Transcription
As the Rolling Stones say, you can't always get what you want. And President Trump wants energy companies to produce more oil. We will bring prices down, fill our strategic reserves up again, right to the top, and export American energy all over the world. It's called Drill, baby, Drill.
One of the pillars of President Trump's economic plan is ramping up U.S. energy production to pump a lot of oil. Lower gasoline prices. People have more money. Citi says that oil at $60 a barrel and the U.S. economy could see as much as $100 billion of a deflation impulse. I always say people may not know their ATM pin number or their anniversary, but they know to the Senate what gasoline prices are that day. And it's really because it's the only price that we see written in ten-foot-high letters.
The problem is people might want lower oil prices, but oil producers want returns. The end of the day, oil is a business. Companies have to make investment decisions based on what they think is a price that they will be able to achieve for this product that they bring on. Saddam is the chief economist at Trafigura, one of the biggest commodity trading companies in the world, and it's his job to forecast prices. The Dallas Federal Reserve just recently did a survey of the companies within its region, mainly the oil producers. So asking, what do you think? Know average breakeven prices are for their different plays and ultimately the lowest one came in at about $60. So really, you know, anything at 60 or below is really going to then impact the decision-making and the profitability of these investments.
Even when oil prices averaged $80 last year over the course of the entire year. Really crude oil production really only grew about 200,000 barrels a day. So that's telling you that even at $80, which is a much higher price in that range, companies are not deploying a huge amount of capital this time. Oil companies will prioritize shareholders' returns over most everything else. Unlike last time when things ended with a spectacular crash in oil prices, bankruptcies, and burned investors. We were all caught up into Wall Street in the multiples that were being paid. It's like it reminds me of the tech side now. And so it was the same thought process that went through our minds back and call the 2010-2019 time period. Pioneer was trading at ten times EBIT back in 2012 to the 15-time period.
Scott Sheffield was CEO of Pioneer Natural Resources for over 20 years until he sold the company to ExxonMobil for $60 billion. He's one of the original wildcatters, a risk-taker who drills for oil in unproven areas. What led to the massive amount of exploration and development? Was it also cheap money? We went public in 1991. The reason you go public is to be able to raise capital. We ended up raising probably 5 to 6 billion, probably more there than top one or 2% of all public independents to acquire opportunities to grow. And then eventually the shareholders, said Scott and the rest of the independents live within your cash flow. So create a free cash flow model that returns U.S. dividends, returns U.S. buybacks and live within that cash flow to be able to do that, move forward.
Sheffield and others like billionaire Harold Hamm, were credited with the innovation, technology and perseverance that led to the shale revolution, unleashing a flood of American oil into global markets. You know that going in, there's a certain amount of risk there, but I think you could also be rewarded greatly. You know, we took a lot of risk with the Bakken, 1.3 million acres. And so, you know, that paved the way. That paved the future.
In 2008, oil prices spiked to $140 a barrel and mostly stayed between 80 and 100 between 2010 and 2014. Capital markets were wide open and companies took advantage. U.S. independence raised a whopping $371 billion in debt. We had the Arab Spring. You know, so we were in the 110 to $120 range. So at that point, people were saying great future barrels at those prices. But with a break-even, that is, you know, $50. That spread is enormously profitable. The oil came fast, as did the cash, and neither lasted. U.S. shale has a quick initial production and a steep production decline. When shale oil is first produced. It's like the opening of a fire hydrant, a ton of oil really fast. Once that initial flow subsides, the oil slows down. In order to keep the same net amount of oil flowing, producers needed to keep pouring money into new wells. You had to produce basically use holding leases. So you had to. So what? Whether you liked it or not or wanted to. But, you know, you're trying to protect those leases that you've taken on, so that always serve shareholders. I think it did produce preserving the future for them, but some of them didn't see that they wanted a media return.
When oil prices crumbled, the party ended. I think the washout really was that drop in 2014. So we went very rapidly from about $110 down to at one point, I think it was the low was about $28. Right. So imagine any industry where that would that happens, but in particular in a capital-heavy capital-intensive industry that has long lead times where you have to invest over a period of years. That obviously really was the reckoning behind that. Equities tanked. The XLP, which tracks publicly traded U.S. oil and gas producers, lost over 90% from its peak in 2014 to trough in 2020. High yield spiked almost 22% and there are more than 200 bankruptcies. We came down very, very sharply to the point where we weren't just below breakeven. We were getting to what we call cash costs. So basically just the amount to keep the lights on. It was certainly a lot of loss of shareholder value, which is why I think shareholders are now saying if you're making money, I'd prefer you return it to me now.
Shareholder pressure can be stubborn and so is economics. And I think ultimately it is inflation across everything. So whether it is materials, whether it is labor, you know, you're starting to see those things move higher. And I think ultimately also you're seeing a lack of that talent coming into the industry. But you also then look at what's happening around increased costs, around steel, you know, potentially tariffs having an impact and all that starting to add up.
There are things that could help producers drill at $50 oil, lower taxes, less regulation, cheaper federal land leases and less perceived hostility from the government. Natasha Conserva is global head of commodities at JPMorgan. We do believe that it can happen. So first of all, the $50 is a target. The US at the moment, if you look at the breakevens, they at about $55, what the administration can do, they can bring the cost of production, the cost of drilling lower. So we actually believe that 45 is the new 55. So we believe that they can bring the cost of of drilling by about $10 lower. Canada gets there in three ways, lower royalty fees on production on federal land, corporate tax reduction to 15% on things produced domestically, and bringing back the bonus depreciation from the 2017 Tax Cuts and Jobs Act. This lets businesses deduct 100% of certain capital investments. That alone could cut breakevens by $9. So, yes, they have this additional $10. What they can decide is they can say, okay, we'll pay ourselves more dividends will increase the dividend yield, will increase the buyback or all other things that they can do with this money. Or they can say half of that actually will go into the grant and will increase production. So this we don't know. What we're saying is that we believe it's doable.
Cannava says you don't need to spend that much money to produce more oil. Our numbers are showing that $1 million spent today versus 2014 gives you about 86% more production. So pretty much you're doubling production through efficiency gains. The math says producers can drill more with less. Now shareholders have to let them now. Maybe it takes a change on the part of shareholders to then say, actually what we do want is to go back to production growth, because production growth obviously ultimately is that future revenue that's coming in. And I think we've been in this period where they're not valuing that production growth. And partly it may be because of concerns around peak oil demand. So if President Trump could incentivize long-term oil demand growth past 2030, that might change things. Whoever is in the White House has a bigger impact on the demand side of the equation than on the supply side of the equation.
If more oil production isn't the answer, an alternative for President Trump might be gas, baby gas. In a recent speech at the premier energy conference Ceraweek in Houston, Texas, the Secretary of Energy, Chris Wright, mentioned LNG or gas eight times and oil only twice. It was a fiery speech that had industry leaders abuzz. President Trump immediately ended the pause on LNG export permits. Today I can announce our fourth action in this regard improving the Delfin offshore Louisiana LNG export terminal. Oil gets all the headlines, while U.S. natural gas production also sits at a record 107 billion cubic feet a day of 90% since 2008. It's called basins. The three-point plan is considering, yes, it's about 3 million barrels per day of oil equivalent growth between now and the end of 2028. So we actually believe the true number is closer to 4 million barrels per day of oil equivalent material that would be done by by the gas. Actually, it's not by the oil, but by the gas. It's a lot harder to export natural gas. You have to freeze it in order to ship it with a similar process on the importer side. Those facilities are expensive to build, but more and more are coming online, helping to expand America's potential. By 2030, the U.S. should have over 250 million metric tons of LNG export capacity a year based on current regulatory approvals. I think LNG has a great future. It could be more focused on English liquids, it could be more focused on the natural gas side versus the oil side. We don't have many oil plays left in this country.
The biggest problem for producers, either oil or gas, is infrastructure. Moving the hydrocarbon from the wellhead to the Gulf Coast or your local utility. The permitting process is pretty much hated by all energy folks. Oil, gas and renewable alike. Permitting is difficult for many different reasons, but one of them, it's not in my backyard. And because of that, there is a lot of those sort of environmental considerations that need to be solved for and decide exactly how you approach that. Many pipelines have been scrapped or held up in courts for years, leading to bizarre pricing, like $20 gas in the Bronx versus $3 gas in Chicago. It's crazy. I mean, you get some markets that will even get into a negative market if you can't get your product to market. It does distorted in a lot of different ways. And it and it also distorts it to the consumers. We think away from build a drill, baby, drill. What's something better as a gas? Maybe gas. Is it dig, baby, dig? Is it build, baby, build?
The reality of that is that if we want to achieve all those targets that the Trump administration put forth. Yes. And that's a lot of that. Bring inflation down. Yes. We have particular objectives in terms of trade, which have particular objectives in terms of geopolitics. So it's definitely drill, baby, drill. It's definitely dig, baby, dig. It's produce, baby, produce. We have all of that in the ground, but we need to be able to move that and we need to go through the approval of those pipelines. And so they do work. And at 79, Harold Hamm is still working. How do you feel like Are you as bullish on the industry as you've ever been? Probably more so than than I've ever been. It takes both oil and gas to make this industry work, and it's good to see the demand coming on for natural gas with the data centers high demand. I think that's a good plus here. In 4 to 6 weeks, we've seen a complete change in the outlook for natural gas in this country. I've seen nothing that's going to slow down the demand growth on off on your side.
Maybe the Rolling Stones were right. You can't always get what you want, but if you try, sometimes you'll find you get what you need. And in this case, what we just might need is more gas drilling and pipelines instead of oil. In that case, everyone wins. Shareholders, President Trump and us.