#288 - Wilkie Colyer - CEO of Contango Resources

Chris Powers: Wilkie, welcome to the show. Thanks for joining me today.

Wilkie Colyer: Thanks for having me on, Chris.

Chris Powers: All right. I've known you since we left college, and you started your career and have been in one place forever. So I want to start with how you got to where you are today and growing up at Goth.

Wilkie Colyer: Yeah, so you're exactly correct.

I've had a couple of different titles over the years, but I've worked at one place for my career, which is fortunate to do, mainly under the mentorship of a guy like John Goff. He's been incredibly successful.

He's taught me a ton about various things in business and life. But most importantly, he's just a perfect guy. He's a humble guy. He's a fun guy to hang out with. So I've been fortunate to learn business under his wing. But yeah, I started there in 07.

John had just sold Crescent Real Estate to Morgan Stanley in August of 07. It was like the last deal that got done before the financial crisis. So at that time, he was starting a family office, and I was lucky enough to get the invite to come and hang around for a few weeks.

And that's very much John's style. Come to hang out, and we'll see if there's something you can do. And like a pickup basketball game is, he's called it several times. I showed up in the fall of 07, knowing little about everything. I just never left; I started doing a couple of different things.

In real estate, he had two different groups. He was looking at personal real estate and managed a building in Fort Worth for him that he just owned personally, but he also had a private equity firm that at the time was doing C M B S. So I did a little bit of help on that stuff.

I learned a lot, but I could have been more helpful. But the other thing I was doing was public securities, and most of our investing exposure, while I was there for ten years, was public equities. And we'd look at private deals and things of that nature, but we just felt comfortable in the public markets.

John's always been a public markets guy, and so that's just where I found my niche. And so the better part of the first, seven, eight years was generalist investing. It could be more forward than how most people learn about business because you learn about it by doing, but I did a lot of learning in theory.

Chris Powers: What do you mean by that?

Wilkie Colyer: We're looking at investing in whatever xyz company. I can look at balance sheets and read financial statements but in terms of understanding what working capital is or what a working capital swing is an intra-month, or how you're going to deal with your creditors or all those things.

They were concepts I understood, but not things I felt I understood. So I learned a lot from John and guys like Warren Buffett. Charlie Munger learned a lot about thinking and did a lot of work on psychology because I didn't know much. Still, I was intuitive, competent enough to know that the people who said this stock trades at five times EBITDA and this other one trades at seven, you buy the five and sell the seven. It's just that sounds silly.

If that's how this works, everybody will be good at this. I was at least smart enough to understand that. And I learned the business from the outside in more than you'd typically expect. But like I said, generalist investing, I only did a few tech or high-growth businesses.

It was more complex assets, deep value. Just by my nature, I am a pretty big contrarian, and I think John would say the same. That was something that I focused on a lot, and I found my niche in that part of the world. So I had done generalist stuff for about seven years.

I handled the oil and gas investments we had done during that time just because we were in Fort Worth.

And yeah, Just by location will see many deals that come through. So I did the underwriting on a lot of those things. And then, mainly as I got more experienced, John's style is concentrated on investing, and I'm a massive believer in that.

You only have a few eggs in the basket, but you watch the eggs very closely. I think it was like, I just butchered a Stan Druckenmiller quote, but I can't; it was something like that. And trying to dig deep, understand businesses at a fundamental level, and then bet big when you feel like you've got an edge.

In 2014 when the OPEC deal happened over, over Thanksgiving and oil dropped a bunch, as simplistically as it was, as simplistic as it was, we looked at a crude chart and said it was at 110 in August, and it's at 50 now. There's gotta be something to do here. And I had enough knowledge to know where to start turning over rocks.

So we started with a blank sheet of paper. I took all the rest of the industries I was covering off my list, and we focused solely on oil and gas investing. Starting in, call it January 15. So we started mainly buying equities, and we were; the thesis at the time was if you fat or rewind a year before that, call it spring of 2014, you started hearing these people talking about multiple benches and the Permian and other places.

But the Permian was the main focus. But when you'd look at the math on all these things, it would imply that, hey, if all these benches work, you're still, it seems like the market's pricing in a lot of these benches at the time, or they're pricing in higher oil prices, or it's something like that. So it felt like little of a margin of safety there.

So they had started to preview that, and then oil collapsed, and everybody said forget about everything you were talking about, adequate acreage and all that. So that was the main focus for us initially. And we had two buckets. It was good assets, good balance sheet, good assets, wrong balance sheet, and we put some money to work.

They looked brilliant for a little while. First six months, everything was going up and to the right, and then summer and fall of 15, you had two things happen. One was oil came back down, and the high-yield market rolled ever. And many of the names we were focused on, particularly in the good assets wrong balance sheet bucket, where we had put less capital on the equity side.

You saw those equities drop significantly, but the excellent balance sheets didn't move much. And those same companies who had. With fewer great balance sheets, we could buy their bonds. And I've always liked focusing on small-cap businesses rather than large ones. If 25 analysts write on a name, it's tough to have an edge.

You may find it, but I tend to find that it's much more complicated. The other thing is, we can, as a family office with just the Goff family's capital, we could put enough capital to work in those businesses to where we would have a voice, whether it's not necessarily in the boardroom but, we call management, they're going to pick up the phone.

And that was important to us because we sometimes had differing views from the people we were investing with, but we certainly wanted to ensure that our voice was heard if we thought some things made sense. So late 15, early 16. We started deploying capital in these good assets and sound balance sheet and moving it over up capital structure into unsecured debt on some of these smaller cap names.

And the great thing about those was that anything under a billion dollars of unsecured debt needed to be more significant for any money centers to get involved in. So you saw those bonds collapse. And so you know, you're buying Resolute Energy was one.

Clayton Williams. Legacy reserves have won cheaply. But, you're buying these bonds at 10 to 50 cents in the dollar and looking to yield the worst of 30, 50, 60%. And so we went from being an equity and business analyst to an amateur lawyer. And so all I was doing for six or eight months was, reading bond indentures and trying to understand credit agreements. How they were all tied together, and the thesis in that part of the business or that phase of our investing period was, I want to avoid buying any bonds.

That first-off values have to be there. But the second thing is I don't want to buy bonds with a complicated capital structure. I want to know with reasonable certainty that if anything goes wrong, This bond will be the fulcrum security. Yeah. You go into bankruptcy if you've got a second lien, a first lien, and a pre. You have to argue with all these people, I hadn't experienced that before, but I knew that it could be costly to try and come to an answer on the fulcrum security.

You usually have to pay a ransom to various other members of the capital structure to get them to go along. So did that through 16 or early 16, and then Q2 of 16, all those bonds went and traded up to par with one exception: Legacy Reserves.

But we bought that one a lot cheaper. We had a great year in 2016. A lot of people did that were invested in Energy but just had a ton of success doing that. We had become the largest shareholder of re Energy, a big win for us that ended up selling in 2018. And another one was a tech-specific land trust, a sleepy business.

Great. I love it when I find a business, even if it's a larger cap, if it's got no analyst coverage, it's like being a small cap, it's, you're just, you're not going to have a lot of people focused on it. The other exciting aspect was you only have a little liquidity in that name, or at least at the time.

And so I'm always looking for situations where I know I'm not the most intelligent guy in the room. Finding value is much easier if I don't have competition from professional, institutional investors. And so we had a lot of success with the public markets investing model, but we've found that many of these businesses needed high insider ownership.

And because of that, it was easy to get the incentives misaligned between the management, investors, and the business. And a lot of those investments that we had made were winding down. They had either been merged into the more prominent companies or had sold, and We were looking at where we will take this next because we still think there's a lot of opportunity here.

And there was a situation, contango Oil and Gas, which was a public company. We had followed it since I probably first looked at it in 08, which was very early in my career—I had a ton of respect for the founder. It was run for shareholders. It was a very shareholder-friendly structure.

And so, just a business we greatly respected, it was tied to natural gas prices. We didn't own it because we weren't constructive on natural gas around that time, and, Then they ended up, tragically, the founder passed away; they merged with a company called Crimson Exploration, which, in a corporate finance textbook, would say Crimson's, over-levered.

They're oily. It is levered. It's gassy. It looks nice to put them together. But, the company became somewhat distressed because of the strategic direction and the significant drop in commodity prices. And, one thing in oil and gas that we liked at the time. We found this in resonated Energy, which was, if you can find A portfolio or a company that has a portfolio of assets that, you've got one asset that you know is a growth engine, but you've got something else that nobody likes but churns a lot of cash flow out. That can be interesting because people like, at least at the time, people loved pure plays.

They wanted to keep everything diversified. So soResolated Energy had this Aneth field, which was a CO2 flood in Utah, and then they had this Delaware basin asset that was core of the core, at least, very close to it. But if you mix the two, the lifting costs look off, and capital intensity still looks high.

But we knew if we disaggregate those two things, you've got something that can feed the growth. Of this asset, you like it, but the market needs to give you credit for that. So we love that. For and good example, I had an investment banker come and meet with me and say, look at all these trading multiples, and if Resolute gives away this Anna Field asset, my prediction is that the stock goes up 50% the next day.

And I went, look, I get all the math you just put on that page, but I need to tell you that giving away a 200 million asset will make a stock go up 50%. Again, I get the math; that's just; I won't ever believe that because I'm just convinced that it's not true. So Contango was a lot like that.

They had a very shallow water offshore natural gas asset. And then they had an asset in the Delaware basin that, we thought you could fuel the growth of that asset with shallow water Gulf of Mexico. That asset in the Delaware 10 was not in the core of the core like the persistent asset was.

We thought the fairway of that play was still maturing. And it was, but it was more core than we thought. But, Contango, that was the thesis look; they've got an exciting collection of assets. It's a public company, and it's over GNA right now. As you can imagine, when these businesses went from 2014 to 2015, You might have had the asset value of these things cut in half or more, but nobody cut their GNA in half.

And you have to do that. And Economics 101 says you must cut GNA when your asset value drops, or you'll bleed. And a shareholder, a mutual fund out of Chicago, owned a substantial position in this company, which is unusual. Still, they invested based on the founder of Contango.

And they had a lot of conviction and his strategy, and I can't disagree with them. But then, that strategic direction changed when they did the merger because the founder passed away this mutual fund; we just called them up and said, Hey, do you want a bid on your 20?

It was 15% at the time, 15% position. The company was way down because they had owned it since 2012. They may want to take a tax loss. And they at first said, no, it's worth a lot more than this. And. Hemmed and Haw, and a couple of months later, they called us back.

And so we bought that, literally over a weekend. And we went to the board and said we're willing to bid on this, but there needs to change at this company if we're going to buy this because we're not just going to buy this and watch what's been going on. Continue to go onSo bought the position.

Chris Powers: Quickly, why would the board want you to buy it and then change things? Were, did, were they in agreement that they wanted to change? What if they were doing the things they were doing it? Why would they want to change? Just because you bought it.

Wilkie Colyer: Yeah, it's a great question. It was a very unique situation. At the time the founder died, Contango was about 1,000,000,002 market cap they had about. 200 or 300 million in net cash on the balance sheet, and they had eight employees. That's a unique business. And that's another thing that I love looking for in public markets or anything, but public markets are where I spend most of my or most of my time.

But you are looking for these extreme situations where you find outlier companies regarding long-term returns. Crimson was more of a traditional oil and gas company, so you know, even though Contango shareholders took 80% of the combined business, 80% of the employees, or more than that, came from Crimson.

And the board was initially five and three, five Contango Board members and three former Crimson Board members. Some of the Contango board members two of them said, yeah, this isn't really for me. They resigned. And so what you had then was you had a six-person board, an even-numbered board is a little bit odd in and of itself, but you had three and three.

Getting gridlocked is easy when you're in that position. And so when we went to the board members and said, look, there's gotta be a change here. They were looking for a catalyst, and we were able to be that catalyst. So I had never run a business and managed people other than one at good Goff Capital.

But over a weekend, John and I went on the board, and I stepped in as interim CEO, which was a crazy learning experience.

Chris Powers: To be clear, so part of the negotiation, so you go to the board, you say, I'm going to buy this mutual funds position for 15%. And then you go to the board, and you're like, we want to make some changes.

So part of the negotiation was we're going to buy it, and we're going to take over basically, and I'm going to be the CEO coming Monday morning.

Wilkie Colyer: No. So we went to them and said we're going to bid on this assuming that the board is supportive of making changes to this business because that's what we think needs to happen for this to be successful.

And they said, or at least some said, we're all for it. So we bought the position and started talking to them and negotiating about what change looks like. We were already willing to risk the capital, knowing they were willing to make changes.

And it was, it was a good, mutual decision. You don't see that a lot. There wasn't a ton of fighting or anything; it's kind of like we can do this the easy way or the hard way, and nobody wants to do this the hard way because it's going to be painful and expensive and time-consuming and all those things.

And then it was over, maybe six or eight weeks, that we figured out, let's Wilkie step in, we'll go on the board and then go off to the races.

Chris Powers: When you first bought the position, though, did you think that's what it would end up, that you would be c e o, or is that really what evolved over six-day weeks?

Wilkie Colyer: I didn't know that by any stretch of the imagination. I knew that we needed change in the organization. And I didn't necessarily know whether that was who and what that looked like, but we knew that there needed to be a lot of changes At some point during that six or eight weeks.

I told John to look, and I could take this project on. Many of my other projects are winding down or in cruise control to some degree. I can still help with those things but I can turn this around. And he said, go for it.

Chris Powers: Okay. You've done all the pre-preparation work of your career from 2007 to 2017.

I envision that video of Tiger Woods where he comes, and he is, hello, world. So you get announced, CEO, you've managed one person before. That's just an extraordinary story. So what happens, like when you become CEO, you have to learn; I'm now CEO of a big organization. How did you do it?

Wilkie Colyer: Yeah, we weren't that big at the time. We probably had 25 or 30 people in the office down in Houston and another 40 or 50 out in the field. So it wasn't tiny. It was much, much bigger than any other.

Chris Powers: Yeah. It's more than one workforce.

Wilkie Colyer: Yeah, exactly. It's way more significant than the one that I managed before. I knew it would be hard, but I knew I could do it or was convinced I could do it; maybe I needed to be sure.

Chris Powers: That's awesome.

Wilkie Colyer: I was the best-positioned person to do it then.

I wasn't the best but I may have been in the best position. So I went down to Houston, and we went to a board meeting, and then they announced the change in position the following day. So then, for the next 15 months, the focus was step one: let's get our arms around the assets and where we're positioned in the market.

And step two is we have to cut a massive amount of GNA out of this business if we survive. And I knew it could be done, but I needed to figure out how I would do it because there's only so much you can know from public filings. I spent the next 15 months; the day I started, my oldest daughter turned five months old, so I was down in Houston for the next 15 months; I went down to Houston on Monday morning and returned on Friday.

I didn't see anybody there for a while, but it was a lot of work. I spent many hours at the office trying to soak up as much as possible. We had, and this was a thing that I underestimated, just the relationship with the bank group.

That was our main credit line at the time. It was not good. There have been missteps, and I understand Lender's opinion on some of that. They're in the first loss position, have capped upside, and it is what it is.

You have to figure out how to get them to give you enough time to turn the ship around, so we cut GNA by between 40 and 50% and 12 months. And it was the right size for a position where we could succeed. We needed a scale, though.

And look the goal with this: once we got in there, we felt there would be a lot of carnage in this business. And what better way to take advantage of an industry that needs to consolidate than just being the consolidator? Now if you're going to be the consolidator, you have to be willing to be consolidated.

And our ownership position gave us a lot of street cred in was, look, here to run this, and we can consolidate up many assets at the lowest point of a cycle. But somebody comes to us with the right offer. The situation is money's money, and we want to make money on the investment that we've made. So we did that for about 15 months.

Chris Powers: You aligned you guys, because we, you said a second ago, like a lot of these businesses create misalignment, and I don't know if that's like an oil and gas industry thing or if you see that pretty much in public companies across the board, but I think one of the unique parts of your stories, I want to skip over it, is how the incentives and alignment you created at Contango that was pretty much different than the rest of your peer sets.

Wilkie Colyer: The first thing I did when I stepped in was cut the CEO's salary in half. And we've tried to maintain that mantra at the C-suite in our company ever since: if you're here for a salary, this is not the right place for you. Yep. I had a lot of my money that I had put in, and that was one thing I learned from day one with Goff: I started once I got enough, Confidence to start going and pitching ideas.

And I didn't know what I was doing. I was in sales mode, and John, if he liked one, he'd go, okay, how much money are you putting in it? And I don't know. I don't want to talk about anything you don't want to put your money in. And that was a huge learning lesson for me.

And something that I'll always have as a big thing for me is alignment via ownership. If people are putting their dollars in, that's big. Now, you can only ask a small percentage of your workforce to do that in a business like this. We create that alignment via long-term incentive plans, whether stock grants or PSUs, like stock grants, but with a little more leverage. Please do well and not good if you don't do well. And I'm lovely with making those bets. So that's something that we continue to this day. And I didn't even ask once I got in there for a couple of weeks, and anytime somebody said, let's talk about compensation, we're not there yet.

I don't like it, and I got so much stuff to fix right now. Let me focus on this other stuff, and we'll return to that. And so there was such a trust factor between me and Goff that I never worried about it. At Goff, we only really had something on paper. It was, here's your salary, and we'll figure out how we did at the end of the year, and we'll figure out how we divide that up.

And I never really worried about it because we might disagree, but I knew he would treat me fairly, and I trusted him. So I had no stock options when I worked for those years. I didn't worry about it. I knew we'd figure it out.

I knew I would be compensated for it if I did well. But, we try to do that in the company now, and the company, when it was standalone, the long-term and center program, we wanted to make sure that every single person in the company, from lease operator, pumper, all the way up to the C-suite was getting ownership in this business. And we wanted them to be thinking like owners. Because it's the most important thing, people can think about other than being safe.

Chris Powers: Okay. So you cut overhead, you spend 17 months or 15 months turning around. Compensation incentives are right now. What's happening?

Wilkie Colyer: Yeah, so at this time, the market's getting nasty, and it's funny, this was in 2019, so it wasn't even like prices were really that nasty, but the bank market was nasty. So this was pre covid. But we're starting to see many of these businesses that, in general, borrowed money to drill, and they drilled in the wrong places, which can get you turned upside down quickly in oil and gas.

And We see many of these situations, and at the time, I'm talking to who's now our president, Farley Deakin, a ton about this. He took over a distressed situation that banks essentially owned and worked that situation out. And so he was suddenly in the oil and gas business; his entire career had been turned around and restructured but as a service provider.

So he'd swoop in when XYZ private equity company had a second lien about to blow up because the company was either fraudulent or underperformed and had to figure everything out. So he was used to being in that chaotic environment. And again, I do things well. One of the best things I do is see where we need to go in chaotic environments rather than running for the hills. And so I'm talking to Farley, almost every day, about things we're seeing, deals he's working on, deals I'm working on, and we ultimately decided, why don't we put these two things together?

We'll buy your business; you come on and help us. There was going to be a lot of distress at the time. And so we knew that his skillset would be different. That whole turnaround restructuring business is very cliquey, and as distress will move from industry to industry, so the people that, the players in those industries are typically not the best people to understand how to capitalize on.

Bankrupt businesses, right? Because they don't know the rules of the game. They know the rules of the game they are playing, oil and gas operations, but they need to learn how to deal with the bankruptcy court. So we bought his business, brought him on, and a deal that he was bird-dogging at the time was white star petroleum.

Chris Powers: And so you have to tell the whole story.

Wilkie Colyer: I will.

We signed the deal to buy his company and re-rack our business with a new credit facility from JP.

Chris Powers: And can I stop you for one second? Because what we're about to talk about's essential; what is the mission of Contango like, what are your goals, and how does it differentiate you from other upstream operators?

Wilkie Colyer: Good question. Most of our focus is around The acquisition of assets, which tend to be lower decline and more mature, in basins all over the country. We are conventional Permian, conventional Wyoming, and then the mid-continent area.

But we try to be reactive to value. Now, we're not going to buy a million-dollar deal in California because we don't; if it's some brand new area, we need a little bigger deal to put a beachhead there. But we tended to buy production.

And what we noticed was if you look, if you analyze the GNA of a lot of these businesses, at least at the time. It's still the case; The GNA is so heavily skewed towards your development capital, so your geologists, big land teams, land brokers, drilling engineers, and completion engineers.

Like the amount, the percentage of GNA spent on development capital is massive, 80, 90%. And we're looking at the market and the valuations, and we're saying, look, most of these companies, at least the ones that aren't in the Permian or some sexy basin, are trading at or below PDP value.

So why would you have all this GNA unless you were just really, and look, if you're convicted that I can drill a bunch of wells and create better value than via acquisitions, then you should do that. That's difficult to do in small companies. And we know guys who have done it excellently, but that's different from how we're geared.

If we buy a business, we should be able to cut 80 to 90% of the GNA out and keep all of what we want, plus all the call options on future drilling. And so that's the niche that we've tried to carve out is to buy assets, focus on trying to optimize opex rather than CapEx, which is, what not, what most people are doing.

And we're willing to accept higher lifting costs because of that. Typically these mature and conventional assets, lower decline assets, and white Star happened to be unconventional, but it was in terminal decline. We would go. We'd gladly trade higher lifting costs for lower capital intensity.

Chris Powers: And real quick, this is a dumb question. So you say we can take out 80 to 90% of the GNA, but we have, you said, the call options on future development. How would you develop it if you've cut out that GNA that already has the infrastructure built? You only need a little of it every time you buy a company.

Wilkie Colyer: Yeah, that's right essentially, so you know, if we're not doing much drilling at the time when we bought White Star, we were doing a little bit, but our view was we don't need three drilling engineers. The one we already have, who we like, can handle this.

And if we need to backfill with additional people, then let's do that. But in a lot of cases, you're buying leases that are HBP. And so, I viewed all those future drilling locations as free call options and the assets I am picking up. Some leases expire sometimes, and now you can't drill that, or you have to release it.

And that's a different equation. And some of that happened. It's bound to happen in some of these things. But we just found that the accretion to scale was very real if you can buy assets at a discount to what you view as the value of the production.

Chris Powers: Okay. So now we know what Contango does. Let's return to White Star because you're a white star if anybody listens. It's just an incredible story.

Wilkie Colyer: Yeah. So white Star, I mentioned earlier that Farley had taken some bad credits out of a bank, managed them, and stepped in as a fiduciary to operate those assets.

As you can imagine, they were in disrepair. Farley was able to go in with little oil and gas knowledge. Fix these things up and improve their operations of them. And so it was; I wouldn't call it a massive win for the banks, but it was much better than what would happen if he hadn't stepped in.

And so that was a minor deal. The White Star had, I think, 1,000,000,002 of invested capital; they had a 325000001st lien. They had a 50000002nd lien. So a ton of capital had been spent on this deal. And it was 18,000 barrels a day. And so that was a much bigger deal than he had done before.

But the bankers had talked and heard that Foley was working on this. So they asked him, do you think you could do that in this situation? Cause we may need to credit bid this. And he said, maybe, but why don't we? I might be able to get up and down the traditional way on this thing because we were talking, he didn't disclose that to them, but he said, I've got something I'm working on, might be able to get this done the traditional way.

Chris Powers: Which buy it?

Wilkie Colyer: Yeah, buy it rather than operate it. On the bank's behalf, So we announce our deal. We immediately scramble mode to determine how to bid on this white star asset. And one of the things that were very beneficial for having his distress expertise was that there was already an auction, and only one company qualified to bid on it.

Now, Farley went anyway, and they told them like, Hey, the bankers and, now we're talking about investment bankers who are selling the asset versus the commercial bankers who have had the loan in charge with the loan and trying to figure out how to maximize value on that so that, the investment bankers always want competitive tension, right?

You get one bitter. You're not getting anything. And we thought this thing would go away for a song. So the high bidder was at 115 million. And when they won that, the next step is you go to the formal auction where essentially all the judge does is hit a gavel and say, you now own this asset.

That team was offered the stalking horse position in this bankruptcy, which gives you many advantages. You get a roofer on the deal, but you're a little bit naked because you've already agreed to a price, and nothing can change between then and the auction. So this was an oil and gas business.

They turned down the stalking horse bid. And we would say stalking a horse is one of the best protections you can have as a bidder. And we would always want to try and do that if we're in a position to do so they had turned that down. So they lost many of the privileges they would get for that designation.

And we immediately went into how we qualified for this auction. And the banks want the investment banks to want us to get qualified, but they also don't want us to get qualified because if we come in and screw anything up, maybe they're, the deal doesn't consummate, and then they don't get paid. So we got them convinced that we could do this. And then they threw us a curve ball 36 hours before the auction and said, guys, this is great. We'd love to let you in. We need you to have backstop financing on this deal. And we were talking about this other group at one 15; we were going to bid 125, and they said we needed it in 24 hours.

And we went, guys, we can't do that. And we were convinced that the other group needed backstop financing. So we were trying to argue that nobody has that, nobody can get that right now. They did have it; we found out later, but, Sort of serendipity.

At breakfast, Travis Goff, John's son, ran into somebody who does that kind of debt financing, a different family office. And we tended to focus on equity at Goff Capital, but family offices are all very different. So anyway, this guy knew we were working on the steal and said, how's it going?

And Travis said we need whatever it was, 80 or 90 million of backstop financing in 24 hours. And he said I'll do that. And, like, literally, I got a call and was told to call this guy right now. And I called him, and we stayed up all night and got the dock sign. I went, signed the docks, hopped in an Uber, and headed to George Bush to fly to Oklahoma City because the auction was at nine o'clock the following day.

And this is the last flight out. It was like eight or nine o'clock. I was scrambling to get there and thought, if this flight gets canceled, I'm driving two options. I'm driving and can barely get there in time for the auction. So I will walk in without sleep, having stayed up all night.

That could have sounded better. Anyway, luckily, the flight took off and got to Oklahoma City; Farley and our attorney, who was Farley's attorney, he was working with Farley on the deal. They drove up that morning at four or five o'clock in the morning. So we all met up and had another call with the investment bankers that morning.

They tried to shoot holes through our backstop financing, and after some hemming and hawing, they let us in, but we had to get our wire in before the auction started, or it didn't matter. We needed to put up 10%. I'm on the phone with our CFO, and you know how wires go.

Who knows where they go? You hit a button, and then they're in Ether for, sometimes, five minutes. Sometimes it's five hours, and, so I'm just chewing him out, going, where is the, so anyway, the wire hits about 15 minutes before the auction starts, and our attorney's And he had told us a week before guys, this is not going to happen.

It is all of you have gotten a long way here. It's impressive. It is not going to happen. And he came up and said, guys, I think they're going to let all of you bid on this. And we had the element of surprise because the other group did not know we were coming. So we showed up unannounced and slapped a bit on the table for 125.

Chris Powers: And you're at the courthouse.

Wilkie Colyer: We're literally at the courthouse. And this was the first, and it's not a huge company, but the first big problematic bankruptcy that happened in oil and gas because the prevailing thought in the commercial banker community in oil and gas was that first lanes never lose money.

And if you looked at the lost history over decades, like that was born out. Now you don't want to go back to the mid-eighties. Because there were a lot of losses there, but if you start right after that, people had yet to see significant losses in the first lane for most of their careers.

Now we're talking about buying this for 125. The other group was 115, and the effective date was way back. That purchase price is much lower than what I'm talking about here. And so you're talking about, even pre-paying all the advisors and lawyers and everybody, you're talking 15, 20 cents on the dollar for the first lane, which is unheard of.

When the company was headed into bankruptcy, they tried to drill their way out of it. So not only that, but you also had 150 million drilling companies, completion companies, chemical companies who were all thinking that this company's okay, that had run up a bill and now became unsecured creditors.

There are a hundred lawyers in this room, and all 10 and 15 banks had two lawyers for every unsecured creditor. And our lawyer walked in and slapped this PSA on the table that was the exact PSA signed by the other group and said, we're at 125.

They didn't know what to say, but they pulled us into a room and said who are you guys? And explained to us where you'd get this money, we went, here's who we are, here's what we're doing. Unbeknownst to everybody in the room, Farley was still an employee, and the lawyer needed to be officially engaged with us.

We were all explaining who we were, and Farley works at Contango, and this is our lawyer, and this is what we're going to do. And let's go and, our lawyer's very convincing. He's perfect at kind of bankruptcy court and again, cottage industry, there's advisors and lawyers and bankers, and they all know one another, and they know how to play the game, and everybody else in the room, I would say, didn't know how to play the game as well.

So they came back to us and said, okay, we agree that all of you are bidders, but we're going to give everybody a best and final so you and the other group can come back and bid one more time, and we're going to do it closed envelope. We didn't like that because our view of the asset was that it was worth at least 175 million bucks, and we thought cash at close, if we bid, 125 would be 85, 90 million bucks.

So we knew we could drive a truck through what we thought this thing was worth. And prices were somewhat depressed at the time. They were much worse the following year. But we knew we had plenty of room. So we were let's do open outcry.

These guys weren't expecting us. They need the authority to decide what they're willing to bid. And so we want open outcry.

Chris Powers: What is the open outcry?

Wilkie Colyer: Maybe I'm using the wrong term, but literally where, we would keep going up in increments until somebody was unwilling to bid anymore.

And they did this closed-door thing, and We wanted to go up more because we were like, look, we really should get this deal. It is going to be a good one for us. And so we're in the bathroom in the courthouse called Goff, our board chairman at Contango at this point.

And are walking him through the math, why we need to go up, and how much we need to go up. And, he is, yeah, do it. So we're, playing all these games in our head, what are, what do we go to? And we went to 130 million and decided 130 to go there.

We didn't think the other group could go up that high with that, short of a notice period, and they might get 130 and $1 to try and tie us. So we went 130 million in $2. So we submitted, and the lawyers came back a little later and said, you guys were close and did a great job, but you have to outbid.

And man, that was rejecting. We had just killed ourselves for a while on this deal. But we went and got in the car and started heading back to Fort Worth. And we got to Norman, and for those who have been in Oklahoma, Norman's probably about 30, 35 minutes south of Oklahoma City.

And we get to Norman, and our lawyer gets a call from one of these unsecured creditors and says, do you know, do you guys know what the other group bid? I said no. And they said 130 million, 500,000. And our antennas were up the whole time because the other group was an Oklahoma City-based company. The debtor was an Oklahoma City company too, and that's a very tight-knit gas community.

We're thinking, yeah, I get that these people don't want, Three Texans coming in here, and I call myself a Texan now. I grew up in Atlanta, but Texas is my home now. They want us to come here and keep their assets and businesses neat.

And maybe we were being too cynical; the bottom line was that the unsecured credit said, look, if you guys are willing to go higher than 130.5, I will stall this hearing until you return. And we immediately get off, turn around, driving back above the speed limit.

I don't know what it was, but I was driving back well above the speed limit and screeching up to the building. And this guy's look, you only have a little time, but I'll buy as much as I can. Screech up to the building, Farley's driving. We're in his car and about to start running there.

And our lawyer says, Guys, I must go to the bathroom.

I said, you kidding me, Eli? You have to go to the bathroom. Can you hold it for a little bit? He's. I really can't. Alright, we'll run in there. Just make it as quick as you can. We run back into the courtroom. Now there's, all these hundred people are all in there.

They're, and the ladies, the judge up there who's a lady's, going, I guess this was not the judge, I'm sorry, this was the kind of head bankruptcy attorney said, we've run a whole and fair process. This oil and gas company is the highest bidder at 130.5, and we're ready to announce the sale to them.

And, I'm standing in the back, and the lady's about to say, hit the gavel, and I didn't know what to do. There are a hundred people in here. I need to learn how to handle a bankruptcy court. And so I just raised my hand, like I'm standing, I'm sitting in the back, and I just raised my hand, and this judge is like, Who are you, and why is your hand raised in my courtroom?

I don't know why my hand's raised, but I must slow down. Yeah, exactly, We do an elementary school. I'd try it here, and I'm fumbling through, but you need to hold on for a second. And then Eli comes running in and takes the same PSA. He writes 132.5 on it, slaps it on the table, and says, you know this was not a fair process.

We're ready to go at 132.5, and we're ready to sign right now. Does anybody have a problem with that? And the judge is very upset at this point, but the exciting thing about bankruptcy is that there aren't any rules at the end of the day. The goal is to get creditors the best value they can get them.

And they may not like it if you come in and do something you're not supposed to, but they have to allow it. And the lady's going, I wouldn't say I like anything that you guys did this entire process, but if you're at 132.5, we'll have to open this backup.

Because the sale's not final yet, and so then they, go back, everybody goes back to their corners and, we're about to do, we said, look, if they want to keep bidding, that's fine, we are, we're at 132.5, and we suggest in the courtroom light a day, no closed envelopes.

We just bid until somebody backs out. So the management said, yep, we're going to do that. We're going to start in 30 minutes. So then we go back out, we call a board meeting. Hey, how high can we go up here? And we talked through that with them, and we had some more room, but it was a little room, then the other company ended up just walking before the kind of open auction had begun. So we won the deal and went back outside; Farley's got a parking ticket on his car. It's framed in his office as we speak. That deal quadrupled our production. And many people, this was the peak in the Mississippi lime, and this is Peak Miss Lime hatred.

It's certainly not a tier-one asset, but it had a ton of production and cash flow. And funny the next week we went up there. Because part of the deal was, we signed that deal on, and I want to say, September 26, 2019. We had to close by November 1. And both groups had to agree, but it was our issue because this other group had already done a bunch of diligence.

We had to sign, we had to close the deal by November 1, or they were going to charge us a quarter million dollars per calendar day until we closed the deal. We moved to Oklahoma City for five weeks and entered the office the following Monday.

And we met with some of the technical team, who said, "Look, congratulations, you bought this asset. How many wells are we going to drill next year? And we said, Zero. We are drilling zero wells on this acreage. Not that we won't, but our first focus has to be optimizing Opex.

And what you found in this field in particular, but you saw this a lot at the time, were people had these extensive drilling programs. They were trying to build all their facilities ahead of all that. So all the compressor stations and tank batteries and all these things were biggie sized because they wanted to get to, whatever the number is, some massive amount, 50,000 barrels a day or a hundred thousand barrels a day.

And we just said, let's cut all that back. And to these guys' credit, that wasn't their guys and gals; to their credit, this was not a business model they had ever looked at. But, we cut 25 to 30% out of opex, which was an excellent asset.

And remember, we bought it on November 1, 2019. We were fortunate in that. I don't mind taking some commodity price risk, but at the time, it was such a massive asset relative to the size of our business. The best thing to do is maximize your borrowing base, which is how your credit facility is sized.

Because we felt, hey, we might miss some of the upsides on this, but as long as I have more money and more liquidity to buy more stuff, that's much more valuable than the potential upside to commodity prices. And luckily, we hedged that aggressively and then, of course, five months later, COVID happened, and we would've been in deep trouble if that was not hedged.

But, even even though it wasn't fully hedged. And our 2020 cash flow was well below what we had, modeled. But we paid 96 million bucks of closing on that and. We probably generated cash flow, call it 150 million on that thing, and it's worth a couple hundred million.

And we still need to drill a well there.

At that time, some wells were drilled but uncompleted, and they'd already spent 40% of the dollars to put a well online. And we still couldn't justify completing those wells at the time, given commodity prices.

What economics or type of curves were being run to support this investment decision? But yeah, that was the white star story, and I think it's, we do a pretty good job of being opportunistic, and yeah, that was an excellent example of that.

But also, again, he and knowing the lay of the land in a bankruptcy proceeding was valuable to us.

Chris Powers: I want to talk about the relationship with Crescent, and then I want to dig into just what's going on in the market today. But let's start with, okay, we're done with White Horse.

Oh, white Star. I keep calling it a white horse. Dammit. I picture Wilkie riding in on a white horse into this courtroom, hand raised, dropped a gavel. All right. How does everything work with Crescent? What's going on there? And then let's talk about the market today and how you're thinking about it.

Wilkie Colyer: Sure. Taking a step back, that was our first significant acquisition. We bought Farley's Business Will Energy, but that was our first significant acquisition, and then we made several more during 2020; all have turned out to be great. And it was all about just, are you willing to stomach?

Can you find the money, and will you stomach the dilution? And the dilution never really bothered me. When we bought White Star, I think our stock went up to, I don't know, 300-350, Something like that: $ 3 and 50 cents. By mid-2020, you remember, all the stocks went up like the first half of 2020.

And then all these oil and gas companies at least got crushed in the second half. We're bidding on stuff. We're winning because we're the only guys on some unsexy assets with the money to close.

Chris Powers: And why were they unsexy?

Wilkie Colyer: if people had assets they liked, they just weren't for sale.

In 2020 we were able to buy some stuff that was bank owned. And I think Banks at the time were, Hey, get this off our balance sheets. Like, I'm tired of talking about assets that we own, and you have these big syndicates of banks, so nobody has a ton of exposure for the most part in these individual deals.

And we were able to wrangle some of those things at a time when, you know, that's the tricky part about, and, I'm sure you know this in real estate when the shit hits the fan in the market, people don't want to sell anything. And that's why it takes time to capitalize on that.

That's another reason why I like the public markets because there are always ways to capitalize on distress. Because there are people who are panicking, businesses tend to do a better job of not panic selling, and we own, we were targeting low decline but very unsexy assets and large bank-owned in that 2020 period. And they just wanted to, and they needed to focus on their more extensive credits, and they're more make sure those are okay. And there was a willingness, with some things, to dump them at whatever price you could get.

Like the Grizzly acquisition we did, that company had already been bankrupt twice. And now the bank zoned it, and they're going, get this out of here. But, our stock was at a buck 50 or a buck 40 doesn't feel good to raise capital when your stock is zoned, whatever, 60 or 70%.

But, doing that was a ton of accretion to our business. And so, that didn't worry me at all. Confident investors don't look at it that way, and I struggled to see their point of view on it.

Chris Powers: What would be their argument?

Wilkie Colyer: You raised capital at $3.

Why are you raising capital at Buck 50? And my argument would be if Exxon's for sale at a billion dollars and our stocks at 25 cents, I will raise the money to buy it because that's massively accretive to our business. That's an extreme example, but it's all a relative value, right?

When you're in, particularly in the public markets, in the private markets may be tougher to say, I'll price Something 50 cents in the whole if your investors are surprised to find out there to be a 50 cent in the whole deal. But in the public markets, everybody knows where everything's straightened daily.

So it's, it's like the market therapy is there. So we had put a bunch of capital to work. We had bought a couple hundred million dollars worth of stuff by the, call it, by February 21. But we saw two things happening. We saw that there might be a bifurcation in the future where there were haves and have-nots, and our view was the bank market would continue to be very challenged.

And we were trying to upsize our facility because we had bought all these assets. And I mean, we're knocking down doors all over Houston, trying to get big banks to come into our facility, and, they're spending two months on things and then coming back and saying, we can come in for 5 million bucks.

And it's yeah, that, that's just not, we can't spin our wheels like this. So then we said, okay, because I always like the bank debt market better than unsecured.

Chris Powers: Why?

Wilkie Colyer: Because banks don't want to own your assets. And distressed investors do in many cases. So you've got a, I won't say, a friendly counterparty, but you've got a counterparty that is more willing to work with you to work out a solution.

And look, I was on the other side of the table when I owned those bonds that, 30 cents. It was like, we're willing to listen; I'd like to get paid off at par when this thing matures, and you've got the asset value to do it, so do it. So bank market wasn't going to work.

So we're talking to our investment bank relationships about doing a bond deal, and they're saying, yeah, you're a first-time issuer. You're small. You're looking at eight to 9% of your initial bond deal. And I said that's, keep in mind bank debt at the time is 3%.

So that's a big delta. And we would look at many of these companies that had bonds in the market, particularly some of the, I would call them, Lower quality investment grade businesses, and I'd look at their credit metrics. We were better on every single metric. Cause, at the time we bought all this cash flow, we hadn't been spending a bunch of money; we had been banking it and raising our credit facility.

And so, at the time, we had driven our leverage ratio down to half a turn or something. It was shallow. So I'm going, how come these guys are born at three and a half percent, and I have to borrow it eight and a half percent? It's size, and size is the only differentiator here.

So we were like, okay, that's an option, but let's get more prominent like we need to figure out how to get bigger. Because if we can get to investment grade and we can keep buying the same stuff that we're buying, which we think we can buy at a higher discount rate just because there's less competition, but we can do it while borrowing money at a much cheaper rate That's going to be a significant competitive advantage for us.

So we went and met with all the private equity firms down in Houston to talk through, look, we need more capital to scale this thing. We've got a good business model. We've got a unique business model, but we need a partner.

There's only so much that Goff can do, and it was Goff and his, a lot of his ecosystem, funding many of these deals. And so one of the groups we met with was KKR, and KKR had their fund one business, which they were interested in doing something strategic on.

And so we looked at that and said, this is a big business here. It's A couple of billion dollars. And at the time, our market cap was, I don't know, eight or 900 million, something like that. Maybe a billion. I know it was a billion off and on. But, we could create something here that allows us better access to the bank market, that bifurcation between the haves and have-nots.

And then we can also have good access to the debt capital markets, which is where we need to get if we want to scale this because the bank market will get a lot smaller. And so we need, the idea is really to use the credit facility as acquisition financing, and then you term it out in the bond market.

Now you have a fully undrawn credit facility and can use that for acquisition. So that was the thought process. Now look, then, I won't call it a downside; their expectation was if we're going to merge these businesses, then you got, we're going to run it.

As guys who had a big chunk of our net worth, most of our net worth into this business, all I care about is maximizing the value of our assets. And there were no social issues. And back to your question about kind of incentives, many social issues exist because there's not that same level of alignment in certain instances.

If you don't own any stock and make 3 million bucks a year in cash running a business, why would you entertain doing anything until somebody kicks you out? It's apparent to me. And I think it's something I certainly learned on the buy side doing, in investing in public markets that you didn't find a lot of, and this is everywhere, but, just an example, people do not, they way underestimate the power of incentives. I'd have a guy call him to pitch some of the parts on this; it's worth three times; what is trading at right now?

And I'd go, okay, I may believe you on that; this CEO e o makes more money in a year in cash than they own in the stock. So what incentive does he have to sell off assets to realize you're the sum of the part's valuation? If it's going to put him out of business like he's not going to do that. So it only matters what the assets are worth once somebody can, somebody with an economic incentive here to do something, does something.

And that's pervasive across the world. Munger says I understand incentives better than he thinks anybody in the world, or the top 5%, was his quote. And I've underestimated him my whole life, which is very accurate.

So we did the merger with them. All of the fund one asset and all of our assets were combined, creating Crescent Energy, which was a nod to John Goffs. His real estate business was Crescent Real Estate. So that was a nod to him. He became the board's chairman, and they're operating subsidiaries underneath the team who manages that crescent energy business in terms of the public companies. So they manage bank relations, debt, capital markets, investor relations, equity, capital guidance, SEC filings, etc. And then also shared services, it, accounting, that kind of stuff.

And we are an operating subsidiary, and the two most prominent are ourselves and Javelin Energy Partners. There's also a mineral business that's underneath there as well. But those are the two big operating businesses. And we like the complementary nature of those two.

We're buying lower decline assets with much longer tails but may have fewer capital reinvestment opportunities. They're still there but need to have as big of capital reinvestment opportunities as other businesses in the industry.

On the other hand, Spear does, what they call mid-cycle shield development, which is, they're not going to try and pioneer a new play or anything. Still, they'll go into fairly well-understood plays and then invest capital in drilling completion and development of those assets. But they're much higher decline.

We think yin and yang between our assets and their assets are very complimentary. And one of the things that, and I'm not involved in the public company, but for being running one of the operating subsidiaries.

But, one misunderstood aspect about Crescent Energy is that our decline rate is much lower than the rest of the industry. People may have lost sight of that in general in the industry just because all the companies look so homogenous in terms of what they are because they're all unconventional. You must keep spending money to keep production from falling off a cliff.

And maybe that needs to be better understood in our business. So we operate an operating subsidiary, as I said earlier. We're always very long-term incentive focused, but now our long-term incentives are tied to the performance of our assets versus the entire public company and all the subsidiaries.

Chris Powers: You've dealt with analysts and understand the public markets well now; as you said, people need to understand that we have a lower decline curve than our competitive set. You're saying that it's probably in the shareholder letters. At what point does the market like understand that?

Is it an, like, why wouldn't an analyst pick up on that and how to do it eventually, even if it's related to this or any company that needs to be understood?

Wilkie Colyer: Yeah, I mean, it's a great question. When we were standalone Contango, we had one analyst. It took us a while to get one.

We were proud to have one. And the analyst was a great one.

Chris Powers: And you get one, you, so you talk to all the analysts and say, somebody please cover us.

Wilkie Colyer: Yeah. And indeed, for that first one, it was like, Hey, I don't need JP Morgan to be the first person making up because they have no interest in covering this.

There's not a lot of floats and all that. But you can go to some of the smaller investment banks. And pitch, if you're early on this and we're right, then you're right. And that's when people can make. Your clients can make a lot of money, and you can hit it out of the park regarding your career development.

If you're the first person calling out a business now, it's riskier. But, if you can convince somebody, Hey, being early will be beneficial for you here. And, but it's a much more complex business to model and to value, I think, because we would say, yeah, we've got capital, we've got places to redeploy capital, but the principal place we're going to focus is on inorganic.

Because if I've got drilling inventory that is HBP, I have time to develop that. I will only have time to pick up some of these distressed assets when the market turns around. So I want to focus on that right now. But that's challenging to model. So they say, okay, what's your decline curve?

Let's keep GNA flat or even inlining, and we'll decline your production like a PDP Blowdown. That doesn't work. If you're doing a PDP Blowdown, we would've needed to cut GNA substantially to ensure that most of that value and cash flow would go to shareholders rather than being liquidated into the hands of GNA.

And they'd say, how do we model it? We're going to make accretive acquisitions, and that's how this will become a bigger and bigger company. And that's just not easy to model. It is easy to model if I had 10,000 acres of land and a type curve, then I could hand it to the analyst and say, we got 2,000 sticks that we can drill here. We will run three rigs and throw them in your model, and you'll get a neat number that pops out. And that's what people and that's, and it's not easy. It's complicated Excel modeling, but that's the industry standard.

So everybody knows how to do that. And it's straightforward to have a neat PV number that looks big if you do that. It works every time. And so that's a specific business to pitch as a sell-side analyst. Ours is much more different.

Chris Powers: But if you hand them your model and say, start telling people about this model, are they, do analysts tend to be hesitant and say, We still want it to be our model, we can't trust it.

Wilkie Colyer: Yeah. We couldn't hand them our model. You've got all sorts of restrictions around that. They need to put together their model. We can answer whatever questions we can. But if we deem anything material, we must file an eight-k to inform everybody else.

So you can't handle your model. But yeah, look, we're a unique business, at least in the upstream space, be it Crescent, we're new, a structure that is not typical upstream. But it's typical in REITs, private equity, and tons and tons of capital in these structures.

And by the way, KKR currently controls the vast majority of shares. They effectively control the company right now. So what difference does it make if it's formal or informal? And, if we think they'll be able to sell the story, and over time, you'll get new shareholders who believe in the story, which will, by definition, dilute the rest of us down.

But we're okay with that. That's what we must do if we continue to consolidate and use this balance sheet to scoop up assets over the next five or ten years while you still have a lot of noise in the market.

Chris Powers: All right, let's spend a little time here.

I was having lunch with somebody the other day, and they said, you could tell the world that you own a business in the porn industry, and they'll like you more than if you tell them you own an oil and gas industry. Do you have any optimism, or what's the current temperature or optimism that capital flows will come back into fossil fuels?

Or is it going to get worse before it gets better? Or does it ever get better again?

Wilkie Colyer: I wonder if it gets worse before it gets better. That's always stuff to tell. I've always found I'm everybody, but I'm much better at figuring out what things will look like five or ten years later than six months.

I'm terrible at that. Almost everybody is, whether people tell themselves differently or not; the longer term is easier to see. And from my purview, having a lower carbon footprint and a lower environmental footprint and being safe is very important for any business, but certainly for oil and gas.

And oil and gas didn't do an excellent job of that for a while, and they didn't worry about it. And now, people are focused on it, and we see no contradiction between being able to operate older assets and doing it safely and environmentally friendly.

Let's make this asset better than it was before. And the flavor of the things we buy is typically either distressed or something owned by a vast company that focuses on it less. And in both cases, we can put some TLC into that, to say either they didn't have the resources or capital resources, or they didn't have time.

And in either case, we can go in. And invest the time in understanding how we operate this responsibly, do methane flyovers, and try and retrofit your tank batteries so that your spills are less likely. And things like that.

It's not, they're not big dollars, but they're impactful, on your ability to operate, in an environmentally friendly and safe way. And that's important on the alternative energy side. Where you are right now is the topic du jour for two reasons.

If we could be solely powered by wind, then that's a lower carbon footprint. It's tough to tell, but I agree that, if possible, it's probably a lower carbon footprint. Now, again, you have to build the giant windmills, how long those things last, and what happens when you junk them and all that stuff.

Those are difficult questions to answer, but particularly for people who are not, there's a desire from everybody's standpoint to do this more responsibly. Now, some people would say oil and gas are bad.

I don't want anything to do with it. I only want alternative Energy. And there are two problems with that. One is that the incentives are in place to where you're misallocating capital. So, whether it's wind, solar, or geothermal, those are great options for some regions.

But you can't just say, if we put a wind farm, Everywhere in the world, it's linear. So if it works here, just do it a thousand times, and then we can power the United States. There are areas where the wind doesn't blow. That's something that you need to think about.

But if there's a ton of capital flooding and then there's a bunch of government incentives to try and incentivize development, you may put things where they don't need to be. But it makes you feel good. And we need wind, and we need solar, we need geothermal.

We need to focus on the areas where they can have the most significant impact or the highest utility because we will need all of them. And we're going to need all of it. And oil and gas are going to be a big part of that. People will have to accept a lower return and alternative Energy for the most part.

And if you're not reinvesting any money in the, at least right now, the best bang for your buck, be it oil and gas, those are the most efficient ways to power homes, cars, and everything else. Now again, maybe you'll have a better answer in the future, but starving an industry of capital when it's the most efficient way to power people's homes and get them to work is not a good answer.

We need to have a rational discussion about this. And it was Mike worth it at Chevron that said it's not wind or solar or oil and gas. It's all of the above. We need all of the above. And particularly in developing countries, you think about even natural gas, like the infrastructure required to power a country with natural gas, which we have here in the United States, and it's great.

That's only feasible in Africa right now. No, the energy density of petroleum is just much, much higher than natural gas. Maybe we'll get there over time, but when you've got people burning dung as their energy source, that's less than oil.

And the world needs to be focused on how you bring the most people out of poverty. And that's cheap Energy, period, end of the story. Cheap Energy is the answer to everything. And people have taken their focus off of that. And again, we need to be responsible and view being a responsible operator as your entry cost into being allowed to be in the industry. But until a more rational discussion about what is needed and realistic, oil and gas prices keep increasing. Because until that happens and you have people focused on deploying the amount of capital into this industry that is needed to help power the world's growth and get people out of poverty, prices will keep going up because supply will be constrained.

Chris Powers: Yeah. It doesn't have to be a transition. It's like you said, it's all the above. The word transition makes it seem like we have to get off one and get on the other.

Wilkie Colyer: We haven't seen any unintended consequences yet. People talk about them a lot now, whether it's lithium mining or all that stuff, but you still need to learn.

Chris Powers: Yeah. All right. If we take America, there's a lot of talk on demand, but where will all the supply come from? Is the Permian? It's, again, from somebody on the outside looking in. Just reading it, we know how much oil is left in the Permian. Tier one technically has been drilled.

Where else will the supply come from?

Wilkie Colyer: Yeah, it's a good question because Shell has been the majority of the world's supply growth for several years and is running out now. Are there Shells that are prospective for oil and gas in other countries?

Absolutely. But it's not easy because nobody owns their minerals in other countries, and many governments are now very hostile towards oil and gas. So I, you can't see that type of production growth that you saw in us. They're not, the countries aren't as commercial, and property laws must be better developed.

And then again, the most important thing is that there's no mineral interest or private ownership, which drives much of that incentive to develop. I don't know. We'll figure it out, and it goes back to the above. But what's going to happen is you go, you drill all the tier one locations, and those do great at 70 bucks or maybe even 60 bucks, maybe even 50 bucks, I don't know.

But once you finish drilling those, you have to drill your tier two locations, and you're spending the same money or maybe more, but you're getting less yield. So your type curve's going to be lower. So you're, drilling, you're lifting costs on a DNC basis is going to be, let's say, it doubles or goes up 50%.

People will continue migrating from tier one to tier two to tier three. But by definition, the only way to do that is if the price is at a level that incentivizes them to drill their tier two in tier three locations because they are less economical if you leave the price flat.

And then the most significant thing, the biggest thing to me, Back to all of the above, is unclear. That's something that is just a fascinating history of nuclear Energy. There were two different predominant technologies, and they went with the fusion in a pressurized container.

They did it because the plutonium that you're creating was weapons-grade. You can create this plutonium for power plants and nuclear bombs. And that was where the fork in the road, that was the direction they went. I think there are safer ways to develop nuclear power now.

Are they as well developed? Because it has been many decades since people put capital into them. But that's starting to be a big focus area, for several competitors are playing in that space. I certainly have my opinions on that.

But the reality is they're all somewhat immature. But that can be figured out in the next decade or two. And you talk about the greatest gift to the world that could be invented, its safe nuclear power.

And it will get done, and it'll happen in our lifetimes. I may be wrong; if you consider that a fundamental transition fuel, we have plenty of time to reach that spot. And to me, it's not the only answer because, again, we will need all the above for a while.

But to me, it's the best answer.

Chris Powers: It fills the most significant gap. Why do you think someone like Elon Musk hasn't noticed it? He is focused on batteries with how smart he is and how obvious, not just you, but much of the conversation is like nuclear is pretty apparent to many people. It only fits some of the agendas because it can't be weaponized as much, but why would somebody that everybody looks to like Elon be the savior of Energy? Why do you think he's put no even words behind it?

Wilkie Colyer: It is a great question, and frankly, it's one that I've thought about, and I don't have a good answer for you on that.

He's got a big bet on EVs and batteries. That's probably it, and there are a lot of incentives there to see that through. But I wish I had a better answer for you than that.

Chris Powers: All right. Last question. On the industry, is there anything related to upstream, like technology-wise, we had fracking, whatever it's been, 20 years or something like that?

And correct me if I'm wrong, but When we drill oil out of the ground, even if it's fracking, not a hundred percent of it comes out. Even 80% of it's still left in the ground, something huge.

Wilkie Colyer: More and unconventional. If you look at the primary kind of conventional development, right?

You can get 15, 20. But if you're talking about unconventional, where you're going down and fracking and drilling horizontally, you know it's in the single digits.

Chris Powers: Okay. So there's this excellent argument that there's still, it's not that we're running out of oil, we're running out of technology to get oil out of the ground.

Is anything cool going on that could say something will come that can get us another 15%? You've recreated the industry again.

Wilkie Colyer: There are some things people are trying. EOG is always thought of as being on the leading edge of technology in the industry.

And I have a ton of respect for those guys. They're very secretive for the most part. They don't talk about what they're doing, but I know in Eagleford people were working on, they call it a huff and puff, but it's an enhanced oil recovery technique on their Eagleford assets.

They were working on that; a year or two years ago; juries are probably still out on that, but something like that could be exciting. And not that we're going to pay for it, but if you think about buying unconventional assets like a white star, that may not be, in the best basins, that's a coal option you're buying too, right?

So there are things like that, and people always say we're running out of oil. We're not running out of oil; they mean we may be running out of oil that we can economically produce at this price. But until we find a substitute for the actual commodity, prices will adjust to whatever the capital costs and the business's cost structure to produce the amount of oil the world demands.

Chris Powers: All right. I want to bring it back where we started. I have two notes I've been staring at since we started, and then we'll bring them home. The first was you started in the public markets. You said there was a period in 2014 where it just became apparent that you would go all in on oil and gas for a while, but before that, you had been a generalist.

When you and just in like the conversations we've had at lunch, it's evident that you understand the business well when looking at an industry-agnostic investment opportunity. What are things happening in businesses that excite you to say, I should pay attention to this?

Wilkie Colyer: Yeah, that's very much stylistic regarding the answer. I talked about earlier; I'm more of a contrarian by nature.

Chris Powers: Were you taught that, or you've always been a contrarian?

Wilkie Colyer: I was taught that at Goff Capital, but it was something that I was always easy.

That was the way I

 always was; I just was able to learn it in a business sense. And so I've found that I can do well in Cyclical Industries because there's a lot of panics when things go wrong. The other nice thing is I don't necessarily have to dig into a company that stock's been doing this for a while.

There are a lot of things that do that for a while. Everything goes up, or most of the market goes up over time. Most companies go down over time; the winners more than make up for the losers. So that's why you see the S and P doing this over time.

But that makes it easier for me, whether it was Goff Capital or my investment, which I still like to do and am passionate about. I need more time to dig through thousands of companies so it's easier. And even at Goff Capital, with a small staff, it was easier for me to be reactive.

So oil's gone from a hundred to 50, and the stock's gone from 12 to 50 cents. The market's pricing it as if it's going bankrupt. Let's dig in and see whether it's going bankrupt; if not, it will probably go up by multiples. And that's another thing I focus on is, can I buy something that I can hold for at least a decent amount of time so I'm not paying short-term taxes on it?

And then, is it something that I could see being a multi-bagger? Because that can make up for many mistakes if you're right on one of those. Now there are other businesses that, for one reason or another, I love the idea of, focusing on these high-quality businesses, and you buy it and forget it because it takes me the same amount of time to analyze and assess an idea that I can hold for six months is Something I can hold for ten years. But there's a lot more value in the latter. I'd love to find these businesses that are cheap and high quality. They're much harder to find, so I do a bit of that, but most of my success has been diving into a cyclical business when everybody's headed for the exits.

If you're the only guy running into the burning building, you don't have to be the most knowledgeable person to know what to do because you're playing off psychology. There are many things outside of industry knowledge that you can bring to bear. Like somebody who's a read analyst right now, they're looking at stocks that say, this is an outstanding stock, but it's not 80%.

I have no credibility with the people I'm talking with anymore because I told them to buy it when it was five times higher. And that's an extreme example, but that's what happens. You get these people with tons of industry knowledge, or they're hedge fund manager who focuses on REITs or runs a private equity firm that only focuses on office buildings.

You have the most knowledge, but you have all the scar tissue, and you're managing problems and trying to figure out how to make it to the next day. And if you can step into an industry that's just in disarray, you can have many advantages without being as smart as everybody else's.

Chris Powers: I love that all. I want to bring it back to Goff. From my understanding, he worked under Rainwater, and Rainwater has this prolific history of creating many of the country's greatest investors, maybe the world. And then you said, I went to Goff and just got to hang around the hoop.

And I was a young guy, a very similar pattern to how, like what is, what did you learn from Goff? What has he taught you? But one day, you're going to be Goff's age, and God willing, your career continues to take off. What is the magic of letting young people come in and hang around the hoop that takes the ball and runs with it?

It has been a unique pattern in this lineage of folks that keep coming out of the system.

Wilkie Colyer: Yeah. The first thing is intellectual freedom, and even when I was super green, I didn't know anything; I didn't sit there all day with a list of tasks that he wanted me to do.

It's going to do this and this, and you do all these rote tasks, clock out at the end of the day and come back the next day. There was never any of that, and I could have been more productive early in my career. That's the downside of that.

But, his view was, You're here to create value, and let me know when you see it. But it wasn't this thing where it's like, Hey, if you haven't come up with an idea this week, like I'm going to give you a talking to, you go months and months, if not a year, without coming up with anything.

And there was never this pressure to put money to work just because I have it or want you to prove yourself. And it was, we'll go anywhere and do anything, but we're looking for value and want to make returns and have some fun doing it. And that allowed me to look at many different things and industries.

Sometimes I'd spend a year in an industry and come back and say nothing is interesting to do there. And rather than saying hey, you just wasted a year of my money that I was paying you, it was great; let's find something else to do. That was a big thing for me.

And then the other thing and John talks about this a lot, about how, when Rainwater hired him, he wasn't quite sure why he had worked with him, but he was an accountant. And he says, Rainwater believed in me more than I believed in myself. And that has certainly been my experience too.

Sometimes I felt like, man, I don't know if this will work out. And, he's a vast cheerleader saying, stay focused, keep your head down, And that helped me immensely. And then the other thing going on there is that I'm in an office daily. I'm assuming this is the same way with Rainwater. Still, I was in an office every day for ten years with John, and he's a Very well-respected and almost mythical person in many circles. How he's been able to do deals, make money, and follow the legacy of Rainwater.

But, I was in a unique position to see, he's all that and more, but he is also a regular guy, and he has problems and solutions and bad days and good days, and so that taught me like, hey, yeah, I get it. John's intelligent and good at many things that I'll never be as good at, but there are other things that I'm better at, and there is no reason why I can't do what he's doing.

And that was my view. And once John spent time with Rainwater, he said the same thing. That guy does some great things. I do some great things. There's nothing inherently stopping me from doing, from getting to where he is. And I talk a lot about it.

The key to life is low expectations, but that's really for your expectations of others; your expectations of yourself have to be high; you will be happy if your expectations of everybody else are lower.

Chris Powers: That is a perfect way to end the conversation. Thanks so much for joining me today.

Wilkie Colyer: Thanks for having me, Chris. It was awesome.

Chris Powers: I hope you've enjoyed this episode of the Fort Podcast. Follow us on your favorite podcast platform or hop over to YouTube to watch full video episodes. Suppose that's what you'd prefer. For more information, you can check out fort pod.com.