Meet Don Gray: Calgary’s most outspoken oil executive takes aim at his industry
The founder of Peyto Exploration and Development Corp. on the difference between land and value, why he's concentrating on heavy oil over shale gas and pseudo-ponzi schemes
There’s speaking truth to power, and then there’s what Don Gray has a habit of doing. Gray, the founder of Peyto Exploration and Development Corp. and the man behind a new oil and gas startup called Gear Energy, doesn’t mince his words when he talks about his industry. He sees salesmanship and marketing taking the place of true value creation, and he thinks there is a fundamental disconnect between the way Bay Street values oil and gas companies in Alberta and what they’re really worth. The fact that the price-to-earnings ratio for Peyto sits at a shade over 15 while other companies enjoy P/E valuations in excess of 150 is emblematic, he says, of the market’s inability to understand and appreciate value. Still, he thinks his approach – one that he says focuses on creating real value rather than perceived value – will win out in the end. “I feel like a guy who’s lining up for the 100-metre dash at the Olympics and I’m the only one not on steroids,” he says. “And the funny thing is that I’m beating them.”
Don Grey
Photo Marc Rimmer
On why Gear Energy is focusing on heavy oil rather than shale plays
These days, the term “resource play” has been used by lots of promoters, and the shale plays have been perfect bait. They milk big land purchases to get their share price up and cover off the fact they have performed very poorly if you look at things like production per share. The market gets excited about the land, but forgets about whether this so-called growth is profitable or not. Gear is focused geographically in an area where we can generate repeatable high rates of return on the wells we drill. We have a large heavy oil resource play.
On the confusion between land and value
If you’re using land as the basis for success, you’re a fool. This all started with the oil sands, because it brought a whole new group of investors into oil and gas that traditionally weren’t there. They’re the type that didn’t want to invest because they did not like the exploration risk, and they like oil sands because the resource is defined – and the exploration risk. But they forget about the fact that there’s massive execution risk and these projects have very high operating costs. They just assumed that if an engineering company assigns a value to the opportunity, then it must be so.
On the failure of the markets
I do find it a little frustrating that our markets aren’t more efficient. These guys, it’s not that they’re dumb – they’re actually quite smart. Why spend your time building a profitable oil and gas company when you’ve got an easier way to make money? They’ve got the market convinced that the end game shouldn’t be about creating an asset that generates a certain amount of cash flows that exceeds the capital that you put in. The end game is to find some fool that’s going to overpay. But at the end of the day, we’re not building a competitive and viable energy sector. You can only find so many greater fools before the gig is up.
On why this matters in the big picture
Ultimately, we don’t truly have an underlying industry that’s creating wealth. It’s transferring wealth from earners to promoters. Now, am I against the wealth being transferred from Royal Dutch Shell to the shareholders at a company like BlackRock? That works. Shell should have the expertise to make intelligent decisions. If they make bad assumptions they will eventually have to answer to their shareholders. Buyer beware. I’m more concerned that the mom-and-pop investors out there are being taken advantage of. It’s not good for our economy to be based on pseudo Ponzi schemes.
On what might happen when the music stops
It’s musical chairs, right, and it could end well, like BlackRock did with Shell and Daylight Energy did with Sinopec – we’ve seen a number of those situations. Or, it could end very badly. But there are a number of these guys setting themselves up for big-time failure.
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