Who: Jeff Johnson, CEO of EPUS Global Energy.
What: Interview with World Energy Magazine.
Why: To discuss what happens to Energy if Donald Trump wins the election, and what happens if it is Hillary Clinton.
Where: Houston Texas.
,/P.
Main Points:
• Uniquely different approaches to a US Energy policy.
• Both candidates have the potential to create rising oil and gas prices.
• New high yield opportunity has arisen for oil and gas assets
• EPUS, founded 7 months ago, has isolated the opportunity
• Opportunity for smaller investors to invest at the wellhead and realize both income and cap-ex expansion.
• Low priced environment creates opportunity to buy high quality smaller assets.
JJ: Oh, absolutely Richard. It’s good hearing from you again, Hope all is going well and I’m looking forward to the discussion. Who would have thought that just not that long ago, that we would be where are in this process and one thing that I ask myself, you know, regardless of who ends up winning the election, is what does it mean for me, my family, business and our investors hopefully we can answer some of those questions today.
WE: Well, absolutely today we are going to talk about the politics of an election and it’s likely effects on the oil and gas industry and possible effect on oil prices but, before we jump into that can you give me the two minute version of what you are up to at EPUS?
JJ: Yes sir, so Richard we started EPUS six or seven months ago and the primary reason was that we think there is a market disconnect creating a niche that we can take advantage of; and where we can buy some high quality, oil and gas producing assets, that just happen to be in what we call a bad situation, under the model we have set up we go directly to the investor, through the advisor or directly to the investor, let them invest at the asset level with us and distribute the capital directly to those people, we believe we can get some really good assets in this price environment with a good yield and as prices go back up we will sell the assets at about twice what we paid for it.
WE: Sounds like fun, ok, well lets dive right in.
WE: Jeff, I mean, my goodness, the poles are showing (the election) about 50/50 so how would you compare a Hillary Clinton strategy to a Donald Trump strategy and what are you telling your unit holders, today?
JJ: Yea, well Richard you know its interesting I’m 51 years old, going on 52, and for the first time that I can remember in an election, for a presidential election, that there truly are two different paths. The way they want to take it (the country) in all aspects of this but especially on an energy path, and we will start with Hillary. Hillary I think wants a continuation of Obama policies, uh she will make no argument about it, she’s anti-fossil fuel, she’ll tell you she’s trying to put fossil fuels out of business and she’s very pro renewable energy, in fact she’s come out and stated that she believes we can, or her goal is to get to twenty five percent renewable energy by 2025 which is pretty aggressive, if possible at all, I would argue it would not be. But in any event those are her policies. Try to get this country as quickly as possible to a renewable clean energy and completely do away with fossil fuel.
JJ: On the other side of the coin you’ve got Donald Trump, where Donald is going to be pro-business, he say’s he’s going to lower some taxes, he’s going to reverse many of the Obama policies, which include freeing up federal and state lands for drilling and development, I think you could expect reduced regulation, freeing up land to drill more wells
JJ: With Hillary you are going to produce less coal, drill fewer wells, and potentially trying to get a ban on fracking and if she gets the house and the senate and if she gets elected that’s something that one needs to consider.
JJ: So here’s the thing, just the threat, I think, of another Clinton administration coming in could reduce some drilling, with Trump coming in I think he is going to allow us to get back into the drilling phase quicker, with that said, it should bring on more production, it should help the economy, and thereby in either scenario I think you can see good stable oil prices under a Trump. Probably the same even with a Clinton administration if she does try to reduce drilling, so she’s bad if your a driller, but if you own production with barrels in the ground its good, because I believe prices will rise either way.
WE: So to summarize, I think what you’re telling me is that if either one is elected there is pressure that would put oil prices on the rise?
JJ: Could be, yea, I think more so than that, as much as anything would be basic world wide supply and demand… with the amount of capital that’s been cut over the last two years, drilling rigs off by 75%, and just the lack of capital, but absolutely if you are trying to shut down the fossil fuels, we are a long way away from being able to replace that, at the same time if you reduce regulation and lower the tax burden off American manufacturing, American oil and gas companies, your going to see this economy expand, your going to see it grow, so in either environment to could be positive for those that own hard assets in the oil patch.
WE: I find that interesting. You watched the same three debates that I did, these two have very different approaches to what our country should be doing and while they didn’t specifically address energy they certainly showed us a different approach between the two, After the Election what do think is going to happen to oil prices?
JJ: Well, you know, short term, from day-to-day, week-to-week… I don’t know. But I will tell you this, regardless of the election I think you’ve got a path to profitability, if you will, with the assets that we are buying, so first of all, at the end of the day that’s going to be based on supply and demand. And if you take a look at the world production chart over the last 5 or 6 years, we saw world oil production increase by about 5 or 6 million barrels a day. That’s why prices have dropped so much. We had been pretty stagnant staying around 90-91 barrels a day, until we started drilling and fracking here in the US with our Bakken and other Shale plays, during that time that we saw production rise that 5-6 million barrels a day. If you take the World Wide chart and put all the world production on it you will see that production rise. Take that same chart; pull out North America (United States and Canada) you’re going to see if you clump the rest of the world together production still remains relatively flat. So virtually all of the production growth came out of the United States and Canada with most of that coming from the United States.
JJ: Now our drilling rig count has gone down 75%, our capex or capital expenditures has gone down 75 to 80%. Our domestic oil production reached a high of 9.6 million barrels a day in the beginning of 2015 and we are at 8.3 million barrels a day now. And there are two price points that count to me, there’s only two that count. What’s the cost that you can go drill wells and still make a profit, so particularly here in the United States since that’s where most of the of the lift comes, what price do we have to have so that people will go take a risk to drill wells. On the other side of the coin at what price point do consumers quit buying as much fuel?
JJ: The opportunity I see at these price levels is to buy the asset, we can buy oil in the ground for about $15 a barrel, and then it costs about another $10 a barrel to get it out of the ground. So effectively if you can go buy a barrel of oil for $15 set it in your garage, let it sit there two or three years and when prices go to $80 sell it and while you held it, while it’s sitting in your garage, just sitting there, you can make an 8-14% yield, would you do it? And I am highly confident we can do it.
JJ: But the one thing I can’t tell you is what oil prices will be, but if you think the probability of them going up is stronger than the probability of them going down, then there is a real market disconnect and we get good solid assets with exposure to the upside of oil prices, so I guess that’s not exactly what you asked but that’s kind of a long answer to your question.
JJ: Interesting, we have a question coming in from our audience that I would like to jump to, “If we see oil prices going back down how will it affect what you can buy?”
JJ: Yea… well as prices go lower obviously the price to buy will go lower. However the one thing you gotta keep in mind whenever you are buying in this market, it’s not unlike real estate, you are going to pay a multiple and so the lower the oil price, the lower price you pay, but you’re still gonna buy on somewhere between a 5 and 10 year multiple and you are going to get those rates of return. To me the lower prices go and the more that you can buy at the lower price the far more upside there is. Again we are not depending on drilling to improve our returns. We are not depending on much of anything other than taking our rise with the price of oil.
JJ: So the type of assets we are talking about, Richard, we are going to be looking at assets that have been producing for years. So we know what they have been producing and based upon models going forward we can decide what we believe they are going to produce for next 20 years. We have historical expense ratios so we know what they have been and so we know with a high probability what they will be going forward, so as you do that and if you buy at the current yield that we are talking about for every dollar that the price of oil goes up the yield will go up about 1%. Though the lower prices go the better buying opportunities, if you can find the right assets.
WE: I have another comment from the audience, you mentioned earlier in the interview that Hillary is anti-fracking “if she were to come in in and ban fracking doesn’t that make investing in oil and gas more risky?”
JJ: Well you know, it just depends on where you invest. I don’t think it makes it more risky. It just sure eliminates a lot of the opportunity to invest. If you are a drilling company or if you own undeveloped acreage that you are going to drill… you are probably not going to get to drill. If you own production that is already producing your good to go and you ride the prices up.
WE: So to clarify if she were to ban fracking, but you own current production and are not fracking, you would take advantage of the price rise?
JJ: Correct
WE: With where are today, we have this uncertainty on whether it will be a Donald Trump or a Hillary Clinton; of course you have an overheated stock market, you have the fed making noise that they will raise interest rates, how does oil and gas really help investors during this period.
JJ: To me, I don’t look at it so much as oil and gas, I just happen to be in that business and I have been my whole career since 1989, I just happen to see an opportunity out there. There is no yield in the market, as a matter of fact I have a friend of mine, he’s in the partnership, that came in and said, “You know the yields are so bad out there people are bidding up real estate prices to where we are making a 3-4% cap on real estate.” So in some cases we have negative interest rates in different parts of thee World, here in our country, I don’t know 1 or 2% or maybe less than that, and so for people that are looking for a portion of their portfolio to provide yield, to provide income this is a time that I don’t ever remember in my life time… that that really doesn’t exist. Real estate has always been a safe haven, it still is, but because your typical (investment), for example MLPs, their equity was wiped out, so their not paying any yield, stock dividends: because there is no other way to make interest rates, their yields are reasonably low and your typical bonds, whether they be government bonds or corporate bonds yields are very low.
JJ: You could do some junk debt; and again there are a handful of assets out there. But where there is really a disconnect, that I haven’t seen in this market place, is to go look for small assets lets say less than 20 million dollars that the large money will not chase because it will not move the needle. (The opportunity is) Being able to buy those at a multiple that you cannot buy in any other market and hold it… so it happens to be oil. The reason I like that is because we are also sitting here at $40.
JJ: We can talk about hedging strategies and those sorts of things, but you can provide a hedging strategy where you can put a floor on, hold the assets and for every dollar that the price of oil goes up your yield goes up and the underlying value of the asset goes up. And I don’t know of too many places in the market place (you can do that), to your point the stock market is trading at pretty lofty levels, yields are at very low levels, so where can you go get a high yield income… that as the price of the commodity goes up so will the value of the asset. I just think it is a tremendous opportunity that probably won’t be around real long but as long as oil prices remain in this price environment then there will be some opportunity that we can take advantage of.
WE: We actually are looking at an election that we don’t know which direction it is going to go, but I gotta ask, in your opinion which one wins and which one is better for energy?
JJ: You know I’ve got my opinions on which one is better for energy, we do need to find more renewables and more green energy but the market is a good place to handle that, so obviously I am pro business. On the other side of the coin, you know if Hillary gets elected I think it could create some stress, not only on domestic oil production and on drillers, but stress on oil prices which will be another stress on the economy, so if that happens you will want to be owning oil production.
WE: Well this has been very interesting I really appreciate you taking the time to have this discussion
JJ: Thanks Richard
WE: The next time we visit the election will be over, and we will see what the reaction really has been, tune in every first Thursday for our discussion with Jeff Johnson, 30 year veteran of the oil and gas business, former CEO of Cano Petroleum, and current CEO of EPUS Global Energy.
WE: I’m Richard Loomis for World Energy and thank you very much for listening.