Mark Papa's Got a Brand New Bag, and it's Weird

By Stephen Clayman · March 7, 2018

Oklahoma Oil and Gas Interest Owners,

Mark Papa of Centennial Resource Development, Inc. ("Centennial") has made some bold statements recently regarding the future of oil and natural gas production from shale reservoirs. The thrust of his claim is that energy companies will not be able to produce as much oil and gas as they have forecasted. Berlin will not fault Papa for his statement, which could very well prove to be correct, but she believes that his arguments are faulty. Since Berlin has not interviewed Papa, all that she can analyze are his public statements. Berlin's comments are bolded and italicized after Papa's quotes:

1. “The oil market is in a state of misdirection now” - Unfounded s** tatements like these give Berlin the willies. Oil is a commodity traded across the globe in high volumes. In which direction should the oil market be heading besides it's current direction? Papa doesn't say whether the price is too high or too low, but Berlin assumes Papa means that company stock prices are too high...? Hard to know.**
2. "Mr. Papa told executives and investors that most of the best drilling locations in North Dakota and South Texas have already been tapped." - This should also give one pause. Maybe he could re-frame it as the best drilling locations that we know about in North Dakota and South Texas have been tapped. But, Berlin would presume that Papa would concede that there are unconventional reservoirs in North Dakota and South Texas that haven't been discovered. If he wouldn't concede that, then he should make a bolder claim such as "exploration geology in North Dakota and South Texas is fruitless as everything worth finding has been discovered." Papa isn't going to say that of course. In addition, even if the best locations in North Dakota and South Texas have been tapped, they aren't the only places to find oil and gas in economic quantities. He excluded every other basin to include the Anadarko and the Permian (where Papa's company is focused).
3. “Apparently, you can just use your imagination to dream what might happen with big data in five or 10 years.” - This skeptical take on the future of technology in the oil and gas sector is just mere paragraphs before the article mentions how, while at EOG, Papa utilized new technology to drill for oil in shale reservoirs instead of gas. It would be odd if Centennial wasn't spending money on R & D or continued using vendors and service companies that have failed to innovate. (note, Berlin isn't screaming "put it on a blockchain," just that it isn't logical to discount how technology will further change the industry. Something tells Berlin, that Papa hasn't spent all night prying casing joints around with 2x4's before they are sent up the cat-walk and through the v-door....there is some room for automation...)

The Godfather of Oklahoma mineral rights. Not the same Papa.

Maybe the weirdest part is that Papa is still at the helm of Centennial, a pure-play Permian concern currently valued around $5 billion. Papa hasn't said how he has positioned Centennial to cope with the "misdirection." Berlin argues that it is a bit self-serving of Papa to claim the market is too optimistic, but keep his company long. And if it isn't self-serving, then should his shareholders be upset that he believes the sector (which would include Centennial) is overvalued and that he hasn't returned more cash to shareholders? It would take some brass ones to take the other side of the trade. It is difficult for any publicly traded oil company to decrease production from one time period to the next and while staying in the good graces of "the market." Then again, shareholders continue to buy high and sell low. Berlin has argued before that managers and shareholders are often misaligned and that seems to be the case again with Centennial and Papa.

If Papa or anyone else feels like Berlin has erred in analyzing Papa's statements, please comment below.

More to follow,

Berlin