1 00:00:03,960 --> 00:00:07,020 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. 2 00:00:07,080 --> 00:00:09,988 Sean Aylmer: We talk a lot about oil prices on this podcast, 3 00:00:09,990 --> 00:00:12,960 Sean Aylmer: but we've never really talked to an oil producer about 4 00:00:12,960 --> 00:00:16,769 Sean Aylmer: how the industry actually works. Brookside Energy is an ASX 5 00:00:16,770 --> 00:00:19,829 Sean Aylmer: listed oil and gas producer, but its operations are very 6 00:00:19,829 --> 00:00:22,170 Sean Aylmer: much focused in the U. S. David Prentice is the 7 00:00:22,170 --> 00:00:25,200 Sean Aylmer: Managing Director of Brookside Energy and the perfect person to 8 00:00:25,200 --> 00:00:28,920 Sean Aylmer: give us a 101 on the industry. David, welcome to 9 00:00:28,920 --> 00:00:29,639 Sean Aylmer: Fear and Greed. 10 00:00:30,480 --> 00:00:31,350 David Prentice: Nice to be with you. 11 00:00:31,830 --> 00:00:33,449 Sean Aylmer: Now, I want to get into Brookside, but can we 12 00:00:33,450 --> 00:00:35,340 Sean Aylmer: just take a step back? We talk about oil and 13 00:00:35,340 --> 00:00:40,320 Sean Aylmer: gas together, obviously very different commodities, though, energy commodities, but 14 00:00:40,320 --> 00:00:42,930 Sean Aylmer: different things. Why is it that we talk about oil 15 00:00:42,930 --> 00:00:43,470 Sean Aylmer: and gas? 16 00:00:44,370 --> 00:00:48,479 David Prentice: So I guess, specific to Brookside and specific to the 17 00:00:48,479 --> 00:00:52,979 David Prentice: onshore U. S. patch that we operate in, typically the 18 00:00:52,979 --> 00:00:56,130 David Prentice: oil and gas comes out of the formation together. So, 19 00:00:56,280 --> 00:00:58,860 David Prentice: explaining it in very, very simple terms, if you've got 20 00:00:58,980 --> 00:01:02,760 David Prentice: liquid with the gas suspended in the liquid and you 21 00:01:02,760 --> 00:01:06,899 David Prentice: start to bring that to surface, the gas bubbles expand 22 00:01:06,900 --> 00:01:09,809 David Prentice: and help to bring the liquid to the surface. And 23 00:01:10,469 --> 00:01:14,400 David Prentice: so there's a nice symbiotic relationship there between the two. 24 00:01:14,400 --> 00:01:18,420 David Prentice: And then what we do and what most onshore U. 25 00:01:18,420 --> 00:01:21,179 David Prentice: S. oil and gas producers do is separate the gas 26 00:01:21,179 --> 00:01:25,319 David Prentice: from the liquids on the location. The oil gets trucked 27 00:01:25,319 --> 00:01:29,459 David Prentice: to a refinery that's usually very nearby, and the raw 28 00:01:29,459 --> 00:01:33,240 David Prentice: gas goes into a pipeline, and usually the natural gas 29 00:01:33,240 --> 00:01:36,720 David Prentice: liquids, which are a high value product in that stream, 30 00:01:36,720 --> 00:01:39,449 David Prentice: gets stripped out at that point and the gas goes, 31 00:01:39,450 --> 00:01:41,849 David Prentice: in the U. S., into the national grid to be 32 00:01:41,849 --> 00:01:45,420 David Prentice: used and the liquids get sold. So, that's a very 33 00:01:45,420 --> 00:01:47,459 David Prentice: high level description of it. 34 00:01:47,459 --> 00:01:50,940 Sean Aylmer: Yeah. No, no, that's perfect. So, an operation like Brookside, 35 00:01:51,330 --> 00:01:53,670 Sean Aylmer: the costs are in... There seems to be lots of 36 00:01:53,670 --> 00:01:57,389 Sean Aylmer: costs there, but is it mostly in finding the oil 37 00:01:57,389 --> 00:02:00,179 Sean Aylmer: and gas? Is it in extracting it? Is it in 38 00:02:00,179 --> 00:02:02,909 Sean Aylmer: distribution? How do the economics of an oil company work? 39 00:02:03,150 --> 00:02:05,699 David Prentice: Yeah, so if you look at it, the most costly 40 00:02:05,699 --> 00:02:10,530 David Prentice: part really is in what I call the engineering part of the business, 41 00:02:10,530 --> 00:02:13,590 David Prentice: so drilling the wells to extract the oil and gas 42 00:02:14,280 --> 00:02:17,039 David Prentice: is the most capital intensive part of the business. The 43 00:02:17,040 --> 00:02:21,420 David Prentice: prospecting side of the business, which I think is arguably 44 00:02:21,480 --> 00:02:26,580 David Prentice: the most rewarding, particularly for the small EMP companies, you 45 00:02:26,580 --> 00:02:29,400 David Prentice: can do that on a relatively modest budget. That's really 46 00:02:29,400 --> 00:02:33,989 David Prentice: about good science, good people, good ideas and testing all 47 00:02:33,990 --> 00:02:37,859 David Prentice: of those things. But once you get into production, drilling 48 00:02:37,860 --> 00:02:41,100 David Prentice: these wells, they're typically $ 8 to $ 10 million each to 49 00:02:41,100 --> 00:02:45,030 David Prentice: drill. So, you're starting to spend big licks of capital, 50 00:02:45,270 --> 00:02:47,970 David Prentice: but once the wells are down, if you're in the right play, 51 00:02:47,970 --> 00:02:52,230 David Prentice: which we are in a good area where the reservoir 52 00:02:52,230 --> 00:02:56,040 David Prentice: quality is high and you're not producing any impurities, you've 53 00:02:56,040 --> 00:03:00,119 David Prentice: got a good high value stream, then the operating costs 54 00:03:00,119 --> 00:03:02,460 David Prentice: are actually very low. So once the well's down and 55 00:03:02,460 --> 00:03:06,060 David Prentice: producing, the operating costs are very low. So, in our 56 00:03:06,060 --> 00:03:10,440 David Prentice: case, we're talking significantly less than $ 10 per barrel of 57 00:03:10,440 --> 00:03:14,849 David Prentice: oil equivalent would be our ongoing, sustaining operating cost. So 58 00:03:14,849 --> 00:03:17,219 David Prentice: there's a lot of margin there once you get there. 59 00:03:17,760 --> 00:03:19,950 Sean Aylmer: Yeah. Okay. So Brookside Energy, where are you? Where are you 60 00:03:19,950 --> 00:03:22,380 Sean Aylmer: operating? What mine or mines do you have? 61 00:03:22,710 --> 00:03:25,950 David Prentice: Yeah, so we are located in a place called the Anadarko 62 00:03:26,250 --> 00:03:29,580 David Prentice: Basin, which is in Oklahoma. We're about a two hours 63 00:03:29,580 --> 00:03:34,169 David Prentice: drive south of Oklahoma City, quite close to the Oklahoma- 64 00:03:34,169 --> 00:03:38,280 David Prentice: Texas state line. And this is an area that's had 65 00:03:38,670 --> 00:03:41,520 David Prentice: 100 years of oil and gas exploration. It's a very 66 00:03:42,300 --> 00:03:46,709 David Prentice: geologically well understood area, and really what companies like us 67 00:03:46,710 --> 00:03:48,869 David Prentice: and some of the other bigger players that are active 68 00:03:48,870 --> 00:03:51,750 David Prentice: in the area are really doing is sifting through 100 69 00:03:51,750 --> 00:03:56,280 David Prentice: years of old data to look for areas that have 70 00:03:56,280 --> 00:03:58,620 David Prentice: been under exploited, so where we can go in with 71 00:03:58,620 --> 00:04:02,910 David Prentice: new technology and really recover oil and gas that previously 72 00:04:02,910 --> 00:04:04,710 David Prentice: wouldn't have been recovered by the old timers. 73 00:04:05,099 --> 00:04:06,900 Sean Aylmer: Stay with me, David. We'll be back in a minute. 74 00:04:13,170 --> 00:04:16,830 Sean Aylmer: I'm speaking to David Prentice, Managing Director of Brookside Energy. 75 00:04:17,640 --> 00:04:21,420 Sean Aylmer: The oil and gas we talk about, Shell, ExxonMobil, Total, 76 00:04:22,200 --> 00:04:25,469 Sean Aylmer: some of these massive companies, we talk about the big 77 00:04:25,469 --> 00:04:30,960 Sean Aylmer: guys here, Woodside, Santos. How do juniors, like yourselves, compete 78 00:04:30,960 --> 00:04:33,810 Sean Aylmer: in that? Is it about what you just described, going 79 00:04:33,810 --> 00:04:37,140 Sean Aylmer: through data and finding oil and gas that may have 80 00:04:37,140 --> 00:04:40,440 Sean Aylmer: been left behind? I'm just interested in why there are 81 00:04:40,440 --> 00:04:41,310 Sean Aylmer: so many companies. 82 00:04:41,580 --> 00:04:44,219 David Prentice: Yeah, look, I think it's the similar story to what 83 00:04:44,219 --> 00:04:47,519 David Prentice: you would see in the West Australian hard rock business. 84 00:04:48,390 --> 00:04:51,510 David Prentice: I guess the typical role of the small, junior companies 85 00:04:51,510 --> 00:04:56,849 David Prentice: has been really to do the work around that prospecting 86 00:04:56,849 --> 00:05:01,289 David Prentice: and proving upside of things. And that's typically smaller, more 87 00:05:01,290 --> 00:05:03,660 David Prentice: nimble companies are better at doing that than the bigger 88 00:05:03,660 --> 00:05:06,630 David Prentice: companies. So, the flip side of that of course is 89 00:05:06,630 --> 00:05:10,109 David Prentice: that once you do make a large discovery and you're 90 00:05:10,110 --> 00:05:14,010 David Prentice: going into more of the manufacturing part of the business, 91 00:05:14,010 --> 00:05:17,549 David Prentice: then obviously these big companies bring to the table some 92 00:05:17,550 --> 00:05:21,748 David Prentice: capital efficiencies around their cost of capital, their access to 93 00:05:21,750 --> 00:05:24,779 David Prentice: equipment, their buying power, all those things. So, there's a 94 00:05:24,779 --> 00:05:27,839 David Prentice: place for everybody in the market, and there's often crossover 95 00:05:27,839 --> 00:05:31,500 David Prentice: between the two. But generally speaking, it's a lot easier 96 00:05:31,740 --> 00:05:35,580 David Prentice: for a small company to have an idea, quietly go 97 00:05:35,580 --> 00:05:39,299 David Prentice: about acquiring the rights to the land that you need 98 00:05:39,299 --> 00:05:43,440 David Prentice: to test that idea without inflating asset prices too quickly. 99 00:05:43,740 --> 00:05:47,370 David Prentice: You can imagine if you're a farmer in Oklahoma and 100 00:05:47,820 --> 00:05:49,830 David Prentice: a truck pulls up in your driveway and it's got 101 00:05:50,010 --> 00:05:52,440 David Prentice: Exxon written on the door, you're going to think that 102 00:05:52,440 --> 00:05:55,499 David Prentice: you've won lotto and prices jump up very quickly, whereas 103 00:05:56,040 --> 00:05:58,379 David Prentice: a little white truck turns up with Brookside on the 104 00:05:58,379 --> 00:06:01,049 David Prentice: door, then people are like, " Okay, well these guys are 105 00:06:01,050 --> 00:06:04,260 David Prentice: having a go and let's have a conversation." So I think that's the 106 00:06:04,260 --> 00:06:06,810 David Prentice: general description of how that all works. 107 00:06:07,290 --> 00:06:10,740 Sean Aylmer: Okay. So, in terms of the challenges, and I'm coming 108 00:06:10,740 --> 00:06:14,940 Sean Aylmer: towards ESG and environmental challenges, just park how long oil 109 00:06:14,940 --> 00:06:16,469 Sean Aylmer: and gas is going to be around for, that's a 110 00:06:16,469 --> 00:06:18,868 Sean Aylmer: debate for others to have, that's fine, but just in 111 00:06:18,870 --> 00:06:23,640 Sean Aylmer: terms of getting the oil and gas out, separating it, 112 00:06:23,820 --> 00:06:27,870 Sean Aylmer: shifting it, all that, how much better is the industry 113 00:06:27,900 --> 00:06:31,109 Sean Aylmer: at that than it was, in environmental terms? 114 00:06:31,650 --> 00:06:34,470 David Prentice: So, look, enormously better is the answer to that. And 115 00:06:35,969 --> 00:06:38,729 David Prentice: it's frustrating for me sometimes when I talk about this 116 00:06:38,730 --> 00:06:40,860 David Prentice: subject, because I don't think the industry does a particularly 117 00:06:40,860 --> 00:06:44,219 David Prentice: good job at explaining how we go about our business 118 00:06:44,220 --> 00:06:47,790 David Prentice: and the safeguards that we put in place. And it's 119 00:06:47,790 --> 00:06:50,969 David Prentice: really useful to tell a story about the way we 120 00:06:50,969 --> 00:06:53,369 David Prentice: operate in Oklahoma. And this is the same for people 121 00:06:53,369 --> 00:06:58,589 David Prentice: operating in Texas or Colorado, wherever you might operate. Typically, 122 00:06:58,860 --> 00:07:03,089 David Prentice: you are operating on privately owned land, where the farmer 123 00:07:03,809 --> 00:07:06,419 David Prentice: owns the rights to the oil and gas. In other 124 00:07:06,420 --> 00:07:09,089 David Prentice: words, they're the beneficiaries of the royalties that come from 125 00:07:09,089 --> 00:07:11,969 David Prentice: the production of oil and gas. And you don't get 126 00:07:11,969 --> 00:07:16,260 David Prentice: to go and explore on his land without negotiating with 127 00:07:16,260 --> 00:07:19,170 David Prentice: him a lease to do that. And the terms of 128 00:07:19,170 --> 00:07:23,309 David Prentice: that lease are negotiated typically, what I call, the kitchen 129 00:07:23,309 --> 00:07:26,340 David Prentice: table leasing. So, you're sitting down at their kitchen table 130 00:07:26,340 --> 00:07:30,450 David Prentice: and you're discussing how you might go about exploring, how 131 00:07:30,450 --> 00:07:32,670 David Prentice: you might go about drilling, what kind of safeguards you're 132 00:07:32,670 --> 00:07:34,830 David Prentice: going to put in place. And ultimately, these people live 133 00:07:34,830 --> 00:07:39,839 David Prentice: there and they've probably got sons and daughters, or relatives 134 00:07:39,840 --> 00:07:42,030 David Prentice: that work in the oil and gas industry. They understand 135 00:07:42,030 --> 00:07:44,160 David Prentice: the industry very well. And so if you have a 136 00:07:44,160 --> 00:07:51,390 David Prentice: poor reputation for your environmental, social and governance, if you've 137 00:07:51,390 --> 00:07:55,290 David Prentice: got a poor reputation in that area, everybody knows. And 138 00:07:55,290 --> 00:07:59,130 David Prentice: so you just simply don't get a lease, because they 139 00:07:59,130 --> 00:08:02,790 David Prentice: won't let you in their front gate. So, it's hardwired 140 00:08:02,790 --> 00:08:05,759 David Prentice: into the system to say, " Well, you need to protect 141 00:08:05,760 --> 00:08:08,760 David Prentice: the environment. You need to have safe operating conditions for 142 00:08:08,760 --> 00:08:10,620 David Prentice: your workers. You need to do all of these, and 143 00:08:10,620 --> 00:08:13,950 David Prentice: you need to look after your local community," because you're 144 00:08:13,950 --> 00:08:16,320 David Prentice: going to be working with those people. Chances are you 145 00:08:16,320 --> 00:08:20,460 David Prentice: know some of them. So it's hardwired into the industry 146 00:08:20,460 --> 00:08:24,929 David Prentice: that we have to really protect the environment, protect our 147 00:08:24,929 --> 00:08:29,820 David Prentice: people, and behave responsibly in producing what is a very 148 00:08:29,820 --> 00:08:32,640 David Prentice: important energy source for the local community. 149 00:08:33,630 --> 00:08:36,780 Sean Aylmer: What about oil prices? So, a couple of years ago 150 00:08:36,780 --> 00:08:39,270 Sean Aylmer: they were negative, whatever that means. I suppose you're paying 151 00:08:39,270 --> 00:08:41,280 Sean Aylmer: someone to store oil, because there's so much of it. 152 00:08:41,490 --> 00:08:41,761 David Prentice: That's correct. Yeah. 153 00:08:41,761 --> 00:08:46,800 Sean Aylmer: Yeah. And then you get to $ 100 plus, or $ 100 U.S. 154 00:08:46,800 --> 00:08:51,120 Sean Aylmer: plus, a barrel. They're relatively high on a historical standard 155 00:08:51,120 --> 00:08:53,490 Sean Aylmer: now, that they have come off from where they were. 156 00:08:53,670 --> 00:08:58,978 Sean Aylmer: How does a company manage the ups and downs of 157 00:08:58,980 --> 00:09:03,090 Sean Aylmer: oil prices? Particularly, say, someone like Brookside Energy, you are 158 00:09:03,090 --> 00:09:06,238 Sean Aylmer: doing your thing, yet you don't know whether in a 159 00:09:06,240 --> 00:09:10,140 Sean Aylmer: year's time you're going to get $ 30 or $ 100. 160 00:09:10,380 --> 00:09:14,129 David Prentice: No, so that's a great question. So, I think where 161 00:09:14,130 --> 00:09:17,579 David Prentice: the industry lost its way in, what I'll call, the twenty- 162 00:09:17,580 --> 00:09:23,460 David Prentice: teens, was people felt like growth for growth's sake was 163 00:09:23,460 --> 00:09:26,040 David Prentice: the right way to go, and the market was rewarding companies 164 00:09:26,040 --> 00:09:28,828 David Prentice: for growth for growth's sake, and people lost sight of 165 00:09:29,370 --> 00:09:33,599 David Prentice: the economics. If you go back to the '80s and the '90s when prices 166 00:09:33,599 --> 00:09:36,569 David Prentice: were more volatile perhaps, and there was a lot more 167 00:09:36,570 --> 00:09:40,980 David Prentice: privately run companies where the investment capital was a lot 168 00:09:40,980 --> 00:09:43,828 David Prentice: closer to the managers of those capital, in other words, the people who 169 00:09:43,830 --> 00:09:45,749 David Prentice: were putting the capital in were a lot closer to 170 00:09:45,750 --> 00:09:48,929 David Prentice: the managers of the capital, then I think people were 171 00:09:48,929 --> 00:09:53,669 David Prentice: really focused on returns. If I give you a dollar, 172 00:09:54,029 --> 00:09:56,190 David Prentice: what am I going to get back? And I think 173 00:09:56,190 --> 00:09:58,170 David Prentice: we lost sight of that in the twenty- teens, but 174 00:09:58,170 --> 00:10:00,809 David Prentice: we've firmly got a grasp on it now. And one 175 00:10:00,809 --> 00:10:03,569 David Prentice: of the things that we did when we were doing 176 00:10:03,570 --> 00:10:07,108 David Prentice: our prospecting back in 2018, we first started taking our 177 00:10:07,110 --> 00:10:10,289 David Prentice: leases in this area in the Anadarko Basin, we said, " 178 00:10:10,289 --> 00:10:13,440 David Prentice: Look, we want to look for rock that's going to 179 00:10:13,440 --> 00:10:17,309 David Prentice: deliver a 10% rate of return when the oil price 180 00:10:17,309 --> 00:10:22,170 David Prentice: is $ 40 and the gas price is $2.50. And if we can do that, if we can 181 00:10:22,170 --> 00:10:25,710 David Prentice: find that kind of rock, then to some degree we 182 00:10:25,710 --> 00:10:28,799 David Prentice: will be immune from some of that volatility." And so 183 00:10:28,799 --> 00:10:32,040 David Prentice: that's the way to manage that. And that's not really rocket 184 00:10:32,040 --> 00:10:36,030 David Prentice: science. It's just something that the industry lost focus on, 185 00:10:36,030 --> 00:10:38,970 David Prentice: I guess. And we're firmly back in that camp now, 186 00:10:38,970 --> 00:10:41,849 David Prentice: where people are looking for a return on their investment, 187 00:10:41,849 --> 00:10:43,349 David Prentice: and in order to do that, you need to have 188 00:10:43,349 --> 00:10:44,309 David Prentice: an eye on those metrics. 189 00:10:45,270 --> 00:10:47,039 Sean Aylmer: We are totally out of time, but I'm loving this, 190 00:10:47,039 --> 00:10:49,078 Sean Aylmer: because I'm learning a lot. David, are you a geologist 191 00:10:49,080 --> 00:10:50,578 Sean Aylmer: by any chance, by trade or not? 192 00:10:50,820 --> 00:10:54,120 David Prentice: No, no. I'm a finance person by trade, but I've 193 00:10:54,120 --> 00:10:57,360 David Prentice: been working long enough in the oil patch to have 194 00:10:57,360 --> 00:10:59,968 David Prentice: a reasonable grasp on the engineering and geology, yes. 195 00:11:00,210 --> 00:11:04,708 Sean Aylmer: No, I remember Tom Albanese, I think he was the 196 00:11:04,708 --> 00:11:07,348 Sean Aylmer: Rio Tinto boss many years ago, and I happened to 197 00:11:07,350 --> 00:11:09,390 Sean Aylmer: be at a media lunch with him, and he had 198 00:11:09,390 --> 00:11:12,600 Sean Aylmer: this term, " the natural optimism of a geologist," and it's 199 00:11:12,660 --> 00:11:14,910 Sean Aylmer: always stuck with me, because I think that's exactly what 200 00:11:14,910 --> 00:11:17,370 Sean Aylmer: you need sometimes. David, thank you very much for talking 201 00:11:17,370 --> 00:11:18,210 Sean Aylmer: to Fear and Greed. 202 00:11:18,540 --> 00:11:20,610 David Prentice: No, it was a pleasure, and thanks for the time. 203 00:11:21,120 --> 00:11:24,689 Sean Aylmer: That was David Prentice, Managing Director of Brookside Energy. This 204 00:11:24,690 --> 00:11:27,270 Sean Aylmer: is the Fear and Greed Business Interview. We're not an 205 00:11:27,270 --> 00:11:29,910 Sean Aylmer: investing podcast. In fact, if you are thinking about investing, 206 00:11:30,120 --> 00:11:33,480 Sean Aylmer: we always recommend you go and get professional advice. Join 207 00:11:33,480 --> 00:11:35,340 Sean Aylmer: us every morning for the full episode of Fear and 208 00:11:35,340 --> 00:11:38,819 Sean Aylmer: Greed, Australia's best business podcast. I'm Sean Aylmer, enjoy your day.