Transcript: Bethany McLean (Enron & Fracking)



The transcript from this week’s MIB: Bethany McLean, is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.



This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. Her name is Bethany McLean, she is the author most recently of “Saudi America All About The Rise of Fracking” it’s really a fascinating book that brings up all sorts of interesting things that I had never considered before about fracking, most notably the direct line from the financial crisis and the very low rates we’ve had to the fracking boom of the ensuing decade. Bethany is a highly-regarded author who has written numerous books many of which have won awards and are highly thought of. She’s one of my favorite writers, I find her stuff absolutely fascinating and I think you’ll find this conversation fascinating as well.

So with no further ado, my conversation with Bethany McLean.

I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Bethany McLean, she is a contributing editor at “Vanity Fair”, she also spent three years in the investment banking department at Goldman Sachs from which she joined “Fortune” as a reporter. She is known for her books probably the most famous one is “Smartest Guys In The Room, The Amazing Rise And Scandalous Fall Of Enron” eventually that became an Academy award nominated documentary. She also wrote the book “Shaky Grounds, The Strange Saga Of The US Mortgage Giants” and “All The Devils Are Here, The Hidden History Of The Financial Crisis” her latest book “Saudi America, The Truth About Fracking And How It’s Changed The World” Bethany McLean, welcome back to Bloomberg.


RITHOLTZ: So I really enjoyed the book “Saudi America” and let’s jump right into that because there are some really fascinating things that I have to start with a quote that really stood out to me, quote “The most vital ingredient in fracking isn’t chemicals but capital, if it wasn’t for historically low interest rates, it’s not clear there would even have been a fracking boom.” Now, all this time, I’ve been told that’s technology that’s driving fracking, you’re saying it’s not, it’s ultra low interest rates.

MCLEAN: It certainly is technology as well, horizontal drilling is a big innovation so I do want to give credit to that, but I think most people, when they focus on the problems with fracking, or the issues, they focus on the environmental issues, very few people focus on the shaky financial foundation of the fracking industry and this is an industry that needs huge amounts of capital, huge amounts of capital are required to drill a well and then because the decline rates of the wells are so steep, if you are going to maintain production or grow your production every year, you get on this treadmill of constantly needing more capital.

So most shale companies have a fair amount of debt, and so if it weren’t for record-low interest rates, it’s unclear that they would’ve been able to raise all the debt that they needed to get this thing going the way it did.

RITHOLTZ: Let’s talk about those decline rates. You cite a study, in the book, you cite a study by the Kansas City Federal Reserve that showed the average well in the Bakken region, first year decline of output is 69 percent, within three years, it’s 85 percent, so what do they have a very short window to squeeze whatever they can out of that well?

MCLEAN: Yes and you can make, one well can be profitable and a simple return on capital analysis, but if you are part of a publicly traded company and you need to show growth in production every single year, you’re on this treadmill of constantly needing to raise more capital in order to show production growth. And the big question overhanging the shale industry is does that ever come to an end? Is there a point where this industry begins to produce free cash flow because right now it doesn’t, it depends on the largesse of Wall Street being willing to fund it.

RITHOLTZ: So let’s talk about that a second, you describe how fracking developed with thousands of wildcatters, they would go out, they would get these land leases, they were deploying the technology using horizontal drilling, lots of Canadian sands and all sorts of other surprising things I had no idea about, you are suggesting that these one-off drills themselves, these one-off wells themselves, they were profitable for those wildcatters?

MCLEAN: A one off well can be profitable, yes, not as profitable, I think, as people think it is, I got some numbers for the returns at the well heads on a bunch of the wells that Aubrey McClendon who is the most colorful character in this whole story, the former CEO of Chesapeake had and even at the wellhead, those returns were at 9 percent, that is before the cost of marketing and transporting the gas. It is not clear how profitable but some wells can be profitable, the problem is for publicly-traded companies or for any company that needs to show growth that they get on this and basically the steamroller of needing to raise more capital all the time.