A really long time ago I worked for a large public company that was doing acquisitions in the oil field. They were interested in acquiring anything related to oil and gas; reserves, drilling companies, service companies, equipment companies—anything. Unfortunately for them, it was a time when many companies were looking at oil and gas assets as a smart diversification move. That meant a lot of competition to acquire anything of value. I had been around that oil and gas industry some and knew the guys from other backgrounds were in for a rude awaking-especially the New York guys who employed me.
From my perspective, it seemed the first rule in the industry was not to make anything clear. Who owns that well? Depends on the time of day. Stupid answer, but it might be true. What is the division of profits? Depends on circumstances that will not be clear until we have finished drilling. So, people invest in this well but don’t know what their percentage of ownership will be? Yep! When you’re drilling a well how are the costs shared? Sorry, I’m not allowed to tell you that.
But, the New York boys knew they were a lot smarter than some clod kicker from Oklahoma; and in most things that was no doubt true—but the oilfield? Maybe, not.
My job was to run numbers, lots and lots of numbers. Huge spreadsheets on columnar paper—this was long before personal computers. Pages and pages of numbers. Taped together spreadsheets that would almost fill the largest conference table.
What did the numbers say? With great clarity the numbers said; go home and invest in shipping, or mining; something other than the oil business. Of course, if you’re the smartest people in the room (or on the planet); you don’t listen to numbers crunchers. To be a man you had to trust your gut.
All of the projections and resulting analysis were based on conservative and realistic projections on the price of oil. What was the cost of a barrel of oil today and what would it be in five years, or ten years or even twenty years? From that analysis we could determine a rate of return on various assumptions about the initial investment.
The time was the middle 70s, just after the oil embargo. Prices were unstable with little agreement on where they would be in the future. For most of our analysis we were using projections in the $40 to $60 a barrel range—and that felt risky.
As the big shots continued to miss out on one deal after another due to their low-ball bids, they made a “big shots” decision. They told the numbers crunchers to start assuming the future value of oil at $100 a barrel. I remember there were a few laughs in the room (mine included) when they made their brilliant determination about value. Of course all of the new analysis (now being done using “big shot” values) was supportive of higher values on those desirable assets. They started acquiring those wonderful assets as they dreamed of being a hero back in New York City—maybe CEO?
Most of the overly worked numbers crunchers dreamed about having some piss-poor oil field assets they could sell these suckers. But of course they didn’t—they were only numbers crunchers.
I did hang around long enough to see their ridiculous decisions come home to roost. Oil is volatile to say the least—the latest current price for a barrel of oil is about $30. There were some times in those ensuing years when the price pushed towards $100, but only for a very brief period. Soon as the price of oil fell instead of rising, the highly sought assets were becoming a huge liability and needed to be unloaded at any price–no more CEO hopes.
The best example of that dumb headedness today is food delivery. It’s not the same as the oil field, of course, but what is the same are the “big shots” who think they know something no one else knows; and who can ignore the obvious questions because they do not like the answers.
Great source of fun facts and relevant financial analysis is a newsletter called The Margins, should check it out.
From that newsletter:
“Grubhub just lost $33 million on $360 million of revenue in Q1.
Doordash reportedly lost an insane $450 million off $900 million in revenue in 2019
Uber Eats is Uber’s “most profitable division” 😂😂. Uber Eats lost $461 million in Q4 2019 off of revenue of $734 million. Sometimes I need to write this out to remind myself. Uber Eats spent $1.2 billion to make $734 million. In one quarter.”
I was young when I met the “big shots” from New York, and I was impressed. They looked like they knew everything; fancy cloths, smooth talkers (also loud) and they were big shots. I later learned they knew very little and had a major flaw—they didn’t know how to listen.
Many business people (and politicians) have this critical flaw. They know how to hire people who have expertise they do not; but few know how to listen to that advice when it doesn’t agree with their preconceived objectives.
Of course the people at Doordash might say “hey, it’s not our money; and I’m making a bundle!” They would be correct, and I offer my sincere apology for disparaging their business venture that is losing millions—no doubt, I’m just jealous. The “big shots” always win, one way or another.
Four Corners War is now available as an audiobook.