What the Frac? | Jordan Strebeck

Jordan: How y'all doing? Okay. Two of you are doing well. The rest of you are hopefully mostly awake. Free shout out, free plug to Patrick's podcast. If you don't listen to it, it is tremendous. And that was a little disorienting for me because I usually listen to it while I'm driving my lawnmower and I listened to it on like one and a [00:01:00] half or two X. And I had no idea he sounded like that in real life. And now I want to listen to Ali talk at 1/2X. Because I guarantee you my brain doesn't work that fast. Which is a low bar anyway. 

So yeah, this is a little aggressive, I think. When Brent asked me to do this, he found out somehow that I had been assigned to talk one time called Go Frack Yourself. I did not come up with the title. It is not on brand for me. I'm a pretty straight laced guy. I've had this haircut since kindergarten and really haven't changed.

So this was the title that was given to me and I don't actually know that you are wrong about oil and gas. So I'm going to amend it to why you're probably wrong about oil and gas or at a minimum why you should care about oil and gas, even though you probably have no direct connection to oil and gas.

Like Dhani said, my name is Jordan Strebeck. I run a company called Fortress Energy, along with [00:02:00] my co founder, Daniel Charbonnet. We're in Midland, Texas, which is the middle of nowhere. They literally named it that because it's literally the mid land (we’re creative in west Texas) between Dallas and El Paso. So it's five hours from each in the middle of nowhere. But in the oil and gas world, it's the center of the universe. 

And so we run a private, independent investment shop in Midland, Texas. We've deployed just shy of $400 million of capital into mostly minerals and royalties in the Permian Basin.

We don't use debt. We're kind of a long-term, very boring. I tell people we're about as boring as you can be in the oil and gas basin and still credibly have energy on your logo without perjuring yourself. 

The reason that I think this matters is it really touches every part of our lives. Energy touches every part of our lives as business owners, as people, it's really important for our economy, and [00:03:00] really for the world. 

If you just read headlines and you just spend time listening to maybe podcasts or read things on Twitter, I would argue you're probably misinformed about what's actually going on in the energy space.

And part of that is that we're just uniquely terrible as human beings at modeling things. We're just really, really bad at it. I feel like there's an inverse correlation between the number of smart people that you get together to try to project something and the outcomes.

So I remember during Twitter there was a group at, I think it was Oxford someplace with British accents and a bunch of very smart PhDs, MBA types. And they had this COVID model about what was going to happen. And basically if you looked at it, it was like, man, in three weeks, everyone's going to be dead. Like this is this is a really bad outcome. Like we're it's like I guess we should all just sign off now because in three weeks we're all going to be six feet under. 

And of course that informed a lot of [00:04:00] decisions. It wound up that model turns out had, you get one or two bad faulty assumptions in a model and it can get a little bit wild.

Y'all probably heard a lot of talk in the last couple years, oil and gas is a little bit more in vogue right now, but even thinking back into 2020, 2019, 2021, it was a lot less rosy of a prognosis. So I went back and found a couple just quick headlines.

Oil may finally be peaking. This was from 2020. Who would have thought that the Bloomberg green guys wouldn't have been a super reliable arbiter of whether or not peak oil was. Well, Tom and Haley got it wrong. Not BCG, not all my business school classmates. They were so good at building discounted cash flow models. The Europeans at BCG didn't get it right. And who would have thought NPR, of all the [00:05:00] people, I mean, come on NPR. They've been saying the same thing about coal too though. How many times have you heard in the last two decades that coal's dead? Coal’s dying. Coal’s hasta luego.

Look, it turns out these transitions are a lot less sharp and sudden than people would have you believe. And the reason for that is that as a global economy, we have to have affordable, reliable sources of energy. And as amazing as some of the new green technologies that have come on the market.

You still cannot beat the energy density, the transferability, the reliability and the affordability of good old fashioned hydrocarbons. Don't even get me started on natural gas and the resources that we have. But if you would have guessed 23 years ago from reading the headlines that coal was going to be phased out in 20 years, you would have [00:06:00] lost that bet.

I hope Ali is actually not in the room, because if he finds out a lot of this stuff about oil and gas, I'm a little worried he might put us out of business. 

Just to give you an idea, I went through the IEA's net zero pathway by 2050, and this, they updated this most recently in 2021, was the report that I sourced, just to give you an idea of some of the behavioral models that would have to change, or some of the behaviors that would have to change for us to get to net zero and phase out hydrocarbons by 2050. 

First of all, no new coal or oil and gas fields approved for development post 2021. That kind of came and went. We missed benchmark number one. 

Here were some of my favorites when you start reading through some of the footnotes in here. First of all, in the winter by 2030, no more heating your home above 68. [00:07:00] I live in Texas. I'm fine. I'm cool with that. Like, I don't even want it to be above 68 degrees anyway, so no problem. This one though, they did not run this past Brittany Strebeck. I'm telling you right now, you asked someone to live in the southern portion of our great country and tell them that they can't cool their home below 75 degrees. You will have you will have all sorts of issues. None of them will be good.

So I'm skeptical of that. And then they didn't consult Sid Strebeck on this one. My dad with the lead foot, you're not gonna limit people to driving under 62 miles an hour. I'm just I'm extremely skeptical about that. Carl Edwards was in here earlier and I was like, man, I really wish we could call this the anti Carl Edwards rule. I'm just again, I'm skeptical. 

And then there are some other things where it's like, man, I just don't know in the realm of feasibility where this is going. I don't know if we can build 20 [00:08:00] factories per year to increase battery output to convert everybody to electric vehicles. And I definitely don't think that we're going to be able to stop the sale of normal, good old fashioned internal combustion engine cars by 2035. As a matter of fact, I was on a call earlier last week with the largest Ford dealer in Florida, of which I'm assuming there are a lot of Fords sold in Florida. I think he's selling a couple cars at least per day. And he mentioned that nationwide on the electric vehicle front, there is an average of 168 days of inventory sitting on dealers lots and with good old fashioned internal combustions. It's ranged between 14 and 28 days of inventory. 

And so in spite of all the subsidies that have come down the line, in spite of all the efforts on behalf of governments to change behaviors, there are a lot of impracticalities around how those can be adopted.[00:09:00] 

As a result, if you look at this gray line right here that I realize now in hindsight was probably terrible to put on a screen this size, but this gray line here shows what's happened to demand. So when we talked about those slides at the beginning where peak oil was finally upon us and those sort of things, when those headlines were written, oil demand was around 90 million barrels a day.

Today it's pushing up towards 103 million barrels a day. And I think even now the IEA is saying, hey, that probably doesn't peak until like 2027, 2030. Okay, it might be 2035. The truth is no one really knows. But right now we are under supplied and part of that's artificial. There are some supply cuts with Saudi and Russia. There's some questions maybe about how much of that is a cut versus kind of an inability to produce at that level for very long, but there is some artificial [00:10:00] component of that deficit. 

But as you can see there right now, depending on whose estimates you look at, we're under supplied on a daily basis right now, anywhere from between 1 to 3 million barrels per day.

The reason for this is that we are simply, as a global economy, not investing enough in hydrocarbons. And you might say, Jordan, this sounds a lot like you're talking your own book, and that is not untrue. However, the reason that that is our book is that we've looked at this data, and we find it very, very compelling.

If you see, back there they told me there was a laser pointer in here. Get some of that in your life. Uh, so, if, if you look right here, leading up to the crash in 2014, we were spending globally on bringing new oil and gas resources over a trillion dollars per year. And then you look at what's happened post COVID we're talking 400 billion.

Now look there's going to be technological advances that happen and a [00:11:00] lot of those things. But the other thing that happened post COVID and really was even on the way pre COVID, is a lot of the publicly traded companies, people were going, Hey, you guys are spending money like drunken sailors and just trying to grow at all costs and we don't want to fund it anymore. And so those companies started going, Oh, I guess we should live within cashflow. 

I was talking this morning about how the venture capital talk reminded me a lot of what's happened in the energy capital space, which is specifically that people have actually started to demand that there might be some performance as a result of the investment. And so you've had all of these publicly traded companies that are saying, No, we're gonna grow within cash flow. 

So what you've seen in the Permian Basin is we've been in one of the really strong commodity environments for the past 24 months, and the rig count has gone down. The rig count in the United States has actually gone down since 2021 and 2022, which is insane when you think about it.

But the reality is [00:12:00] that people are no longer drilling just to drill. The other thing that's driving this is of course, the ESG movement. I said we run a private mineral investment firm and a couple of years ago we hired a guy from a real estate private equity firm and he was kind of looking through our stuff.

We were getting, this was in 2021, we were getting ready to raise our third mineral fund. And he said, guys, I gotta be honest with you. I'm looking at all your materials and compared to the firm I left, y'all are kicking our rear. And we were using 80 percent liquidity to do it and y'all are doing it debt-free.

And this is great, but y'all are doing this all wrong. Y'all are getting all these checks, like one and 5 million at a time. Y'all need to be going and getting like 50, a hundred million dollar checks. And Daniel and I kind of looked at each other and we were like, Hey, yeah, go knock yourself out, man.

And he's like, yeah, I got some buddies at institutional places, I'll give them a buzz. So he sends an email to one of the largest private foundations in the world. They write fairly significant size checks and actually had somebody that manned their natural [00:13:00] resources desk and Chris sent him our stuff.

And, and the guy responded back and he said, Chris, I really appreciate it. Love the team, love the track record. Unfortunately I can't invest in hydrocarbons due to our ESG policy. And so, Chris came in, he's kind of down on his daub, and I said, hey, look, let's mess with the guy. Let's send him our ESG statement.

He's like, what's our ESG statement? I was like, we're about to write it, and let's send it to him. Let's have some fun. We're the mineral owners, we can actually control some of this stuff. There's actually some good stuff here. So, we send all that back to him, and he said, Chris, I appreciate what you're trying to do here. Let me put it to you this way. If you could guarantee me a 10x on my money, and you were drilling for oil, that would end world hunger and cure COVID 19, but it involved hydrocarbons. I still couldn't allocate capital to it. 

And Chris came into my office and he looked like his wife had just told him she's going to leave him. And I said, Hey, look, man, you're going to go print off that email. And we literally made him tack it to the wall next to his desk. Because I said, that's the only reason that [00:14:00] we can get the returns that we get is that there are people that will refuse to invest in this because of their ideological priors.

So the ESG movement is driving a massive part of this underinvestment, which is going to have an impact on all of us, and on our country, and on the world. If we don't turn that around. 

This chart, I think, illustrates a little bit of that. Our global observable inventories right now are at the lowest point that they've been in some time. And if you look at just the United States, including the S. P. R. which has been drained quite a bit over the last year and a half. It's the lowest that our combined inventories have been in the United States since the eighties. And that's really again, I don't think good news for any of us.

What’s the role the Permian Basin plays in this? I just thought this might be interesting for those of you who are unfamiliar with what we do, but this is [00:15:00] a visual depiction of the technology that's happened in our industry, specifically in the Permian and just to give you an idea of how production has gone from one and a half million barrels a day to five million.

As you see there, we've kind of balanced the market, over the past decade is these wells that you see, they're literally drilling two miles deep. Which still blows my mind, drilling two miles deep, and then they're turning the drill pipe almost 90 degrees and drilling another two miles out, or in some cases three or four miles out, and then they're hydraulically fracturing that wellbore in each of those different zones.

And so that's kind of what it looks like underground. Oh, and by the way, when they get to their terminal point, they can control that drill bit with enough control to drive it through a TV screen. Which again, still just completely blows my mind, but that's what we're working on out in the Permian, trying to help solve that problem.

But until then, [00:16:00] there's some pictures of some cows and beautiful Texas landscape and hopefully we solve this energy problem because if not, it's going to be a problem for all of us. I'm out of time, but thank you so much. 

Dhani Johnes: How did you get into this space and find your way? 

Jordan: It was a complete accident. I was an MBA student at Harvard Business School where supposedly the smartest people were. And I wanted to live in West Texas. That's where my wife and I went to college. And so we emailed a bunch of people to ask them if they'd give us internships.

And an energy firm in Midland, Texas was crazy enough to say yes. And I literally thought that oil was, like, in a liquid pool underground. And you stuck a straw down there and sucked it up. And they were like, boy. Harvard is not, this is all smokescreen, which they were right about, but learned about the mineral business and was hook, line and sinker.

Dhani: So hen some people, [00:17:00] or a lot of people challenge you. Some of the ESG programs that are essentially out there and a lot of people are just pushing towards electric, what's one of the responses that you primarily give to them aside from the slides and naming things out? But what's the conversation that you have with them?

Jordan: Yeah, I mean, I think electric vehicles, I think all these technologies that we talked about are great things to aspire to. I don't think electric vehicles are a great fit for everyone, especially if you live in a place like Texas where you routinely have to drive long distances, there are a lot of problems with some of that.

But the bigger thing that I think about is I think of all this through the lens of human flourishing. That's something that drives a core thesis of why I'm even in the business of trying to make people money is I'm passionate about human flourishing. And if you look around the world, there is an extremely high correlation between people having access to energy and being able to come out of poverty.

And so you look at, depending on whose estimates you look at, certainly over 1 billion people in the world today [00:18:00] who still use animal dung and wood for cooking fuels. And I just think that we need an all of the above energy strategy. 

And so, I'm not anti electric vehicles or anti wind or solar. I'm pro all that stuff. I just think we need kind of an all of the above strategy. 

Dhani: Last question. Someone that's thinking about getting into the business. You know, upstream, downstream, midstream. How do they first find their way into that sector? How does someone invest?

Jordan: Man, there's actually a shockingly low amount of literature out there about the oil and gas industry that's reliable. It's, I think, one of the most opaque industries across the entire economy. But there are great public companies in all those sectors that you can look at. I think it's a great resource to find a friend in Texas. And they, if they're not in oil and gas, they'll probably have a friend or two that they could refer you to in oil and gas. And, you know, [00:19:00] at least 50 percent of the advice is probably half decent.

This transcript was generated with Descript AI