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Author: brianmccurdy Three stars, 500 posts CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5162  
Subject: finally - my notes from lunch with Pickens Date: 4/7/2011 3:18 PM
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There is a lot of material here, so I need to apologize in advance that this is going to be broad, and long. I also have to apologize that this took so long to write-up.

Before the lunch, Boone gave a presentation to a packed house of business school students (myself included). Our dean moderated that discussion, and there were a few interesting things with respect to corporate governance, wealth and philanthropy, taking risks, approach to success, the role of government and energy security.

Corporate Governance – Boone says that the Board of Directors is the problem with corporate America right now. The problem begins and ends with management picking the board members. He believes, and I agree, that it is difficult to be a truly ‘independent’ director with that dynamic. His first step to the solution is to call everyone an employee and get rid of the term management. He thinks that companies should hire head-hunting firms to put together a list of candidates for the board. “Management” would make no suggestions on board members, and shareholders would ultimately choose from the list of candidates. He thinks this will eliminate some of the problems with governance and align everyone’s incentives.

Wealth & Philanthropy – Boone says his interest in M&A began when he ‘acquired’ paper routes adjacent to his as a child. His goal is to make money, and he has done that well. He says his wealth has gone from $3.5B in 2008 to $1.4B today (we’ll get back to this with risks). He said he got a call from Bill Gates a few years ago to ask if he would join Bill and Warren in their ‘club’ to agree to donate 50% of their wealth. Boone’s comment was awesome: “I said, Bill, you should read a 1984 issue of Fortune magazine. In it I agreed to give 90% to charity. Will you join me in my club?” Apparently, he caught Bill by surprise. Bill did not commit.

On Philanthropy, Boone thinks about recipients as customers. He only repeats donations to those that use it effectively. He talked about a large gift that he made to the University of Texas for their hospitals. This was a big deal because Boone went to OK State. He gave them $100M on the condition that they go out and raise and additional $1B within 20 years. If they didn’t make it, they had to cut a check for all the money they had raised to OK State. They agreed, and MD Anderson (one of the two hospitals) raised its $500M share in five years! He says that he loves philanthropy that leverages his gift, and makes organizations more effective.

Taking Risks – He started this out by quoting Arnold Palmer: “It’s your next shot, not your last.” This is how he approaches business and risks. Taking no risk will result in a mediocre career, but placing all your assets in a susceptible position to the same risk can blow it all up in one moment. He says that he and his team attempt to understand every possible risk before making an investment. However, you can never be 100% sure, or it wouldn’t be an investment. You have to lose some, and you need to accept that and move on when things go badly. He says to make it as cathartic as possible, and think about the next opportunity. I liked this.

He discussed the >50% cut he took in his wealth, and said he has three investments that he believes could get him back to 2008 levels. One is shale gas (Marcellus), one is shale oil (acquiring land now, location not disclosed), and the third is “clean fuels” (no details). All are risky investments, but he claims that each one has the potential to vastly exceed his 2008 level, even deducting the cost of failures.

Approach to Success – “Go out, get happy, and produce. If you feel underappreciated, move to where you’re happy and wanted. If it happens 3 times, the problem might be you.” As someone who is about to start a new career, I loved this.

The Role of Government – this was a classic question from our dean, who is a microeconomics professor. Boone said that our leadership has consistently taken us away from energy independence (he seems 100% focused on energy security, and less about environmental aspects of energy). This has been an easy decision for the past few decades because of very cheap oil. Natural gas at $4 dramatically changes that dynamic. Even at $9, he says gas still makes an incredible amount of economic sense for the US. Boone believes that the best thing the government can do is start a discussion about energy security. His path to do this is to create a domestic fuel requirement for every future government vehicle – natural gas, domestic oil, domestic non-food based bio fuels or electricity. While this won’t tip the needle, it will start the discussion.

Lastly, he said that if the government decides to intervene with tax benefits, they should do so in a way where the benefits are predictable for many years (i.e. the opposite of wind and solar tax benefits), decline in benefit over time, and do not pick one winning technology. An example of this is discussed below.

Energy Security - He asked the crowd, “What Board of Directors would accept that the success of their firm is dependent upon one supplier, who doesn’t really like you?” That was his analogy for the US being dependent on OPEC for oil. He believes that things are going to hit the wall in 4Q of 2011, when global demand for oil is expected to exceed 88 million barrels per day. He says that if you look at current global supply, only the Saudi’s have spare capacity on paper. They say (and the US government echoes) that they have up to 4 million barrels per day of oil that they can bring online. Boone says this is the biggest lie in the energy industry, and that it will be a rude awakening when we actually have to test that capacity. He claimed that 2/3 of our trade deficit is from oil.

My thoughts here: I have heard this discussed before, but our economy can handle increases in the prices for energy. What we cannot handle is excessive volatility in the price of energy. Domestic sources are going to be more expensive, but the volatility will be inherently lower if we can meet 100% of our demand. Let’s do it!

Boone has a plan for energy security. He wants to convert 100% of our 18-wheelers to natural gas engines. He says that those vehicles consume 2.5 million barrels of oil per day in the US, which is ½ of the oil that OPEC supplies to us. Imagine the impact from that one, albeit massive change! He cited southern California as an example of what can be done here. The decision to change trash trucks from diesel to natural gas in SoCal was a function of air quality. Replacing one diesel trash truck with natural gas was the equivalent of removing 350 vehicles from the road. Now it is an economic decision. In 7 years, the up-front cost difference for a natural gas trash truck has declined 80%, and is almost on par with diesel versions. Operating costs are much lower.

SOME RANDOM THOUGHTS FROM THE DISCUSSIONS
Boone says wind works well when gas is $6. He says we need a new mechanism for building new transmission in the US, which will help with the build-out of wind power. Wind power growth will be slow as long as natural gas is excessively cheap.

He believes NG is too low, and that producers should have started ‘stacking’ wells at this point. He thinks NG will remain cheap for a long time due to the rapid growth of shale gas. He said Marcellus produces gas at $4, while Hainesville is at $6. He doesn’t understand why the Hainesville folks are still producing.

He thinks that we could electrify 100% of our vehicle fleet, but that it is 20-30 years out. He wants to do something today. His solution, as discussed before, is to convert all 18 wheelers and require the government to use domestic fuel. He sees that as a good first step. This plan will start pushing us down a learning curve with regard to NG vehicles. The plan will require political will, and infrastructure buildout, but he noted that infrastructure has been our way out of past recessions.

He claims the cost for a gallon of gasoline is $14 if you include all military costs associated with wars.

Boone thinks there is a renewed life to the energy industry, as illustrated by the interest of students. He claimed that there are 500 wells in the Hainesville shale that are idle because they need equipment. Huge growth going forward.

He had a lot to say about fracking. He claims the Texas Railroad Commission has overseen 8000+ fracked wells during the last 60 years. He says they can run a macro-analysis to see if the claims from residents are backed up with those wells. He did not discuss the chemicals used for fracking, but said that the industry should be more open to regulation if they want a future of producing.

MY MOMENT TO SHINE (a few moments of tooting my own horn)
I went into the lunch with a long list of questions, thanks to many of you. The dean asked the first question, and Boone mentioned something about electricity storage. I was prepped for this, but the question led to a wild swing in my emotions – first very, very low, then high. Here is my recollection:
“Boone, I’m glad you mentioned storage. I am curious if you can walk me through your investment thesis for your recent investment in A123.”
Blank stare. “I’ve never heard of that company.”
“Really?” (I’m freaking out!) “The SEC filings for BP Capital Management showed a new position last quarter.”
Boone’s assistant jumped up and ran out of the room.
“No idea.”
“OK, I also was interested in your investment in National Oilwell-Varco, NOV.”
Blank stare. “Are you sure you were looking at the correct filings?”
“Um….”
His assistant walks back in, all eyes shift from my red face to him, and he says some amazingly sweet words: “Boone, the kid is correct. We invested in A123 under the thesis of a long-term electrification of the vehicle fleet. We put our money behind GE’s recommendation and investment.”
Boone to me: “What’s the other one?”
“NOV.”
Assistant runs out, and comes back a minute later. “He’s right again, Boone. We added to our investment in NOV because we believe we are entering a new capital cycle in drilling equipment.”
Boone to me: “OK. What else do I need to know about my business?”
Pure joy!

Thanks for reading this far. Sorry it was so long!

Brian
Long: NOV
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