Josh Young journeys through the energy space (Podcast 92)

Josh Young, CIO of Bison Investments, discusses his thoughts on the oil market and why he thinks energy prices are going much higher. Then he dives into his thesis for Journey Energy (JOY CN in Canada), a micro cap Canadian company that he thinks is dramatically undervalued.

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Transcript begins below

Andrew Walker: Alright. Hello and welcome to yet another value podcast. I'm your host, Ander Walker, and with me today, I'm happy to have Josh Young. For those looking on YouTube, you can tell Josh is the CIO of Bison Investments because he's got the famous painting behind him. Josh, how is it going?

Josh Young: Good. How are you?

Andrew: I'm doing good. Hey, let me start this podcast the way to every podcast. First a disclaimer to remind everyone. Nothing on this podcast is investing advice. That's going to be particularly to true[?] today because we're going to talk about Journey Energy towards probably the back half of this podcast which is a very small cap Canadian Oil and Gas Company. If that doesn't scream, please do your own work. Highly risky, not financial advice. I don't know what does, but let's get that disclosure out the way.

Second way, I started a podcast as a pitch for you, my guest. Honestly, I feel like I'm talking to a celebrity. I said you're coming on the podcast and I don't think I've ever gotten this much inbound interest but look, no one has nailed the recent, I'd say late 2022 today, oil, nat gas, energy, crisis, inflation, whatever you want to call it. No one's nailed it like you. Your track record really speaks for itself. But more importantly, I'm impressed by how quickly you're able to distill new information as it comes out down and reshaping to your thesis and prep for this podcast. I listen to tons of your interviews and people would say, hey, this news came out this morning, you could tell them exactly what it meant.

And you and I were talking before and I can throw four energy stocks at you and you can tell me off the cuff of your head. Hey, no, only generous like that. Real energy people know those assets are poor. So, really excited to talk today.

Let's start. I think we'll start just broadly, the oil market, nat gas, energy market, whatever you want to call it in general. Your big theme that you've played on has been oil prices are going up to put it simply. But I just want to talk as we sit today, how are you thinking about the oil market and your thesis there?

Josh: Yeah. Thank you and I appreciate that. And that's been kind of a concerted effort having invested in oil and gas since the last time it was popular or becoming popular. I've learned that it's very important to gather as much relevant information as possible and try to do still it as quickly and effectively as possible in order to avoid over exposure to things that can go wrong.

And I think it's kind of a good way to approach any sort of investing is to really track your left tail risk and you know various famous value investors like Buffett and Munger and so on talk about that a lot, right? Munger says like deal with your downside risk in the upside takes care of itself, or maybe Buffett said it, but both of them have addressed that and I think at the tail end of a long downturn, it's a lot easier to have kind of built that into one's process.

I think as a lot of the kind of growth compounder, whatever things have fallen tremendously over the last year and then others are starting to kind of wake up to that a little bit. But unfortunately, sometimes it takes us many years to realize just how important these things are. So, that's kind of as a result of a lot of kind of unfortunate experiences that potentially could have been addressed, the risks that could have been mitigated through kind of a more concerted effort.

I think what you're describing is just kind of evidence of that. And one of the things I found is that by sharing my interpretation of things, I'm definitely not always right. And I'm relatively new to focusing on macro versus many others who follow oil and gas and kind of other spaces and so, sharing some of those insights on a real-time basis or some real-time basis actually is really helpful in terms of getting input and feedback in terms of whether things are working or not, or whether I'm understanding it the right way or not.

There's a really big benefit to that. I think that's kind of what you're describing. The thesis is kind of simple. There's been massive underinvestment in commodities over the last decade or so. Since China's growth essentially peaked, let's say 2012 or so. What you're seeing is across commodities, there's been kind of underinvestment which leads to improving supply dynamics and then in commodities where the demand is improving also. You're seeing prices rise materially and then for oil and particular unlike many other commodities, it's consumed.

Unlike let's say copper where there could be copper wire and various places or iron or whether steel that can be recycled, you can't really recycle oil once you burned it. And so in the form of gasoline or diesel or whatever and yeah, there's like some plastics that can kind of get recycled, but even that's like not really that reusable so because it's consumable and because of the nature of it and because it's been exploited aggressively for a long time, oil has a particular kind of attractive dynamic and then the other aspect is there aren't really people saying that like steel is going away or that iron or demand is going away because steel is going away. They're not really saying coppers going away. They are saying oil is going away. In this kind of commodity bear market and commodity downturn, oil and gas had been particularly divested from hated underinvested. It's been the best way to end any conversation, just starting to talk about it.

I think that's kind of exacerbated this under investment and that probably makes the upside more compelling and kind of more extreme versus other commodities. On one hand, there's a supply issue. And then from the demand side, there have been many different factors that have driven, sustained, and increasing demand at a time where many or the consensus have been for a while that demand would fall. Whether it's suburbanization, which we've written about and analyzed in detail, or increased travel or kind of the move out of poverty and emerging in frontier markets. There's been kind of this inexorable growth in oil demand. That's paused twice, right? In 2008 and then during COVID.

I think kind of this combination of suppressed supply that's going to be really expensive to take a really long time that I think is just not well understood to get back to where it needs to be as well as demand that it seems to be as just perpetually surprising to be upside. You kind of have this set up that should be really good potentially for a number of years.

Andrew: Look. That's great. I've got tons of questions. I'm sure none of these are things that you haven't heard or thought of before. But they're what's on my mind and I'm sure they're on listeners' minds too. So I guess my first question would be great. You and I are talking today or oil is 80 to 85 or something, right? And a big part of your thesis, I know you do real fundamental work. People are going to see this when we talk about Journey. You do real fundamental work on the companies you're invested, but I think a big part of your thesis is oil is going higher, right? So my question is, how do you know if your thesis oil is going higher, well, it's gone from 50 to 80, 85 in a year, that's a lot higher, right? That's almost a double in commodity prices. How do you know when your thesis is no longer oil is going higher? When is oil high enough?

Josh: That's a great question. I mean, if you look at it on an almost 2 year basis, oil is up by what, $130?

Andrew: It was negative for a day or so. So maybe it's all the infinitely, right?

Josh: Yeah. Exactly. But just on an absolute basis, I mean, it is like over a hundred dollars from period, that it was at sustained. Well, I guess not over 100, but it's up. Let's say $70 from where it was for a meaningful period and up $50 from where it was for almost a year or during 2020. I mean, there were months where oil was 20 or so dollars a barrel.

Andrew: Yeah.

Josh: And if you look at the realized price for companies, it was even lower because there's always gathering and processing and transport and so on fees, almost always. So generally, like the realized price for companies in some cases was the teens oil price per barrel for a number of months. One thing I look at is what's embedded in public equity valuations, so I don't generally own indexes. I own individual companies that I construct individual kind of almost like special situation, almost like a private equity fund, would you where it's like, hey, I want to own this thing. Right? It's not that I want to own an oil producer. I want to own this oil producer in this area producing from these assets at this valuation and very, very specific.

But when you look at the aggregate, looking at the aggregate is helpful in terms of figuring out the answer to your question to some extent. And there was just a Morgan Stanley report that came out arguing that $60 WTI is priced into oil and gas stocks in the US. Any of various investment banks do this analysis and various different ways. I'm not sure I 100% agree with it. I don't know. Right. Is it $55 oil price then is it 62? I don't know, but definitely not $85 oil.

And that doesn't mean that if oil falls to 60 that therefore the stocks going to go down. It just tells you...

Andrew: I've been doing this a while. I'm pretty sure the stocks are going to go down.

Josh: Right, but it tells you kind of what a reasonable approximation of intrinsic value is across the sector of mid and large caps at this time. One of the things I think you see as markets revalue is you see expectations improve and low valuations for the equities are indicative of low expectations. And this has been the case now for more than a year where the price embedded in oil and gas stocks has been materially lower than the commodity price and the commodity has been rising.

So the pushback is, well, that happens at the peaks of cycles. But there are other things that happen that peaks of cycles that aren't happening, that I think give credence to this argument. So, rig counts are still very low, capital budgets are still very low, percentages of cash flow that are getting spent on sustaining production and growing it are still very low. You have these things that you just don't see at tops of cycles. At tops you see over 100% invested, you see growing production that's meaningful versus the global supply. And you're just not seeing these things.

I think it helps with this interpretation. I think that oil and gas stocks are way too cheap, which also helps imply that the commodity is way too cheap.

Andrew: Why do you think you're not seeing the big ramp up in apex because we'll talk more about like the 2014 time frame in a second. But I remember it, I was at private equity. I remember the oil and gas guys were the kings of the earth for a while and then 2014 to 2015. We can talk about that but they were not the kings of the earth anymore. But look, in to 2014 time frame exactly what you're saying, these oil and gas guys, oil was 90, 100 somewhere around there and they were all out. Every dollar that they took out the ground, they were putting it back into capital equipment.

And today you're not seeing that and there's lots of theories around that, right? Some of them say, yes g, right? ExxonMobil can't really go development oil fields anymore because of the ESU[?] thing, but smaller companies also are doing that and I just have trouble believing like small cap kind of the wild cutter[?] oil and gas really care about ENG or really have gotten the discipline that everyone says they're getting great. They just drill oil and they're not doing.

So I'm just wondering, why do you think we're not seeing the drilling, all that type of topic capital top of cycle stuff that you would be used to?

Josh: I had to be careful with this because apparently, my answer to this is why Bison isn't all over the front page of every financial newspaper, right? We have...

Andrew: I don't know though. I've seen you in a couple of financial newspapers and stuff before.

Josh: A little bit. But I mean you saw what happened with the big short and that sort of variant performance. And we basically were there in terms of just an absolutely absurd year and I can't speak to the exact performance, but just kind of directionally I think it's indicative of sentiment. Oil and gas are still so hated that you can do twice as well as everyone else in the world in investment fund, and no one's heard of it.

You might have heard of it, right? But just in general, no one's heard of it. If you do that in housing, everyone's heard of it and you run 20 billion dollars and you can do poorly for 10 years and retire and be a billionaire, right? But in oil and gas, you do that and it's kind of this very kind of niche[?] thing where a few people kind of know. And you have other people, I mean it's wild. There are other investment fund managers making claims about having done the best in the world that whatever.

But not being kind of this niche and just that they can make those claims because no one even bothers talking about it. So the people that will is a Breitbart of the world which again, it's like, great. I'm glad that they featured Bison in something, but it's still the relative traction of something and Breitbart versus something and kind of Wall Street Journal or New York Times or whatever. There's just not that same sort of engagement.

I think that's one indicator, right? You don't have the people that are really winning in this on CNBC. You don't really have the same sort of buzz. I mean, again, there's been those source of returns so it's hard to construct why that story isn't being picked without buying into this really negative sentiment, editorial bias, etc. So I guess that's part of it and then you see it on the capital spending like you were saying for the oil majors and kind of the large publics. On the private side, there are some private companies that are drilling very aggressively but they're not really getting outside capital, and many of the outside capital providers are swearing off oil and gas, or pulling capital apollo recently.

They've had tremendous drama with their co-founders and whatever and it looks like in order to suppress that to some extent, the other day they announced that they will not be investing oil and gas anymore, at least from their main fund and they will want to pick[?] investors.

Andrew: [inaudible]

Josh: What's that?

Andrew: Apollo was the firm you said, is it?

Josh: Yeah. They just...

Andrew: That's just surprising because I know Apollo and the history of Apollo. Anyone who knows them is, if there's hair on it, if other people are doing it, but they can get it for a low multiple, they're going in guns and blazing. It's just surprising. It does speak a little bit to the environment for this.

Josh: Yeah, exactly. So I think you have this combination of things and then there is a reality which is that, like you were saying, people did really poorly for a number of oil and gas. And so, if you're an investor, do you really to own stock in a company that's out spending their cash flow to drill on the hopes of higher prices in the future? Understanding that if too many companies do that, you're likely to have lower prices in the future and not higher. So there's kind of this collective understanding to some extent. There's no obviously a new sort of agreement. OPEC plus is trying to control prices and to some extent, they might just be trying to control the point where people realize that they're out of incremental oil to produce.

But they're to overtly control prices. There's no oil cartel or anything like that. It's not like there's some group of investors outside of the ESG advocates. There's no group of investors that's trying to keep oil prices high as much as on an individual basis. Just like not wanting to get their faces ripped off investments. I think it's kind of that combination of several factors that's really institutional divestment, activism forcing lower capital deployment, and then people just being sick of losing money in oil and gas stocks and on oil and gas assets just forcing under investment.

Andrew: Lots to go there and you kind of alluded to all the questions I want to do but let me start with one thing you mentioned. OPEC and OPEC plus at the end you mentioned that. For those who don't know, this is basically the world's largest oil and gas producer. Saudi Arabie, the big one there, but this is the cartel of the world's largest oil and gas producers, and you said, hey, they're trying to keep the story going where they don't admit to that they don't really have much incremental production left, right?

I know you've done tons of great work on this and stuff, but just that aspect of it strikes me a little strange. If you were this cartel, wouldn't you want the world to think that you didn't have incremental production capabilities because then the price is going to always lean towards the outside because an area that everybody assumed of extra potential supply is not there, so prices are going to tend to run a lot hotter. Does that make sense?

Josh: Yeah. I think the risk is that oil prices go ludicrously high once it's consensus that OPEC doesn't have spare capacity or is running out, right? I'm not saying that they don't have any more right now. It's that, it looks like over the next, let's say few months to maybe year, they're going to hit a wall. And they've already, since we published on it, I think I first talked about this with Guppy[?] who I think was on your podcast.

Andrew: Yeah and I think you talked about him like October time frame though I'm sure you knew about it before then. That's the first time I remember you saying it though.

Josh: So he and I talked about it on a podcast. I think it was in like June or July of last year, something I'd written about a little bit previous to that and then on the back of severe negative pushback to that interview. We ended up doing more work and publishing our thesis. We got even more negative feedback. I mean, it's wild. Like people hated this and still, to this day, I get told I'm wrong that I can't know from Houston, that I'm not in those fields, and therefore, I don't know that I'm not friends with people in Saudi Arabia which actually not true anymore. I have now actually directly have some connections there, and as well as other places.

But there's been these very powerful, almost emotionally driven arguments. And I kind of don't care, right? I care in a sense it could be helpful to me for my thesis but I don't care at all in terms of, if I'm not right about something, I don't want to bet on it. It sounds weird but if you lose money enough over a long enough period of time, you just get sick of it and you just stop. And I think that's why some of the research we put out has done so well in terms of calling these various price differentials and very specific things is because if we have an idea and we've had a number and that's wrong, we just don't publish it and we won't talk about it and if we talk about it like backtrack as soon as we can on the thing.

So I think it's been very interesting just how severe... I think people really understand that OPEC spare capacity is really necessary for the world economy. And I think OPEC understands this too. And so what they've been doing is they have this quota that they've been stepping up and they keep missing it every month. They were missing it already before we published but they really started missing it over the last few months.

Various CEOs of companies in countries that are subject to OPEC quotas, OPEC plus quotas, have been like successively saying we do not have more production capacity like Lukoil, Aramco. It's pretty remarkable but the most remarkable thing is that still not the mainstream narrative and there's still massive pushback from many sources about this being some sort of conspiracy theory and it's like really weird because like, you have the CEO of Aramco saying it. CEO of Lukoil saying it, the math is saying it, and yet it's like this conspiracy theory. I said, okay, well, I don't know. What do you need to see to believe it?

Andrew: One thing you said in there. A couple questions ago, you mentioned it reminded you a little bit of The Big Short, which is funny because I was thinking a little bit of The Big Short when I was prepping for this podcast and reading some of your reviews and stuff. And then the other thing you said was, I published on OPEC spare capacity and I got all this pushback, people hated it, people said, how could you know this coming from... How could you know this sitting at Houston? You don't have boots on the ground in Saudi Arabia, and it just reminded me of similar to The Big Short or any great fraud.

Somebody comes out any great fraud short thesis. Somebody comes out and people say, how could you know this? I'm best friend with Mike Pearson at Valiant, there's no fraud going on over there. Right? There couldn't be, you've never talked to the man., and of course you know. I see that and I hear that and it does have reminisces that, but one thing that also strikes me is, I know you a little bit, I know copy pretty well, I know a lot of the people who are making the $300 oil calls, right?

And I don't know if you think it's going to 150, 300 where... But who say it's going a lot higher, right? I do find like there is a little bit like everybody's got the same thesis and is very lined on. It feels very line on politics, very London, world views and everything. That does feel somewhere to The Big Short in some ways, but I also do worry that feels similar to things that have gone up a little bit and then go on spectacularly wrong. If you wanted to make some real analogies, late 2020, everyone worshiped the ground, the tech bros, and the compound[?] bros[?], and the growth burrows.

We're worked on and you are taking this in early 2022 and it's a lot different in hindsight, right? Not that everybody here is swimming naked and not that everybody there was swimming naked, but a lot of people there were swimming naked. You could see the reminiscence there. I just wanted to throw that thought bubble out there and see what you would say to that.

Josh: Yeah. I think there's a few things. One, I think it's important to track people's incentives. There has been over the last, let's say 10 years, every incentive in my career and financial life to be negative on oil. Over the last 10 years, there have been many opportunities and frankly, it's one of the ways that Bison has done so much better than many of our competitors and many of them that are better known, that are more cited in various things, jumped onto the alternative energy bandwagon, in some cases like as that SPAC boom was going on last year in some cases before.

There have been lots of financial and raise tons of money and made tons of money in cash, right? Their clients may or may not have made money, their shareholders have all now lost tons of money, but they personally made enormous money. So there's been a big financial incentive to do the opposite. I think one thing to track is what's the incentive? The compounder bros and the tech whatever, a year ago were making... They had made a huge amount of money for 10 years believing in this thing and saying this thing.

There's not really money in what I'm saying. I think from my understanding from copies situation, kind of similar where people are like, hey, this is great, but like, why are you doing this thing? I don't get it. Well, I like uranium, I don't like oil or I like... And you can hear it in this podcast, even we were talking about it half a year ago. This is something where he and I both have gotten a lot of flack and I think had negative financial repercussions for our involvement in it.

I think that's like one starting point is okay like what is it costing you versus how much are you benefiting? And I think people think, well, you're benefiting. Not really. I mean right now it's fine but it's still not good. If I said, hey, I'm going to go take my track record and go do anything else. I literally have offers from multiple alligators that want to invest in my next thing. And we'll get to that with a specific stock idea but similar idea like people like, what's your next oil idea? And it's like, well, what if my current oil idea is likely to go up a whole lot or is really undervalued or whatever?

I think I'd focus on that aspect and I think that's where you see variant performance is where there's a big economic incentive. At the point where people are throwing money at me because it's oil, there's this great book Wall Street meet[?] that I read a number of years ago, and I thought it was just fascinating and it was by... I think it's Andy Kessler that wrote it. Famous venture capitalist, now is a famous tech analyst and then investor, and he talked about when the Saudi, I think it was the Saudi. Something that Middle Eastern, their sovereign wealth fund showed up and wanted to write a half a billion dollar check to his check. He left the meeting, they had lunch or something. He sold all these tech stocks. Closed his fund, and moved on.

I'm not saying I turned down half a billion dollars today but over the next...

Andrew: No. That's what I heard. I heard if somebody hears this podcast and calls you up and is like, Josh, I want to write a half a billion dollars, you're saying, I'm shutting down the fund, I'm selling all my oil stocks, it's over. It's all over.

Josh: Yeah. I think in a few years, I think there is a point where this gets scary. And again, it gets back to the fundamentals and there's just more fundamentals there or like the fundamentals were based on things that weren't immediate cash flow. Whereas at this point, it's like low rig count, the world barely replacing oil that's being produced right now with demand rising versus a situation where there's line-of-sight to millions of barrels a day of additional production, as well as potential demand destruction for much higher prices.

Andrew: Perfect. I just have a couple more questions on the general oil and gas thesis and then we're going to go into Journey. I guess the first question, and we've alluded to it a little bit but I always have that in the back of my head. In 2014, I was in private equity. I had friends who were working at firms. We had energy side and oil was, I'll just say a hundred, right? And every person I knew on oil and gas, they would say, look, we've done the analysis. We invest in firms and we invest in firms whose breakeven, I'm just going to pull the numbers out of the hat.

It's 60, and we;ve done a global supply demand analysis and oil just can't go below 70 for X, Y, and Z reasons, right? That's the marginal cost of production. All this sort of stuff. And every company we take will make money in them as long as oil doesn't go below 60. So we've got this huge margin of safety. They're making money, making money, making money. 2014, 2015, in nine months, oil is like a hundred to forty. Everything's bankrupt. Everyone's fired out of a job and everything. And we're not there, right? Because at that point, oil had been approaching a hundred for probably 3 or 4 years. There was a lot more drilling going on.

I do wonder in the back of my head when inflation is this hot, kind of the cure for high prices. Why is right now different than 2014?

Josh: I mean, it's a great question and I was investing in oil and gas then and I experienced that and I think the amount that I spend, the amount of time I spend on researching these things now versus then is very different because I'm much more aware of how much those questions matter and getting them right matters. I guess one thing most of those people no longer have jobs and most of those funds no longer exist. Or if they have jobs, they're not doing oil and gas. And there was a bubble that I think people didn't understand that was right then. There's been a massive growth in private assets worldwide and allocation to private assets.

Along with this growth in private equity generally, there was a massive, very uneconomic, very odd bubble in oil and gas private equity, which wasn't really private equity. It mostly wasn't buy out so it's mostly growth equity investment into shale wells with a poor understanding of economics that mostly ended up money-losing.

Andrew: I mean all my friends who I was just mentioning exactly what you're saying.

Josh: Yeah. And even their individual firms that have individual funds that have done okay or a few even did well, most of that was drilling a few wells and then flipping land to others who then lost lots of money. So there was kind of like, if you look at an aggregate, there was half a trillion dollars that's a loss just from that endeavor, just on the private equity side. And again, that's not that the allocators necessarily lost money.

In many cases, it was public companies that bought the stuff that then went bankrupt shortly after or whatever. So, it's not all and then there was also a private credit bubble going on simultaneously where high yield was unusually available especially given a down cycle. And so you had just hundreds of billions of dollars getting thrown into the industry at a time of oversupply. So that's not happening. If anything, there's still money outflowing, not inflowing into the [inaudible].

And especially in terms of funding of new drill. There's almost no money available to go drill more wells right now. I think you need to see 50 billion show up, start drilling wells, and then 200 billion to show up to start drilling wells , and then you need to see those wells get drilled for a while. And then maybe you get into that sort of contact. So, the world had changed for oil and gas at change starting in like 2000 or so where China started to grow and a whole bunch of commodities. There was this big commodity upcycle as everything had to get built out in order to be able to supply China's increasing growth and increasing demand at, let's say, a million barrels a day every year of incremental demand for a number of years.

What you saw was kind of this growth in demand in China that kind of came to a head in 2008 where we got to...

Andrew: Hey Josh, I think we lost him. Just going to paust it for one second.

Hey, we had a slight, quite slight technical difficulty. I think I paused it right away but I'll just let Josh go ahead and finish his answer. He was just talking about China's rise.

Josh: Yeah. Sure. So there was this commodity boom and investment boom associated with supplying China sufficiently, and so, you had to be retooling as oil company or an iron provider, whatever, to be able to adequately supply China's increasing demand. And as China flattened out, there wasn't this sort of reset of capital provision to various commodities and that's where you kind of saw investment peak to some extent in 2012 across global commodities, and then you already saw various commodities start to fall off by 2014. Oil kind of sustained. There was a lot of bullish sentiment, shale started to get developed, and people were excited about the potential, especially in West Texas, in Southeast, New Mexico. And so, you're already off the cliff, but oil and gas investment continued for a couple of years before things got really really bad.

That's not what's happening now at all and you don't have any individual incremental source of demand. You have this aggregate incremental demand across many different countries, and these are countries where there's much more of a catch-up in terms of low per capita GDP rising to less low, but still very low versus world averages. And so, the incremental consumer of oil to some extent is a buyer of a gas-powered scooter or something like that in India or Pakistan or whatever along those lines.

That consumer is actually very price insensitive because oil can double and their cost to bring their goods to market or their cost to get wherever goes up by some tiny amount. The capital cost for them of buying a scooter is way higher than the incremental cost of consuming a little bit of gasoline. So that's a very different environment and then there's not really of a capital available. Kind of both of those on supply and demand. It's just a lot more stable and a lot more precarious just in the other direction.

Andrew: Perfect. And the last thing on oil prices and then we'll turn to Journey. You kind of ran me with the demand thing but I think a lot of people think, hey, it's the first side more than the second side but I think there's two things on the inside[?]. Hey, oils 80 right now and I don't think $80 is constraining anyone's real demand use. What we've seen in the past, once oil starts going over a hundred people really start looking, hey, do I really need to take that trip, making alternatives and the demand starts pulling back just because the price is so high so that kind of serves as a constraint on the parabolic oil rise.

I guess that would be the short term demand worry and then the longer term demand worry, the world's going electric right there. We're going to have electric vehicles. There's going to be a million Tesla Robot Taxis on the road by I think it was 2019 was when they originally said they were coming but the electric vehicles are coming and that kind of saps incremental demand and stuff like that.

So, what worries you about the demand side or why are you not worried about the demand side both in the short, medium, long term?

Josh: I think people look at the historical prices and one, they don't adjust for inflation and they especially don't adjust for real inflation, not CPI inflation so when you look at as how has the price changed versus other similar products, car prices have risen far more than gasoline prices over the last decade. For example, buy a lot. If you try to normalize, maybe you be looking at $200 oil over a 10-year period versus a hundred dollar oil kind of having that same sort of consumption reduction effect. I noticed this, I was visiting. I'm from Los Angeles originally, I was visiting family early last year and the price for gasoline in Los Angeles was almost twice what it was in Texas because of taxes and regulations.

Andrew: It's insane. It gets insane. I've noticed that when my wife and I go to a wedding here versus I'm in the Northeast. Northeast versus New Orleans versus California. It is just wild out different the regional differences are.

Josh: Yeah, it is. But you know what's extra wild is that you see almost no demand, pause, or destruction in L.A. with gas at 550 or $6 whatever. People just pay it and the really crazy thing to me and the thing that got me and I've done a lot of work on this but sometimes people treat the plural of anecdote as data. Here's one anecdote. What you could see in L.A. was that there wasn't a big variance in demand between gas stations despite variance and prices. So there were gas stations with 450 gas and gas stations with 650 gas and yeah, like the 650 ones, maybe people weren't going to that much but the five or 550 ones were very very busy.

People weren't that sensitive to the incremental price or the slightly higher price.

Andrew: Yeah. I hear you and you acknowledged it when you were saying it. I just worry about that type of anecdata where you see it but... The concern is the marginal man[?], right? If you and I went to the mall, December 24th or Black Friday or something, it would always look super busy, but in the recession, if you actually analyze the traffic, there might be 10% less dollars going through and you really wouldn't notice it until you actually had the real quantity data, but I do hear you on that.

Last question, I think this will transition us nextly to our discussion on Journey. I'm a generalist, you're specialist. You were telling me, we were chatting before and you said, look, there are some stocks that generalists like that you can tell if someone's really knows the oil and gas sector or not by some of the stocks they like and we don't have to name this stocks in particular but I was just wondering, as a specialist, what do you think are the things that, not macro things but when generalists are looking at specific oil and gas companies, what do you think are the things they kind of frequently passover or miss or aren't thinking about correctly?

Josh: Sure and I just want to, the TomTom data by the way, the actual transport data, does support my observations so it wasn't...

Andrew: Okay completely hear you.

Josh: Just like, it's an easier thing I think to understand, hey, people aren't varying their consumption based on price then, hey, the Global Transport Data across a hundred cities over many years.

Andrew: Here's the real question. Who's still using TomTom at this point?

Josh: I mean, there's stuff from GasBuddy [inaudible].

Andrew: I'm just [inaudible].

Josh: Yeah. And some of that, they're like buying from cell phone providers and stuff. So it's not really necessarily people actually using TomTom as much as they've become a good source and aggregator for that data.

Andrew: Yep.

Josh: So I think it's a good question. I think it's a combination of asset quality, which is kind of amorphous... There's lots of different aspects or I guess multifaceted topic, so it's a combination I think of asset quality where specialists tend to like higher quality oil and gas assets. Also, there's a people function where if you know the people and they have made you money, or do you know how they operate in many cases, you might strongly prefer certain operators and that's... I guess that gets into like quality of management, but again, that ends up being multifaceted and a little more complicated than I think people often say or allude to and then balance sheets Also, I think there's not really a good understanding of varying credit quality and not a good understanding of what goes into that beyond cash flow metrics or reserve metrics.

I think the combination of those things can yield a very different results for someone that's been doing this for a while that knows a lot of people working at these companies and knows the assets and is able to actually evaluate the assets on their own versus being dependent on third-party research providers or being dependent on management or something to tell them about the assets or about the people or whatever.

Andrew: Would you say generalist... Let's say I looked at two companies and one of them had some leverage on it and one of them had no leverage on it, right? And the leverage can be nice because it gives you twerk to higher prices. All that type of stuff. Would you say generalist, in your opinion, lean too heavily into the company that's kind of got a little bit more leverage on it or maybe the company that's higher up in the cost curve just because they want that torque then maybe a specialist like yourself who knows the industry a little bit better and is maybe more concerned like, hey, if I buy the best person like they're going to be a little bit more robust on the downside and not to put into simple of turns but, do you think that's a thing?

Josh: Maybe, but it could have to do with which generalists you're hanging out with. So if you're hanging out with the high will price people that are investing maybe they would be tending towards that. There's also the people that own an Exxon or something for the yields or they own a Pioneer some of that because of perceived asset quality and perceived management quality and you end up seeing that those tend not to be stocks that are too heavily owned at least as long-term Investments by people that know the space pretty well.

Andrew: Perfect. Anything else on... We talked so much on the oil thesis but anything else on the oil thesis you want to talk about before we head over to Journey?

Josh: Just that like there are services supply constraints too. And so we just came out with a white paper on that, we'll be doing more on it. And that's something that people don't talk much about. There was a giant amount of capital stand on services equipment and innovation and whatever historically, and that sector also, it's been even more starved than the upstream side. When you look at what it takes to really ramp up production, you actually need a viable vibrant services business and you need a lot of investment and there hasn't been that investment or haven't been those people for a long time. It's a multi-year process just to ramp back up to even a fraction of where we were, let's say in 2014.

Andrew: Yeah. Look, I'm a generalist, but I keep thinking back to... There's a famous quote, I think it was Lowe's, where they went to was it Diamond Offshore something and at the time the marquette, this was in the 80s. Marquette was 100 million or something. And they went to one of the big offshore things and they were like, wait, this is all steel. I think we're buying this company for less than Bastille value in these offshores. If we're wrong, we'll just liquidate them. And I've been looking at... I've done tons of work, but something Transocean, things that they provide, the things that are going to do big offshore drilling and stuff. Those stocks are so cheap and I've had this the same thought where it's like, nobody's built one of these things in years and years. If there's a real increase in demand for drilling, they're going to go up. But that's not investing advice. I'm just speaking. I've looked it up the corner of my eyes.

Let's turn over to the company we want to talk about. I think we've got about 15 minutes left which... This is a little bit more complicated than a normal company for my [inaudible] because there's lots of little interesting things. But Journey Energy, Canadian micro-cap about approaching 200 million market cap. I'll just flip it over to you. What is Journey Energy and why are you so interested in them?

Josh: Cool, so, from a disclaimer perspective, I own the stock, and this isn't a recommendation. Like you said, the goal is education and entertainment. So hopefully this is educational interred and entertaining.

Journey is a company that I've own stock in intermittently and gotten to know management in since 2015. And it's not been as larger position for me as it... There is like one other period of time where I owned a bunch of it and then more recently it's been a large position. Just because I've owned it, I haven't really necessarily always had a large position. It attracted me partly because of the management, the CEO of Journey was a early exact at Bonavista, which was a very successful oil and gas producer in Canada.

He was previously at Shell in a time frame where Shell was one of the premier employers in Canada and around the world and sort of like meant a lot that he was there and that he got to the point where he got to his career there and it meant a lot that he was at Bonavista where he delivered fantastic results. And where shareholders that were invested there did extremely well. He did so well there that the people involved with forming and controlling Bonavista, created a company called New Vista, essentially for him and a few other people that they really liked who they thought would do really well and they made him CEO of New Vista.

And he did really well at New Vista as well and delivered excess returns versus peers. He was a little too aggressive there for the taste of the board members and some of the large shareholders. And at the time, the unconventional revolution was coming to Canada a couple years later than the U.S. He was paying attention based on his old Shell connections, as well as just he's a very smart and extremely hard-working guy. And so he was just like paying attention to a lot of different stuff. Realized that there was potential in areas that he had already worked in at these previous companies to get really highly productive shale, and he came in and maybe didn't do the best job of communicating and bought these assets for New Vista that ended up being phenomenally valuable.

Similar sort of thing to like The Diamond Offshore, not exactly the same because it wasn't steel, but basically bought assets where the existing kind of minor stuff more than supported the value and they ended up being worth like 50 times or something which he[?] hate for that. This was again not very well received because this wasn't kind of I guess his mandate for whatever reason. And so...

Andrew: Really? He bought assets and they went up 50 x and it wasn't well received?

Andrew: Yeah. He got actually apparently fired in the aftermath of having done this just phenomenal deal like New Vista's a multi-billion dollar company right now. Their core asset that they've built their company on, is this thing that he bought that he got fired for. So again, the current team has done really well operationally, there's a lot to tribute to their success to as well. But the thing they built their business on, is this asset that he bought there. I know him, right? And I knew him from that. I tracked what had happened there and then I attract as he went and started, well, he kind of took over... Once he was immune at this point, he was independently wealthy, right? He got kicked out, but it made people a ton of money and he got called in. There was a pension fund that had some assets that needed some help.

And so he became CEO there. And I think it was summer of 2012 range, so he like hung out for a while and then came back in and he took that company public in 2014, and it went public in I think either 12 to 14 dollar per share range and it's currently at three in change even though the oil price is around where it was at the time that they price their IPU[?]. So good person, great track record, doing very similar stuff to what he's doing at Journey, and that was kind of the thing that made me pay attention to it was he was someone who liked had kind of a mixed reputation because again, he was fired from New Vista apparently and people didn't love what he had done, but if you looked at it, it was like, oh my gosh, this guy did this phenomenal thing.

That like catches your attention and then if you can buy into it, his next thing, where he's doing similar sorts of transactions, swapping out assets, adding a lot of spit and gum and whatever to assets to get them to last a little longer. There's a lot of valuation stuff and other stuff but at the core of it there's a dedicated team that's done really well over multiple iterations that got this thing started at a point that was maximally detrimental and where they're just hasn't really been that capital markets support or understanding of what they built.

Andrew: Perfect. I think there's kind of the... They've got the conventional plays, right In here. And then they've also got the power play in here, which I think is fantastically interesting, but it might be a little bit more of a call option. So we can talk about any piece of it. Maybe we should do like just kind of a sum of the parts so people know the different things within it and then we can dive into each of those different parts.

Josh: Sure. So just like very high level... The thing that makes it interesting here. So, I think people aren't buying the stock because the stock price has gone up, but if you ignore the stock price for a second, I know that's like radical to say for...

Andrew: Hey, look. You said you wanted to talk Jeremy, and again, as a generalist, my first thought was I looked at the stock chart and I think it's up 5 or 6 acts in the past 9 months or something. And I was like, ah sh*t, come on. I've missed it, Josh. Why are you having me talk about this company?

Josh: Exactly. So imagine a company that is generating enough free cash flow that they're going to pay off half of their debt this year, wall at like just the forward commodity prices which it's already like doing a little better then, but they're going to probably pay off around half of their current debt, which works out to be almost 20% of their market cap that is going to go towards dead amortization. And they're likely to grow about 15% this year.

So that means that next year, they should be able to, in theory, pay off the rest of their debt and then have enough room to essentially fund the equivalent of, at around today's Pious price around a 20% dividend while growing 15% a year without giving them credit for that incremental kind of cash flow stack from that growth. And again, like in general, the oil and gas industry is not growing and there is some growth that's necessary in order to kind of meet the rising demand and to make up for very short falls with smaller companies. I don't really worry about this affecting the macro balance and it's kind of unusual, but just at the base business, you have this business that's declining so little that they can spend such a small percentage of their overall cash flow, still grow, improve their cash flow, build out a power asset on the side with some of the extra cash flow, and almost fully deal ever over the next 18 months.

So you kind of have this setup where a few of you like said, hey, this is a whatever manufacturer and it's doing this thing and sure the prices are volatile but men like they're delivering essentially a 35% plus potentially compounded return. I mean that ranks it way at the top of the list of most companies I think that are out there in the public markets.

Andrew: And you mentioned that they're going to grow 15% which was interesting because again, I prep for these podcasts but it's not like I've spent as long as you have following this company, but I was just looking at their deck and it look like a lot of their stuff is in decline kind of a normal. I'm seeing 14% go forward decline rate and stuff. So the growth you were talking about is that coming from... Are you just factoring in taking their cash flow and going and doing like little bolts on acquisitions. I know they just closed one in September, or is there something else in the growth profile that I'm missing?

Josh: No. They're doing what most public oil and gas companies don't do which is telling you how much their assets would decline if and they obviously aren't doing the job explaining this. That's how much of their assets would decline if they spent no money on them in order to sustain their production.

Andrew: Got you. Okay.

Josh: And that's a very important factor and that's like one of the things that's so compelling about this is a 14% corporate decline rate is better than like 98% of publicly traded oil and gas companies. Most companies, if they spent no money, would decline at like 30% or 40% or whatever. These guys would decline at approximately 14%. And again, you can tell they're not promoters because you didn't like, people reading their deck don't understand that they're not saying their assets are declining 14%. They're saying their assets would decline that if they didn't spend some of the money that they're planning on spending. So very different obviously set up.

So they're getting that production growth primarily through drilling infill and kind of just normal course wells. They indicate how many wells they have in their inventory. My assessment is that they're dramatically understating their inventory. They have just enormous assets relative to a very small market cap in a very small budget. And so one of the things that they address that most of their peers, I think do a worse job addressing, is the ability to subject to stable commodity prices develop far into the future without requiring any money spent on additional acquisitions.

So they will buy stuff because they like to buy stuff and they've done a really good job with buying stuff.

Andrew: Sounds like [inaudible] has a great acquisition track record too. So, yeah.

Josh: Yeah.

Andrew: What if their base, the wells that you're talking about, their base assets, I believe they're just south of Edmonton and Calgary. Can you talk about... If you look at one Royal company and their assets are in super deep waters off the Gulf of Mexico like that's going to be a much different asset than these which are just below Edmonton Calgary like everything's got different costs for extraction, costs for transportation, everything. So, can you talk a little bit just about the bass assets, how you look at those assets?

Josh: Yeah. So huge oil in place, tiny[?] percent[?] is already been extracted. They're mostly conventional rock, which means that there's a lot of potential to get a lot of the oil and gas out that was in there originally. Generally conventional assets have a little bit of a higher cost break even just on the existing production, but lower required reinvestment rates. So that's what you're seeing here. Their cash flow would be much lower if oil was at 40 and not 80. So obviously they are very commodity price sensitive, but in a stable or rising price environment. This sort of asset base offers far more financial and operating leverage and you'd have with a higher decline rate, kind of more conventional but unconventional, like Shell producer, which is more typical of what you'll see among the publicly traded oil and gas companies.

So higher breakeven, but not like radically high. Let's say their breakeven might be 30 instead of 20 just on production, right? Not on drilling in wells. But with way less required reinvestment, so if you look at it on a net of maintenance capital, their total breakeven is actually probably pretty attractive versus most of the companies in the space.

Andrew: And I'm seeing, unless I'm misreading this, it looks like in 2020 when their average realized price was under 40 for oil and about 224 for nat gas. They made money that, right? So, you just threw out a number $30 break even but it seems like that's around... Like, you threw it out there, but that's actually probably $30 is their breakeven price.

Josh: Yeah. I mean, I like to joke that I don't really like to actually, I used to have Morgan Housel interned for me for a summer and he taught me this thing and I say it, but it's his and I don't know where he got it, he says that building financial models makes you precisely wrong. So, I try to be right, not precisely wrong. So, I don't have a model on this thing and it was scary because I own a lot of it. I mean, I've looked at models of it and I think a really good understanding of the assets and the cash flows and whatever, but it's like through an understanding of the business that's not through reading off Excel outputs. And I think that's kind of where you get to that sort of, is the right breakeven 32 or 28. I don't know. It just matters that it's not 50 or 80.

So, being able to get that directionally correct, and then spend time on the things that matter for the business. I think matters a lot more than having a precise financial model that gets you like several digits of precision.

Andrew: No, look, I hear you. One thing I've said all the time is like, if this was 30 years ago, you and I could go by the thesis for a stock,we buy could be, hey, it's five times price to earnings and that would have been fine because computers had made it everywhere and you can make out for doing that but now Quant funds and stuff for doing that. If your thesis is, this is five times price earning, you're probably going to get your head ripped off in the long run. You need a little bit more than that. So as you're saying, you understand the company, it probably doesn't matter if you have a model that says, breakevens 32 or 28, as long as you understand.

Right now, as we're talking the price of the stock is 350, 360, something like that. What oil and gas price you think is kind of baked into the stock at that level?

Josh: I think around kind of that 55, maybe $60 price level, something like that. It might be a little lower and that's excluding any value for their power generation, which like you said, is still relatively early stage, but my understanding is, it's probably worth around, let's say, at its current level if they never expanded it around, let's say 30 million dollars or so Canadian.

Andrew: And let's talk about what the power generation doing because I think these types I think, I mean, I know you were at a... You were the chairman of a company in 2017 that did oil and gas and you had them do Bitcoin mining, with their excess, kind of waste product, right? So, you're familiar with if you've got this sometimes you can use it to spring and something interesting. I just thought what they're trying to do with the power plant production is really interesting. So could you maybe dive into what they're doing there?

Josh: Sure. I mean, I would say that it's not entirely an accident that this company that I've been involved with since 2015, went into power generation. I may have harassed their CEO. One thing you can tell if you bug a company and you say, hey, like who's your most annoying shareholder? There's a decent chance that it's me if I owned the stock. So they might say that. So I think it's a really good business to be in, in an area where there's a lot of price volatility for the input and where the output is kind of structurally advantage. So Alberto has been shutting down their coal power plants. Columbia has been doing similar sorts of things. British Columbia canceled a third hydropower plant in a row. So there was like no incremental environmental impact because you already had all the plans and everything you already were impacting the fish and they were halfway through building their third hydro plant and they canceled it.

I don't understand how that's good for the environment. I mean, it's definitely would have been better for me or is better for me for this power investment that they didn't do it, but I think the world would be better if they had built that third one. Anyway, very supply constrained power market. So, it's structurally advantageous for these companies to be building out their own powergen, and most of them talked about it and didn't do it and Journey actually went, and they got a great value purchase on some gently used power generation equipment. I think somewhere in the U.S. they track down how to get it, they brought it up, they got all the permits. It took two years to get it up and running and here it is, up and running and generating.

I think they said recently publicly that they will have a 2 year payout on a 20 year asset on this powergen. So obviously, I love oil and gas, but hey, if they can just redirect all their cash flow to get to your payouts in 20 year utility assets or independent power producer assets, would be pretty amazing. And then you look at the multiples, I mean, there's very I mean, I don't think there's any value in the stock at all for their powergen and if they execute on their plan, which they're saying that they hope to dramatically increase their powergen over the next few years, I mean, they could potentially justify their market cap with zero value to their oil and gas entirely driven by their power generation.

Again, that's like 2 or 3 years out. It's not like right now. But I mean, they've done it already. They've shown that they can do it. And there's not, I think, a ton of reason to think that they're just not going to do it, given how well they've done so far.

Andrew: And I'm looking at their deck. It's exactly what you're saying. It's in a nat gas powergen. What type of power is it though? There's baseload power which a nuclear plant is the classic base load power. That's very low-cost. It's supplying basically 24/7, and then there's a little rusty on the terminology but basically peaker power, right? Which is what comes on when it's 5 o'clock on a hot day and everybody turns their air conditioner on, it's only operating there. It's not going to operate at 3 A.M. when everyone's asleep and there's not a lot of power demand. So, what type of, where in the cycle is there power project coming at?

Josh: I mean this is baseload. Alberta along with all of Canada has a carbon tax and so natural gas power generation is significantly advantaged versus some of the rest of the baseload. And then, I think they're doing some, they may end up turning their kind of basic powergen into a combined cycle, which would dramatically with like a heat exchanger or something like that. It would dramatically improve the carbon profile, which would further improve their position on the cost curve.

And that's not really like, I think Kennedy has done it well in terms of just putting a cost on that sort of pollution. And so, I don't, I'm not advocating for that in U.S. but like with how it's set up there, it's kind of a pretty simple thing in terms of, hey, we do this at cost us this and there's the price we get and the cost for Alberta power continues to rise and the input cost for Journey and others that are using natural gas for their power generation is not rising nearly as much as the power as rest[?].

Andrew: And you said that in a couple years, the power side could actually be worth the entire market cap of the company. Right now, again, I'm looking at the deck. I haven't done crazy amounts of work on the power business, but right now they say, hey, the replacement cost of the power plant is 10 million dollars. We think there's 11 million MPV in the power generation. So, what would the path look like, obviously 10 or 11 million dollars, I think this is about a 250 or 300 million EV company. There's a big gap there. What would the path look like for the power side of the business to kind of be worth the entire enterprise value?

Josh: So first of all, the EV is not 250 or 300 million and that matters a lot. So one...

Andrew: Bloomberg has lied to me again.

Josh: Right? One of the keys here is that these producers, especially Journey, that many other producers have paid off a lot of their debt. So, Journey actually bought back a bunch of their debt for 50 cents on the dollar in 2020. And then they've rapidly paid down a bunch of their debt and they had some fairly high interest debt because again, they used to have like 150 or something million dollars of debt and now they have 50. So through that process, they got rid of some of their moderate interest debt, they replaced some of it with high interest debt, and they've amortized a lot of that down already.

So that matters a lot, right? Because, hey, what's this thing? That's a rendered million dollar enterprise value. It's not. And like a lot of what's happened over the last year and a half is, they've just replaced their debt with equity and not through issuing equity just through cash flow and then market appreciation as their debt has gotten paid down. So, it's a much less risky business than it was the last time the shares is were anywhere close to where they are now. And they have a lot more cash flow partly because they don't have 10% or 7% interest debt that's buying them down.

That matters. I think that NPV calculation is dramatically low. So again, I think the right number for that given where Alberta power prices are now, as well as the forward curve for Alberta power prices versus the forward curve for local natural gas prices, that NPV is probably closer to 25 to 30 million dollars. So, it's worth a lot more. And then the question is, how many more of them can they build? And how long does it take to get there?

I can say, I talk to management a lot and they're often not so happy with the regulators and how long it takes to get stuff approved and it's like there's a lot of barriers and Journey management like I was saying about their history, they just, they'll complain about it and then just push through it. So, if you were to like dew points in time every month, over the last 2 years as they have gotten this project off the ground, it would have sounded terrible and like it wasn't happening. And then here we are with this project that is at least a 2X, maybe it's a 4X or whatever.

I think that communication gap is, it's scary if you don't know how to interpret it and one of the ways I think to interpret that communication gap is to look at the history of the management at past entities as well as to look at what they've accomplished but they're currently.

Andrew: What else should we be talking about with Journey?

Josh: Asset retirement obligations. So, this shows up on the balance sheet. It's very, very poorly understood. If you have producing wells that have liabilities, they're getting double counted because they're in the reserve report with the liability netted out, and they're showing up on the balance sheet. There is, I think this is something that generalists have mostly missed. And I think this is something that you'll be hearing about over the next year or so, maybe as Journey continues to do well, maybe as other sorts of similar situations happen. This is a silent form of significant commodity price leverage. So, your reserves at $40 oil if your Journey are heavily impacted by old wells that will eventually need to be shut in and remediated.

And even if that's 30 years from now, that's a very high percentage of the value of oils only going to be at 40 because you're making so much less money. At 80, that's a very small percentage of the total value. So, your move and reserve value is not linear as the oil price goes up partly because the asset retirement obligations have been essentially obscuring the total value of your reserves. So in Journey's case, they're kind of one of the more extreme in terms of high liabilities versus reserve value at a lower price environment as price goes up that changes and that's partly why it matters so much that they paid off so much of their debt because you had essentially two layers of debt, you had the asset retirement obligation, then you had the whole kind of capital structure. Now, you just have that asset retirement obligation.

And then, there was a lot of noise around this for a number of years in Alberta and they finally have like a pretty good program in place, which is they call the ABC program area based closures. And so they just go and spend. They're not liable for shutting in all of their wells all at once or anything like that. They spend a certain amount of money every year which is factored into their cash flow and factored into like any sort of forecast or whatever. And so they're spending I think like 3 or 4 million dollars a year shutting in old wells that are no longer producing and that mitigates, let's say, 200 million dollar end-of-life liability that's going to come in and like 30 years.

So, that's something that people don't really understand. It sounds really ugly and messy, but there's a regulatory framework in place that's working for both sides producers and for the regulators and for their state and frankly, like the U.S. needs more of this stuff. This is actually a really rational way to approach long life liabilities with small producers. And they're amortizing it, right? Slowly over time. As they spend money, they're generally getting more than one for one, so they spent, I don't actually remember the number, but they spent X number of millions of dollars last year, and they got 2X or something of their liabilities removed because they spent it effectively and they added some value in that process.

And then, if you look at their moving reserve value, and they're moving just total asset value because every dollar oil goes higher. There's more than one to one Improvement in value because of the effect of those liabilities.

Andrew: Just to make sure I'm understanding. So, there's a regulatory framework in place and when they spend, you mentioned 3 or 4 million dollars per year shutting in old wells and everything, that's basically the cut so, 3 years from now, they can't cut... Somebody can't... Assuming there wasn't fraud or gross negligence or something, 3 years from now, government can't come to them and say, hey, you shut in this well, but we've decided the area around, it needs more environmental remediation or something. It's effectively cut, it's done. It's over with. There's no going back on that?

Josh: Yeah, I mean, subject to not causing additional environmental damage. Yeah, once you get it, you have to go through a clearing process but if you behave in the manner that is appropriate, the regulators are behaving in a manner that's appropriate as well and so, it does seem to be working, there were some extra government money, which I think Journey and many of their competitors got and spent and so that was like, nice to see you as well that there was even more activity and that kind of cleared through the regulatory process.

But yeah, I think just the general idea is that the province and the people in the province don't want there to be a bunch of abandoned old wells. Well, there's been news recently of this like giant like water like saltwater like poisonous well in West Texas. They don't really want that sort of thing and they don't have it all. And instead what they have as a very active effort by producers to shut in potential environmental problems way ahead of when they might of and in exchange for doing that on a kind of systematic basis, you end up with the equivalent of an extremely long dated loan with very small amounts of amortization on a group basis.

Andrew: No, makes total sense to me. I was just wondering because, I'm sure, you know as well as I do every now and then, you'll come on a company and they'll say, hey, we've got this one old problem well. We've reserved it 50 million dollars just to take care of it and then 4 years later, you come and they say, we've got this one old problem well. So far we spend 100 million. We think another hundred million over the next 4 years is going to take care of it or something. I'm exaggerating a little bit but that type of stuff certainly does happen.

Any last thoughts in Journey that we should be talking about?

Josh: Yeah, I think just the one thing to think about is right now, they're in growth and debt paid down mode and people often don't appreciate that partly because Bloomberg and others might not even show the huge debt paid down that they're accomplishing. I think Quant funds kind of get it. And so, you end up seeing quants owning more of these things as they paid on more their debt, but I think fundamental investors often just don't even screen for it. Don't really understand it. It's not showing up in their screens, etc.

I think once that debt paid down is done, it's very interesting for Journey and others that are similar where you could, like I was saying, potentially see a 20% type dividend in addition to production growth or you could see them just stop growing at some point and decide to pay like a 35% dividend and or share repurchase or whatever that given their low decline rate and their fairly mature assets, they could, in theory, be able to sustain for a very long time.

There's kind of this, I think people are rewarding companies that are paying out dividends now, but I think companies like Journey can actually potentially pay out a lot more but in a year or 2 years.

Andrew: Yeah.

Josh: So I think that's something that's like kind of mist and I think being patient with that sort of thing can end up being very rewarding, especially if you end up with a situation where like with Journey, if oil is at 40, can be really problematic, relative to oil at 80 or a hundred or whatever. If they don't have any debt, you lose or dramatically reduce the ability of those keys to get taken away from you. So it really changes kind of how the equity prices and then it also changes the value of receiving a dividend.

So, your dividend is worth a lot more if it's going to keep coming even if it's less or more versus if the whole thing he get taken away from you. So I think there's like that's a dynamic I think people aren't appreciating and don't seem to be pressing it.

Andrew: Last question. They did a small ball Tom, but it was reasonable size of, I think they just call it, private Co. It was 3.5 million Journey shares plus 2.9 million in cash. I just flagged it when I was looking through this because 3.5 million shares, it's not quite 10% of the company, but it was more than 5%. So, that's a decent amount of dilution and my first thought when I saw that was, Josh is on here. He's very bullish on the company. It seems weird that they would issue shares down there, but then my second thought as we've kind of discussed especially this year as history's back position was, I bet he probably got a pretty good deal.

So I just want to talk, use the little ball Tan to talk about both that vault on acquisition and a little bit more on MNA going forward if you think there's like some pretty creative bolt ons that they can keep doing.

Josh: Yeah. So, I love that they bought an asset of that size. Most public companies, if you talk to them, even of like a similar sort of total production size to Journey, they don't spend time on 400 or 600 or whatever barrel a day acquisitions. They spend time on 2000 or 5000 or they were like, need to merge or whatever. So I really like it. I think this is evidence of their willingness to deal with a bunch of obnoxious stuff in order to improve their company.

The company is actually, it was formerly a publicly traded company that I happen to own a little stock and it was called Brico and long story, but I owned a little stock in it. I saw what happened and I ended up buying a lot of that stocks that came back into the market and I'm very happy that that happened partly because I was able to go buy a bunch more of it at a price that I don't think it would have been available for otherwise, and when you look at the financial metrics, Journey at the time, it looks like bought the assets at almost a 30% discount rate to the existing production. Like equivalent of the interesting metrics that PD PPV, let's say a 25.

And you can't really buy much for that sort of metric. And there was a lot of low hanging fruit associated with that. So there were a lot of opportunities to spend very small amounts of money to increase that value substantially. And we've seen them do a little bit of that. And they also got, I think it was over a hundred thousand acres, it might have been 200,000 acres of land that was held by production. It came with infrastructure. It came with like all kinds of other stuff. I mean, there is a lot there and even with the stock having run quite a bit, I think if they could have bought that asset today for the same number of shares in the same amount of cash that would have been substantially accretive and it's just brilliant.

You have this like small company with the depressed share price and really motivated team and they go and do this like complicated whatever thing in order to bring in this very valuable asset. And I think people just didn't get it. And so they were selling the stock and okay, cool. Like you don't get it. I can do the math and kind of figure out where this is going. And so, I think it's a great point. I think it's very likely they do more of these things. I'm not betting on it, not counting on it, but like, it seems likely and as they do massively accretive tack on acquisitions, they're still small enough where if they get, if they're supposed to be at like 9,000 and really they're probably sandbagging so they get to like 9,500 barrels a day or something at the end of this year.

If they get to 10,000 or 10,500 by buying another 500 or 1,000 barrels a day of production that really adds up over time if they do that this year and next year and so on. So I like it.

Andrew: That was a great answer. The one thing that jumped out to me there was you said, hey, they announced the deal and the stock traded down and you were buying more of it. And it's one of the, not that markets are crazy and efficient or crazy efficient or anything but, one of the big inefficiencies I've seen is smaller companies that announced acquisitions, the stock price can be very strange in the day or two after the acquisition, and if you have a real view, like a lot of time, I kick myself because I've seen acquisitions that I thought were awful and the stock traded up on it, and I was like, well, I guess the market smarter than me. I guess I can hold this. I guess it was a good deal in like 3 months later. I'm like, God, that was a disaster or they announced a deal that I think is a screaming homerun in the stock trades down 10% because everybody says, I'm a native shores value. And then nine months later. The stock is up 70% because people realize it was a great deal and that doesn't happen. It can happen large companies, but this is really more into the very small company range. I think the reaction around MNA. If you can do it, get a quick view, you can get a lot of alpha.

We're running very long but quick closing thoughts. Anything else you want to leave listeners with?

Josh: Well, also, there was a tell there. I think the chairman of the board bought some stock around was that when I was buying it and it was a little frustrating because then the stock started kicking up. So, I kind of ran out of time and I'd like to be a little more aggressive as I was buying it as I was trying to suck[?] up the former Brico shareholders shares that they were dumping into the market.

Yeah. I completely agree. I think it's just, it's so important. None of this is advice and like, I think it's really easy to say because just do your own work, right? Like the market was wrong there. It was people were selling indiscriminately and it was a great opportunity to do the work on the assets and I had a head start because I owned some of that asset previously. But you could find it. It was in the announcements. There were press releases about it. It wasn't a private or non-public, you could find it. You could diligence it and having diligence that it became obvious, like Journey was back in business and it was going to get really interesting.

And so, yeah, I mean, that was a, I'm glad you caught that. I wasn't really planning on talking about it. But that was an amazing entry point and I think it's the sort of thing you should look for, right? Do your own work and don't believe whatever the stock price moves, or someone says it's good or bad. That doesn't matter. Figure it out for yourself and over time, I think that gives a lot of rewards.

Andrew: Perfect. Well, let's wrap it up on that. I think that was a great closing thought Josh Young. I'll be sure to include a link to his Twitter profile. He's super famous now, so I'm sure everybody can find him anyway, but I'll include a link to his Twitter profile so everybody can go give him a follow. Make sure they can catch up with them and everything there and Josh, this has been fantastic, man. I really appreciate it and enjoyed this. Appreciate you coming on and we'll have to do this in the new year. Maybe when oil is at 150. Who knows?

Josh: Hope so. Cool. Thanks a lot.

Andrew: Talk to you soon, Buddy.

Josh: Okay.

Andrew: For some reason. We're not stopping.

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