John Mauldin Defends The Faith, Fails Economics 101

John Mauldin defends the faith of what he calls the “fracking gospel” but fails Economics 101.

In his recent post “Riding the Energy Wave to the Future”, he claims that oil prices are falling because the cost of producing tight oil is cheaper than most conventional oil.

But oil is $40 per barrel and falling because it is being devalued by global market forces that have little to do with tight oil at this point.

Mauldin’s evidence that producers are making money at $40 oil?

“I have friends,” he says, “here in Dallas who are raising money for wells that can do better than break even at $40 per barrel.”

I have friends at oil companies here in Houston who assure me that they are losing their shirts at $40 per barrel.

Do my friends in Houston live in a different galaxy than Mauldin’s friends in Dallas?

No, Mauldin’s friends are investment bankers and private-equity providers who are still able to raise money for lost causes in the tight oil patch. My friends are working stiffs in the business who are losing their jobs as companies struggle to adjust to price deflation.

Mauldin goes on to say, “How are these new economies possible? Answer: they bent the cost curve downward. It has fallen fast and – more importantly – it will keep falling.”

These sorts of claims can be tested by looking at tight oil companies’ first half (H1) 2015 cash flow and income statements. The first chart on the left in Figure 1 below shows that, on average, tight oil companies outspent cash flow from operations in H1 2015 by a dollar more than they did in H1 2014.

Tight Oil Capex-CF & D-CF 23 August 2015
Figure 1. Tight oil companies spending vs. earning, H1 2015 vs. H1 2014, and H1 2015 debt-t0-cash flow for tight oil companies.  Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(click image to enlarge)

That means that these companies are losing more money than they were a year ago regardless of which way the cost curve is bending. Mauldin’s claim fails the test. F.

Debt-to-cash flow from operations is a standard measure used by banks to determine an oil company’s credit risk. The E&P industry’s average ratio from 1992 to 2012 was 1.58. A ratio of more than 2.0 is a red flag that a company may become a credit risk, probably has exceeded loan covenant agreements, and may have its loans called by the banks.

The second chart on the right in Figure 1 shows that the tight oil companies that I cover have, on average, a 3.3 debt-to-cash flow ratio, way above the red flag threshold. That contradicts Mr. Mauldin’s claim that these companies are making money at $40/barrel — companies are deep in debt and could not pay off the debt if they used all the cash they generated in less than 3 years. In fact, tight oil companies will probably have their credit ratings greatly reduced at the end of this quarter because their income statements and balance sheets are such a mess.

Another F for Mr. Mauldin.

Mauldin states, “At $65, they [tight oil companies] can make higher returns than they did three years ago with oil at $95.” I am fairly certain that claim comes from EOG’s latest investor presentation. I know that because I own EOG stock and pay attention to the information they provide. Figure 2 shows the source of the claim that Mauldin references.

More profitable at $65 than $95 from EOG_InvPres_0515
Figure 2. EOG Resources current returns versus 2012. Source: EOG Investor Presentation May 2015.
(click image to enlarge)

This is an example of “cherry picking.”

EOG bases their claim on two plays and not tight oil in general. Plus, the value on the y-axis “ATROR” only includes the cost of drilling, completion and equipping a well. It excludes basic costs of doing business like G&A (overhead), interest expense, gathering, processing and midstream costs, land, seismic, geological and geophysical expenses (these exclusions are stated in Slide 6 of the same investor presentation).

EOG is not breaking any rules here because they tell us why their claim is misleading.

I am surprised that an expert like Mauldin is willing to accept a statement that is, on the face of it, unbelievable. Seriously, is there a business in the world that can experience a one-third drop in the price of its product–from $95 to $65 oil price, in this case–and make more money after the fall in price than before?

Figure 3 shows that EOG is, in fact, among the more disciplined tight oil producers with a spending-to-earning ratio (capex-to-cash from operations) of 1.5 for H1 2015. They are, however, spending 50% more now than they were a year ago when they were able to fund their capex out of cash flow. That means they are making less money as a company at $65 oil than they were a year or a few years ago at $95 oil. Period.

Figure 3. Tight oil companies’ spending vs. earning, H1 2015-H1 2014 comparison with EOG highlighted. Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(click image to enlarge)

F number 3 for Mr. Mauldin.

Mauldin accepts that increased rig productivity “with costs per rig stable or declining” is proof that tight oil companies are making a profit at low oil prices. Rig productivity gains are real but this does not mean that anyone is making money. It means that companies are losing money on more barrels of oil than they used to produce per rig.

“We’re losing money but making it up on volume.”

Another F.

I could go on but I believe that I have adequately shown that “Riding the Energy Wave to the Future” is not among John Mauldin’s better researched or well-reasoned posts.

I will not speculate about why Mauldin adds his influential voice to the dangerously incorrect notion that that tight oil is commercial at low oil prices or that U.S. energy independence is possible. It is a dangerous argument because investors and policy-makers are not knowledgeable enough about the oil business to understand that Maudlin’s and similar views are pure fantasy that cannot be supported by data.

Politicians will base important decisions about domestic energy supply and export on influential but bogus arguments. Investors will spend money on projects that may never return their principal.

This kind of mis-information gives people the false sense that our energy future is secure and inexpensive and that they can go on using as much energy as they like without any consequences. It allows them to ignore or deny the very perilous state of the world economy in which oil price is but the vanguard of a series of cascading and troubling trends.

Energy is the economy.

Figure 4 shows that after every period that oil prices exceeded $90 per barrel in real 2015 dollars — 1979-1981, 2007-2008 and 2010-2014 — the global economy went through a period of adjustment that included devaluation of commodity and currency prices, otherwise known as a recession.

CPI-Adj Oil Prices&KeyEvents_24 August 2015
Figure 4. Oil price in CPI-adjusted 2015 U.S. dollars and key events. Source: EIA, Federal Reserve Board and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

We have been in the midst of one of these adjustment periods since at least September 2014 when global oil prices began to fall in earnest.

After the 1979-1981 period of high oil prices, there was an 18-year adjustment period before the global economy began to recover. After the 2008-2009 period of high oil prices, the economy seemingly recovered in about a year thanks to central bank intervention and an OPEC oil-production cut. Bank intervention included massive creation of liquidity and credit through artificially low interest rates, a situation that continues today.

We are currently at least 9 months into another adjustment period following the 2010-2014 period of oil prices above $90 per barrel. Major adjustments to stock and currency markets are occurring as I write, with the Dow-Jones Industrial Average down more than 1500 points since last week. WTI is near $38 per barrel and Brent is below $43 per barrel, down from $106 and $112, respectively, in June 2014.

But no problem for John Mauldin because he claims that “some US shale operators can break even at $10/barrel.” Really? He sees no requirement to back up such a blatantly preposterous statement with a shred of supporting data.

He thinks that the low cost of producing tight oil is driving down the price of oil. I think it is a colossal market correction that cares nothing about anyone’s marginal cost of production at this point.

You decide who is closer to the truth.


  • Walter Stewart

    He may be one of those that will “Sell you some Ocean Front Property in Arizona!”
    Maybe “wishful thinking”?

    • Arthur Berman


      I doubt that John Mauldin is doing any wishful thinking. As I wrote in my post, I will not speculate about why he has written a post that consists of “pure fantasy that cannot be supported by data.”

      All the best,


  • Art,

    Great job of using data to refute Mr Mauldins absurd statements regarding tight oil being profitable at $40. There are so many folks who read Google articles, or listen to simple comments from investment folks that claim that the US can be, or is energy independent. Yet these articles are not backed up by data. They are simply lip service which, as you pointed out, can be used to make major policy decisions such as exportation of US oil. The major policy decisions need to be made based on data to back them up. Regards, Daniel.

  • John M. Morgan

    Hi Art,

    I assume you would have a similar take on this article:

    • Arthur Berman


      “Q2 oil results show strength of US ‘super-shale’ for the price of a slice” is at least as bad as Mauldin’s ““Riding the Energy Wave to the Future””. They are both part of a conscious mis-information campaign.

      The price of a barrel of oil may fall to almost the price of “an extra-large delivered pizza with all the works, including tip” but it will not cost that little to produce a barrel unless you exclude everything but lifting costs, based on costs as stated in the Q2 SEC filings by tight oil companies.

      Like Mauldin’s article, the Platts article did not include any data either contained in quote, a table or a graph. In other words, it represents the unsubstantiated opinions of the select group of people.

      Thanks for the comment and link,


  • […] John Mauldin Defends The Faith, Fails Economics 101 […]

  • T Bradley

    Thank you for your reality based analysis. Your writings state what we all know is true, way down deep in the corners of our consciousness, but we simply cannot come to terms with it.

    Please don’t “hate on” Mr. Mauldin’s work too much, even though what he’s saying is pretty irresponsible. Limits to growth (and I think that’s what I think we are seeing) is a pretty horrifying subject, so cognitive dissonance amongst our chattering classes and snake oil salesmen is something we should expect. I don’t blame ’em at all.

    Even so, patient, even loving, commentary about what we’re seeing and what we can expect should be the “word of the day.” The life of an Old Testament prophet is a tough row to hoe. You’re doing a good work. Do not be discouraged.

    Be strong. And let us be strengthened.


    • Arthur Berman


      I don’t “hate on” Maudlin’s views. The intent of my post is to give people information so they can form an opinion about his article.

      At the same time, John Mauldin represents himself as financial expert who readers turn to “for his penetrating view on Wall Street, global markets, and economic history.” He knows how to be objective and deal with the truth. If he can’t do it, he should not be writing blogs.

      I think that he knows exactly what he is doing and is making a sales pitch for something that is not real or true in “Riding the Energy Wave to the Future.”

      Thanks for your comments,


  • Art,

    To your excellent list I might also add that in that same report Mauldin said: “Look at the above chart for a few moments; it’s truly staggering. In just seven years, the amount of oil per well in some shale plays has risen by a factor of 10! That is almost all due to new technologies that are increasingly coming online.”

    Um, no. Not even close. Here he has confused *per rig* productivity with *per well* productivity. F-.

    He has a lot of good analysis on economic topics but he is way off the reservation, barefoot and lost, when it comes to oil.

    Many people who have drunk the technology-will-save-us kool aid have the same difficulty.

    • Arthur Berman


      Thanks for your thoughts on Mauldin’s article. I understand that you have written something also but I have not seen it.

      There were so many bogus points that he made that I had to cut my commentary off at four. Obviously, the point is not to critique Mauldin’s to death but just enough so people get the point that it cannot be believed or trusted. Then, I tried to move on to what does matter.

      All the best,


  • Mathias

    My guess is that Mr Maudlin needs to talk up the potential in order to raise more cash, as simple as that. A dirty way of doing it, but it shows how desperate some are in order to survive.
    Best Regards

    • Arthur Berman


      I think that you are correct. I don’t know Mauldin or have any previous experience with his writing or thinking so I was hesitant to come right out and say that. At the same time, he is a smart and experienced observer so, to be so far off the facts and with so little supporting data, seemed like a sales job to me.

      All the best,


  • Sam Taylor


    I’m slightly confused by what you mean when you say the period of 81-99 was one a period in which it took the economy a long time to recover? Wasn’t this period (the ‘great moderation’) a time of stability and prosperity, which was largely enabled by low oil prices caused by the massive surpluses generated by Alaska, North Sea and OPEC all fighting for market share, and it simply took the world almost 2 decades to build sufficient capacity to burn it all? I appreciate it was a stinky time to be in the oil business, but US economic growth must have averaged something like 3-4% over this period.

    • Arthur Berman


      What you say is true for the U.S. after Volker got things more-or-less under control with 18.5% interest rates but the developing world was in a depression for most of this time.

      All the best,


  • Andrew Rudenko

    Thank you for the article, Art. Many rational people can get carried away by hot sales pitches about “microchip jewels” the cost of which Mr Mauldin conveniently ignores. “Jewels”, walking rigs cannot overcome lousy geology, they can marginally improve on the results. The general problem however is not of Mr Mauldin’s making – in producing his missive he is just acting as a volunteer PR operator for heavily leveraged shale operators. Abuse of LTO is one of the QE fallouts of which there will be more to come. Without the indiscriminate funding fed by absurdly low interest rates LTO development would have taken a more balanced approach, centered around sweet spots where recovery is best, step by step, without flooding the market with valuable resource at silly prices, without destroying the livelihood of whole countries.

    I must say however I detest the way Mr Mauldin and Mark Mills he is referring to abuse technospeak to mislead the reader. Big Data will magic up megatons of crude at a penny a gallon…. Big Data in oil is nothing new. Offshore exploration is one of the leading industries in terms of use of supercomputers, and this has not made seismic interpretation of offshore data an order of magnitude cheaper – it has just made things possible which had not been possible before.

    • Arthur Berman


      I agree that monetary policy had a lot to do with the excesses of both tight oil and shale gas development. Using other people’s money usually results in using money irresponsibly. Zero-interest rate policies have a parallel effect on investment.

      The big data part of Mauldin’s article is bogus. As you say, it’s not new but most E&P staff lack the technical skills to even know what to do with big data–it requires a whole different set of skills in data base management, writing macros, etc. that is outside of their training or background.

      My experience working with companies that drill shale wells is that they are working on understanding far more basic issues that “big data” is unlikely to help with like why does this well produce nicely, and a nearby well does not produce at all. We are early in our understanding of shale as a reservoir.

      Mauldin has been persuaded to concoct a success story with his post. I don’t know him and have never read any of his commentary before and that is why I said that I could not comment on his motives in my post. I can only say that he has told a ridiculous tale and he is experienced and sophisticated enough to know better.

      All the best,


  • d.s.


    You are one of the “grand daddies” of the shale bubble busting, and this article is exactly the kind of information that has been taking so long to sink in, and once it’s done it will wreak havoc to the shale cos (good riddance in case of most of them). However, you remind me of the Roubini moment, when the guy would come out in 07, lay down his subprime argument and then would be asked what his “strategy” was. He’d say he’d be long well diversified portfolio of ETFs. So is your disclaimer of being long EOG is I think in the same category. I think EOG is most likely a horrible investment, or at least, horrible to some other stuff available out there. Why buy company that makes no money at 50/bbl and trades at like 40x times 2016 (overstated) EBIT?

    • Arthur Berman


      I’m not an investment advisor or necessarily even very good at investment. I inherited the EOG stock and believe that they are the best of a bad lot when it comes to unconventional plays. They have excellent positions in most of the better plays and may get bought in the upcoming wave of M&A.

      All the best,


  • Sean Deenihan


    A single very good US conventional well can produce oil for $10/bbl. The problem is that to find that well you will drill many dry holes and some less profitable producers. When you factor in the total costs of an exploration program, it cannot be done. Tight oil is disadvantaged with lower porosities and limited permeability (by definition), and requires extra stimulation ($$$). That being said there are many people that make money @ $10/bbl, they are called RI (landowners), ORRI, and refiners. Keep up the good work!

    • Arthur Berman


      I am a working petroleum geologist. You are talking about lifting costs at $10/barrel and you make the important distinction between the phony way that many analysts think about economics by F&D costs and partial-cycle scenarios that make things look much more favorable than they really are.

      The incidental beneficiaries of oil and gas production–royalty owners, mineral owners–and those who sell their company to a greater fool may be the only people who make any serious money in the oil patch.

      Thanks for your comments,


  • Tony Chan

    Hi Art,

    I think a lot of folks are trying to talk up shale ahead of redetermination come Oct. Looking at forward curves, there is just no way some (and I emphasise some) operators can hedge forward at above full production costs. The big question is how much funding and hence production will be cut. I don think we have ever seen the sort of production ramp up ever, so its anybody’s guess

    • Arthur Berman


      Trying to talk up shale when E&P stock prices are a fraction of what they were a year ago, companies are going bankrupt and their earnings reports are depressing only works in the absence of data and to an audience that desperately wants to believe.

      All the best,


  • awbeattie


    Thanks for calling Mauldin out. There are so many people/groups who are just plain lying about “energy” facts, especially when it comes to solar. ALEC comes immediately to mind, one of the many birth bastards of the Koch brothers.


    • Arthur Berman


      It is good to hear from you! There are many “hired guns” out there who will gladly post something to promote someone’s cause if the reward is right!

      All the best,


  • clueless

    Art – I really appreciate your input, and I find it extremely valuable. Nonetheless, I question this: “After the 1979-1981 period of high oil prices, there was an 18-year adjustment period before the global economy ‘began’ to recover.” Lets’ go 18 years from 1979. So, 1997. So, what was the Dow Jones Industrial average on 1/1/79 compared to 1/1/97? I know that the US stock market is not “the global economy,” but I think that you will find UK, Germany etc. “recovering” a lot before the end of that 18 year period. Especially if you “weight” global economies by the size of their stock markets. But, I am biased, in that I believe that the stock market is the best indication of recovery, and almost everything else is anecdotal. The Reagan years were not recovery?

    • Arthur Berman


      You acknowledge that the U.S. is not the world. The U.S. plus the U.K. and Germany is also not the world.

      I am making a simple point: high oil prices create a lot of economic dislocation. Maybe 18 years is too long but this post is not a treatise on economics but, rather, an explanation of why John Mauldin’s views are wrong and dangerous.

      Thanks for your comments,


  • Hammer

    Outstanding analysis

  • Johann Ricke

    Mauldin’s specialty is financial markets. Yours is energy. My impression from your essays is each of you is an expert in your respective field. Outside of your respective fields, not so much.

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