Sitting in front of a fire in a cottage (with Lynn) in the Peak District of England reading your excellent column. Couple comments.
Lee Raymond served ExxonMobil shareholders well. Also JPMorgan shareholders as lead director from 2005 until 2020. Know that Jaime Dimon respected his sage advice.
Knew Steve Chazen when he was a Merrill Lynch investment banker in the early 1990's.
He loved to debate with his clients which is not the usual banker style. Do agree that his best time was as Oxy CFO. Houston will also miss his generous philanthropic presence.
I am definitely looking forward to posts about how Lee Raymond would manage today's super vol environment!
I've thought a lot about your discussion regarding the relationship between ROCE and the oil price. Lee Raymond focussed on ROCE throughout the cycle and particularly at the lower end of the future cost curve, or to use Darren Woods' favourite expression, "investments that are robust throughout the cycle" (i.e. Lesson #3).
Nerding out on one thing: I keep coming back to the definition of 'super volatility' - what does 'super volatility' precisely mean? Please clarify, but I think you mean that the cycle's peak-to-trough demand-destruction to shut-in prices remain the same, the dynamics that drive them (inelasticity of supply and demand) remain the same, but the key change in this cycle is that the frequency of the peak-to-trough waves have increased dramatically. We still go through the same boom-bust cycles as in Lee Raymond's day and for the same fundamental reasons (in our case that supply is choked and no swing producer), but instead of the archetypal cycle taking 5 - 7 years as in his day it's now only taking 1-2 years. Super nerdy definition: the amplitude of today's cycles are the same, but wavelength has decreased dramatically (?).
From an investor's point of view, we are now experiencing these boom-bust cycles in fast forward, which feels like super-volatility to us.
Here's the issue: in Raymond's day his cycle's wavelengths were longer, it allowed the ROCE effect to outweigh the volatility effect over time. But in this super-vol cycle if you invest $1B in Project A at crude price of $70, the bust could come a year later and the project looks like a terrible investment, yes, it could recover quickly on the crude price upswing but it's REALLY stressful to manage capital in this kind of environment, the ROCE seems almost beside the point if you're watching the value of the project swing violently every few months as crude prices shoot up and down.
Question: where does this leave capital allocators? WWLRD? We need to invest and plan CAPEX and the supervol swings cause a lot more headaches today than in Raymond's day. The only approach I can think of seems to be to have a set of top-quartile type investments ready to invest in and wait until the cycle is at an apparent peak (~$120+, to sell, to sell short) or trough (~$30-, to buy, to invest in), rather than risk making investments somewhere in the middle (~$70), because the cycles are so quick today that investing in the middle is too uncertain and another peak or trough will be along soon enough where you'll have a better idea of where you are in the cycle (hard to make a bad call investing in a top quartile type project/company at $30/barrel). To summarize: the super volatility effect has become so large that it feels like it is now outweighing the ROCE effect and so it is forcing us all into being cycle-timers even if we don't want to be. WWLRD?
And on the "climate denier" point, the weakest form of argument is the ad hominem attack. If the science was so definitive, this would not be necessary.
I remember a meeting once where Lee Raymond spoke at the Council of Foreign Relations. He was trying to make the point that most people don't have any idea of the scale of the oil business. To illustrate, he said (paraphrasing) "think of those one gallon containers that people use to get extra gasoline ... now line them up end to end. ONE DAY's oil consumption measured on one gallon containers would go around the world THREE TIMES." Still remember it to this day. 100 million barrels a day is a lot of energy ...
Arjun,
Sitting in front of a fire in a cottage (with Lynn) in the Peak District of England reading your excellent column. Couple comments.
Lee Raymond served ExxonMobil shareholders well. Also JPMorgan shareholders as lead director from 2005 until 2020. Know that Jaime Dimon respected his sage advice.
Knew Steve Chazen when he was a Merrill Lynch investment banker in the early 1990's.
He loved to debate with his clients which is not the usual banker style. Do agree that his best time was as Oxy CFO. Houston will also miss his generous philanthropic presence.
Hello Arjun,
I am definitely looking forward to posts about how Lee Raymond would manage today's super vol environment!
I've thought a lot about your discussion regarding the relationship between ROCE and the oil price. Lee Raymond focussed on ROCE throughout the cycle and particularly at the lower end of the future cost curve, or to use Darren Woods' favourite expression, "investments that are robust throughout the cycle" (i.e. Lesson #3).
Nerding out on one thing: I keep coming back to the definition of 'super volatility' - what does 'super volatility' precisely mean? Please clarify, but I think you mean that the cycle's peak-to-trough demand-destruction to shut-in prices remain the same, the dynamics that drive them (inelasticity of supply and demand) remain the same, but the key change in this cycle is that the frequency of the peak-to-trough waves have increased dramatically. We still go through the same boom-bust cycles as in Lee Raymond's day and for the same fundamental reasons (in our case that supply is choked and no swing producer), but instead of the archetypal cycle taking 5 - 7 years as in his day it's now only taking 1-2 years. Super nerdy definition: the amplitude of today's cycles are the same, but wavelength has decreased dramatically (?).
From an investor's point of view, we are now experiencing these boom-bust cycles in fast forward, which feels like super-volatility to us.
Here's the issue: in Raymond's day his cycle's wavelengths were longer, it allowed the ROCE effect to outweigh the volatility effect over time. But in this super-vol cycle if you invest $1B in Project A at crude price of $70, the bust could come a year later and the project looks like a terrible investment, yes, it could recover quickly on the crude price upswing but it's REALLY stressful to manage capital in this kind of environment, the ROCE seems almost beside the point if you're watching the value of the project swing violently every few months as crude prices shoot up and down.
Question: where does this leave capital allocators? WWLRD? We need to invest and plan CAPEX and the supervol swings cause a lot more headaches today than in Raymond's day. The only approach I can think of seems to be to have a set of top-quartile type investments ready to invest in and wait until the cycle is at an apparent peak (~$120+, to sell, to sell short) or trough (~$30-, to buy, to invest in), rather than risk making investments somewhere in the middle (~$70), because the cycles are so quick today that investing in the middle is too uncertain and another peak or trough will be along soon enough where you'll have a better idea of where you are in the cycle (hard to make a bad call investing in a top quartile type project/company at $30/barrel). To summarize: the super volatility effect has become so large that it feels like it is now outweighing the ROCE effect and so it is forcing us all into being cycle-timers even if we don't want to be. WWLRD?
Best,
J
And on the "climate denier" point, the weakest form of argument is the ad hominem attack. If the science was so definitive, this would not be necessary.
I remember a meeting once where Lee Raymond spoke at the Council of Foreign Relations. He was trying to make the point that most people don't have any idea of the scale of the oil business. To illustrate, he said (paraphrasing) "think of those one gallon containers that people use to get extra gasoline ... now line them up end to end. ONE DAY's oil consumption measured on one gallon containers would go around the world THREE TIMES." Still remember it to this day. 100 million barrels a day is a lot of energy ...