Parallels Abound Between Baseball and the Energy Industry as 110th Fall Classic Gets Underway.
“The journey from the minor leagues to the World Series parallels the struggle to climb the ladder of American business. Many try, but only a few succeed.” – Roger Kahn, The Boys of Summer
Tonight, the last two teams standing in Major League Baseball will descend on title-starved Kansas City in the opening game of the 2014 World Series. The San Francisco Giants and Kansas City Royals both enter the 110th edition of the Fall Classic with a league pennant and a World Series patch stitched to their caps, but the similarities end there. The Giants are mainstays in October, attempting to capture their third championship in the last five years. The Kansas City Royals are the darlings of baseball, storming their way to the Series in the organization’s first playoff appearance since 1985.
As written by Kahn, the path to stardom in the business world is a testament to dedication and expertise. The oil and gas business is clearly no exception. Consider that the oil price collapse in 1986 occurred just one year after the Royals last postseason appearance. It took roughly two decades for the industry to recover. In recent years, the industry has rebounded by implementing new drilling techniques and methods, catapulting the country’s crude production to the highest in the world. But the process doesn’t happen overnight. The Kansas City general manager can attest to that, saying a World Series berth is “an eight-year process” when he first took charge of the organization in 2006.
Knowledge, appropriate utilization and execution in the game of baseball and energy are invaluable. As Derek Jeter once said, “You don’t just accidentally show up in the World Series.”
The Backbone of Business and Baseball
Ask any oil and gas executive the most important aspect of the industry and you’ll likely get a three word answer: rate of return. If you ask for the keys to generating high rates of return, you will likely get a baseball driven answer: Enter a play early, say, the first or second inning, and establish your position.
The Giants, for example, established their rate of return at the starting block of development: the draft. San Francisco is revered for the strength of its pitching staff, and we’ve all heard the old adage of “Defense wins championships.” Aces like Matt Cain, Tim Lincecum and now Madison Bumgarner have all been drafted by the team and have been pillars to its deep postseason runs. Buster Posey, the team captain and former National League MVP, was also drafted by the Giants. Pablo Sandoval, a cornerstone of the lineup, was signed as a free agent in 2006. Discovering talent and developing its players is perhaps the largest reason the Giants are evoking talks of becoming a MLB dynasty.
For Range Resources (ticker: RRC), entering the Marcellus play early in its development stage has set the tables for years to come. The company forecasts line of sight growth of 20% to 25% while remaining one of the lowest cost producers in America’s greatest gas play.
“We started early,” said Jeff Ventura, President and Chief Executive Officer of Range Resources, in the company’s Q4’13 conference call. “We had the advantage of picking [up contracts] in 2007 when a lot of our competitors weren’t convinced the Marcellus was going to grow and build, so being the first mover with a high quality team has given us a big advantage.”
Ventura and his team kick-started the Marcellus revolution back in 2004, identifying the area’s potential when its peers did not.
The Importance of Building a Complete Team
Baseball clubs don’t win games without contribution from both sides of the field, and the Kansas City Royals have benefited from multiple aspects of its squad. Timely hitting, impressive starting pitching and a dominant bullpen (along with some luck) has propelled the Royals to a sterling 8-0 record thus far in the 2014 playoffs. Only the 1976 Reds completed the entire postseason with a perfect record, and one ESPN analyst believes the Royals will join the Reds among the unblemished ranks. Eric Hosmer, the man who Kansas City drafted ahead of Buster Posey, is batting an absurd .448 heading into the showdown. The three-headed bullpen monster of Wade Davis, Kelvin Herrera and Greg Holland has been lights-out: the trio boasts an Earned Run Average of just 1.07 in more than 25 innings of postseason relief work.
A well-rounded portfolio is also of utmost importance to energy companies, and two recent multi-billion dollar deals prove how vital some players believe it is to cover all your bases. Southwestern Energy (ticker: SWN) anted up $5.4 billion for Chesapeake Energy’s (ticker: CHK) position in the Marcellus on October 16, 2014. Three days later, Tesoro Logistics (ticker: TLLP) forked over $2.5 billion for the majority of QEP Midstream (ticker: QEPM) and its field services unit in the Rocky Mountains.
In conference calls following the acquisitions, management of both companies cited the importance for expanding the portfolio.
Steve Mueller, Chairman and Chief Executive Officer of Southwestern, said: “Our current projects in Fayetteville and Marcellus have a large inventory that drive top-tier returns by themselves. When you add [the southern Marcellus] as a third asset that we can immediately exploit and provide potential, we can build value faster and quicker for our shareholders.”
Southwestern plans to equally distribute capital among the three projects by 2017.
Tesoro’s move creates “a tailwind for midstream MLPs, E&Ps, refiners and utilities,” said Baird Energy’s note on October 20, 2014. Greg Goff, President and Chief Executive Officer of Tesoro, stressed the need to create “a full suite of services” in the call. “We wanted to have a full-service logistics company to go out and offer not only services to current customers that we have, but to expand our customer base,” he said. Both companies expressed confidence that the multiple facets of the business will be beneficial in the long run.
Who Gets the Edge?
The prospects of a difficult oil market have been beaten to death in recent weeks but will surely make the rounds again with quarterly earnings season on the near horizon. In EnerCom’s Bam! It’s Earnings Season Quarterly Estimates, our analysts singled out a handful of challenges facing E&Ps and oilservice companies in the upcoming Q3 conference calls, including:
- Lower commodity prices’ effects on basin returns and capital budgets
- Project returns if oil prices fall to $60
- Potential for U.S. oil exports
- Increasing M&A activity in E&P
- Infrastructure build out in Marcellus, Bakken, Eagle Ford, and D-J Basins
- Crude oil and natural gas differentials (Marcellus, Wattenberg, etc.)
- Growing pressure for US to export
- Midstream contracts and take-away capacity
- Oilfield services costs and outlook
- Debt covenants and operating in a low commodity price environment
For the 2014 World Series, we believe the following matchups are critical:
- Home Field Advantage: Both ballparks are known for being pitcher-friendly confines, but AT&T Park, home of the Giants, is notorious. Since 2010, the average number of runs scored per game at the park averages 27th out of 30 parks in the majors. The scarce scoring fits perfectly into the Giants’ defense-hardened team. Giants are 15-6 in home playoff games since 2010.
- Madison Bumgarner vs. K.C.’s left-handed power hitters. Bumgarner was named the Most Valuable Player of the National League Championship Series and carries miniscule 1.42 ERA into the matchup. The Royals left-handed mashers of Hosmer, Mike Moustakas and Alex Gordon have batted in more than half of the team’s runs and blasted seven of its eight home runs. Something has to give.
- Kansas City’s relief guys have been highlighted, but don’t overlook the Giants’ late-inning options. Sergio Romo, Fernando Casilla and Jeremy Affeldt have allowed just eight hits in more than 15 innings of work.
- K.C. small ball. The Royals led the majors in stolen bases this year. The Giants were the seventh-worst MLB team at throwing out base runners, catching only 30% of opponents.
- Catchers: Buster Posey (SF) allowed an average of one stolen base every 1.84 games in the 2014 regular season, while Gold Glove-winner Salvador Perez (KC) allowed one every 2.51 games. In the defensive wins above replacement category (a form of baseball metrics), Perez holds a league-best mark of 2.1. Posey’s total is 0.2.
- Destiny vs. dynasty. The Giants are seasoned, composed playoff veterans. The Royals are young, dynamic, and haven’t been flustered in the bright lights of October. They also haven’t played in nearly a week. Will K.C. ever realize the monumental pressure or will they continue their hot streak?
Given the 9-1 home field record between the two squads this year, we believe Kansas City will prevail in a lengthy series for the ages. Royals in seven.
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