Podcast Summary: A Book with Legs – Episode Featuring Doug Terrison on "Can't Deny It"

Introduction In the February 3, 2025 episode of A Book with Legs, hosted by Smead Capital Management, Cole Smead and his father, Bill Smead, engage in an in-depth conversation with Doug Terrison, a seasoned Wall Street analyst and the author of Can't Deny It. The episode delves into Terrison's extensive career in the oil industry, his influential book, and his strategic insights into value investing within the energy sector.

Doug Terrison’s Background Doug Terrison brings a wealth of experience to the podcast, having held prominent positions on Wall Street. He is the former Head of Energy Research at Evercore ISI and Morgan Stanley, where he covered integrated oil, ENP (Energy, Natural Resources, and Petrochemicals), refining, and marketing sectors. Prior to his Wall Street tenure, Terrison managed Putnam's Energy Mutual Fund in Boston, one of the largest energy funds globally. His career began as an engineer with Schlumberger, a background that provided him with unique industry insights uncommon among his Wall Street peers.

“I was the only person who spoke English because everybody else spoke Cajun French. And so it pushed me out of my comfort zone a little bit.” [04:15]

The Era of the Super Major Terrison discusses a pivotal concept from his book, Can't Deny It: The Rise of the Super Majors and the Transformation of the Oil Industry. He coined the term "Super Major" to describe large oil companies that consolidate to create value and maintain competitiveness. In the late 1990s, he predicted that without strategic mergers and capital management, the energy sector's weight in the S&P 500 would plummet from 14% to 1-2%.

“We suggested that companies combine majors become super majors... which is just a phrase we created at Morgan Stanley in 1998.” [12:11]

His recommendations led to significant consolidations, including the BP-Amoco merger, ExxonMobil, and Chevron-Texaco, transforming the oil industry and stabilizing its market presence.

The Pledge for Greater Capital Discipline Following the shale boom and subsequent market downturns, Terrison introduced "The Pledge for Greater Capital Discipline and Enhanced Corporate Governance" in 2016. This initiative urged energy companies to:

1. Maintain Low Spending: Even if oil prices rose, companies should refrain from excessive capital expenditure, returning profits to shareholders instead.
2. Adopt Value-Based Performance Measures: Replace traditional metrics like EBITDA with measures that reflect intrinsic value and returns on capital.
3. Link Executive Compensation to Performance: Align CEO and management incentives with the company's value creation and capital efficiency.

“We were asking... Keep your spending low even if the oil price increases... Let's start using performance measures that connect to intrinsic value in the stock market.” [39:24]

The pledge was instrumental in turning the fortunes of energy stocks, with companies adhering to it outperforming their peers consistently from 2017 to 2019.

Globalization and Privatization Terrison highlights the impact of globalization on the oil industry, particularly the privatization of state-owned oil companies. He recounts Morgan Stanley's role in advising major privatizations, such as Sinopec in China and Statoil (now Equinor) in Norway. These transitions required significant operational and managerial reforms to align with Western market standards, enhancing transparency and performance.

“Our first major privatization was with Sinopec... The Sinopec offering was very successful. The stock was a five bagger, 500%, I think, in the first five years.” [22:09]

Refining Sector Insights A notable chapter in Terrison's book, "The Golden Age of Refining," underscores his accurate prediction of a refining sector resurgence. Despite being the worst-performing subsector for two decades, Terrison identified underinvestment opportunities. His analysis led to remarkable gains in refining stocks like Valero and Holley Frontier, which outperformed the broader market significantly.

“In 2003, the refining margin was $3.50. Then it rose to $6, to $10, and then $12.50. The refining stocks were a 17 bagger, 1700%.” [26:41]

Demand and Supply Analysis Terrison sheds light on the intricate dynamics of global oil demand and supply. He emphasizes that North America's ability to meet global demand growth is waning, with supply increasingly sourced from geopolitically sensitive regions. This shift elevates the risk profile of global oil supply.

“I think when John Chrisman comes up, he'll probably talk about how difficult it is in North America for the next 10 years.” [16:41]

He forecasts oil prices stabilizing around $80 to $85 per barrel, barring significant geopolitical disruptions.

“The oil price would have to go to $130 per barrel, all things being equal, for us to start seeing meaningful demand destruction.” [35:27]

Investment Strategies and Performance Terrison's investment strategies, particularly his push for consolidation and disciplined capital allocation, have consistently delivered superior returns. His advocacy for the pledge led to a considerable portion of energy stocks outperforming the S&P 500 repeatedly over subsequent years.

“The pledgers... were 80% of the top 10 performers in S&P Energy.” [43:30]

Anecdotes and Personal Stories Adding a personal touch, Terrison shares a compelling fishing story that metaphorically parallels his investment philosophy. Winning the Emerald Coast Billfish Classic with his son and high school friends illustrates the importance of strategy, preparation, and seizing opportunities—principles he applies to investing.

“It was like an amateur winning the Masters... These are cocky, you know, high school kids, right? So they kind of vanished on me.” [57:53]

Conclusion Doug Terrison's insights offer a profound understanding of the oil industry's evolution and the critical role of strategic consolidation and disciplined capital management in driving value. His experiences and strategies underscore the enduring importance of returns on capital over mere production growth. For investors seeking a framework to navigate the complexities of the energy sector, Terrison's Can't Deny It provides invaluable guidance.

Notable Quotes

• “I was a person who worked in the deepwater Gulf of Mexico drilling oil wells. So I knew the industry like the back of my hand.” [07:19]

• “The more things change, the more they stay the same.” [11:12]

• “Demand exceeds supply, inventories decline, margins rise.” [32:55]

• “Your stock can go up just as much if your production's down 5% as if it's up 5%. It's all about returns on capital.” [48:24]

Availability and Further Engagement Doug Terrison's book, Can't Deny It, is available on Amazon, Barnes & Noble, and his personal website dougterison.com. Listeners can follow him on LinkedIn for updates and insights.

Closing Remarks Cole Smead concludes the episode by encouraging listeners to obtain Terrison's book and highlights the alignment between Terrison's frameworks and Smead Capital Management's investment philosophies. He invites feedback and book recommendations from the audience, fostering a community of informed and curious investors.

“If you enjoyed this podcast, go to Apple, Spotify, YouTube or wherever you listen to A Book with Legs and give us a review.” [62:22]

This comprehensive summary encapsulates Doug Terrison's discussions on the oil industry's structural transformations, investment strategies, and the critical emphasis on returns on capital. By integrating notable quotes with timestamps, the summary provides a clear and engaging overview for listeners and potential audiences alike.