Drilling for Oil on Wall Street
by William Smead, Smead Capital Management
As long-duration common stock owners and investors, we focus on our bottoms-up stock picking and seek to analyze the micro-economics of each industry involved. However, the importance of oil prices to the economy of the U.S. and its effect on inflation helps determine the intrinsic value of our companies. While we currently own no energy companies in our portfolio, we would like to pause and see what the rhymes of history can tell us about the circumstances of today.
On November 9th, 2015, Apache Corporation announced the rejection of a takeover offer from an unannounced suitor which turned out to be Anadarko Petroleum. We at Smead Capital Management believe we have entered a period of time where it might be cheaper to drill oil on Wall Street than it is to poke holes in the ground. We also think that those who track rig counts in hope of finding a bottom in oil prices need to review the prior oil boom/bust cycle.
We think a little history on 1984 and background is necessary for our readers. T. Boone Pickens ran a small-time oil and gas company in the early 1980s when oil prices peaked at $40 per barrel. By 1984, the U.S. stock market was two years into a powerful multi-decade bull market while energy stocks suffered the bust part of the boom-bust cycle. Large integrated oil stocks were on sale on Wall Street. Pickens decided that it was cheaper to drill oil on Wall Street than it was to poke holes in the ground.
Pickens was among a group of activist investors cultivated by Drexel Burnham’s Michael Milken, the junk-bond king, to use his financing muscle to buy large companies on the New York Stock Exchange (this writer was employed at Drexel Burnham from 1980 to 1989). Pickens took a 5% stake in Gulf Oil and threatened to buy the company. Chevron ultimately bought the company for $13.3 billion and Pickens made a killing.
As I remember the mid-1980s, corporate acquisitions made Pickens a celebrity in an era of vigorous and extensively reported takeover activity. His most publicized deals included attempted buyouts of Cities Service, Gulf Oil, Phillips Petroleum, and Unocal. It was during this period that Pickens led Mesa’s successful acquisitions of Pioneer Petroleum and the mid-continent assets of Tenneco.
There were some very good things brewing for the U.S. stock market and the U.S. economy and some very bad things brewing for the oil and gas business at the same time in 1984. Look at the price chart of oil in 2013 dollars below: