Striking Oil – CrownRock by Lime Rock Capital (EP.428)

26:06And that moment where Saudi said, we can punch you out of business whenever we want, really focused the industry to be much more high graded overall in the most productive resources in the US. So there's entire plays that were 400, 500 rigs were running that are completely wiped out and have barely reemerged in the years since. It also really strengthened the focus on the Permian Basin, which is where fortuitously all of our investment was located within Crown Rock. And that proved to be by far the most resilient of the basins. You could drill there at that point in time at oil prices below$30 a barrel because service costs adjusted at the same time too.

26:47And it also prompted an acceleration of a big industry shift in the Permian Basin. from the vertical drilling, which we had been doing since our founding in 2007, to horizontal drilling, which proved to be effectively a 3x uplift in the productivity of the capital, just capitalizing on that innovation that had already been perfected in other parts of the country at that point in time. And then the last extinction-level event was obviously the pandemic of 2020, when oil prices actually went to negative$40 a barrel on a single day for the first time in the 150-year history of the oil business. It was by far the most calamitous from an oil price perspective, but again, really forced very substantial operational changes within Crown Rock.

27:37Two-thirds of those operational efficiencies that we really focused on and gathered then persisted for the years after the pandemic. So if you can live through these things, which fortunately we were able to, you come out much stronger. But man, there's a lot of up and downs through that 17-year period. And I think one of the calling cards of LimeRock as an investment organization is we're reluctant to use aggressive leverage structures. We used leverage less aggressively. And when we did have leverage, we used hedging aggressively to ensure that we had the capital to continue our drilling program at bad times.

28:11So that meant when we hit the global financial crisis, when we hit the shale war versus OPEC, when we hit the pandemic, we had locked in the revenue stream. We were able to spend our board meetings focused on where are there opportunities to add to the acreage position? Where can we high grade? Where can we pick up locations that are better than our existing stuff? We didn't have to sit there and worry about restructuring covenants with lenders and desperately protecting the value of our assets to avoid having to sell at a bad time in the cycle, which is really the cardinal sin in our business from a value destruction perspective.

28:44What was it about the management team and organization that allowed you to navigate these crises that come in the sector? We use less leverage than many other players, but I also think the team's really, really strong focus on operational efficiency enabled us to do that. Our vertical wells were economic even at the worst of times. That turned out to be incredibly important. If you just look at the absolute breakdown of value creation in terms of vertical wells versus horizontal wells, almost all the value creation ultimately resulted from the horizontal wells. We wouldn't have had the land to drill those wells on unless we held the acreage with the vertical program.

29:24So the efficient vertical program is what allowed us to put ourselves in position to capture the huge value uplift when horizontal drilling took over. The management team philosophy was a forever hold philosophy. So if you canvass the investment banks that cover the energy sector, the most common refrain about Crown Rock is Tim Dunn will never sell it. And I think that was an important distinction relative to the other PE-backed oil and gas deals at the time, and that the mindset was just forever. It's a long-term case. Capital allocation is everything. You marry the best land division in the Permian Basin with the best drilling and operations team in the Permian Basin, and you have a don't worry about next quarter mindset, worry about what we look like 10 years from now mindset.

30:11And I think that dials back to the ownership structure. This was not a term sheet that said, hey, under certain circumstances, the management team take is X percent of the profits, and above that level, It's Y percent of the profits. It was a mutual ownership structure from day one where the management team and the LimeRock team in parallel thought as owners of a business jointly and building value through time with really no end date. Unlike I'd say just about every other deal that's gone through the system, the attributes of forever hold were pretty central to this deal right from the get go.

30:44How did the idea of that forever hold dovetail with the initial expectations of this is probably going to be like any other deal you do with a five-year hold? It was around 2011. I think we really started talking about that more directly between ourselves and the management team. Before that, we hadn't really talked about exit much at all, but we had a successful investment going into 2011. And I just remember calling up the CEO of the business and just saying, most of the management teams really start thinking about exits around this point in time. You're four or five years in. At that point in time, we're three to four X ROI on the investment.

31:27When you go into a deal with the management team, they're always worried that the private equity firm is going to sell the business out from under them at some point in time. The vast majority of the deals that we're in when we actually exit is because the management team wants to sell more so than us. And there's very logical reasons for that. Almost all of their net worth in a successful deal is involved there. They start to get really worried about concentration levels and the like. I think one big advantage that we had in this deal is that our management team was very successful before Crown Rock.

31:57They weren't looking for their next dollar to go on vacation or buy a new home. They were very well set up even before that. So they had the flexibility of taking a very long-term view. And when we opened the door to them that the private equity firm, Lime Rock, were not necessarily beholden to strict five-year terms. and when we get above a 3X, we always hit the exit button. I think they started thinking differently about, we might not actually hold this investment forever, but we can manage the investment as if we're holding it forever. As a result of that, I think we took very different decisions than many other people would take in terms of how we develop the assets, which ultimately added a lot of value over time.

32:42But of course, we didn't have the contractual right to hold the investment forever, we had a 10-year plus two option year fund, just like most other private equity funds have. We had to do some restructuring along the way to facilitate the hold as long as we did. What were some of those different decisions that the management team was able to make because of the duration of the hold? We treated the land as if we were going to hold it forever. And as a result, we always wanted to develop it as if we were going to drill every well on it. And we knew that our cost of capital was high. We knew that the ability to go out and replace that land was effectively impossible.

33:22There's a finite amount of it. We had some of the best resource in the entire world. You can't just go out and recreate that land position. And as a result, we drilled the wells in a much more deliberate way over time. As a happenstance of that, also maximize the value for any new buyer that would come in and buy the asset. It didn't necessarily result in the best quarter to quarter production growth. In fact, it decidedly did not because that was never a consideration for us. It didn't result in the highest near-term internal rates of return on our capital program. But over the life of an entire asset, I think we managed the asset to try to maximize the total amount of profit dollars that would come off of that asset over time.

34:09There are distinct trade-offs in there. And you can see how different companies would take different decisions based on the constraints that they face. If you're in the public market, you care a lot more about quarter to quarter performance. If your cost of capital is different, you would make a different decisions than the ones we made. When you have a drilling unit out in the Northern Midland Basin, you've got several different options to develop. One of the ways that a lot of our peers adopted was when horizontal drilling was quite early before we had really refined the well design and the fracking methodology people went and drilled a lot of one-off horizontals in virgin acreage on drilling units that hadn't really been drilled before.

34:50And that was a real help to near-term cash flows that helped with your quarterly progression on production. But ultimately that was a mistake because it marginalized the ultimate recoveries from that drilling unit. So the fact that we drilled horizontals to hold the land and then did very few one-off horizontals and were able to offer those undrilled units to buyers was a big part of the value creation. As you grew the land base with the original vertical drilling over time, how did you think about capital structure? We tried to keep the capital structure simple. We also had some sales of producing properties.

35:31We sold a number of packages early on in the investment to MLPs, to these production-based partnerships that were public trading at good values. And we were able to lock in a lot of capital, cycle into land over time. And that's how we kept the initial investment in the deal to$100 million while essentially putting a lot more money than that at work over time. So the management team had wealth, but presumably not every employee in the company did. How did you think about over this long hold period, making sure that the management team could retain the people they needed to to continue their growth?

36:09Well, ultimately, every employee of Crown Rock was an equity holder. I mean, that was a big part of the overall compensation scheme that we had there. Well over 200 millionaires were kind of birthed from the Crown Rock investment. I think our CEO had a very keen insight relatively early on, which is that if you give someone a piece of equity, they will very often undervalue that if there's not an option to realize the value that's there. Relatively early on, we started offering to buy back the equity from the employees on an annual basis. We would buy it back at whatever our mark-to-market value was that we reported to our investors.

36:50And in the early days, LimeRock purchased a lot of those units back. We were able to invest around almost another$25 million in secondary purchases from various people that retired or other employees that just wanted to realize some level of liquidity. What you find when you do that is almost no one wants to sell. As soon as you offer the ability to sell it back, they can see that it has real tangible value. They could make the election to sell it and realize some cash, but it's very rarely that they would ever actually do that. And the senior management team would never do that, even though we wanted to put more capital to work all the time.

37:25It really was great for tying further alignment to the business throughout the entire employee base. Since you got through that 2011 discussion about longer duration hold with the management team, and then you hit the 2015 bump, somewhere along the way, I imagine you guys are sitting back thinking, what did we just do? We had a great result, and now it's back. How did those discussions go on your team? There was actually reasonable pressures that started to build up earlier than 2015. Maybe they kind of hit a crescendo in 2013 or so. The investment was marked at about an 8x ROI, which is a great investment.

38:04It would have been one of the top five investments we'd ever made if we had sold at that point in time. You have a small team within a team that's managing this investment, but it's come to represent a large share of unrealized carry. and we have a partnership and other partners start to have a lot of questions like, why are we still holding this thing? What does it really mean? For the people that are working on it day to day, it seemed obvious as to why we were holding it. But that's because we're having at a minimum conversations every week with the management team, which we did for 17 years, in many cases, multiple times a week.

38:37You live with it every day. You're very comfortable with it. But in 2013, there was enough questioning about why were we still holding this investment that we talked about it, I don't know, two, three hours at a strategy session going through a very long, exhaustive presentation on why we're going to continue to hold an investment marked at N8X for potentially another 10 years, which was the time span that that presentation ran through. And it was really healthy for the partnership to hear all of the questions, alternative cases to test that continued thesis that was held. And I think after that, there was just a much broader organizational buy-in.

39:21A big part of that 2013 presentation was, we're probably going to get another oil price correction, another recession before too long. What does this look like if we go through another global financial crisis? And so when it actually did occur, when Saudi declared war on shale in 2015, I think at that point, there was already just a lot of comfort with how the investment was performing, that it wasn't a big gut-wrenching questioning of what had we just done when we actually got to 2015. It was sort of a seminal moment in Lime Rock history. Jay put together this amazing 100-page PowerPoint, and the idea was, are we crazy to continue holding this deal?

40:02That's kind of the cognitive bias that we really had to overcome to achieve what we achieved on this investment. There's an anchoring effect in private equity, like in every area of investing that is not rational. It's a very real intangible thing. In our business, that's manifested by people looking at a three bagger or five bagger and saying, well, that's a great deal. We got to sell it. We got to tell the investors about this. This is how you build a big AUM business over time is you realize those. You don't continue holding and taking risks. But in this particular case, Jay was able to put together a deck that was incredibly persuasive.

40:38There were moments when oil prices were minus$37 a barrel. It wasn't a happy day for us. And you can certainly think about the offers. We had had a number of tangible offers to sell the business over time. And by the same token, we had consistent confidence that not only were our assets ultimately worth a lot of money, but that the technology was getting better. There was still this tailwind of value creation that was driven by improvements in rig efficiency and frack strategy and the layout of the wells. All that stuff was still getting better. So unless you felt like the impairment to oil prices was permanent and our background as research analysts gave us confidence that that wasn't really the case, it was just something that impacted the whole time of the investment as opposed to what we saw as the ultimate ROI on the deal.

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42:22Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. At that crucible internal moment to making that decision, how did that conversation compare to others that you've had in the past or since of similar successful investments that maybe you should continue and re-up for a while or exit? There's moments where the market collapses and you just have asymmetry in front of you and you layer in the bet and the challenge is don't overstay your welcome because whatever created that asymmetry is probably going to present itself again on the opposite end of the spectrum.

43:05We owned an oil sands company in Canada, first deal we did. We owned a shallow water jackup drilling company in the Gulf of Mexico and our second fund outsized ROIs in both cases. In both cases, within five years of our exit, those companies were bankrupt. It just speaks to the fact that each year we were holding Crown Rock, the technology that was being really ubiquitously applied throughout the industry in horizontal drilling techniques, lateral lengths for the fracks. Everything was getting better every year. I'm not sure there is an analog to the question you're asking. This was very unique insofar as prices were coming against us at moments in time, three that Jay mentioned, But there wasn't that extinction risk fear.

43:47The Crown Rock deal just never had aspects of that risk factor. How did you match the duration of your capital with what you were seeing in this long duration investment opportunity? Well, we had a fund that effectively ended. That fund concluded, came to an end, including its two option years in 2018. So we had to go raise an entirely new fund. I think it might be the largest continuation fund in the energy sector even still. It was certainly one of the big pioneers effectively in single asset continuation funds in the energy sector when we did it. But that was a big six, nine-month process to get that done.

44:27Effectively, the investment at that point in time was marked at a 20X. So you really have to give a lot of credit to the investors that did come into the fund. I can certainly understand any investor that sold at that point in time. They'd been in a fund for 12 years. They probably had a different CIO through that period and had a different capital allocation objective. So you can't really fault anyone for selling, but I think give a lot of credit to new investors that came in into almost a single asset fund at a 20X ROI to buy into the vision that we had, that there was a lot of continued growth yet to come out of that asset.

45:03And at that point in time, we were producing a little under 40 ,000 barrels a day. And we had projections to get well over 150 ,000 barrels a day if we held it for another five years. We briefly got over 160 ,000 barrels a day right before we sold the investment. So the thesis that we had going into the continuation fund bore out eerily correctly. It was a big effort getting that done. And from there, we had another seven years of runway to really execute on an entirely different business strategy at Crown Rock. In the history of the investment, there's effectively two major phases. One was where we drilled a thousand vertical wells.

45:46And then there was an entirely new phase as we transitioned into becoming a horizontal driller, which was a very different skill set that we had to build within the business. And I think one of many, many great things that the management team did, reinventing themselves as a preeminent horizontal driller has to be up there. So you have a management team that executes as vertical drillers, horizontal drillers, do the continuation fund, you make it through COVID. Management team now has a reputation of wanting to hold these assets forever. How do you then decide to ultimately exit? There was a couple of factors, Ted, that went into that.

46:24For one thing, we were getting close to the end of the continuation fund. I think we had two years left in the continuation fund. We had obviously developed a tremendous reputation for the business, for the management team in the limited partner community. But doing another continuation fund structure at that point would have been a huge exercise. It would have been a massive undertaking. But the bigger factor, at least in my mind, was the phenomena that I talked about earlier, this sort of continual value creation through technology improvement, we thought it was no longer as real going forward.

46:59There's only so much resource that you're ultimately going to recover. And we just felt like we were getting closer to the sort of maximum economic recovery point. And that changed the risk calculus. You had this big asset, you had market risk in retaining it, as we saw come home to roost several times during the whole period of the investment. but offsetting that you didn't have as much additional upside. The well design, the frack design had unquestionably gotten much closer to their theoretical maxims. We don't know how much yet. And in fact, the degree of improvement in rig efficiency since we sold the investment just over the last year has been greater than people expected.

47:36And I just felt like the risk calculus had changed materially in the sense that there was just a lot less upside in the asset. And the merger market has a pulse and the pulse started to beat insofar as there was a lot of interest and a merger wave was soon to be upon us. And there were not many Permian companies like Crown Rock available. You kind of had the numbers in our favor, I think, in that moment in time with, I think, a lot of influence and input from the merger community saying the big boys are ready to come back and play. And really almost to that moment, Exxon announces it's taking out Pioneer Natural Resources.

48:15So the merger buzz was not lying. There was certainly moves afoot that I think would encourage an owner of our type in that moment to say, there's a window here, not to be overly cliched, when the ducks are quacking, time to feed them. And that was just a perfect moment, I think, to begin a process that we did begin. The flip side of that was the business had been so successful that we got to a size that very few companies could afford to bid in that process. And the deal that John was talking about with Exxon taking out Pioneer, that took two of our best buyers off the table. It wasn't a big group to begin with.

48:48It was a little bit of a white knuckler going through this process. How'd the process play out? Early in the year, 2023, we had one of those strategy sessions where we got a lot of different views from investment banks. And I think we just came out with maybe an unspoken consensus that we should probably test the market and see what it would bear. We marketed it to a handful of firms that could take down a deal of this size. As John noted, there wasn't many of them. We got a lot of interest. It was competitive. I think multiple firms viewed the business in a similar way, as was manifest by where the bids came out.

49:24And we were able to strike a great deal with Occidental, and they were a pleasure to work with and have a great vision. Wanted to keep all of the employees to really execute. it was a great addition to their portfolio. I'd love to talk through some of your postmortem on this. What were your main takeaways? We put together a simple structure around this deal. I think a lot of people in our world get seduced by complicated structures that have many bells and whistles for different potential scenarios. And we made a cash investment, the management team put in assets. We had an ownership structure and we were kind of immediately all on the same side of the table in terms of advancing long-term value.

50:09And I just think that being able to think about the investment, think about the best ways to grow value overall without worrying about when we're going to reach this tier of value creation and what that does to the management participation and whether there's some sort of time-limited other structure is just really helpful. And it's something that I certainly try to apply to other aspects of other things that I'm doing in life. I just feel like if you have simple incentives that are easily understandable, you can spend more time thinking and focused on the things that are important as opposed to the fine print in your investment agreement.

50:46I think their biggest differentiator relative to every other management team that we've ever dealt with is Tim Dunn and his lieutenants and partners had a greater respect for capital than any other management team I've ever met. Most of the time, management teams are so focused on growth and so uninterested in the cost of capital it takes to achieve that growth, they end up making really poor decisions along the way. And there are excellent decisions that this management team made because they knew how costly capital was. They contributed a lot of assets initially onto a big piece of the business right from the very beginning.

51:29And bringing more capital in creates dilution. They viewed that as very costly to them. And as a result, they developed a number of solutions that allowed them to grow the business probably more slowly than their other peers, but massively more profitably, which allowed the outcome that we ultimately achieved. Frankly, that applies to private equity firms too in many respects because there's also a trade-off between managing money and accumulating assets under management and growing that way versus staying smaller, exploiting a niche where you have an edge, which is necessarily a more confined space and generating really high rates of return.

52:12And I think that's part of the culture of LimeRock as a firm, notwithstanding the fact that we tried to put more money into Crown Rock over time. And the management team there was smarter to think, I have this other alternative that's a lot cheaper than your money. That's a lesson that similarly applies in the private equity space too. John, any thoughts? The uniqueness and the attributes of the deal in a postmortem sense. We need to be careful not to overread too many learnings and think that they could be applied to the standard deal that comes across an NRGPE firm's desk. There are attributes of the people, the Midland Basin that you just don't replicate.

52:49It's a very special case. And there's probably some danger in thinking there's an application in the postmortem for everything we do going forward, because there's certainly not. Over the 17 years you own Crown Rock, there were some pretty significant shifts in the industry. You talked some about the shale revolution. And on the other side, certainly the last half, you have the whole ESG movement. And we'd love to get your thoughts on how you see this deal fitting in to those two perspectives. Crown Rock as an investment essentially spanned the entire history of oil shale development in the U.S.

53:26The development of gas shales started almost 10 years earlier, but the development of oil shales was essentially coincident with the starting of Crown Rock. 2007, U.S. oil production as a share of global production hit its absolute minimum that we've seen over a 70-year time span. And at the moment that we sold it, it hit a local maxima that spanned 30, 40 years. The tremendous growth in oil production in the US is exemplified in the Crown Rock story. And one of our great frustrations as energy guys, not as investors, is this broader notion about whether the shales were a scam. There's been books written about how shale was a scam.

54:10And I think much less focus on just how disruptive shale technology has been, not just in the energy industry, but for the global economy overall. In the absence of shales, I'm very confident that the oil price would be$50 higher than it is today. When we look over the ownership history, that 17 plus year duration for the ownership of Crown Rock is that if you looked at the E &P oil and gas index, the XOP of independent producers over the ownership period of Crown Rock, where we realized on that one specific investment, a 79X ROI, the return on that index was 0.9X. You lost 10 % of your money.

54:52And people point to that and say, oh, the shales were a scam, But the shale so disrupted the legacy oil and gas business in the US, it just consumed and destroyed a lot of capital, legacy capital that was in the oil and gas business and was replaced by much, much more efficient, more profitable shale development over time. I think that is a little lost in the conversation around energy over time about just how big a technological movement this was. Thousands and thousands of people constantly innovating, making small changes, sharing that information broadly, ultimately to the benefit of the U.S.

55:33consumer, the global consumer. The biggest shift I would say relating to ESG was more of a LP related shift where we through time had been a very endowment foundation heavy LP base and somewhat coincident with the continuation fund. I think there was clearly a divestment movement on university campuses, and those that bought into the divestment movement wanted out. Those that didn't certainly had pressures that were less of a divestment type, but more of were not going to do an incremental deal. So we did have the benefit, I think, of a few endowments that were able to roll into the structure, despite a lot of ESG, non-fossil fuel type drumbeat that was happening on their campuses or at their foundation boards and the like.

56:17That issue has been most acute, I'd say, in LP interactions rather than day in the life in terms of Lime Rock deal activity. How have you thought about the conversations you've had about the impact of the environment on the space as a whole? Mark McCall came on board day one as our chief financial officer, general counsel, sort of jack of all trades. We were smart enough to realize there were aspects of running a business that we were less interested in. Mark was recruited into the Department of Energy to run the loan program office at the DOE. during the Obama administration. And when he came out of the administration, he came back to John and I and said, there's a growth equity opportunity set that we should be capturing at Lime Rock.

56:58And we discussed and debated it, gave him kind of a year runway to evaluate the market that he saw from that perch that he had within government. So how have we dealt with it? We've actually spawned an independent strategy under the Lime Rock umbrella to target growth equity, LimeRock partner style deals, but in the new energy economy, separate team that is dedicated to that in the LimeRock new energy business. I think on the core oil and gas side of our LimeRock partners and LimeRock resources business, we've always held ourselves to a standard in terms of the operations of the portfolio companies or the assets we're managing, but there's clearly more ESG-minded metrics that get followed today that frankly wouldn't have been on the dashboard five years ago.

57:40I think most inside Lime Rock would argue we were following it. We just didn't have it in a harmonized manner that we do today. I think everybody in the industry has heard the call. This is something that matters today. It's going to matter in the future. The energy transition is real. It's going to take a long time. And the strategies coexist for the foreseeable future. One thing that is often forgotten is when you look back to Paris commitments, I mean, the United States is really one of only a very small handful of countries that has actually lived up to Paris commitments in terms of per capita CO2 emissions reductions.

58:16That is primarily driven because of the displacement of coal. Coal consumption in the U.S. is down 50 % since 2008, right around the time that we invested in Crown Rock. And 80 % of coal reductions have been allowed by the increase in production and consumption of natural gas. The other 20 % from other renewable resources, solar and wind and geothermal and others. But it's been predominantly displaced by natural gas. When you account for natural gas emissions, the total emissions reduction that has been allowed by the increase of natural gas because of shale development is 2x that of solar and wind.

58:58I think we have a lot to be proud of in the oil and gas business. as it relates to that. If that is your number one issue, you should be a very big fan of natural gas in the United States, which the shales have greatly allowed to increase. I'm curious the impact on LimeRock of having such a successful deal over such a long period of time. And how do you reset the individual investment deal when on the one hand you have a 79 times outcome and the next one probably has no chance of doing that? The market today, it's a little bit of back to the future from the days we started the business. There's far fewer people playing the game.

59:36The shales brought a rush of capital. The walls just opened, the big buyout shops right through to family offices, small mid-market firms that wanted to play the picks and shovel side of the shale revolution through oil field service. That capital's all fled. It just did not perform well in aggregate, and it doesn't look like it's coming back anytime soon. So I think the difference today in the market is there's a lot more cash generation happening in the industry. There's a lot fewer players playing the private equity game. And there's, as a result, valuation entry points that allow for something that didn't exist really in the earliest days, which is cash flow generative, free cash generative aspects of the return coming through dividends.

1:00:19We weirdly have, I would say, probably one of the lower risk portfolios that we think we've had through time. We own a lot of Permian exposure through the royalties and minerals market. We extended the Crown Rock relationship by buying up the underlying mineral rights in the basin, as well as some other basins. But the risk profile as a result certainly may not allow for 79s to hit the board, but there's an oddity in terms of the feel of the risk of the portfolio in relation to what might be more standard PE return outputs that might fault more on the two and a half, three, three and a half, you know, are your success case deals?

1:00:55I wouldn't say it's a factor. I don't think people's ROI expectations have been reset by the results on Crown Rock. I think we're very driven by conditions in the industry today. And ironically, that is probably creating an overall lower ROI scenario, but one which on a risk adjusted basis, we think is among the most attractive periods of investing that we've seen. I want to make sure I get a chance to ask you a couple of closing questions. What is your favorite aspect of private equity? The thing that I love about private equity is you have the opportunity to roll up your sleeves, invest thematically, and most importantly, develop long-term relationships with excellent management teams.

1:01:36That's what originally drew me to private equity. That's kind of why I wanted to be on that side of the business. I thought there were great opportunities. It just suited me better to sort of work on establishing those long-term relationships. I almost echo it. The welcome to the NFL rookie moment for me, first deal I did, these guys would remember it well, where the ink was not dry on the deal. Canadian pipeline construction contractor, four weeks later, after putting about seven or$8 million into a company, I got a phone call from three of the division VPs saying, we're leaving or the CEO's leaving, but we all ain't staying.

1:02:10Hightailed it up to Calgary for a little sit down. It reinforced First, the role, the individual interactions, the decisions we take, they matter. You have to take decisions in this industry. Sometimes they're very uncomfortable. That to me is everything about private equity. The decisions you're taking alongside partners and deals ultimately matter much differently than should I sell my Halliburton and buy my Exxon, which was sort of the day in the life before starting the business with John and Jay. I would just say private equity is not a manufacturing business, at least the way we invest capital.

1:02:45Trying to do the same thing over and over again is really, really tough when you're trying to find really outsized investments. The lack of repetition is really engaging because there's always a new and different problem to think through and solve. And I'm not really good at repetition. I like problem solving. It lends itself to that very greatly. What's your favorite hobby or activity outside of work and family? I'm a golfer. I love to cook. I like concerts, live music as much as possible. I don't know how you can do all those three together at the same time. What's one fact that most people don't know about you?

1:03:23I am the 1986 Connecticut Monopoly champion. What's the trick to being good at Monopoly? The primary lesson is just to focus on one or two of the top yielding monopolies on the board. You got to trade aggressively early on to get that position. And then obviously to some degree, there's luck that gets involved, but that's the focus, getting early access to one or two good monopolies. All about boardwalk and park place. All about boardwalk and park place or high quality acreage in the Northern Midland Basin as the case may be. Mine's actually very similar, but in a much more sophisticated way. I play really obscure strategy games.

1:04:04I probably spend way too much time doing that. I think they're great for training your mind. Think about game theory, which is very, very applicable in our business. It's also very good for conditioning yourself to think about marginals. People on average think too much in terms of averages and not enough in terms of what's the marginal result of this decision that I'm making, which I think tends to produce better decisions, and games are really good at thinking about margins. John, fact most don't know about you. Couldn't be more different. 1965, my mother was probably weeks away from her final vows as a Catholic nun, and thankfully she chose a different path.

1:04:45Rather jokingly, when I eulogized her at her funeral, I said the Sisters of Charity's loss was quite literally my gain. What's your biggest pet peeve? You're a Connecticut resident, Ted, so I drive the Merritt Parkway probably as often as you do. And if somebody's doing 55 or 50 in the left lane, left lane Larrys are my biggest pet peeve. I can't stand it when people misuse the word fulsome. Fulsome does not mean comprehensive. A lot of people in the investment business think it does. And what really ticked me off recently, Ted, was I saw in one of the dictionaries, I don't remember which one, they've added that as a secondary definition because so many people incorrectly use it.

1:05:19So they're incentivizing dumb behavior. I get really annoyed at people that make bold pronouncements or predictions, but then are unwilling to bet on those bold pronouncements and predictions. I make a lot of bets with people. I think it's very good at honing clear thinking. I have a big log of bets that I made with people, some spanning decades. I just think it's really good to focus the mind. Betting is good. Making bold predictions without being willing to bet, that's bad. What's the best advice you've ever received. The best advice came from my dad. It was when I had a job offer at Goldman Sachs that was $32 ,000 and a job offer from a European bank that was$39 ,000.

1:06:00And he said, short-term decisions sometimes have long-term consequences. You can walk across the street to that European bank when you're working at Goldman Sachs, they'll hire you. You can't walk in the opposite direction at 85 Broad. That life advice, I need to remind myself periodically and certainly have channeled it in different form to my four children. It's quite useful. One of the early pieces of advice I got from Don Texter, my boss at Goldman, I was hired into the oil and gas group. I enjoyed it, but maybe I was expressing the desire to be more of a generalist or to move into another part of the bank that dealt with multiple industries.

1:06:34He goes, look, the secret to being successful in the finance world is to be the biggest fish in a small pond. That's been a really critical part of my career. I think that's been a critical differentiator for LimeRock over time, and that was great advice. When I started at LimeRock, I felt like I knew a lot about the energy business. I didn't know anything at all about investing. And just one thing that has stuck with me ever since those early days in 1998 actually came from Jonathan, which is to pay a lot more attention to the tails and less attention to the average, because it's going to be the tails that really drive performance, both positively and negatively.

1:07:15And just reinforcing the points about thinking about the full breadth of the distribution has really been influential in my life as an investor. Which two people have had the biggest impact on your professional life? Certainly my father. And John just mentioned another individual, Don Texter, who was a partner at Goldman, hired both of us, spawned our careers, supported our careers early inside Goldman. I think Da Vinci had a quote that is sort of pity the pupil that doesn't surpass the master. And I think the Goldman culture was an embodiment of that line. And Texter certainly embodied it by giving us the runway to do what we did inside Goldman in the very early parts of our career.

1:07:54For me, it's Texter and a guy named Clayton Voidus who ran Renaissance Energy, which really created this incredible expertise in the Western Alberta. When he got active in the play, it was viewed as washed up. And he just showed that by focusing on an area and developing expertise that others didn't have, you could create tremendous amount of value. I think a lot of those lessons came home to roost in the Crown Rock investment. Clearly for me, it's these two guys. I'd never had any ambition as a 24-year-old kid working for an oil and gas company of getting into the private equity business. But thankfully, these guys had the foresight to do that and incredibly thankful that they asked me to join many, many years ago.

1:08:34All right, guys, last one. What life lesson have you learned that you wish you knew a lot earlier in life? I had a very low drama, no stress upbringing. And I think when you have that, you assume everybody else has a low drama, no stress upbringing. And I think when you run a business and you're managing people, I wish I learned earlier empathy. Everybody's got something going on behind the curtain. I would have benefited early on in managing people at Lime Rock, understanding everybody's life circumstances may not be quite analogous to one's own. and take pride in what you have, but assume others may have something else going on.

1:09:08I wish as a younger man, I was much better at accepting constructive feedback. We're surrounded by much younger people in the organization now. And I'm always quite envious of how accepting they are of feedback, even critically. I think they view that as a real tool for improvement. I wish I would have been much more accepting of that. I probably would have improved a lot faster over my professional career had I done so. I get very wrapped up and nervous about any public speaking opportunity. And I think in the last few years, I've realized that I just don't need to feel that way. And it's become much more enjoyable for me.

1:09:48And I've had a lot of stress over my life related to that, which would have best been avoided. Well, Jonathan, John, Jay, thanks so much for sharing this very left tail outcome on Crown Rock. Thanks, Ted. Thanks, Ted. Appreciate Appreciate the time.

1:10:30Thank you.