The First Billion is the Hardest

What will happen when oil is no longer a viable energy source? We’re already seeing the beginnings of a push towards alternative fuels, but what really is our best option? Well, as Chris Mayer points out, the answer may be right under our feet – and championed by an unlikely hero.

“I’ve been drunk, but never two nights in a row.”
– T. Boone Pickens

T. Boone Pickens’ new memoir, The First Billion is the Hardest, is better than I thought it would be. Based on reviews I’ve read, I thought it would spend a lot of time on Pickens’ plan to reduce U.S. oil dependency. I always find such discussions a bore. But that part of the book was only 10 of 250 pages.

Mostly, it’s memoir material, with some peeks into the future as T. Boone sees it evolving. The most interesting parts, to me, were some nuggets from his career, his views on natural gas and his large investment in water.

Pickens is 80 years old now, and he’s accomplished an awful lot in his career. He started Mesa Petroleum with $2,500. Five years later, he took it public, and Mesa earned $435,000 in profits on revenues of $1.5 million. Not a bad start at all. After only eight years as a public company, Mesa generated $92 million in sales and $15 million in profits. It helped make him a rich man.

Along the way in the book, Pickens offers various “Booneisms” such as: “Chief executives who themselves own few shares of their companies have no more feeling for the average stockholder than they do for baboons in Africa.” Or this: “As my father used to say, ‘There are three reasons we can’t do it. First, we don’t have the money, and the other two reasons don’t make a damn.'”

He complains about the bureaucratic nature of Big Oil and its track record for dumb deals. “I’ve said that giving the good old boys of Big Oil excess cash flow,” Pickens writes, “is like handing a rabbit a head of lettuce for safekeeping.” Pickens points to Mobil buying Montgomery Ward as part of its plans to diversify. What a bust! In 1984, Fortune focused on the seven worst mergers of the decade. Four of them involved oil companies. I think big oil companies have gotten smarter since – or maybe just less dumb.

He also talks about his career in deal making, finding deep values in the oil patch and making millions taking them over. He eventually gets out of the oil business and starts BP Capital in June 1997. What follows is an incredible ride. By May 1998, the fund lost $24 million and had only $13 million left. By January 1999, it was down to $2.7 million – down 90%.

It was practically out of business. No one would’ve blamed Pickens for changing things or giving up. Some investors left him, but most stuck with him. It paid off big for those who stuck to their guns.

In 2000, he rung up one of the best years anybody has ever had anywhere – up $252 million, a 9,095% gain! I love Pickens’ grit and determination in all this, sticking it out and coming back.

Plus, Pickens offers peeks into the future. A couple of topics piqued my interest: natural gas and water.

“Natural gas is the fuel of the future,” Pickens writes. I agree with him. Natural gas is our second largest resource, behind only coal, and it burns a lot cleaner than coal does. Pickens’ big vision for natural gas is as a transportation fuel. The logic is pretty simple. “[Natural gas] is the highest-priced fuel in the United States when used for power generation, but it’s cheaper than gasoline or diesel when used for transportation.”

Pickens is talking his book, as they say. He owns Clean Energy, which runs fueling stations for natural gas and builds more every year. Even so, he makes a good case. I was not aware, for example, that there are 8 million natural gas vehicles on the road worldwide already. He also points out that 25% of all transit buses burn natural gas – a use that’s growing 25% annually.

I had a hard time imaging who would want to own a natural gas vehicle when fueling stations are so sparse. It’s kind of like being one of the first people to buy a telephone. But I recently read a review of the only natural gas-powered car in America at the moment: the Honda Civic GX.

It was a positive review. Though the range is limited to only 200-220 miles, the car comes with a GPS locator to find the nearest fueling station for you. Refilling also costs about half of what it would cost you for gasoline, though the car itself sells for a third more than a gasoline-powered Civic. Tax credits help offset that somewhat, and the EPA estimates the payback is about 2 1/2 years. Meaning after that, you’re even with the conventional gasoline vehicle. There are also home fueling systems that go for about $5,000 and let you tap into your gas lines at home (assuming you have gas). You get tax credits for that too.

Anyway, this is the way these things get started. Pricey in the beginning, but as technology improves and more people adopt, the price will go down. I think there is a good future in natural gas-powered vehicles.

In addition to his stance on natural gas, Pickens writes that he is a large owner of permitted groundwater in the U.S. His investment here follows the same key principle he’s used throughout his career: There is profit in scarcity.

Pickens owns land in Roberts County, Texas, a place so rich in water, he jokes it’s the only place he couldn’t drill a dry hole. It’s not difficult to pump 1,000 gallons per minute. This land lies above the Ogallala Aquifer, one of the largest in the U.S., covering over 174,000 square miles across eight states.

Pickens plans to sell water to parched regions in Texas, like Dallas or San Antonio, where water supply is becoming an issue. “We can deliver water faster and more cheaply than any other option on the table,” he writes. “It’s not a matter of if, but when, and I’m betting it’s soon.”

I’m thinking along the same lines as Pickens on water, too. This all ties back to the agriculture theme, as well. In fact, The Economist recently ran a story called “Running Dry: The World Has a Water Shortage, Not a Food Shortage.” It’s a simple idea. As world populations and incomes rise, expect to see meat consumption also rise. Meat takes more grain and water to produce – exponentially more.

In a post-finance world, where the mortgage gravy train is dead in its tracks, these are the kinds of ideas – essentials like grain and water – that will attract new money.


Chris Mayer
for The Daily Reckoning
December 03, 2008

The above was taken from an issue of Chris’ newsletter, Capital & Crisis.

Chris is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital & Crisis – formerly the Fleet Street Letter.

Chris also recently wrote a book: Invest Like a Dealmaker: Secrets from a Former Banking Insider.

The Dow got a break yesterday – up 270. Oil closed at $46. Gold rose $6 to $783.

The recession, says Bloomberg, is just beginning.

And a group of economists working for the UN says the dollar is likely to fall hard.

Meanwhile, shopping may be a patriotic duty in America…in Britain it’s “Christmas every day,” says the Prime Minister.

Where do they get these ideas? What makes anyone think you can solve the problem of excess debt by lending people more money? Who is dumb enough to think that you can cure the problem caused by too much spending…by spending more?

Who’s that dumb? Well, most of the world’s leaders and top economists…or so it appears.

They have their claptrap theories, of course. But theories don’t really count for anything. We’ve seen that. They all believed in the free-market…right up to the moment the free-market seemed to be failing. Then, they believed they had to “do something” to protect people. Protect them from what? Protect them from getting what they deserved!

Take Wall Street, for example.

This week, the geniuses at Goldman got another hard whack. Their stock sold off after rumors of a loss of $2.5 billion for the third quarter began making the rounds. That puts Goldman stock down 70% this year.

But what did they expect? What they deserve? This is the company that Hank Paulson put on steroids…with a whole financial engineering department, designing the kind of investment bridges you wouldn’t want to drive over.

Or how about Detroit? The automakers are still haunting Washington. They don’t have any money of their own, so they’re looking for taxpayer’s money. GM says it needs $18 billion – bad.

If they don’t get taxpayers’ money, they say they’ll be forced to turn to the Swedes or worse…the Chinese!

We suspect they’ll get a bailout. But what do they deserve?

Here are companies that have been around for an entire century – plenty of time to learn their trade. And they’ve been in the center of the best auto market in the world – the United States of America. If you couldn’t make it in the car business in the U.S….you had to be hopeless. Nobody bought more cars than Americans.

And these companies had every advantage – they had capital, they had the sales and service networks reaching into every Middlesex, village and farm in the nation. They knew their customers better than any of their foreign competitors. And they didn’t have to ship their cars across an ocean to sell them.

For a half century, it was downhill driving for America’s automakers. But it’s very hard to recover from success. And Detroit couldn’t quite do it. They squandered their money…they missed their market target…they saddled themselves with costs that gave them a disadvantage and hobbled them so greatly it was almost impossible for them to compete – even with the playing field tilted in their favor.

Then, even when asking for a handout, Detroit’s executives couldn’t seem to get its signals straight. They flew into Washington on their private jets…apparently unaware that anyone would notice.

What do they deserve? They deserve to go broke.

*** We’re in South Africa…with little time to write.

What’s going on in South Africa? Near as we can tell the place is still booming. The restaurants are full. Shopping malls are busy. There are cranes and backhoes blocking the roads.

The local paper tells us that the economy is going flat…with zero GDP growth expected for 2009.

Curiously, you can put your money in a bank and get 12%.

“That sounds like a very good deal,” says an American colleague. “It’s not such a good deal for people in South Africa because inflation is about 12% too. You don’t actually come out ahead. But if you don’t live in South Africa and don’t pay your expenses in rand, you don’t care about inflation. What you care about is the exchange rate. So, I ask myself…which is most likely to go down? The South African rand? Or the US dollar? I don’t know. But I’d guess that the dollar is a bigger risk than rand. South Africa is a resource economy, so the rand has gotten hit hard. And the dollar has gone up because so many people want the safety of Treasury bonds. But at some point, the dollar is bound to fall. So, I figure I can collect high rates of interest on South African investments at very little real risk.”

Of course…we’ll see.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning