The BusinessMakers steal a guest from the EnergyMakers Show this week when we host energy expert Fred Charlton, managing director for Simmons & Co., an investment bank specializing in the energy industry. Numerous recent game-changers give the U.S. reason to celebrate, he says. Charlton discusses how the shale revolution (gas and oil), significant new technologies used in deepwater environments, horizontal drilling and advanced imaging equipment give us the ability to identify new reserves.
Russ: This is The BusinessMakers Show, heard on the radio and seen online at TheBusinessMakers.com. For today's featured guest, from this week's Energy Makers Show, Fred Charlton, the managing director of Simmons & Company. We enter the discussion where I'd asked Fred to tell us about Simmons & Company.
Fred: We're an investment bank that focuses on providing advisory services to corporate clients and investors all across the energy business. We're operating two primary groups. The first group is our corporate finance advisory business where we're providing advice to corporate clients and investors on mergers and acquisitions, which means that we conduct sale processes for companies to achieve liquidity for their shareholders. We also find acquisitions for corporate clients and investors and help them to execute those acquisitions in the industry. We also raise growth capital for our clients, both in the private markets, for example, from private equity investors, and also access to public markets by managing public equity and debt offerings.
So that's the first part of our business. The largest part of our business. Second part of our business is we have a research and trading operation, which means we have, we believe, the largest group in the industry that's providing research on the energy industry. We work on a global basis. We have our largest office here in Houston, and then we have satellite offices in Aberdeen, London, and Dubai, so we're working actively today on projects all across the world in North America, Latin America, Europe, Middle East, and projects in Southeast Asia as well. We believe we've got the largest group of bankers working in the energy sector. We have a total of about 160 personnel, and we have about 110 professionals who are exclusively focused on the energy sector.
Russ: Well, I've got to tell you, Fred, it must be primetime with what's going on in the transformation in the energy industry, I would have assumed the last few years have been the best years of the company's history.
Fred: Yes, we've been growing rapidly now for the last several years. There are really two sort of key themes that have been driving this since the mid-2000s. The first is very public, I think, and it's the shale revolution. Let's call it that. And so through a number of new technologies, in particular, horizontal drilling and fracturing, we've been able to release oil and gas from formations that hitherto have been too impermeable to be economic to produce. On the oil side, we've started to apply the same techniques that we first learned in the gas shales now to the oil shales. For example, the bark in Old Eagleford that many of your viewers will have heard of. And so really starting on '09 when we had very little crude oil production from the shales, we've now grown to about 1.3 million barrels a day, and we've totally turned around the whole oil production picture of the United States.
Russ: Fred, the transformation that's taken place is just mind boggling, going from energy crisis and peak oil to actually considering being able to be a net exporter. When did it first dawn on you and Simmons & Company that, my goodness, the world has changed?
Fred: Well, we certainly started to see changes occurring in the mid-2000s where we started to see companies like Mitchells who became Devon, and then Chesapeake, and XTO, and some of these emerging companies started to show real interest in the shale plays, and start to figure out these new technologies and really started to have some success. But frankly, it's amazing to find that we've suddenly been able to grow gas production significantly here in the US, and then to see exactly the same techniques to be applied in oil and to actually turn the corner of what look like just a relentless oil decline here in the US.
Russ: I'm one that often contends we should have a national celebration going on right now. Because I mean it was really bleak. I mean even the founder, Matt Simmons, wrote the book about peak oil in Saudi Arabia and how frightening that was. I got to see him speak one time along with Rick Smalley about bringing in nano technology to solve the problem, and the two speeches were incredible. But they were all very - we were real - in a very pessimistic state in that era.
Fred: I agree, and I think it's only true that some of the larger reserves of the world are continuing to roll over, and it will become harder and harder for the largest reserves in the world to maintain their production. Now we're looking forward to a global opportunity to develop reserves from shales in a totally new era, which really didn't exist even sort of seven to ten years ago.
Fred: But I don't want to just focus on the shales. The other sort of key theme that we've seen developing is in the deep water. What we've seen, new technologies to image rock formations in deep water, and in many cases, below large salt formations. So rock formations are never possible to image and figure out what kind of reserves might be there. Now we're able to do that, and at the same time, we've seen more technology being developed for sub-sea completions in the areas of things like flow assurance, being able to move oil and gas from cold, deep water environments to surface platforms.
And so the whole deepwater area now is growing extremely rapidly as well. Areas like Brazil, for example, have found new reserves in what they call the pre-salt under large salt formations in the Campos and Santos basins, and they believe they might have anything up to 100 billion barrels of oil there. And just to put it in comparison, when you think of the great Saudi oil fields totaling maybe 250 billion barrels, and these new reserves that have recently been found in Brazil really are very significant.
Russ: All right, we'll be back with more with Fred Charlton, managing director of Simmons & Company, after this. This is The Businessmakers Show heard on the radio and seen online at TheBusinessmakers.com. This is The Businessmakers Show, heard on the radio and seen online at TheBusinessmakers.com, and continuing on with Fred Charlton, managing director of Simmons & Company. Well Fred, covering the shales and the incredible advancements in deepwater, too, that clearly impacts your category of services and equipment quite significantly. Right?
Fred: That's correct, yes. We've seen a substantial growth in the service and equipment arena. I mean if we were to measure it, for example, just with the North American land recount has grown 40 percent since 2005 driven by the shale plays. What's perhaps much more important is the total spend we have here in North America on land today is three times what it was in dollar terms - it was in 2005. And that's what speaks to the complexity of the wells that are being drilled, and it's clearly a huge growth opportunity for the service and equipment industry.
And it's not just an issue of increased activity. It's also an issue of some new service lines that have grown significantly, like fracturing, for example. It was a relatively small segment of the industry. Now we've seen substantial growth in frack capacities now six times what it was in 2005, and it's a critical service that's emerged to serve the shale plays. We're also seeing a lot of other types of equipment, like new rigs being built. So the whole capital equipment industry is growing now as we see new fit for purpose equipment that needs to be built to meet these new challenging conditions of horizontal drilling.
And exactly the same thing is true in the deepwater arena where we're seeing new rigs being built. By the time - there are several rigs being built right now. By the time we get to delivery of the last of the rigs that we can see today, we will have doubled the deepwater rig fleet from the timeframe of 2006 through 2015. And along with that in the traditional US entrepreneurial way, we've seen the emergence of a whole fleet of new companies that have emerged to serve these new opportunities. We've seen new capital flowing into these companies. They've been buying assets and expanding, and then over time, we start to see some of these entrepreneurial and new businesses being purchased by larger players, and we've seen opportunities for some of these entrepreneurs to gain liquidity for the value that they've created.
So when we look at it from the point of view of Simmons & Company, there's growing opportunity to help divide capital, to grow and serve these two main themes we've been talking about, and then merger and acquisition activity as well that emerges as these themes emerge.
Russ: Well you know, Fred, I couldn't help but think about when you're describing all this the technology in this space is just over the top. And then simultaneously, the importance of oil and gas overall in the economy is almost ubiquitous. Yet, still, in the United States of America today, sometimes the industry doesn't get the respect it deserves. It's even disparaged at times. What's your perspective on that?
Fred: Well, I guess I would agree with that. I think we have a number of issues, one of which is there's no real champion for the oil and gas industry. We're viewed as being large corporations that charge too much for our fuel, and folks are very familiar when prices go up at the pump. And we're really viewed as the bad guys, effectively. We charge too much for what we produce, and environmentally, we're not environmentally sensitive. What people forget, though, is that everything they do involves energy, whether it's air conditioning their house or driving to their offices and their work. Everything they do involves energy, and unfortunately, we don't seem to have a set of champions in Washington who are able to present that case and the importance of the oil and gas industry to the United States.
Russ: You know, I have recently interviewed Dr. Kenneth Medlock out at the Baker Institute, and we got onto this topic, and particularly the impact on the whole economy. And he, being an economist, has studied a lot. And said, "You know, it's interesting because the industry is only three percent of the GDP, but the big factor is that it affects the other 97 percent totally," and it seems like there ought to be a champion or something that the industry could do better.
Fred: We certainly need to change the view that the majority of the population has on the energy business because it so crucial to what we do, and now that we've proven that we can develop new reserves both offshore and on land here in North America, we're going to be a huge job creator going forward. And not just that. We're also going to reduce the requirement we have to import energy from more volatile parts of the world.
Russ: Right. I mentioned this a while ago when I saw Matt Simmons and Rick Smalley speak together about maybe combining technology into solving the energy problems. But they really got into this category a long time about water. And apparently, and this was even before the shale gala happened, but water is even sort of a bigger issue today than it ever has been and is quite a challenge.
Fred: No, you're absolutely right. I think the - first of all, the energy service companies are looking very, very hard at this indeed. Historically, the water that was produced from flow back or fracks were produced from - are producing natural gas wells were simply just trucked away and disposed off. There's a realization across the whole oil and gas industry that if we don't have enough water, we are not going to be able to continue to grow the domestic oil and gas business, which depends so much on water for the frack jobs themselves. So there's absolutely no doubt it's one of the most important issues for service companies, and the biggest players are looking extremely hard at finding ways of reprocessing and reusing versus disposing.
Russ: Okay, an outstanding challenging out there still.
Fred: Oh, yeah, it certainly is. But I say we were amazed to find there were as many as 90 companies that are looking at various different ways in doing it. So there's no doubt the entrepreneurial spirit is alive and well in the oil and gas business.
Russ: Okay, so Fred, how long have you been now with Simmons & Company?
Fred: I joined Simmons back in 1990. I had started out life after engineering in college with Schlumberger, the biggest oilfield service and equipment companies. And I went off to the Middle East with them and was working on rigs out there. And then decided to sort of redirect somewhat and learn something about finance and went to business school in Boston, and then I got a phone call from Matt Simmons one day, and that brought me down here in 1990. So for the last 23 years, I've been eschewing transactions here in the oilfield service and equipment industry.
Russ: And for young, aspiring business people and engineers, man, there's a lot of opportunity in the energy space right now. Right?
Fred: Well, there absolutely is. I think one of the most critical challenges we face today is the lack of technical people in the industry. If we go back and look in the early '80s when the oil business was booming last time around here in the United States, we were graduating something like about 10,000 geo-science graduates per year. And of course, that just collapsed in sort of the '83/'84 timeframe, and today, we're graduating only about 4,000 geo-science graduates per year. That is just simply just not enough. Then if you do the math on when the last wave of graduates came to work, these guys are approaching retirement age today. So the real question hanging over the industry is how do we develop these more complex reserves in the shales, in deepwater, and develop these reserves in remote locations all over the world that we just simply don't have the trained personnel to do it. So I think that is probably the most important issue that the industry faces today.
Russ: Well Fred, I really appreciate you sharing your perspective with us today.
Fred: Thank you, Russ.
Russ: And that concludes our discussion with Fred Charlton, managing director of Simmons & Company. And this is The BusinessMakers Show, heard on the radio and seen online at TheBusinessMakers.com.