The Big Secret Behind T. Boone's Fortune
- How to Buy the Best Resource Acreage in Texas at a Discount – Without any Production Costs or Risks
- California Energy Idiocy
- “It’s Like a Coin Where Both Sides are Heads”
"Why don't we fly to Aspen for lunch...?"
About 10 years ago, we visited T. Boone Pickens at his famous ranch, Mesa Vista.
The ranch, at 100 square miles, consumes a little over 10% of Roberts County, Texas. It has 18 miles of manmade lakes for duck hunting and bass fishing. There are more than 100 different fields for hunting quail and over 1,000 wild quail feeders.
There are also enormous homes. Several of them. T. Boone (everyone called him “T. Boone”) was married five times... and each new wife got to build a house at Mesa Vista. The house T. Boone built for himself, The Lodge, is over 30,000 square feet. And in the living room, looming over an enormous fireplace is a life-sized, full-length portrait of... himself.
On the second day of our visit, a snowstorm ruled out quail hunting. Fortunately, T. Boone had his own airport at Mesa Vista and a nicely appointed Gulfstream V. The pilots circled the ranch as we took off. The landscape was covered in oil and gas wells.
"It's the damndest thing, Porter... I spent most of the 1960s and 1970s looking for oil in Canada and Libya... if I'd only known how much oil I had right here, on my own ranch!"
Boone was, for most of his life, an ardent believer in "Peak Oil." He believed that oil production in the U.S. had peaked in the early 1970s and that, in only a few more years, all the oil would be gone. He believed nuclear and wind power should be used to produce electricity for the power grid, so that all the remaining oil and natural gas could be conserved for use as a transportation fuel. He was convinced that the country was heading for a disaster because we were going to run out of oil within a decade or so.
In 2008, Boone announced a major investment in wind power. He ordered 667 1.5-megawatt turbines from General Electric – a $2 billion turbine order. Boone was going to cover his Mesa Vista ranch in wind turbines.
"I lost my ass on that wind deal," Boone complained.
By 2010, the entire project was scrapped. Among the hurdles and economic realities T. Boone didn’t anticipate: It would have cost $5 billion just to connect Mesa Vista's windmills to the regional power grid. Worse, the entire premise of his massive investment into wind energy and his “Pickens Plan” was dead wrong.
We’d first met T. Boone because we were extremely vocal opponents of his “Plan” and had mocked Peak Oil as yet another nonsense Malthusian fantasy. At a 2014 Stansberry Research Conference event in Dallas, T. Boone conceded that he’d been dead wrong about Peak Oil and that his “Pickens Plan” would have been an economic disaster.
In a wonderful example of how truth is often stranger than fiction, a huge amount of oil and gas was discovered directly underneath Boone’s own ranch. By 2014, oil and gas production in Roberts County exceeded 3 million barrels annually. Easing the sting of his losses in Wind Energy, even today – a decade after they were completed – several of T. Boone’s new Mesa Vista wells (#008888 #008543, and #008991) are still among the most productive wells in the country. T. Boone’s BP Operating Company LLC is still the third-most prolific producer in the county, even three years after T. Boone’s death.
We learned much from T. Boone over the years, but the most important lesson he taught us was that commodity industries – like oil and gas – that require huge capital investments are fraught with risk. T. Boone very nearly bankrupted himself by investing heavily in an economic myth: Both Peak Oil and the idea that wind power can reliably and affordably produce baseload power are economic fallacies.
T. Boone also showed us the trick to avoiding 90% of those risks.
THE REAL STORY OF T. BOONE: A FORTUNE MADE ON A MYTH
Most people think T. Boone made his fortune developing Mesa Petroleum, which by the early 1980s was America's largest and most successful independent oil and gas company.
But that's not so...
Boone's unfailing belief in ever-higher prices for fossil fuels led Mesa Petroleum into serious financial distress in 1996. Legendary dealmaker Richard Rainwater bought it for pennies on the dollar in 1997, and turned it into one of America's best independent oil companies, Pioneer Natural Resources.
Boone, meanwhile, was forced out of the company. He was 67 years old and virtually broke. He took his last $8 million and raised another $30 million from friends to start a hedge fund, BP Capital.
What did he invest in? Natural gas, of course! He kept pyramiding leveraged bets on higher prices for natural gas, essentially same strategy that led to ruin at Mesa. Within 18 months, he'd lost more than 90% of his fund, which dwindled to under $3 million.
What happened next was the greatest speculative triumph in the history of the financial markets.
T. Boone continued to bet on natural gas going higher, using the futures market. And in 2000, his commodity fund rose by $250 million, generating a 9,000%-plus return.
The gains came, in large part, because of the California state energy crisis and the subsequent spike in natural gas prices. It’s worth understanding what happened, because the same thing is about to happen again – but on a much bigger scale – in Europe.
California “deregulated” electricity in 1996, creating a market structure that could have only been built by politicians. Baseload providers (Mirant, Reliant, Williams, Dynegy, and AES) were to supply power on a competitive basis to the California Power Exchange.
But to ensure competition, they could only sell power to the system the day before it was to be delivered to the customer by one of California’s three retail electrical utilities. Worse, the regulators demanded caps on wholesale energy prices for a decade and based the caps on prices for energy that existed before deregulation began, on the theory that competition would increase efficiencies.
As a result of these caps, there were no additional power plants built in California between 1990 and 1999. Meanwhile, the population grew by 13%. Where did the state get the additional power it needed? All of the additional demand for power was supplied by importing electricity from Oregon and Washington, which normally came from hydro-electrical plants.
In 2000, the stage was set for a huge crisis when California finally deregulated wholesale prices – but continued to regulate retail prices. A drought led the hydro-sourced power to leave the market, causing a massive shortage. That, along with an absence of any long-term market for power, led to skyrocketing wholesale electrical prices, which the retail utilities had to pay because long-term contracts were not allowed.
The result? The power went out all over California with rolling blackouts as the retail utilities – which couldn’t pass the price increases on to consumers – were forced to balance supply with demand by rationing power.
Eventually the governor, Pete Davis, resigned himself to the inevitable, signing long-term supply agreements with Enron and other major natural gas-based suppliers of energy. The crisis cost the state of California an estimated $40 billion, as natural gas prices soared on anticipation of increasing demand.
Where did all of that money go? A lot ended up at T. Boone’s hedge fund, which had been buying natural gas futures throughout 1999 and 2000 and continued to do so through 2007. By early 2008, as oil soared to around $150 per barrel, T. Boone’s fund had earned more than $8 billion in profits, leaving him with a multibillion fortune.
T. Boone spent 40 years looking for oil and producing millions and millions of barrels of it. But what made him a billionaire wasn’t producing anything. BP Capital didn’t own a single oil field or gas well. It merely owned the rights to energy other companies had to produce.
As he told us, “I sure wish I’d thought of that earlier.”
CALIFORNIA ALL OVER AGAIN
Just imagine what T. Boone would think of the opportunity being created by European politicians today.
Just like California in the 1990s, Europe has regulated itself into a severe energy shortage. Bans on hydraulic fracturing and political decisions to abandon nuclear power led to dependence on Russian natural gas. Then Russian President Vladimir Putin turned out to be even less reliable than wind and solar power. The result: Europe is spiraling into an economic collapse, with severe consequences for the entire global economy. The only solution: Much higher prices for natural gas.
Fears of a halt in Russian energy flows this winter have sent European natural gas prices spiking into previously unimaginable territory, approaching $100 per thousand cubic feet (mcf). (For reference, U.S. gas prices traded around $3-$4 per mcf for much of the last decade.) Without any easy or immediate replacement for disrupted Russian volumes, the market is pulling the only remaining lever to balance the market: a demand-destroying price rally.
That's how Europe finds itself in a situation with power prices trading like a meme stock stuck in a short squeeze.
This isn’t only hurting consumer demand. Natural gas and electricity are the two key inputs for manufacturing in Europe. The tight supplies of gas and soaring electrical prices will push the European economy into chaos. Each day, it seems we hear of another new announcement of production cuts or outright shutdowns in manufacturing plants.
For now, the wholesale power market is the focal point of the European energy crisis. But it's only a matter of time before wholesale prices hit consumers in the retail market. An executive director at one UK power company recently issued a shocking warning that "more than half of UK households will likely be in fuel poverty by January."
And yet, politicians show no signs of addressing the real problem – a rational approach toward energy policy. The political solution? Print more money and attempt to manipulate the market with price controls! (A recent series of UK parliament resolutions called for "energy price freezes, solidarity taxes, and social tariffs that lower bills for lower income households.")
Likewise, across Europe, governments continue to regulate retail prices of electricity, while subsidizing utility companies (with printed money) that have been bankrupted because they cannot pass on the new, vastly higher cost of energy. These policies will cause a hyper-inflationary environment in Europe and, sooner than most people expect, fuel and electrical rationing there. The only solution is producing or importing a lot more natural gas.
BP Capital made $8 billion when these exact same things happened in California. How much will you make on Europe’s crisis, which will be even bigger and last even longer? The situation is like a coin where both sides are heads.
WINTER IS COMING: THE U.S. WILL SEE VASTLY HIGHER NATURAL GAS PRICES TOO
As Russian energy supplies leave the world's markets, global demand for American energy will continue to grow, pushing up the price of energy that can be exported from America, like oil, coal, and liquefied natural gas ("LNG"). That will, in turn, lead to higher electrical prices here, too.
And in places like New England, which rely heavily on natural gas – but which lack new natural gas infrastructure – the price spikes will look more and more like Europe's:
The only cure to these problems is increases to baseload power generation.