Texas Style: John Goff in the lobby of the glass-faced, 20-story McKinney & Olive office tower in Dallas, which his Crescent Real Estate built and still manages. The lip-shaped sofa is by Cassina.
John Goff sees huge gains for distressed frackers especially if they follow Big Tobacco’s playbook for declining businesses.
John Goff made his first fortune more than a decade ago, teaming up with his mentor, legendary investor Richard Rainwater, to buy up empty “see-through” office buildings for pennies on the dollar in the wake of the S&L crisis that began in the late 1980s. They went on to sell Crescent Real Estate for $6.5 billion at the 2007 peak and then scooped it up again a few years later at a discount amid the wreckage of the financial crisis. Goff, based in Fort Worth, Texas, is now chairman of $3.4 billion (assets) Crescent, and personally owns the Ritz-Carlton Hotel in Dallas and the Canyon Ranch spa chain founded in Tucson, Arizona. He still loves high-end real estate, but today he’s focused on what he calls “the single biggest opportunity of my business career”—oil.
It’s a contrarian move, all right. Watch the financial headlines and you’d think the end of oil was nigh. Last April, oil prices went to less than zero for a day as crude in storage reached “tank tops.” America’s frackers have mothballed 60% of their drilling rigs in the past 18 months, while more than 100,000 have lost their jobs amid the bankruptcies of 46 producing companies—including the one-time shale champion of them all, Oklahoma City–based Chesapeake Energy. The plight of the American oil patch, Goff says, “is like real estate in the early ’90s. They had overbuilt, doubled the office space and were woefully overleveraged.”
Back in 2008, when oil hit a record high of $147 a barrel (and Big Oil made up 15% of the S&P 500), all the talk was of Peak Oil supply. Today oil trades at $53 and makes up just 2% of the index—and market watchers are pushing the idea that we’ve already passed Peak Oil demand. Goff, 65, laughs at such forecasts.
“Before the world does not need any more oil, we will suffer a shortage,” he predicts. The world may be burning nearly 10% less oil than the pre-pandemic 101 million barrels per day, but, he says, “don’t mistake Covid-related weakness for a secular shift.” Goff reasons that electric vehicles are still just a blip. “I think there’s tremendous pent-up [consumer] demand. People are really tired,” he says, adding that workers want to get back to their offices. “Oil and gas is going to come back with a vengeance.” Already, in Brazil, petroleum demand is above pre-coronavirus levels.
So this vulture has been circling, fully convinced that with the right assets, capital structures and incentive plans, oil companies can thrive. “We’re buying reserves in the ground at a big discount,” Goff boasts. His primary platform is publicly traded Contango Oil & Gas, of which he owns 24%. Goff oversees the holding company as chairman; acolyte Wilkie Colyer Jr., 36, serves as CEO. In October 2019 they snapped up 160,000 acres of prime fracking land in Oklahoma and the Texas Panhandle for $23 million. About the same time, on the steps of an Oklahoma courthouse, they grabbed 315,000 acres from bankrupt White Star Petroleum (founded by the late wildcatter billionaire Aubrey McClendon) for $130 million. In November, they paid $58 million for 180,000 acres in Wyoming, Montana and Texas. Goff followed that up by merging Contango with another small oil company he controlled, Mid-Con Energy Partners. Assuming a conservative $45 per barrel, Contango is on track to generate in the neighborhood of $75 million in earnings (after capital spending and interest payments) in 2021, pumping roughly 25,000 barrels per day. So far, Wall Street hasn’t credited Goff’s bargain buying. Over the last 12 months Contango’s stock is down 34%, while the S&P oil-and-gas index is off only 20% and the broader market has surged 20%.
Goff intends for Contango to keep growing. But unlike during the heyday of the shale boom a decade ago, when companies seemed to be drilling and fracking nearly every cow pasture in oil country, this growth will come from continuing to buy already developed cash-producing assets at what he calls “very, very attractive” prices.
Indeed, Shale 2.0 has gotten religion about needing to “live within cash flow,” says Ben Dell, managing director at New York–based private equity outfit Kimmeridge Energy. He shares Goff’s enthusiasm for restrained growth. A Brit and former oil analyst at AllianceBernstein, Dell sees a “path to relevance” for America’s beleaguered shale frackers if they would just act more like the tobacco giants did a decade ago: Accept life in a declining industry, slash costs and ramp up returns of capital to shareholders. His favorite example is Altria Group, owner of the Marlboro brand, which despite cigarette smoking’s global peak in 2012, returned 250%, double that of the S&P 500, between 2010 and 2017. Key to Altria’s stock performance during that period was the return of more than $50 billion to shareholders via dividends and buybacks—an amount that exceeded the company’s entire enterprise value in 2010. “It was not a high-growth strategy that drove the outperformance,” Dell says. “Rather, it was the dramatic return of capital that forced investors to pay attention.”
Which publicly traded frackers have the potential to follow suit? Valuation is important. The preferred metric in the oil patch is EV/Ebitda—a company’s enterprise value, consisting of market cap plus net debt, divided by earnings from operations before interest, taxes and non-cash expenses (such as ExxonMobil’s $20 billion writedown of reserve values in 2020). But no fracking operation is worth buying these days if it doesn’t own prime assets that can generate profits even at $45 a barrel. Among the best places to find such operations has been the Permian Basin of west Texas and southeastern New Mexico, where, thanks to the one-two combo of directional drilling and hydraulic fracturing, oil production exploded from 1 million barrels per day a decade ago to about 4 million today—more than that of most OPEC countries.
Goff’s current Permian favorites include Chevron, which sits on some 2 million prime acres in the region and has a sterling balance sheet. The next best Permian portfolio, he says, is the newly merged powerhouse of ConocoPhillips and Concho Resources. He has also been a buyer in recent years of Texas Pacific Land Trust, which collects royalty payments from oil and gas produced from under its 900,000 Permian acres. Outside the Permian, Goff is an admirer of Canadian Natural Resources, a low-cost oil sands producer. And both he and Dell are fans of PDC Energy, which holds a dominant low-cost position in Colorado’s Wattenberg basin.
Although Goff likes buying private deals via Contango, he insists that “the best opportunity is in the public market” (see table, above). He learned that lesson early from his years working with Rainwater, who, starting in the 1970s, helped Fort Worth’s Bass brothers turn a modest oil inheritance into a multibillion-dollar portfolio that at one point included 10% of Texaco, 5% of Marathon Oil and a controlling stake in the Walt Disney Company.
Goff joined Rainwater Inc. in 1987 at age 31, fresh from a public accounting job with Peat Marwick. He describes the Fort Worth investment firm as a dealmaking hothouse where Rainwater would spend half the day with phones in each hand negotiating with multiple counterparties simultaneously. Soon Goff was building Rainwater’s real estate business and looking on as he bought T. Boone Pickens out of Mesa Petroleum in 1996, recapitalizing it as Pioneer Natural Resources. At the time, no one imagined that Pioneer, with 800,000 acres in the Permian, would become a champion of American frackers.
Big Tobacco not only serves as a template for what oil companies can do right, but what they can do wrong. In 2018 Altria abandoned its focus on returning capital and spent $12.8 billion to acquire a third of vaping giant Juul Labs. Over the next two years, Altria wrote down that stake by two-thirds as federal investigations into Juul’s marketing to children ramped up. Meanwhile, Juul’s founders awarded a $2 billion special dividend to themselves and other pre-Altria employees. (Juul’s founders deny any wrongdoing.)
Goff cautions that Big Oil could easily make a similar mistake. He points to BP, whose stock has declined by 35% since last February, when it declared its intention to reinvest into renewables rather than oil. Want to invest in renewable energy? Goff suggests Florida-based NextEra Energy, which operates America’s largest fleet of wind turbines and solar panels.
Lest you think this real estate maven turned oilman is an old fogey, Goff marvels that his most successful investments in the past year (by percentage gain) have been in cryptocurrencies, especially bitcoin.
But he can’t shake his preference for storing wealth in the ground and thinks the geology two miles under the Permian tumbleweeds is so rich with frackable layers of oil-bearing rock that owning acreage there (as well as in prime parts of Oklahoma and Wyoming) will be a solid hedge against the increasing likelihood of inflation, prompted by the Fed’s 72% expansion of the U.S. money supply over the past year.
“This can go on for a prolonged period—printing money at a breakneck pace,” he says. “It’s frightening to me.”