones share prices. 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, you know, I got to speak to business development people at these 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 100 percent premium 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 Canada. 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 that 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 there are. 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 100. 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, there's multiple sort of margins of safety and downside protection. And, you know, the stock has just fallen so, 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, you know, if you get 100 plus dollar oil, you could see a value that's many times

where it's trading. So it is important to highlight the benefits, like not everything, almost nothing is sort of one-sided. And, you know, 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. 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 the BTLE right up in the show notes. So everybody should go

check that out. But Josh, John, thanks for coming on for the second time and I'm looking forward to the third. Thank you very much. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.