Real Talk: Oil and Gas Finance Expert Michael Tanner

Video Transcription edited for grammar. We disavow any errors unless they make us look better or smarter.

Rey Treviño III [00:00:11] As I like to say, let’s wait for the rest of the facts to unfold and based on this afternoon and where the oil markets are at, I’m glad we did. We talked to a financial oil and gas expert here immediately barring the weekend of the week that we’ve just had on this episode of The Crude Truth.

Narrator [00:00:29] In 1901, at Spindletop Hill near Beaumont, the future of Texas changed dramatically, as, like a fountain of fortune, thousands of barrels of oil burst from the earth towards the sky. Soon Detroit would be cranking out Model Ts by the millions, and America was on the move, thanks to the black gold being produced in Texas. Now, more than a century later, the vehicles are different, but nothing else has truly changed. Sure there may be many other alternative energy sources, like wind and solar and electric. But let’s be honest, America depends on oil and entrepreneurs, and if the USA is truly going to be independent, it has to know the crude truth.

Narrator [00:01:12] This episode is brought to you by LFS Chemistry. We are committed to being good stewards of the environment. We are providing the tools so you can be too. Nape Expo, where deals happen. Air Compressor Solutions. When everything is on the line, Air Compressed Solutions is the dependable choice to keep commercial business powered up. Sandstone Group. Exec Crue. Elevate your network, elevate your knowledge. Texas Star Alliance, Pecos Country Operating, fueling our future.

Rey Treviño III [00:01:48] Well, good afternoon. If anybody’s tuning in, thank you for tuning in live today as we’ve witnessed America’s power over the weekend. I think a lot of people forgot how powerful America truly is. However, I think we do have a lot of fear going on. As the day ends and as the market is closed today, oil actually closed below $70 a barrel. It actually closed on Friday at about $75. What an interesting way the weekend worked and also doing an airstrike in the middle of the weekend and how that had absolutely no effect in some ways on the price of oil. But to make sure that I said what was said correctly, I’m just so excited that I was able to get somebody in here today to talk about this, somebody that understands the oil and gas industry, somebody who understands the finance. Today I’ve brought in oil and gas finance expert, Michael Tanner. Michael, how are you?

Michael Tanner [00:02:46] I’m doing good. I don’t know if I qualify as an expert. Was the first choice, but I’m happy to be here and this will be fun.

Rey Treviño III [00:02:48] Well, thank you so much for coming in. You have been on a busy streak all day today and I know getting you here took a little bit. So I cannot thank you because of all the news that has been going on. You’ve just been at it really since last week when Israel first bombed those nuclear sites, right?

Michael Tanner [00:03:05] Well, I think you have to go back and first kind of understand how we got here. We didn’t get in here a week ago, two weeks ago. I mean, if we wanted to go back and plot the geopolitical path that we’ve been on, we’d have to go back, you know, probably 60 to 70 years how we’ve got to this point. But I think really the big thing to point out of what happened was much like a lot of the geopolital risk that has been associated with where we see oil prices now, we kind of dive into some of the mechanics of it. It seemed to always be a massive gap up. And then a fade down to what we saw. I mean, you thought about last night, markets open from an oil and gas trading standpoint, markets open Sunday night around 5 p.m. Is central standard time, 4 p. M. If you’re in the good old mountain standard time which we love our folks over there. But everything is gapped up and then faded down. I think it’s exactly what we say. And just about two hours before we sat down to do this, we even saw another huge drop of prices, mainly due to the response. But it’s been a really wild ride, and I think it’s gonna be a great conversation kind of charting through what’s been going on.

Rey Treviño III [00:04:06] Well, yeah, no, and that’s where I want to go with this. You figure last week Israel bombed the nuclear sites in Iran. And by 10 o’clock, that was Thursday, by 10 O’clock Friday morning, prices were at $78 a barrel. By the end of the day, they were back down to $73 on Friday. All week they kind of teetered between that $70 and $75, and then they closed the markets, like I said, on Friday, give or take $75 a barrel President issued orders to airstrike on nuclear sites on a Saturday and Prices drop all day today My first question is did the fact that the markets weren’t open have any effects on the price of oil?

Michael Tanner [00:04:47] Absolutely, Trump’s not stupid. And I don’t think his administration is stupid. They could have ordered this airstrike at any point in the week, but they chose when? To do it on a weekend when all the markets are closed. Why? Well, because for the fact that when you don’t have all the information, uncertainty rises. If you don’t know what’s gonna happen, your risk tolerance goes way down and you have no idea where things are gonna go. Now, if you have time to compress and think about it and you’re not allowed to make a trade, you’re allowed to… Act impulsively it allows everybody to breathe and you know the big thing that we saw happen was the threat of the stray door hermeneuse closing and then today that was a whole bunch of I’ll bark no bite yeah where they you know I ran congress whatever they call it says oh we’re to close. And but they didn’t end up actually doing it, which is why you saw the huge gap up and the fade down as the more and more tankers begin to roll through the straight without. And I think the interesting part is I saw an interview with Secretary Wright today on CNBC and he was talking about something that we’ve, me and you have talked about a bunch, which is the straighter Hormuz closing that is really a, Banging your left foot in order to make the pain in your right foot go away from the standpoint of about 20% of the world’s oil Flows through the Strait of Hormuz, but only about five to maybe six percent of that oil actually makes it over to the United States Most of that Oil comes from Saudi Arabia Iraq Iran and goes to three places the rest of the world besides the United States, India and China. Why would they cut off their main supply and China imports? 40% of their oil flows through that port. Right now, China is Iran’s really only ally in the region besides Russia. Why would you spite your left foot in order to tick off China, who is really the one that’s been giving you, especially with this new administration, giving you a bunch of cash. So I think that was a predictable, oh, we’re gonna close it, but not actually close it. And then what we saw here in the last two hours was a very tepid response from Iran to basically say, hey we responded, we don’t want any part of an upcoming war.

Rey Treviño III [00:07:03] You know, I’ve been seeing it heavy for the last week on LinkedIn and other places that it’s like, get ready, oil’s about to jump up to $100. And I know for the last week, you, me, other individuals like Stuart Turley, David Blackmon, we’ve been saying there like, hold on a minute there. Let’s just take a chill pill and see how this actually unfolds. And that’s why I was very excited that your schedule actually opened up today for the end of the after we saw what the markets did because. You mentioned it, impulse, fear. You cannot make decisions based off of that. Is that correct?

Michael Tanner [00:07:39] And is it, there’s this weird meta-conversation of people who, you know, it’s almost like they want World War III to happen, to prove their oil bullish thesis right. And there’s a meta-level of like, really, like, aren’t we just against war? Even though, yes, I love hundred-dollar oil. We make a lot of money in hundred- dollar oil, but I’m not sure that should come at the expense of World War II. So there is this real interesting, this almost fear-mongering mentality, like you on LinkedIn where it’s like. It’s also social media, so you can’t really dig into their motives, but on the surface, it’s like, wait, wait a second, you’re calling for World War III? Just so that you’re-

Rey Treviño III [00:08:17] oil prediction can be right? Well, let me ask you this, Mike. You know, that’s called uncertainty, correct? So we work in a volatile industry. Okay. But I heard this the other day and it’s like, hey, our assets are sold every day. Are they not? So is it really that volatile? So we do our best to work on certainty. Is that a fair statement?

Michael Tanner [00:08:40] I mean, nothing is 100% certain. Absolutely. But the more certain you can get about something, the more you’re going to invest in it, the more want to do it, all that good stuff.

Rey Treviño III [00:08:51] Right, so that means there probably is a lot of certainty in oil and gas, because there is a certain, there is lot of people that see this as long-term. Is that correct? Oh, I mean.

Michael Tanner [00:09:01] Absolutely, from a supply standpoint, you know, the infrastructure, all that, I mean, we’re not moving, the grid’s not moving to electric anytime soon.

Rey Treviño III [00:09:10] Now, some people are saying that, you know, obviously we’re not gonna see it, but it’s like, oh, we’re gonna see $130. Well, JP Morgan was saying that. And I wrote an article in my sub tag saying, that ain’t gonna happen, and here’s why. What are your thoughts? Do you see us actually shooting up anytime soon? If the straight of a Hormuz.

Michael Tanner [00:09:28] Closed then yes and I think that’s what all of those predictions were predicated on was the fact that if they actually do go about the business of closing that port yeah oil prices are gonna shoot up to up to $120, $130. No, I don’t think that’s maybe a little hot. Maybe we would have gotten to 100, we would’ve gotten to mid 90s, absolutely. But then it goes back to what we were just talking about, which is spiting your left foot in order to, you know, to spite your right foot. They’re not gonna, they’re actually not gonna do that. And I think that the game theory that the Trump administration played out. Because you, again, going back to when I mentioned earlier about how this is a. You have to look at these things as a wide conversation. I mean, really there was a tectonic shift when Trump won. Obviously, if you just chart who’s in, what political party’s in office and oil prices, you’ll see a clear trend. The clear trend is when a liberal administration is office, prices go up. Why? Prices aren’t oil and gas, or prices are a pure supply demand commodity, which means when the market thinks the supply will outweigh the demand, prices goes down. When the market things demand will outway supply, prices go. Okay, so under liberal administrations, what happens? Permitting gets restricted. The thought is we’re going to have less oil tomorrow than we do today. Demand outweighs supply. Price is gone. Vice versa Republican administration. So you really go back to the change of administration. Joe Biden left. Everyone thought Kamala was gonna win. Trump, I don’t think, as an underdog, I think is a bad way to put it. I’m not a political analyst. But point of the matter is, Trump won and it was slightly unexpected. That had a tectonic shift in just the overall. The overall thought of future supply and demand, which is truly how oil and gas is priced. Now, when you layer in all these geopolitical things, you throw in tariffs, the price sort of goes a little bit wonky, but tariffs had more to do with the fact of future-supply began to look. Interesting, so do I think oil could get up to 130? No, because of the fact that the underlying supply and demand, we’re in an oversupplied market right now. And that’s where, you know, we were just talking about before we went live about how we just don’t spend our time underwriting projects at. The new oil price every day, because there are some times when those oil prices aren’t necessarily indicative of the true supply and demand outlook, but are indicative of the geopolitical premium associated with it, which is what we’re seeing now. Prices are now back down to 67, which were they were before all this craziness happened with Russia.

Rey Treviño III [00:11:56] You know, Mike, another thing I want to ask you, and this is something I’ve been telling a lot of reporters, is the reason why the price is so low also and why it hasn’t skyrocketed is because of the production here in America, that we produce 14 million barrels of oil a day, and it’s because of hard work of all the Americans that are in the industry in some form or fashion that the price hasn’t skyrocket. Is that what you’re seeing also?

Michael Tanner [00:12:20] Yeah, I think it has more to do with, I go back to the shift of, the Trump administration made it very clear. What did he say, $55 oil, we’re going to drive prices to $55. And part of that was, we are going to produce, baby produce. Part of that is, you know, obviously there’s this tariff geopolitical premium associated with it But I think the market was expecting supply to outstrip demand to the point where prices were falling to that point I mean we did get there. I remember I was on vacation. I was in Mexico when that was like the one weekend of the year I decided to take a vacation oil hits $55, which everybody was going absolutely insane. Oh, yeah Well now, you know, we’ve seen things stabilized really around that 63 to 68 dollar range Certainly where we’re sitting right now. So, you know I just go back to there are two things that drive prices, the underlying physical supply and demand and the geopolitical risk associated with that price. We’re in a fundamentally oversupplied market right now. So as that geopolitical risks shrinks, you then end up with the price migrating back towards where it should be from a supply and demands point, which is probably in that $65 range.

Rey Treviño III [00:13:31] Yeah, you know you also mentioned $55 and I know for us at PECOS If we were to get to $55 oil in the next two months We’re gonna continue to drill new wells and produce our oil what makes small companies. I feel like there’s a niche right now Well, let me let me back up I feel there’s an interesting niche of the mid-size oil companies that cannot produce unless the $60 oil However, if it’s one of the smaller tier companies like a PECOs or the larger tier like an Exxon they’re still happily producing and drilling new wells, even at these lower prices.

Michael Tanner [00:14:06] Excellent and interesting point, but I think there’s two reasons why Exxon’s drilling and my PECOS is drilling Why Exxons is drilling is they have economics of scale that far go beyond a Your mid-seer companies they have they’re the largest vent. They’re the large Revenue sources for Halliburton slumber jay bakeries, you know what that means? They can they got the direct line to the to the chief revenue officer at slumber. He said hey We need 20% off our frack and guess what? Somebody’s gonna do that, they’re not gonna lose that business, they are pipe supplier, they’re pipe vendors not going to lose the relationship they have with ExxonMobil over a 10% price cut. And truly, oil going from 70 to 60 and maybe even 55 is only about a 15 to 20% drop in your AFE, which is the cost that it takes to drill. If you can drop it by 20%, you can make $55 work. The difference is those mid-tier companies don’t have that. Power with their vendors. So their AFDs are really stuck where they’re at. Now, what do the mid-size and the ExxonMobiles have? Lidial horizontal wells. And horizontal wells is a completely, not a completely different ballgame, but the economics are completely different. You’re rewarded for lateral length, you’re rewarded your frac volume, prop and size. I was dealing with that today, trying to size different fracs all day today. And newer vintage fracs have much more fluid, more prop and all that. Where PECOS and the niche that we have is super interesting is the shallow conventional vertical game, which has a completely different economic set, which at the end of the day, for Exxon, the mid tiers, and for PECOs, all it matters is how much do I spend and how much am I gonna get for it. It’s really, I mean, that’s every investment, but that’s truly the, but so the horizontal. Attributes of drilling a horizontal well are completely different than what it is to drill a shallow conventional well. And those, and that attribute set works a lot better at lower oil than a horizontal weld does. Sure, there are some horizontal welds that are going to be economic, and you also have to take into account some of the reason why Exxon’s drilling is to maintain their leases. They’re leasing up hundreds of thousands of acres that if they don’t drill on and they don’t HBP the acreage, they lose it. So it could be worth It’s actually worth drilling a slightly sub-economic well in order to maintain the lease because there’s a value that they paid to maintain lease and they assign a future value to that acreage where there’s little bit of that standpoint. The mid tiers don’t have that ability to actually drill. I don’t wanna say sub- economic. I see economic as 20 to 30% rate of return. They may drill a 10% rate or return well in order to maintain a lease, but that doesn’t look very good on their cashflow chart. For smaller operators like PECOS, who have a defined niche of specifically, in my opinion, the conventional vertical game, you’re much more price insulated from these big swings because one, the cost of capital’s not as aggressive, and also. You’re not dealing with large decline curves. You might not have these huge IP numbers, but the wells are a lot more steady. And the strategy is much more long-term versus we gotta get all our money back quick or this investment ain’t gonna work.

Rey Treviño III [00:17:20] You know, Mike, we’re running short. I just want to say this or ask you one question as we kind of wrap up. Where do you see this going? Where do see the market going? And again, I know I get that question all the time and then I’m recording. I think last year I was recording. Say, no, we are going to be at $100 oil. Well, that didn’t happen. So I’m not going to hold your gun to your head, but you do like to use that term. Holding your gun your head. Where do your see oil over the next 30 days?

Michael Tanner [00:17:44] I would say we’re gonna end up in the 60 to $65 range. I think the geopolitical risk will ratchet down a little bit. It’s clear there’s not gonna be an extended war in the Middle East. I shouldn’t say it’s clear. It’s my assumption that we’re not gonna see an extended War in the middle East between Iran and Israel. And when you look at the fundamentals, we are in an oversupplied market, which means prices do need to fall to balance that out. And I think that’s what you’ll see over the next six months. We still the facts of the oversupplied market are gonna take six to 12 months to unwind themselves. And eventually in a cyclical market, we’ll spin back around and eventually get back up. But over that six to eight month range or if we’re having this conversation to the end of 2025, I still think we’re no more than $70 and I’d put my price target somewhere in 60 to $65.

Rey Treviño III [00:18:34] Michael for those out there that don’t know who you are, which I don’t think is a lot out there But how can they reach you get in contact with you? And I’m so sorry. You’ve got your great podcast that you do energy news be daily show. Is that correct?

Michael Tanner [00:18:46] Yeah, absolutely. I mean, best way to find me is on LinkedIn. Just search for Michael Tanner. I’m always available to talk to anybody. Like he said, we also run energynewsbeat.com so you can check me out there. And yeah, we’re not hard to find. So we appreciate it and love coming on and being able to talk. I probably wanted to ask 20 more questions but I expanded upon a little bit.

Rey Treviño III [00:19:08] I, Michael, I cannot thank you enough. And to everybody out there, the crude truth is we are actually in an oversight supply market. You got any questions about oil and gas, analyzing any projects, don’t hesitate to reach out to Michael Tanner or myself. We’d love to have, I’d love talk to you about it. And we’ll see you again on another episode of The Crude Truth.

Narrator [00:19:28] Again, The Crude Truth would like to thank today’s sponsors LFS Chemistry, Nape Expo, Air Compressor Solutions, Sandstone Group, Exec Crue, Texas Star Alliance, Pecos Country Operating, and Real News Communication Network.

Narrator [00:19:47] The easiest way to start your own podcast and TV show, Real News Communications Network. Stand out from your competition. Produce streams of high quality social media content. Become a thought leader in your industry. With RNCN, you get to be the host. We handle everything else. Tour one of our three locations in Dallas, Fort Worth and the Colony. Call 972-402-6333 or visit launchashow.com to find out more.