This story appears in the February 7, 2016 issue of Forbes. Subscribe
After selling 7 deals in 7 years for $7 billion, press-shy wildcatter Trevor Rees-Jones is better equipped than anyone to pick through the wreckage of the oil and gas bust.
As Trevor Rees-Jones steps down from his plane, two black labs bound out after him, followed by his wife, Jan, and her terrier. It was a short hop from Dallas to the runway at Cook Canyon Ranch, on 26,000 acres between Fort Worth and Abilene. They have a bigger ranch on 58,000 acres a little farther north, but this one is nicer. Same deal with the turbo-prop they flew in on.
"How ya doin' " booms Rees-Jones, 64. "You like my plane? If I knew you'd be here already I'd have brought the Gulfstream 550." In voice and manner Rees-Jones is like a more garrulous version of former President George W. Bush, with whom he pals around in Dallas.
We set off in his Ford F-150 to see the sights: Longhorn cattle. Majestic oaks. Striking ravines. A beautiful horse stable that has never had a horse in it (too messy). Atop a hill he is building a castle-size "hunting lodge." He has populated a 5,200-acre section with African animals, including the antelope-like addax, aoudad sheep and zebras. A 10-foot-high fence keeps them in. We stop at his legendary Party Barn. Built from reclaimed timbers, it features a stage and a long, polished bar right out of Lonesome Dove. Rees-Jones charters buses to bring in hundreds of Dallas friends for concerts at the barn headlined by the likes of Faith Hill and Bon Jovi. For Rees-Jones' 60th birthday party the Eagles played, and his wife flew in actress Heather Locklear, "my longtime crush," as a surprise. "Jan got the wife-of-the-decade award," says Rees-Jones. "Unfortunately Heather had a round-trip ticket."
The barn, built in 2008, was only the first step. "I had the Party Barn. Then I realized I needed a party patio. Then I got to thinking I might want to have bigger acts, so I had to build a party lawn over there." Sometimes things get out of hand, like when Jim Belushi and Dan Aykroyd performed as the Blues Brothers. "They loved the ranch so much I had to throw them off the next day."
Rees-Jones' rolling party is telling, since most in the energy sector aren't in a festive mood. From 2009 to 2014 frackers unlocked tens of billions of barrels of American oil, goosing domestic petroleum output from 5.5 million barrels per day to 9.6 million at a time when oil frequently traded for more than $100 a barrel. But with oil now below $35 a barrel, we're in the throes of a full-on bust: 250,000 layoffs, two dozen bankruptcies and dozens more zombie companies suffocating under huge debts they incurred to drill and frack thousands of wells. At current prices there are very few oilfields left in America where it makes economic sense to drill a new well. "Companies have been cutting off their arms to save their heads, but that only postpones the day of reckoning," says Mark Deverka, an investment banker now with JPMorgan who specializes in big energy deals. "The worst is yet to come."
So why is Rees-Jones, who has a net worth of $5.3 billion directly reliant on the oil business, celebrating? Or even talking? (Since he first appeared on The Forbes 400 in 2006, he's never spoken to FORBES.) Because while his privately held Chief Oil & Gas continues to drill and frack on 200,000 acres in northeastern Pennsylvania--from which it produces 830 million cubic feet of gas per day, more than any other privately held company--he spent most of the oil boom selling. In seven deals, encompassing oil and gas wells, pipelines and hundreds of thousands of acres of drillable land, first in the Barnett shale field near Fort Worth and then the Marcellus shale of Pennsylvania, he grossed $7 billion. That figure makes him the biggest winner of the shale fracking boom. And that figure also makes this former bankruptcy attorney the most potent--and dangerous--American energy entrepreneur right now and someone whose story is worth telling for the first time. "He's like General George Patton. He's brash and opinionated, and he leads by example but with a big heart," says Deverka.
Surveying the current scene, Rees-Jones sees it this way: "I'm licking my chops."
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Growing up in the University Park section of Dallas, Rees-Jones (a Welsh name he shares with Princess Diana's bodyguard on the night of her fatal car crash) got his start catching tadpoles and birds and selling them to neighborhood kids. "If the tadpole had just a tail I sold 'em for a penny. And if it had sprouted its back legs it was three cents. And if it had all four it was a nickel." Rees-Jones' mom ended his bird business after he sold a cardinal for a quarter to a kid who wanted a refund after his new pet flew away. He graduated from Dartmouth in 1973 and then law school at Southern Methodist University, becoming an attorney specializing in bankruptcy. "I just couldn't stand being a lawyer," he says. "I found myself bored to death by the legal aspects. But I was fascinated by the oil and gas business--putting deals and prospects together."
In 1984 he parlayed $4,000 into a $48,000 line of credit at Republic National Bank. A decade-long roller-coaster ride followed, as Rees-Jones scraped by from deal to deal, drilling hundreds of wells across Texas. At his low point he drilled 17 dry holes in a row. "There was one time we drilled a dry hole, and I got the call in my office. Typically I would call my investors to get the bad news out. But I just couldn't bear it. I was so despondent and depressed that I walked across the street and saw E.T. and called them the next day." He can laugh about it now, but it wasn't funny at the time. "Jan would get her pencils and help color the maps I took to investors. Green for oil and red for natural gas." Jan Rees-Jones remembers when business got bad enough that they canceled cable TV and call waiting: "Trevor would just pore over the real estate ads looking at ranchland for sale, dreaming."
Once his two sons came along, Rees-Jones tried to dial down the risk, and in 1994 he and four partners started Chief Oil & Gas with the intent of "picking the meat off the bones" in conventional gas fields north of Fort Worth that had been developed by pioneering wildcatter and billionaire George Mitchell. Rees-Jones had long been watching Mitchell. Backed in part with funding from the Department of Energy, his Mitchell Energy & Development was experimenting with drilling techniques. Mitchell's breakthrough was to combine the brand-new trick of horizontal drilling with the older practice of hydraulic fracturing (blasting a high-pressure concoction of water, sand and chemicals down wells to break up rock to release oil and gas). Fracking is much older than most people realize--dating back to the 1950s. The combo had never been done before Mitchell applied it to the Barnett shale, a mile-and-a-half-deep "source rock" out of which oil and gas had migrated over millions of years to fill up the shallower reservoirs around Fort Worth.
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Rees-Jones soon replicated Mitchell's techniques and began fracking the Barnett in earnest in 2000. Suddenly every well he drilled was a success. "It was amazing to watch him bat a thousand after years of struggling to hit .150," says Chris Cowan of Texas Capital Bank, his banker. "Sometimes the Lord just decides, 'You're the guy.'"
At the time Rees-Jones thought it might be a fluke. "I wish I could tell you that I had a crystal ball, but I didn't," he says. Tony Carvalho, Rees-Jones' longtime head geologist, says, "We always thought the field would end just down the road, but it just kept going. How slow we were to figure out the implications." Today the implications are clear: America's proven reserves of oil and gas have doubled, while prices have fallen enough to save Americans more than $150 billion a year.
In 2002
What really lit the fuse on the Great American Oil & Gas Boom were the record prices in 2008: $140 a barrel for oil and $14 per million cubic feet for natural gas. Worrywarts cried that the world had hit Peak Oil and we'd all soon be paying $20 a gallon at the pump while importing liquefied natural gas in tanker ships from places like Qatar. Those prices incentivized a lot of risk-taking. Land that Rees-Jones had previously leased for $50 an acre was going for $10,000. "It was a runaway-train atmosphere," he says. "So hopped up and hyped up, it was a boom that looked like it had gotten away from itself." In 2008 he and Perot sold the rest of their operations to Quicksilver Resources for $1.3 billion, from which Chief netted about $330 million.
Rees-Jones doled out celebratory bonuses to his employees, millions of dollars in some cases. He also took $400 million to endow the Rees-Jones Foundation. He was less eager to write checks to those former partners. One of them, D. Bobbitt Noel Jr., sued Rees-Jones in a Texas district court. A jury determined that Rees-Jones had defrauded and breached his fiduciary duty to Noel (a close friend from back in high school) by buying out Noel's stake in Chief while concealing from him the knowledge that advances in drilling and fracking had made Chief's leaseholds much more valuable. The judge awarded Noel $196 million. Rees-Jones later settled with him out of court for an undisclosed sum.
But he was far from done making money. Rees-Jones had moved quickly to replicate the Barnett miracle. In 2007 Chief and its 20% partner, Tug Hill Inc., owned by Michael Radler of Dallas, began leasing up land in Pennsylvania to drill the Marcellus shale. Rees-Jones knew there was no way to identify the "sweet spots" of the field until hundreds of wells had been drilled, so, competing against big public companies like
The Marcellus soon proved to be the nation's biggest gas field. Interest exploded, again prompting Rees-Jones, wisely, to "take some chips off the table." In 2009 Chief and Tug Hill dealt in a new partner, Enerplus Resources, which paid $400 million for roughly 30% of the acreage. In late 2010 they sold another 100,000 acres, half the northeastern portion, to Exco Resources for $460 million. Then in May 2011
Seven years. Seven sales. Seven billion dollars.
As in the Barnett, the timing of his Marcellus sales couldn't have been better. At the time of the Chevron deal natural gas was trading at $4.30 per thousand cubic feet. A year later it had slumped below $2. The price collapse didn't surprise Rees-Jones: He'd seen firsthand that massive amounts of gas could be fracked out of Marcellus rock. For gas producers that 2012 slump was a prologue to what the oil drillers are dealing with now. "This is nothing new for me," he says. "I've been learning how to deal with low prices since 2012."
Chief had held on to its best acreage: 200,000 acres in the most prolific northeastern part of the Marcellus. And as cratering prices began crushing heavily indebted producers, he's leapt at the opportunity to switch from seller to flush buyer. In 2013 Chief paid Chesapeake Energy $500 million for Marcellus land that overlapped its own position. He says it costs about $1.50 per thousand cubic feet to produce and transport gas there--among the cheapest spots in the nation. Thanks to long-term contracts guaranteeing him capacity on pipelines to New York and Boston, he can make good returns even at today's low $2 natural gas prices. Without those pipeline contracts (that is, if he were trying to sell excess gas into the spot market) he couldn't even break even.
That'll change in a couple years, he says, as new pipelines get completed. In recent months Rees-Jones has picked up more acres from
So what his next play? With plenty of natural gas to work with, Rees-Jones is looking for oilfields that enjoy the same low-cost advantage as his Marcellus gas operation. Where is that? "I don't know, but I suspect we're going to find out." What he means is that, as the oil bust grinds on, we will learn which oilfields are the best, because they will be the last spots with drilling rigs still operating. And it's in and around those places where he hopes to find assets to buy.
Cheap doesn't necessarily imply good value. The lesson that many companies have learned the hard way is that in many spots "even if you got the land for free it makes no sense to drill the wells," says Ed Hirs, an energy economist at the University of Houston. "You have to have low-cost rock above all else." For example, Rees-Jones has no interest in buying back into the Barnett shale. There's still plenty of gas there, but it costs more to drill out than it's worth. Quicksilver Resources, which bought much of Chief's acreage there, went bankrupt last year. Other oil plays that have been all but abandoned in the past year include the Tuscaloosa Marine shale of Louisiana and Mississippi (which needs oil above $90 to be economic) and the Mississippi Lime in Kansas, where Rees-Jones lost $150 million drilling some uneconomic wells in 2012. "I was able to take that loss in a lot more stride than a $2 million dry hole back in my Barnett days."
So what does look interesting? There are plenty of sweet spots in North Dakota, Colorado and the Eagle Ford field in Texas. His team has been eyeing some multilayer shale formations in Oklahoma and is developing some conventional (that is, nonshale) fields that had been overlooked in recent years, including one in Florida. But ultimately, he says, "the Permian Basin would be my favorite place. There is just so much oil out there."
That vast region of West Texas and eastern New Mexico, the land of Friday Night Lights and Giant, has been drilled for 100 years, but drillers are only now figuring out how best to tackle its layer cake of frackable shales stacked on top of each other. Because of the low cost of extraction, the Permian is the only large U.S. oil patch that has continued to increase output during the downturn, to more than 2 million barrels per day. Shares of Permian-focused companies like
Don't bet that oil prices will get back up to even $75 per barrel anytime soon, let alone $100. "The Saudis, with the pain they've endured to this point, they are not going to let the price of oil get back to that range," says Rees-Jones. "It would stimulate too much activity." The Saudis, still sitting on $600 billion in foreign reserves, can endure. Saudi Aramco's marginal cost to produce a barrel of oil is about $20. Their average cost? Less than $6. Sure, they would love $100 oil, but not at the cost of making viable marginal deposits in the tar sands of Canada and the shale rock of America.
Rees-Jones doesn't need to do more deals. He could just spend his days riding his mountain bike, overseeing construction of his hunting lodge, expanding his collection of Western art (think Remington and Russell) and planning the next Party Barn bash. But that isn't enough for this king of fracking. "I always enjoyed playing poker," he says. "But after I got to drilling I lost my interest in playing poker. My risk-taking was satisfied by drilling wells."
We enjoy his good fortune, watching the sun go down over the ranch with cigars and a bottle of exceptional French Bordeaux. Coyotes begin to howl in the distance. Rees-Jones assures me he's still in it: "When I was able to get down the road a ways and look back, I realized success is 90% perseverance. The key is to stay in the game." F
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As the price of oil has plunged from $100 a barrel to $30, gasoline has gotten cheap. At $2 a gallon you can now fuel the average car for about $1,000 a year. No wonder SUV sales have surged. But the cheap gas won't last--oil companies can't make any money at these prices. Even Saudi Arabia is feeling enough pain that it's considering an IPO of Saudi Aramco. Don't think for a second the oil industry is in some kind of death spiral. Global supply, at 95.5 million barrels per day, has never been higher. Neither has demand, at 94 million bpd and growing. Despite the handwringing of the anticarbon agonistes, we'll still be using oil for a long time. In a couple years or less demand will catch up with supply, oil prices will return to sustainable levels and $2 gas will be history. You can effectively lock in your cheap fuel supply by buying oil now. Though you probably aren't in the position to buy oilfields outright, like Trevor Rees-Jones, shares of oil and gas producers are selling at deep discounts.
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