← TFTC: A Bitcoin Podcast
Loading summary
Transcript223 lines
- [00:05]
A
Sean, welcome to the center of hash.
- [00:06]
B
Thank you. It's good to be here.
- [00:08]
A
Your former home, Bitcoin Park.
- [00:09]
B
I was going to say it's good to be back in the Common or Bitcoin Park. We miss you guys.
- [00:13]
A
I've only been away for a few weeks, but I know there's a vacuum that we need to fill a void.
- [00:21]
B
Yep.
- [00:22]
A
How are things going at the new office?
- [00:24]
B
Oh, they're great. You know, it's sad to leave this space, but it's good to have our own space. We're growing the team a lot, so it's nice to have conference rooms to take calls, things like that.
- [00:35]
A
Signs of success?
- [00:36]
B
Yeah, yeah, we hope so. You know, the team's growing a lot, putting deals out, so going and going well.
- [00:44]
A
Chris, your co founder and partner at 360 Energy, recorded in July and he and I were catching up and I suggested that we should get you on as well. You have a very different background from Chris and wanted to start out just talking about your, the history in the oil and gas space on the finance side and how you came to be working on bitcoin and specifically bitcoin mining. You were formerly at Blackstone, so just talk a little bit about. And then investment banking at Credit Suisse before that, both on the oil and gas side. Energy energy side, I guess. But yeah, talk a little bit about your history, what you were doing and how you ultimately decided to become interested in bitcoin and then. And then work on bitcoin mining.
- [01:38]
B
Yeah, definitely. So started at Credit Suisse in the oil and gas group in Houston, went to school in Dallas and that was we talked about earlier, Led shipper finance. You know, being an analyst in investment bank is a lot of grunt work. But you do learn a lot over your two year period there.
- [01:55]
A
What years was that?
- [01:56]
B
That was 16 to 18. Houston.
- [01:59]
A
I've done my pledge ship in investment banking as well. New York, 2006 to 2009. What you bank.
- [02:06]
B
So that was a pretty wild time.
- [02:08]
A
And I know what it's like.
- [02:09]
B
Yeah, yeah. So that was great. But the goal is always to get to the buy side. So did two years there and then move to gso which was the credit arm of Blackstone. It's rebranded Blackstone Credit now in New York. 25 person team across New York and Houston and we were investing when I first joined in all oil and gas companies. So investing across the capital stack mostly preferred equity down to up to senior secured debt. And you know, day one it was all oil and gas. So a lot of Upstream deals, some midstream deals, a little bit of ofs. And it was just if you need capital as a business to, you know, expand your drilling program or buy more equipment, we would be a capital provider to help them do that and make return for our lps. So that was a great experience. You know, it's, it's a very intense environment for sure, a lot of very smart people. And I learned a ton. You know, I was there for six years overall, learned a lot in my first three years. It's almost like the first two years are almost like investment banking all over again, but with a different skill set. You're just working very hard, long hours as well. But it's your LP's capital you're investing. So the standard is a bit higher on. You have to be really sure you're right. At an investment bank, it's kind of you're being salesy. Right. So that was a great experience.
- [03:43]
A
So a question there, one just total. As an aside, what does GSO stand for?
- [03:51]
B
The three founders. So Goodman, Smith and Ostrover.
- [03:55]
A
And that was a unit within Blackstone.
- [03:56]
B
Yeah. So those three guys were DLJ, Credit Suisse guys back in the 90s. They started GSO early 2000 I believe, I think 2004 and then Blackstone bought GSO in 2008.
- [04:10]
A
So and then specifically talk about the like in terms of the deals that you would work on, were you typically working on primary equity financings, credit financing all throughout the capital structure and just the nature of the type of deals that you would.
- [04:29]
B
Yeah, sure. Have experience with an example, it was mostly credit focused because GSO is a credit shop. We would do minority common equity, but we wouldn't do control common equity. There was anything control that would go to the private equity group. The Blackstone kind of has many business segments, right? Private equity, real estate and then GSO is the credit arm. So a typical deal, for example a midstream or sorry an upstream operator in The Permian needed $100 million to go drill 10 more wells. We would give them a term loan. $100 million term loan, pretty expensive capital. We targeted mid teens and then we might co invest 10 million of common equity alongside.
- [05:11]
A
And were these typically. I mean presumably if they're getting $100 million term loan. These are well established companies, are really often public companies. Private mix.
- [05:20]
B
It was a mix. I would say most of the deals were private companies. We would do some public stuff. The biggest deal I worked on was a $1.6 billion preferred equity investment into a system called Targa Badlands. So Targa is a massive midstream company, publicly traded, and they wanted to monetize a part of their Bakken assets, their midstream assets there. So we bought a 45% interest, preferred interest for 1.6 billion. And that's an example of a deal we would do with some public guys in Bakkens.
- [05:52]
A
North Dakota owns oil and gas.
- [05:53]
B
Yep, oil and gas, North Dakota. So a gathering system means they. The pipes that actually connect to the wells, so they're the ones that build out to the pad, connect to the actual wells and get those hydrocarbons to market both oil and gas.
- [06:07]
A
And so you were there for six years. You mentioned the first two years being very similar to an investment banking first few years, but in terms of exposure to different types of the energy markets. How did that look? How did it evolve?
- [06:27]
B
Yeah, yeah, great question, Covid. Changed a lot for us. Oil went negative that one day our portfolio was, you know, not in shambles, but there was a lot of stuff breaking at negative oil. Right. So we spent a lot of time triaging that. That was probably a three month period of just making sure all of our portfolio companies had enough cash to make it through. And then when we came out the backside of that, the group kind of made a pivot saying, hey, we kind of. The administration was very anti oil and gas. The senior guys at Blackstone were kind of leaning away from oil and gas as well. So we actually rebranded the group from energy to sustainable resources and started doing new originations on more energy transition and related companies. So my background was oil and gas at Credit Suisse. So it was interesting to look at a whole new, you know, sector of the industry, in the energy industry. So renewables service companies that service those renewable projects, things like that. And I was really excited about it at first, you know, to kind of broaden my horizons within energy. But quickly became fairly jaded, frankly with whole renewable craze. I think it was overhyped. The asset of returns were just not attractive, frankly. Like they weren't good deals. But there was so much LP demand for this. People wanted green investments at the time and ESG was all the rage. So that's kind of the direction the group went in. And that's a part of the reason I ended up leaving and making the jump to 360. I just didn't feel like I liked the way the group was going.
- [08:13]
A
How large within Blackstone is that group? Just in terms of like total assets that are under management, capital being deployed, just.
- [08:25]
B
Yeah, Blackstone Credit as a whole is pretty large, so I'd have to look at the latest numbers, but let's say Blackstone is around a trillion or a year ago. Is around a trillion. I'm sure it's more now of total AUM. I believe Blackstone credit is around 400 billion of that. 300 to 400 billion.
- [08:40]
A
But then the energy, and then the.
- [08:42]
B
Energy group, we had 25 billion of AUM.
- [08:45]
A
Okay, so maybe 25% of the credit and then two and a half on that trillion dollar total. Two and a half percent of the total.
- [08:56]
B
Exactly. And we were a bit unique within Blackstone Credit. We were the only industry specific group just because energy by nature is a bit more technical and you need a little bit more industry knowledge. The rest of Blackstone Credit was more industry agnostic and covered broad parts of the economy.
- [09:15]
A
You mentioned though, preferred equity deals to credit. Did you specialize on one or the other over the course?
- [09:24]
B
No. You kind of got staffed on a deal that came in as you were available and would work on various things. So I was, I worked on anything from, you know, just vanilla senior secured term loans to Harrier preferred equity stuff.
- [09:41]
A
So now connect for folks, the transition from what you were doing. What, what got you originally interested in bitcoin before even 360.
- [09:49]
B
Yeah.
- [09:50]
A
Or maybe they're intertwined.
- [09:51]
B
Yeah, no. So my origin story, if you will, in 2016, my buddy at Credit Suisse, a fellow analyst, told me to buy some bitcoin, you know, and I did, just to appease him, but didn't understand it at all. Thought it was Internet fake money, as everyone kind of does in the very beginning. Didn't really think about it again until 2020. I was at Bloxxone at the time and saw the whole Covid response printing trillions of dollars. And I just, you know, the finance background in me was like, if, if they're going to print that much money, something's going to go wrong. Like that that has externalities, negative externalities. And I had my dad kind of like gold in the past, so I had some, some gold exposure, just the etf and then kind of recircled around to Bitcoin. You know, Marty's podcast was one of the early things that kind of started getting me down the rabbit hole. Read the bitcoin standard and then just slowly fell down the rabbit hole kind of 2020 onwards.
- [10:55]
A
It was very similar for me in 2008, 2009, which I think is fairly common for, for people, which was there's a financial crisis and 2020, 2021. The response was different. I'd say it was much quicker. But being in the middle of at the time, for me, investment banking, it was that something's broken here. I don't know exactly what, but none of this makes sense. And then for me, it was at that time, tail end of it, I guess at the time where it was happening, 2008, early 2009, Bitcoin was just being launched. I had no way to connect it to Bitcoin, but later came revisited to figure out what exactly was broken. But I think that's very logical where there's just an instinctive reaction that something's wrong here and it sets you off on a course to figure out what that is. Even if the immediate connection isn't directly there.
- [12:04]
B
No, exactly. And we were doing all this hard diligence, all this hard work and making know, 11% yielding loans and everyone knew inflation was around that. You know, it's like, what are we spending all this time on to make loans and make 11% when they're just printing all that money anyways and you're going to be breaking even really on an adjusted basis, you know, so. Totally.
- [12:29]
A
Yeah. And that's also something that. I've talked about it in a couple episodes, just very briefly. Maybe we can talk about it in more detail.
- [12:37]
B
But.
- [12:37]
A
But one of the ways that I'm describing Bitcoin to somebody that's new is connecting that. And I don't have nearly as much knowledge as someone like you might have in terms of the operations of an upstream oil and gas business. Say if that was example of a subset of the businesses that you were financing and working deals on, but that it doesn't make sense if you think about all the complexity that goes into those businesses, complexity to the supply chains, the amount of actual money required to make those operations work, the human capital, the physical capital, and then to sell the output of it. Just using the case of oil and gas, maybe gas that comes out of a pipeline or oil at a gathering station. Force some money that someone can click a button and print out of thin air.
- [13:35]
B
Totally.
- [13:37]
A
You know, you mentioned previously that when the COVID lockdown happened, a lot of the focus shifted to making sure companies that were in the portfolio had enough money to survive. What does that mean in practice for. For some of the. More like in a tangible case for the type of companies that you would work on.
- [14:00]
B
Yeah, for a tangible example was we were in a debt position and so we are owed interest every quarter. We could go to them and Say, hey, for two quarters we'll pick this interest, we'll let you not pay cash, just add it to the debt balance to give you some breathing room proactively. We didn't have to do that, but we didn't want them to default because of this really black swan event. Right. Oil going negative is very rare. So, you know, give them some flexibility from our capital is one thing we can do.
- [14:36]
A
That's an interesting. So just as an aside, can you explain contextually why oil went negative?
- [14:42]
B
Yeah, I mean, it was a bit of a freak event, but from my understanding, there was so much. There's just no demand. Right. There's no one's flying planes, there's no demand, no one's driving cars. So demand was so low, wells are still flowing. And Cushing, Oklahoma, where WTI is cleared every day, that one, for that one day, there was just no buyers and all that oil was still there. So it. And there's a real cost.
- [15:10]
A
There was no place to store it.
- [15:11]
B
Exactly. Storage was full. And there's a real cost to storing that. So people were effectively paying to have their oil go somewhere, which is a negative price.
- [15:22]
A
And there were speculators in that market that couldn't actually take delivery.
- [15:26]
B
Exactly.
- [15:27]
A
Okay.
- [15:27]
B
Exactly.
- [15:30]
A
And so would your group do the restructuring or, you know, essentially if you were going to work on an amendment for a credit deal, would your group within Blackstone work on that directly or would that be outsourced to restructuring?
- [15:45]
B
Yeah, we would work on that directly. We would hire restructuring attorneys to do the more technical document related things. But our deal teams, we had some bankruptcies that we would have to work through.
- [15:54]
A
And so if you connected in this period of extreme money printing to thinking about the amount of effort and work that went into your deals and the type of returns versus how easily the money could be created to Bitcoin.
- [16:15]
B
How.
- [16:16]
A
In a direct way did that help inform your understanding of Bitcoin? When you started to go down the rabbit hole, just like, how do you think about Bitcoin?
- [16:26]
B
Yeah, exactly. I mean, again, we're spending all this brain damage, all this effort on structuring creative deals and trying to make alpha risk adjusted positive returns. But at the end of the day, like you said, someone can print a print money with the push of a button. So once you learn about Bitcoin and you ingrain in your head there's only 21 million. That's a, that's a fact. It really changes the way I thought about it. You know, you can own an asset that can't be devalued by someone. I would rather own that than do all this work trying to make 10% in a currency that's being debased. It's a lot easier to just go hold a. An asset that can't be debased. So that was kind of my original path down the rabbit hole, was informed by that thought process.
- [17:15]
A
And so when that started to click, you called Chris.
- [17:21]
B
Yeah, so I was going down the rabbit hole. Chris called me. Yeah, Chris called me and, you know, said, hey, I want to do this bitcoin mining thing. Cheap electricity is the name of the game. That's how you differentiate yourself as a bitcoin miner. I had this idea with natural gas. He didn't know much about oil and gas at the time. He knew I did. We went to SMU together, so kind of reconnected about that. I at first thought he was crazy, but then started running some numbers in Excel. And then funnily enough, around the same time at Blackstone, we looked at a deal for Crusoe Energy, who was one of the first guys doing bitcoin mining in the oil field. So the fact that Blackstone, you know, didn't make it through investment committee, but the fact that Blackstone was at least looking at doing a deal with Crusoe, which was doing natural gas bitcoin mining, kind of made me think different about it too. So I took another look at the numbers and said, hey, there actually might be something here. And Chris started the company. I was just helping him on the side in the beginning, and over the next year I started spending more time helping him. And it was much more interesting and dynamic and exciting to work on the beginning of that company versus going to credit committee for another 11% term loan. And at the same time at Blackstone, we started doing more and more direct lending deals. Direct lending was kind of in its infancy back in 2019, but now everyone's doing it. And those deals are generally more boring than some of the harrier preferred equity, mezzanine type stuff that I liked working on. Those deals are unique. There's a lot of structuring involved. You have equity kickers, warrants, things like that. In your typical direct lending deal, it's really just SOFR plus 6% and that's the return you're going to make. So the interest in my Blackstone deals was going down. The interest in 360 was going up. And eventually made the decision, you know, I don't want to be a managing director at Blackstone. You know, I respect Those people, they love it. I didn't love the deals I was working on, was loving what I was doing at 360 with Chris. So, you know, decided, hey, now's the time to make the jump.
- [19:37]
A
Well, you know, again, difference in time period slightly, But I remember 2008, 2009, when there were, there were guys who were my age now that in my mind then seemed much older at the time. But I remember having the express thought that I didn't want to be sitting around waiting for somebody to come tap my, tap me on the shoulder and say, hey, you're out after 10 years of service or 20 years of service and realizing that you're really at the, the center again. At that time my reaction was just that something's broken and I don't want to be that guy. Not that there were a lot of good people there. Later I figured out that not necessarily investment banking because it's more on the edge of the bank, I'd say in terms of money creation and the problems, but it's all interrelated. You mentioned looking at the economics of some of the traditional deals you were doing and looking at the economics and thinking to yourself they weren't sustainable. Talk about maybe how that contrasted in your thinking looking at the sustainability of the economics around bitcoin and bitcoin mining.
- [21:00]
B
Yeah, I mean to, to give an example on the renewable side, you know, a typical renewable project has a lot of debt on it that you'll sign a 15 year power purchase agreement to sell your power that you make with hopefully an investment grade counterparty. So it's very financeable. You get a bunch of debt and then there's an equity piece. Like any deal, those equity returns over the 15 year period were 0%. You were simply making your money back on the equity over 15 years and then all of your return was some assumption on year 15 to year 25. What's the merchant power price going to be at that point in time? So you're making a bet on power prices in 15 years and then even then the equity returns at that point in time, I don't know if they are now, was still like 6, 7% on these deals. And that just seemed crazy to me. And then you look at the bitcoin mining economics at the time, you were making $40 in MCF and making year paybacks on your infrastructure. Granted it's a lot riskier because it's a fluctuating commodity price. You don't have a 15 year power purchase agreement to finance. But in my mind and once you understand bitcoin, it becomes a lot less risky compared to that 6% IRR over 25 years.
- [22:24]
A
How much of it do you think was say long term power purchase agreements versus the financing structures and then pipeline of money to underwrite those deals that was creating the sustainability versus lack of.
- [22:42]
B
The reason those equity turns were compressed so low was because how much money was chasing those deals? There was just so a lot of this printed money was flowing into these deals. The equity turns should not have gotten bid down that low, but they were because everyone wanted to own a solar farm. And now, by the way, those returns are after all the tax incentives. Without the tax incentives, they're negative return projects.
- [23:09]
A
And so when you pull it forward to what you guys are working on at360, you went from this world where when you started combination of Credit Suisse going into Blackstone, the bulk or the volume was oil and gas shifted more towards wind and solar.
- [23:35]
B
Wind and solar and ancillary businesses. The guys who install the solar panels.
- [23:39]
A
Yeah. And now you start to figure out bitcoin, start talking to Chris more, helping him out on the side. And Chris, maybe with your input or you know, maybe if you can share the thinking on it in terms of how it evolved. Coming back to natural gas and why natural gas as a long term strategy for mining, Bitcoin made sense, right?
- [24:09]
B
Yeah. So given my experience in oil and gas finance, I at least knew a little bit about the production profile of wells and how that works financially. So the idea originally for the company was let's find the cheapest power. How can we do that? And the idea was let's get to the source. Let's buy these unattractive upstream assets that other people don't care about. The wells we bought originally were drilled in 2006. They're well past their flesh production, they're on their terminal decline, they're dry gas. So they're. And they're selling into a high pressure pipeline, meaning you're not making a lot of money. So from a traditional oil and gas standpoint, it's not attractive. It's a cash flow, break even asset that people are willing to sell for very cheap. But we saw that as a opportunity to buy that very cheap and then monetize that gas through bitcoin mining. Because you can control your own power, you make your power behind the meter and you effectively have 30 years of almost fixed power costs. Right. Your only cost at that point is maintaining your generators and producing the wells. You're not beholden to the market. Price, I guess you are for bitcoin price, but again, at the time it was $40 in MCF when Henry Hub was at $2 in McFarlane.
- [25:27]
A
But in terms of your power cost, it's the capital you have invested in the well plus largely fixed cost.
- [25:34]
B
Exactly.
- [25:35]
A
In any infrastructure that you need on site and then the efficiency of converting natural gas.
- [25:44]
B
Exactly. So you can model your costs in a pretty tight band. Unlike if you're on the grid, you sign a three year power purchase agreement. In three years, you really don't know what your power price is going to be. And that was back in 21 when everyone was just trying to get Asics plugged in. It was bull market. People were paying crazy prices for Asics and just to get powered on. So we at least knew that wasn't sustainable and figured, hey, let's figure out a way to get long term power at a, at a lower price.
- [26:16]
A
If you were to have a conversation with one of your former colleagues at Blackstone making the case for why the economics of bitcoin mining say not necessarily what you're currently focused on, upstream natural gas, but just more generally, how do you make that case?
- [26:39]
B
Oh man.
- [26:40]
A
How would you explain it in terms of the opportunity and why? When I mean sustainable, it's like why this will continue to exist.
- [26:47]
B
Yeah.
- [26:49]
A
Five years from now, 10 years from now, 20 years from now.
- [26:51]
B
Yeah. I think an analogy that's good to use, that we use with customers is if you're mining bitcoin, your largest cost is your electricity cost. So how do you become the low cost producer in oil and gas? The low producer, lease, operating expense producer can stay online when oil and gas prices go down, as they often do. The same thing applies to bitcoin mining. You know, the lowest cost producer is going to be able to weather the fluctuations of bitcoin. So I would use that analogy. But then you're going to have to explain to them why bitcoin will exist in five years. And that is a whole nother rabbit hole. I'm probably not the best person to orange pill people. By the time I left Blackstone, I was the crazy bitcoin guy trying to tell everyone about it. And I found a couple other people within Blackstone who also loved bitcoin. But there was real no way to express that in the work we were doing at Blackstone.
- [27:49]
A
Could you maybe elaborate on the parallels and then maybe differences between those market dynamics of being the low cost producer and energy and when the price comes down, what happens in that market versus when the Price goes up and then the parallel to bitcoin mining and maybe just talk about similarities and differences.
- [28:13]
B
Yeah, sure. So in an oil and gas well, let's just say an oil well you have lifting costs which is how much are your expenses divided by how many barrels you make. So companies will say hey for every barrel of oil I produce my costs are $10. Some guys cost might be $30, other guys might be $5. So the guys with 30 $40 lifting costs when oil goes down to $40 a barrel their break even or cash flow negative. So they have to shut in their well. The guys that are only their costs are $5 per barrel can still make money at $40 WTI. Same exact thing happens in Bitcoin. If you're paying $0.07 per kilowatt hour on the grid, hash price goes down to 40, which it did. And it's not too far from that now you're going to be break even to cash flow negative depending on what machines you have plugged in. So those guys shut in same thing as shutting in a well. You shut down the bitcoin mine because why are you going to mine if you're cash flow negative? Our all in costs off the grid, our LOE is you know, 2 to 3 cents a kilowatt hour. So we can stay profitable with hash price a lot lower. But you know there's no free lunch. You do have to spend capital up front on generators and things like that. But that's, that's the analogy. It's, it's very comparable.
- [29:35]
A
And so in the oil and gas world, let's just talk oil. Price of oil drops, certain producers become unprofitable, they physically have to cut off.
- [29:48]
B
Turn off the well. Yep.
- [29:49]
A
And that oil stops flowing.
- [29:51]
B
Yep.
- [29:52]
A
And the low cost producer or those that are on the lower end that remain profitable functionally take more market share because other operators are turning off. And those other operators, maybe they become unprofitable overall, maybe they go away, maybe there's consolidation in the industry. I remember 2014, 2015 when I believe it was Saudi stopped or basically said they were going to continue to produce and not hold the 100 target. The weakest fail consolidation. The world of bitcoin. A mine will shut off and the amount of bitcoin that are issued continues to remain functionally the same price might be lower and those that are continuing to operate would get more nominal Bitcoin.
- [30:55]
B
Exactly.
- [30:56]
A
So in the oil and gas world the direct feedback loop is you're still producing the same amount that you were. You're just able to continue to do it profitably, albeit less profitably. And maybe in the future you might be able to go accumulate more assets to expand your production footprint in Bitcoin. It's more dynamic where you might actually produce more Bitcoin at a lower price.
- [31:24]
B
Exactly. And it's the same. You know, the saying goes, the cure for low prices is low prices. If oil prices go down, people shut in. That'll eventually cause a supply crunch and prices will go back up. Same thing in hash price. You know, hash price goes down, people are going to unplug at some point, which caused hash price to come back up.
- [31:45]
A
So when you guys were looking at wells and you guys looking at gas wells for the initial well or set of wells that you invested in, were they just gas?
- [31:57]
B
They were dry gas only.
- [31:58]
A
Okay. And when you look at the economics where you, who were the counterparties that you were buying from? Were they just other individuals that you knew? Were they larger companies?
- [32:12]
B
No, it was a privately held, fairly large oil and gas operator just in the Barnett and they were just. We're selling this package on Energy Net, which is a craigslist of oil and gas assets. You log on today and there'd be 20 assets for sale to describe in your terms.
- [32:30]
A
And maybe this has evolved over time. You come more from. You wear the CFO hat at 360 Energy. You've worked in oil and gas finance, but more broadly, looking at a spectrum of preferred equity to mes debt to term loans, you understand the financing structures of oil and gas deals and the underwriting and then the assets that are attached to them through the financing lens. What do you look for in attractive assets that are particularly interesting for bitcoin mining?
- [33:13]
B
Yeah, it's a great question. So the way PDP assets prove developed producing assets, so flowing wells are called PDP wells. The way they trade on the market is a discount cash flow analysis. So say I'll buy that well for PV15. You model out the cash flows, the production of the well. You assume strip pricing, you model out your costs, you discount all those cash flows back by some discount rate. That's what the market decides. And you can buy it for the present value, discounted back 15%. Call it. So depending on the specific asset, it might be 20. You're getting a little cheaper. But the, the interesting part is the, you're discounting back just in oil and gas terms. Like you can buy stuff on the market on just oil and gas terms. So since these were unattractive wells, the costs were very high. The midstream cost was high, so the cash flow on an oil and gas basis only was pretty low. So the PV20 was cheap. No one else was thinking about layering in the bitcoin mining economics on top of it. So when you look at the present value, assuming bitcoin mining, you're getting a good price, can layer in that capital and have a present value uplift and say I'm buying this gas asset for cheap in oil and gas terms, layering on the bitcoin that no one else thinks about and then you have upside for that asset.
- [34:43]
A
Maybe elaborate on that for people that aren't as familiar because I think what you said there, there was something implied about the fact that hey, if you're valuing net cash flows on the oil and gas side and what costs remain if you were to mine bitcoin versus what cost would be eliminated such that if these assets are being sold out to the market and all of the market of potential buyers are looking at it one way, but you're looking at it through a different lens, why you would value it potentially more than somebody else that could only look through it through the traditional lens.
- [35:37]
B
Yeah. So on the cost side, a big cost you can eliminate with bitcoin mining is your midstream fees. We have to pay, call it $0.80 per MCF to the pipeline operator just to take our gas. So if you're using your gas on your own pad, that's a cost item you can eliminate. But the real uplift comes in the revenue side of it. Right. If you look at strip Henry Hub and it's, you know, call it $3 ish for the next five years, everyone else is looking at $3 of revenue. In the bitcoin mining side you have to invest capital day one, but your revenue is going to be a lot higher. Today it's $15. When we looked at it, it was $40. You can run sensitivities, but inherently your cash flows that you're looking at are going to be higher because your revenue side is higher. That's what the bitcoin mining brings.
- [36:29]
A
Are you still paying the lifting costs.
- [36:31]
B
That you still have some lifting costs for the well? Yeah, you still have to put chemicals in the well, you have to haul water, things like that. So those costs are the same. You can eliminate the midstream cost and then you have higher revenue.
- [36:45]
A
With incremental capital.
- [36:48]
B
Exactly. So that's, you do have to spend money to get that higher capital. So that's just the math problem.
- [36:55]
A
If you can without having to lose people and specifics of the individual dynamics, at least kind of order of magnitude help somebody understand the biggest levers. And then when you're thinking about bidding on an asset, what you'd be willing to pay relative to somebody else that was only looking at it through the conventional lens.
- [37:28]
B
Yeah. So really round numbers. Let's say the oil and gas asset in a traditional oil and gas sense at strip pricing is expected to make a hundred thousand dollars of free cash flow a year.
- [37:41]
A
And strip pricing is the forward.
- [37:42]
B
The forward curve.
- [37:43]
A
Yeah.
- [37:43]
B
Of Henry Hub. And then all your costs after. All your costs after strip pricing, after the production curve, $100,000 a year is what the gas wells will make. So the market is going to put a discount rate on that and then that's what it trades for in the open market. Someone's willing to buy that for a round number million dollars. They'll buy that for a million dollars in the oil and gas only sense. The beauty of it is we don't have to pay more than a million dollars. We can still buy that for a million dollars. That's the market price. We're not going to overpay just because we're going to do bitcoin mining, but we're willing to buy it for a million dollars and then invest an additional 2 million, call it to build a bitcoin mine. And then now instead of $100,000 a year of cash flow, it's $500,000 a year or whatever the math is. But you're investing, you're buying the asset for market price. But because you can invest the money and increase revenue that other people aren't thinking about, your return hopefully is going.
- [38:45]
A
To be higher on both an absolute basis and on a percentage basis as a combined function of eliminating certain costs, putting capital investment in to capitalize it. But then when you reference a cash flow increasing by five times but increasing your capital base by three times, the overall economic.
- [39:06]
B
Exactly. The uplift is higher. So if the strip pricing ended up playing out exactly how it was and you were operating it as just an oil and gas asset, you would make whatever you bought it for. 15%. Right. Because that's what you're buying. The PV15, everything plays out as modeled. You're making a 15% return.
- [39:23]
A
And how do you think about. Obviously bitcoin is volatile, but oil and gas are both volatile as well. How does somebody think about the volatility of gas? Because you talk about strip, but you don't actually know what that's going to be. Maybe.
- [39:49]
B
Yeah, it's never what strip actually is.
- [39:51]
A
Right. Is it from a, from an underwriting perspective, I'm not talking about ability to predict, but how the difference in volatility in the revenue side of bitcoin versus the revenue side of oil and gas. How do you account for that?
- [40:11]
B
Yeah. On the natural gas side especially, the volatility is pretty comparable from just an absolute basis.
- [40:18]
A
That's pretty wild.
- [40:19]
B
It's extremely volatile. And especially you talked about it with Chris a little bit. But the various hubs are all different. You know, Waha. Today's at negative $2. Henry Hubs at $3.
- [40:31]
A
Wait, why is it negative $2? Is that right? Because I felt like two weeks ago it was like a dollar.
- [40:36]
B
Yeah, it was. It's negative $2 today because kinder Morgan has an outage in some plant and they're 2% of the volume of the Permian, even though they're only 2%. That shut down has just caused more supply than there is demand.
- [40:53]
A
And they're a processor.
- [40:54]
B
Yeah. They have a bunch of gas plants and pipelines. They're a midstream company.
- [40:59]
A
Yeah. It's really interesting because bitcoin is clearly volatile and everyone generally knows that it's volatile. And it's oftentimes difficult for people to be able to invest long term, not just in bitcoin, but particularly a business that is either a service company or more directly involved day to day in the bitcoin world. Whether it's a bitcoin exchange custody business, working on payments, you guys are working on mining. It's difficult for people to perceive how you can operate in a world that is so volatile. Cyclical is not the right. Maybe cyclical is the right term, but it's cyclical. With long term adoption going in your favor without the appreciation that something as mature of a market as natural gases is incredibly volatile. So if some people might be familiar with when I think it was Henry hub went from 2 or $3 to $9 when I believe it was Nord Stream.
- [42:19]
B
Nord Stream and then Russia, Ukraine.
- [42:20]
A
Yeah. And that if you actually look at the daily volatility, Bitcoin's fairly comparable to natural gas.
- [42:30]
B
Sure. But the follow up, I was going to say is the helpful thing in natural gas markets that producers utilize. It's very hedgeable. It's extremely liquid market to hedge three years out, so.
- [42:43]
A
But not 15, not 15.
- [42:45]
B
Now you could probably get five, seven, eight years out. Someone will buy it because there's a lot of natural buyers of gas. There's the producers want to sell into the future, power plants, things like that. Want to buy oil has the same dynamic in mining. Luxor is working on some hash price derivatives. It's nowhere near as liquid. You can hedge out maybe six months, maybe 12 months, but not even close to five years. And then since it's so illiquid, the bid ask spread is wide, you're not able to really lock in your hash price as well as these guys can lock in their, their natural gas prices. So producers can say, hey, I know natural gas is going to be volatile, but I can at least lock in 80% of my production at $3 for the next three years. And they do that.
- [43:34]
A
So the ability to hedge in the bitcoin world in my view is functionally non existent.
- [43:43]
B
Correct.
- [43:44]
A
When I've done the analysis of lending dollars in an over collateralized way with bitcoin as the collateral, the hedge has been cost prohibitive. You're functionally though, trading bitcoin volatility or natural gas volatility, when you're actually at the well site and owning the molecules. The decline of a natural gas well, the ones that you were looking at conventionally, what are those typically and how do you think about that in the context of bitcoin mining in a site?
- [44:28]
B
So every well is different. Our specific wells are on terminal decline, which is 3 to 5% a year. They're very old, very steady decline. When a shale well first is drilled, the first year is going to have an 80% decline. That is not ideal for bitcoin mining because our generators and our mines would like a steady flow of gas. So you want as steady flow of gas as you can get and you want to build your mine to where in three years you still have enough gas. So you might have to undersize it a bit today to plan for where the decline curve will be in three to five years.
- [45:07]
A
So if a well was going to decline 3 to 5% for 10 years and it had a certain amount of volume, you might build your mine to a capacity of say 60% of today. Of today?
- [45:22]
B
Yep.
- [45:24]
A
What do you do with that excess or how do you account for it in your model?
- [45:28]
B
So our asset was pipeline connected, so we would just sell the excess into the pipeline and take, take that. If there is no pipeline, you have to flare it or you can choke back your well again. Every well is different, but some wells you can choke back the production a little bit to make it more flat and you know, you have to keep the reservoir pressure the same. All these complicated things that petroleum engineers are really good at to keep production pretty flat in the interim. But you might have, you might not be able to do that. You might have to just flare it that excess.
- [46:05]
A
Conceptually now, one might be more predictable than the other. But is it fair to think about the decline curve of a well with assuming hash rate is increasing the decline in production of bitcoin at a mining site?
- [46:30]
B
That's interesting. I've actually never thought about those two compared. But yeah, I mean bitcoin denominated hash price will go down forever pretty much in the long term as hash rate increases over time, right?
- [46:43]
A
Yeah, because that's one thing and I've never participated directly in bitcoin mining, but I've looked at bitcoin mining models, I've built financial models around bitcoin mining. I think one of the other things, beyond just the volatility of bitcoin, which somebody that is steeped in oil and gas and natural gas specifically would recognize that, hey, if I look at the historical volatility of these two things, at least over the last year, two years, three years, five years, even the volatility is fairly comparable that it's difficult to project what the change in hash rate.
- [47:19]
B
Is going to be. Exactly.
- [47:20]
A
So how do you guys think about that both internally to360 but also when you're taking questions from customers that are looking at using your services?
- [47:34]
B
Yeah, for our customers we think about things on dollar denominated hash price and we try to explain it to them. It's a little tricky but we basically just say dollar denominated hash price is the same as Henry Hub. It is the clearing price you're going to get paid for the commodity you produce. So as a natural gas producer, the commodity is natural gas molecules. The price you get is Henry Hub. For bitcoin mining you're producing hash rate and the price you're going to get is dollar per PETA hash. And we tell them just like natural gas, we can't predict where it's going to go. So what we do is we'll run sensitivity tables for them and say hey, here's the all time low. If hash price is below the all time low for five years, your return is going to be this. If it's at the all time low, it's you know, the five year average and we'll run sensitivities because we're not smart enough to know where hash price, no one is, you know, know where that's going to go. And they, they appreciate that because they're used to every hub right they wish they could hedge it and hopefully over time those markets get more built out in bitcoin mining. But they get that comparison because they're used to the fact that they don't know what Henry Hub's going to be in the next three years.
- [48:47]
A
When you're underwriting a acquisition of a GDP portfolio, something like what Stoneridge just bought from Anadarko, they would inevitably have to be doing the same exact sensitivity analysis.
- [49:01]
B
At Blackstone, we do the same thing. You run Henry Hub from a dollar to five dollars and you look at your returns and sensitivity table and then.
- [49:09]
A
You basically say, I need to account for this range. And so what do I think the downside is, which in the case of bitcoin mining, would be a faster increase in hash rate and then account for that in what you're willing to pay up.
- [49:22]
B
Exactly. Yeah. Yeah.
- [49:25]
A
So now, coming into where you guys started buying wells and thinking about the financing of individual wells and the economics of wells and well sites, my discussion with Chris, we talked about how you guys have shifted to being more of a service company, to people that own assets in the oil field rather than owning the assets yourself. Talk about when you're discussing your services and how you structure your services with customers, how you actually approach the alignment of incentives and the various different pathways you evaluate and how you decide going down one path or another, what those decision points are based on. The profile of the owners of the actual wells.
- [50:28]
B
Yeah, definitely. So part of the company, we owned our own gas wells and we viewed it through the lens of bitcoin mining. We said we wanted cheap power. Let's do bitcoin mining to make more money on this gas. Once we got good at that, took us two years. You and Chris talked about that. Other producers came to us and said, hey, we want you to do this for us to make more money on our gas. So we saw a need in the industry for someone to provide that service. These oil and gas guys don't want to learn how to be bitcoin miners. So our original model was, hey, you can buy the infrastructure from us, we will build it to our spec that we know that works and we'll operate it for you. We'll take a service fee on that. You're spending the capital, you're the owner of the generators, you're the owner of the asics, and then you get that same economic uplift that we realize on our own wells. So in that model, the incentives are very aligned because the producer is spending a bunch of capital that they need to make return on. We're building it for them. And we are banking on the fact that they're going to blow gas to that system because they have millions of dollars invested in it and they need to make a return. So our service fee is a percent of the hash rate. We're aligned because we want to make sure the mine's running well to get our royalty or our service fee. So that's how we align it for that business model. The other business model I think you and Chris might have talked about, if the producer doesn't want to spend a bunch of money on bitcoin mining, they can rent our infrastructure. We own the, the generators and ASICs. They pay us a fixed monthly fee to be out there no matter what. They flow gas through the system. They get 90% of the revenue back from the bitcoin mine. That in that case, incidents are also in line. They have no capital skin in the game, but they're on the hook every month for this rental fee. And if they want to break even to make a little bit of money on the gas, they have to flow gas through the system as well. So we're also aligned incentive wise.
- [52:36]
A
There, there was a structure that I know you guys had considered which was just going and buying the gas directly from an asset owner. So rather than them send it to a pipeline or layer, but compare that and the incentives of that so basically being more looking more similarly to the owner of the assets as gas offtake, why or why not take that approach?
- [53:14]
B
And so that was the model Crusoe started with. They would go to guys in the Bakken in North Dakota, say, hey, you're flaring this gas marathon or Exxon, eog, whoever. Instead of flaring it, why don't we Crusoe buy your gas for 25 cents of mcf? It sounds like a good idea. You make a little bit of money, you're not flaring and we're getting really cheap power as a bitcoin miner. So they were just trying to find cheap power. The incentives break down a little bit because the upstream producer in that case doesn't care about the $0.25 MCF that's nominal to them. So if they have any operational issues, they will shut off the gas in a second because they don't care about the 25 cents of MCF. So there's a misalignment of incentives with the operator because they can just shut you down. And if you have no gas off grid, you know you're not hashing and you're going to have Bad uptime. That's one main issue. The other is these producers aren't incentivized to lock up gas for long term periods. So they might only sell you gas for a year. So you're, you, as Crusoe or whoever bitcoin miner, you're spending a lot of capital to get your infrastructure out there. You're buying gas for cheap, which is great, but then in a year they might have a pipeline built to them and then they can kick you out. So those are kind of the reasons that we don't just buy gas from people.
- [54:45]
A
And we were talking before about how you guys go and actually communicate around the incentives for both of these types of structures. Where would you say the legacy oil and gas industry is in terms of how receptive they are to these types of solutions and what in your mind, the level of understanding of bitcoin someone would need to have in order to pursue?
- [55:23]
B
Yeah, I would say we are still in the first inning of understanding the oil and gas industry broadly. I think people have heard about this idea or they've had someone approach them maybe, but it typically has not gone well for various reasons. It's hard to do. Or they just shut it down instantly because there's still a stigma around bitcoin and they're like, that's a scam. We don't want to do that. That's often what we're up against.
- [55:54]
A
What percentage these days is the response that bitcoin is just no go zone.
- [56:02]
B
It's gotten better. It probably was 50, 60% a couple years ago and now it's down to 20, 30% of just non starter. And I think the reason, you know, the way we pitch it is we say it's not about bitcoin mining. Guys like you have a gas problem. This is oil field infrastructure that works, that consumes your gas, that monetizes it. And oh, by the way, it happens to be bitcoin because this is what works in the oil field. Like we tell them if we could do AI computing, we would. But bitcoin can run on Starlink and there's no penalties for downtime. So that's why we use it. And they appreciate that. They say, okay, fine, as long as it works, solves our problem, it can reduce our flaring problems, or we can bring these walls on a production. That's what we care about.
- [56:53]
A
So just because you mentioned it, what describe the nature of the work and the nature of bitcoin mining that allows a site to be viable for bitcoin mining upstream at the well site where it wouldn't work to set up an AI data center just because you brought that.
- [57:16]
B
Yeah. So bitcoin mining, the, the computations at the ASIC level is very energy intensive, you know, running all those hashes per second. But once you find the answer or just showing your proof of work, it's a very small amount of data to actually transmit that to the, to the network. So we can run on Starlink. Because the bandwidth required to run bitcoin mining is much lower. If you're running complicated AI, you need high speed fiber. So that's why, that's a main reason why it doesn't work. Also in AI you have to have perfect uptime. You're writing these complicated LLMs. It's all above my head. But you can't just go down and lose a month of work. That would not be acceptable. So all these data centers are on the grid. They have backup diesel generators, they have backup batteries, they have many redundancies. Make sure they never lose power. In the oil field, you can't guarantee that the well can go down, the generator will go down. Things just happen in the oil field. And then the third reason it doesn't work is the scale we're talking about is just much bigger. For AI, they're talking 20 megawatts plus each of our units is, you know, 1.3 megawatts. So it's connectivity uptime and scale.
- [58:38]
A
And if you think about the, the trade offs of the structure where someone's effectively leasing your equipment versus putting the capital in and also pairing that with the understanding that bitcoin is still a non starter for 20 to 30% which means it's at least open to the conversation for 70 to 80%. But is there any credit financing that is helping to bridge the gap between somebody that might want to own the asset themselves and take on the bitcoin mining risk versus not wanting that risk and just wanting to pay you a lease, likely for the reason that it's solving or reducing a liability or unlocking say an oil asset.
- [59:35]
B
Yeah, well, the first thing I would say is oil and gas companies, especially large ones, they like renting oil field equipment anyways. That's what they're used to. They rent compressors, they rent as much things as they can rent. They like that model simply for the fact that it is in pattern for everything else they do. On the purchase side, you asked about finance ability. The generators are very financeable. You know, these are generators that have other applications outside bitcoin mining. So there are banks Credit shops that'll give you 80% LTV financing on that. The A6 are tougher. You know back in 21 people are doing ASIC loans that went very poorly. So there's a lot less credit willing to finance asics.
- [60:24]
A
Yeah, Nydig was lending against ASICS and now they're a large bitcoin miner which I think was the right move for them given the circumstance of what had happened. They essentially became a bitcoin miner. When ASICS were at I don't want to say dirt sheep prices but at a bottom of a period of high stress. But in the absence of financing, how does that factor into the decision in terms of the typical customer that you're.
- [60:59]
B
Yeah, since there's no financing for the.
- [61:01]
A
Asics and then also what's the relative amount of capital? If someone's looking at a site that's a megawatt or half a megawatt or 100 kilowatts, what percentage is the ASICS and the mining infrastructure and the tie ins versus the generator?
- [61:22]
B
Yeah. So for a 1.2 megawatt site that'll consume 300 mcf a day. If they want to buy it with no financing and use top of the line asics it'll cost $2.3 million. Call it. That's the equity check they need to write. If they want to finance a generator that can get down to 1.4, 1.5 million. But out of that all in $2.3 million cost 50 to 60% is the ASICS and the container and that's not financeable. So they're going to have to equity fund a big chunk of that capex. And if they are spending capex on something, they're going to have to understand bitcoin mining. So that's the purchase model is what we call it. We have seen more success with smaller operators that are willing to learn and willing to take that risk and say hey I do want to try to make $15 in MCF which is if they buy the infrastructure, that's what they're making today. Whereas if you're Oxy or Exxon it's going to be long putt to get approval, capital approval internally to spend that kind of money on something so foreign as bitcoin mining. So the larger guys, it's kind of ironic, they have the capital but they don't want to spend capital on anything besides drilling new wells. So they say hey I'll rent this, it'll solve my gas problem and let's just see it work. Maybe In a couple years, if they see it work, they'll look into owning it. But the dynamic today has been the smaller guys are willing to take that risk. They're kind of more the wildcatters.
- [63:02]
A
How much appetite has there been to do the work on bitcoin in terms of people, combination of customers that you talk to on a day to day basis, as well as folks that are in your network that are either working on financing structures for conventional assets. Where is that that appetite to dig in? Obviously I would always say that there's no more than 1% of people in the world that understand bitcoin. So obviously it's a small base. But yeah, the oil and gas space specifically seems like the type of profile of person that's more willing to take risk that the average person isn't.
- [63:47]
B
Yeah.
- [63:47]
A
So I'm just curious of. Of where and how you see people.
- [63:53]
B
Yeah, I mean it's a really wide range. We'll come across the random person at XYZ operator who's fully orange pilled. And they love this and they're pushing internally. And those are always the best companies to work for because you have an internal champion who gets bitcoin who wants to try this on their assets. So that's rare, but it happens. Then you'll have a bigger chunk of people who are willing to learn about it. They'll ask really good questions, walk them through hash price, walk them through how it all works and they actually want to learn about it. And we'll send them materials and things like that. We've gotten pretty good about educating these oil and gas people on bitcoin mining and how it works. And then you know, bitcoin itself. So maybe it's 5% of people are orange pilled. A pretty good chunk of 50% of people willing to talk about it. And then there still are some people that just the word bitcoin and just shut off. And like I said, that number is slowly going down over time. But there's not much you can do with those people if they are just shutting it down day one.
- [64:59]
A
What do you think causes that to change in terms of shifting to looking at bitcoin as either reducing a liability, whether they were flaring, and now they have a better way to economize what they were previously doing to get rid of what was a waste product versus potentially enabling the ability to drill more oil in ones and twos then maybe shifting how the overall industry looks at bitcoin mining to be a solution to look at the map differently.
- [65:45]
B
Yeah, totally. I think the first step is just solving their day to day problems. Even if the person doesn't like bitcoin, they're desperate for a problem in certain scenarios. They have a well shut in, going to make a bunch of oil. They can't flow that well because there's nowhere for the gas to go. So if we bring them a solution for that gas, they don't care if it's bitcoin mining. They might be skeptical, but they'll say, fine, let's put two units out there, let's try it, we'll rent it. And then once they see that work, that'll slowly ease them into the fact that hey, this is solving a gas problem. Let's learn a little bit more about bitcoin. So I think the biggest step that we can do at least is educating these people on the operational benefits they'll get because that's what they cared about day to day. I don't think it's our job to go around trying to orange pill people. That's probably not a good use of our time. It's really just this is an oil and gas solution that's going to help you flare less. Right. So if there's people that are already curious about bitcoin and get it, we'll kind of nudge them down the rabbit hole a little bit. But for the skeptical people, they just need to see it work, I think.
- [66:59]
A
And it's fair to say that in the current landscape there is still the. No one got fired for buying Apple stock or whatever. The analogy used to be Microsoft, whatever blue chip with the certainly the people at large operators. But then to a large extent still folks that might work at private operators.
- [67:23]
B
Yeah, I mean if you're a middle level guy at Oxy, you don't want to go to your boss and say, hey, I have this bitcoin mining thing, you know, if it works, you're still a middle level guy at Oxy. If it goes terribly, you know you're gonna get fired.
- [67:40]
A
How fraternal is that business though in terms of folks talking to each other?
- [67:46]
B
Yeah.
- [67:46]
A
Somebody seeing somebody take a risk, that normalizing that it's okay for me to take a risk versus seeing it working.
- [67:56]
B
Yeah. And I mean that is, it's huge in oil and gas. People are always looking at what their offset operators are doing. The first guys that drilled horizontal wells, people thought they were crazy. The first guys that did the fracking, you know, George Mitchell and the Barnett people thought he was crazy. They're like, there's no way you're going to get that gas out of that tight shale. But he just tried it. It worked, and now everyone is doing it and it changed the US Global energy landscape. It really did. So we think hopefully if we can get in with the right guys, make this work, they'll see it work. Their offset operators, we'll see it work. I was telling you earlier, we had a meeting in Midland and a lady said, yeah, we think we want to try this out. We're curious to see it work. And by the way, we have three guys next to us that have the same exact problem and they're very curious to see it work, too. So we really do think it's going to be a snowball effect. We've already seen that with some of the early wins we've gotten inside the business itself. You know, if you are a large operator, one group might see it work. Then their other, their Barnett Group or their Permian group will talk to the Gulf Coast Group and say, hey, you know, this is a solution that can work now. So it really is a copycat industry that might be slow to adopt things at first, but once something's working, people do it.
- [69:23]
A
When you guys are thinking about repeatable opportunities for the reason that this is still so nascent, it has the opportunity to solve problems in a big way. But recognizing that you just can't go from where we are today to that future state and there needs to be demonstrated track record of both solving problems and the economics being sustained. How do you guys. Because your time is scarce, how do you guys create focus around where you're able to have repeatable success? Talking to the type of people that own the assets that like, that's a great example. Is it something of like, there's a certain area and if one person has a problem or a profile of a well, then they're likely to have other opportunities around them or what are the different things that you. Cause you're.
- [70:19]
B
No, you're exactly right.
- [70:20]
A
You're not necessarily like needle in a haystack, but there's a lot of opportunities, but there's only a certain number of people that will say yes. And then how do you look at the board to then focus energy?
- [70:30]
B
No, you're right. Our time is scarce and also our capital is scarce on the rental side. In the rental model, it's our capital, it's our equipment. So we have to finance it with equity or with debt. So there's a limited amount of dry powder. We have to go deploy rental units. So for that reason, we're very focused on focusing on the top 150 accounts for our rental product. The big public guys, the big private guys are who we are spending our time trying to get in front of for this rental product. Um, and hopefully there'll be purchase customers one day to the purchase products. You know, we're happy to put in front of anyone frankly, because the smaller guys are willing to spend the capital quicker than the bigger guys. So that's kind of how we bifurcate what we focus on between the two, the two products we offer.
- [71:21]
A
One of the things that I've come to appreciate is just how dependent the legacy oil and gas businesses to fiat financing. And you used to sit on that other side at Blackstone. Have any of the conversations, has that been the nature of their credit relationships? Been an inhibitor saying yes. And then on the other side, is it a potential opportunity where they could tap financing based on their borrowing base? Non. Non Bitcoin?
- [71:56]
B
Yeah, yeah, no, it's a great point. I mean the oil and gas industry is built on borrowing basis, reserve based lending. Right. So you have explain a little bit how that works. Yeah. So high level, you'll have producing wells, you'll have some undeveloped acreage and the bank will look at all of that in totality, look at a reserve report done. So they'll have petroleum engineers look at all of the hydrocarbons that you have in the ground, how much is producing, how much is not producing. And they'll look at all those cash flows again, discount it back. They'll say, hey, all of your reserves are worth $100 million. We're going to advance you 80% of that in a credit facility. So we'll give you an $80 million credit facility that you can draw and pay down as you wish. So that's a really key way that a lot of these companies finance themselves. At the smaller level. You, you know, the bigger guys use it more as just kind of a working capital facility because they have access to institutional grade debt like bonds and things. But a lot of the smaller guys, their RBL is how they finance their business to drill more wells.
- [73:02]
A
The RBL is their revolving.
- [73:03]
B
Yeah.
- [73:04]
A
Facilities. So they basically have a revolver.
- [73:06]
B
Yep.
- [73:07]
A
And if the price of gas changes or the price of oil changes, how does that come into play?
- [73:14]
B
It'll get reassessed every year. So that's a great question. If gas prices go down and strip comes down, the value of reserves, of your reserves is less. So they're going to haircut. What was 80 million the next year might get cut to 50 million and then you have less capital available. It works in the reverse too. So it is a bit of a, you know, you don't want to ever be fully drawn your revolver on your RBL because that could happen, could get reassessed the next year and owe the bank money.
- [73:48]
A
And if say an operator that had a credit revolving credit facility or credit deals loans owed to different banks, even if bitcoin mining wouldn't be the principal activity that was being financial, maybe it's not financeable in your mind or does it come up of whether or not that increases the perceived risk? You know, in terms of an operator, maybe they haven't had a direct conversation with one of their banks, but saying, hey, if we go down this path and do this, they might view us as less credit worthy or greater risk. Does that, does that come up?
- [74:30]
B
It definitely comes. It comes up all the time really. I mean some guys will say, hey, my bank's willing to finance $5 million is no problem. Some guys say my bank would puke on this. So every bank has different risk appetites or different views on bitcoin. And it also probably depends on the relationship and the size of the business. But some guys are very willing to put this on their credit facilities and use that pretty cheap cost of capital to do this. Others are just, it's a non solder with their banks. So I mean even for our business like we to build out this rental fleet, we're talking to banks and credit shops and things like that. And a frustrating aspect has been the bitcoin on our balance sheet that we hold, that we've accumulated over time is given almost zero credit. In their eyes they're like, well, you don't have much cash. Yeah, we don't have much cash, but we have a good amount of bitcoin that you're giving zero credit to. So that's just a broader thing that I think will get better over the next five years once banks come around to the fact that it is the best collateral on earth, you know, but I think we're slow early.
- [75:39]
A
It is interesting because I was wondering why the oil and gas companies didn't start to accumulate bitcoin. Not necessarily running a bitcoin treasury strategy.
- [75:50]
B
Yeah.
- [75:52]
A
But then I came to understand that what you just described, which was you would get zero credit for it to potentially borrow against that a lot of the free cash flow is swept to the credit facilities. And the way the incentives in that legacy conventional business are is that you're not incentivized to hold A lot of excess cash.
- [76:20]
B
Yeah, for sure.
- [76:21]
A
Based on how the credit agreements are structured.
- [76:23]
B
Exactly.
- [76:27]
A
So last question to wind up to wrap it up is over the next one, two, three years, where are you guys focusing? Because I would presume everything is based on unit economics, but it's also strategically of unlocking a much larger pie. And so in terms of really getting to that next step function for this industry subset of the bitcoin mining industry and the role that360 is playing in it. On the strategic side of your business, whether that's financing, just kind of what aspect of the business do you guys view as most strategic to unlocking, say a 10x wave of growth not based on anything about the price of bitcoin, but just in terms of the market of assets or capital to become interested and view this space as more investable?
- [77:33]
B
Yeah, I mean, we kind of focus on geography first. Everything we've deployed to date has been in Texas. We're based in Austin as we speak. We're putting our first deal in Wyoming with the largest producer in the Powder river basin. And that's going to be important for us because to your point earlier, there's 10 other pads that are exact have the exact same problem there in Wyoming is interesting because their flaring rules are much stricter than Texas. So the pain that producers feel is higher in Wyoming, higher in New Mexico. First Texas, where they can just flare with no real penalties. So we're focused on getting into New Mexico, getting into Wyoming, expanding there. North Dakota also has strict flaring rules. So focusing on the geographies where the producers have the biggest pain because it's easier to, you know, rent our infrastructure if you're feeling more pain. So that's we're focused on on the geography side and then on the financing side, it's really about building a track record with these rental. This rental product is new, like I said, showing people the track record. And then we believe and have already seen that it is a financeable product because most of the capex we're spending on these rental units is in this good collateral, which is generators that banks understand. And that's important for us because we don't want to equity fund our entire rental fleet. That will be expensive from an equity dilution standpoint. So getting efficient financing on the rental fleets, another big goal that we have. And then broadly, I mean, it's just getting our name out there, getting producers positive experiences and hoping that their offset guys see them and say, hey, this works. This is a viable oil field tool. It's not some far fledged crazy bitcoin bro thing. It's an actual oil field tool that works. So that's what we're working on every day.
- [79:30]
A
In the case where you mentioned in Wyoming a large producer, just if you could, because you brought it up, what was the dynamic around that case specifically not needing to understand who customers are? Of course not. But just because there's signal there of if it's a large conventional producer rather than ones and twos or smaller operators, there's signal that's getting through even if it's not fully seeing the field of bitcoin.
- [80:03]
B
Yeah, it's a great question. So this specific example, very large producer, this is a two well pad that they drilled I believe a year and a half ago and they produced the well when they first drilled it, but then they bumped up against their flaring permit and they weren't able to get it renewed so they could not flare any more gas. There was no gas pipeline so they had to shut that well in. So the oil, there's been no oil or gas flowing out of the well for a year and a half which is very impactful for them. They can't flare the gas. So they are hiring us to consume that gas, combust it with our generators, mine bitcoin with it and that is all to allow them to flow their oil. So on the rental economics for them, they don't really care. They're going to be happy if they break even on the gas because their alternative would be flaring it. But they are unlocking 200 barrels plus a day of oil production that they can now flow. Given our units are up there, someone.
- [81:04]
A
Like that are they. Do you think that the mindset is let's do this one with the mind that they have a whole other portfolio where again it's not going to be every other well or every other asset that they own, but evaluating what they do. Have someone like this thinking about it from that frame of mind of like hey, let's test this out with the idea that we know we have other opportunities if this proves to work.
- [81:35]
B
Yeah, they've told us there's five other pads they've already identified that are the same exact scenario and there's no line of sight in this area to gas pipeline being built. So they want to see this work and then there's a lot of opportunity to grow with them.
- [81:48]
A
And then what? It seems like the lat seems like everything is generally backward looking in terms of this is how assets exist. These are where pipelines either exist or Don't. So let's go out and find the wells that fit the profile that best map to profitable bitcoin mining. When do you think? Just kind of, if you're painting a picture out into the future, I know we're not asking to predict bitcoin prices, but are we thinking 5 years, 10 years, 20 years, maybe no horizon at all until the legacy oil and gas industry uses bitcoin mining to change their development programs.
- [82:44]
B
Yeah. On the drill program going forward, is.
- [82:47]
A
That just too far out to conceive, or is it like 10 years? Maybe they're thinking we can go drill that well because being basically the difference of, hey, we've got a problem that we didn't foresee, this can be a solution to it, versus we can actually go drill where we couldn't or wouldn't have otherwise drilled.
- [83:06]
B
So it's already happening today with small producers, small wildcatters that understand this, see the potential, hey, I don't need. I can go wildcat in a new location and have gas offtake where there's never gonna be a pipeline, so I can plan a drill schedule around that. We've already had those conversations with people. You know, granted, they're smaller producers, mom and pop type people, but again, that's where a lot of the innovation in oil and gas comes from. The interesting thing will be, when is a big public guy going to build this into the drill program? And if I had a handicap, a timeline for that, I would say. I'd say four years from now until a big public eye is actually planning a drill program around this. Um, and I think that'd be amazing.
- [83:59]
A
I was thinking you weren't even gonna give me a. Give me a forecast four years. No, I. I think that, you know, just in the spirit of. Of wildcatting, I would think that because I had conversations four or five years ago with someone who had assets in the Haynesville north. I think it was northern, northern Louisiana. Haynesville.
- [84:17]
B
Yeah.
- [84:17]
A
About drilling a well specifically to mine bitcoin and the idea that they might be the first to drill a well and then exclusively mine bitcoin on it with the wildcatter mentality was something of interest to them.
- [84:34]
B
Yeah, I mean, one of our clients drilled a well specifically my bitcoin. So it's happened.
- [84:39]
A
Whoever the next person is is not the first. That's pretty amazing, though.
- [84:42]
B
Yeah.
- [84:43]
A
I mean, the fact that that type of activity, the fact that the example that you gave in Wyoming, the fact that somebody in the world has drilled a gas well to mine bitcoin and in the future will drill an oil well with bitcoin being the first off take is a sign of how far bitcoin and bitcoin mining has come.
- [85:08]
B
Totally. And even if it's just a bridge. Right. You can speed up your drill schedule. The pipeline might be a year.
- [85:13]
A
May not be the permanent solution.
- [85:14]
B
Exactly.
- [85:15]
A
But it reduces uncertainty.
- [85:17]
B
You can plan around it.
- [85:18]
A
Yeah. Oh, Sean, appreciate you coming downtown from your new digs a little bit west of downtown. Always enjoy conversations, the ones we have more frequently here. But excited for what you guys are building at 360 and just all the innovation that's happening in the oil field and the gas fields from bitcoin mining.
- [85:40]
B
So, yeah, I appreciate it. You got to come by the new office and grab lunch with us sometime. Yeah.
- [85:45]
A
Have to do that.
- [85:46]
B
Sounds good.
- [85:46]
A
Appreciate it.