A weekend with T. Boone Pickens...

A weekend with T. Boone Pickens... Another big new oilfield... Why Pickens changed his mind about wind farms... Reader feedback: Moving away to avoid Obamacare...

"You're making it awfully hard for me to like you..."

T. Boone Pickens was sitting in the second row of leather chairs on the starboard side of his Gulfstream V jet. Your editor (Porter Stansberry) was sitting next to him. Last Friday, we flew from Dallas to Pickens' 68,000-acre ranch, Mesa Vista.

There, he built a private airport, complete with 6,000-foot runway, fuel tanks, fueling truck, fire truck... and, of course, an eight-passenger helicopter. After all, the airport is about 15 miles from the main lodge. The plan was to spend the weekend hunting quail... and talking about the oil business with a handful of leading investors and bankers.

I had been invited to tag along because, after hosting Boone on my radio show and our Stansberry Society meeting in Dallas, I had shared our work on independent oil firm Devon Energy with him.

As longtime subscribers know, we warned Devon (rather vociferously) last year that it was making a huge mistake by continuing to invest heavily in the Canadian "oil mud" (our term for the oil sands that produce low-quality crude called "bitumen"). With production of high-quality petroleum in Texas soaring, we thought it was only a matter of time before oil prices fell, making Canadian oil production uneconomic. Almost as soon as the ink dried on our letter to Devon, that's exactly what happened.

For many years, Pickens was convinced we had reached "Peak Oil." In his most recent book, published in 2008, he confidently predicted we would never see oil prices below $90 a barrel ever again.

On my podcast, I gave him a hard time about this stuff. He was surprisingly candid about how wrong he had been. But until I went to his ranch last weekend, I had no idea what motivated him to change his opinion – so much so that his hedge fund has been shorting oil in the futures markets.

You might recall that in 2007 and 2008, Pickens was organizing his neighbors in the Texas Panhandle to build the largest wind farm in the country. He even ordered 500 wind turbines from GE. There were problems with building the wind farm in the Panhandle, though. It was going to be too difficult to obtain the right of way necessary for the transmission lines. And a lot of people think the giant white windmills are ugly.

Pickens famously wouldn't allow any part of the wind farm to be built on his ranch. In 2010, Pickens' windfarm idea was moved to Minnesota. Two years later, he sold out of it, losing something around $160 million. (As Boone told me, "I lost my ass in wind.")

The primary reason the deal fell apart was natural gas prices. Pickens says that for wind farms to earn back their cost of capital, natural gas has to trade for more than $6 per thousand cubic feet (mcf). Otherwise, subsidies have to be in place to make up the difference. That's because gas prices determine the marginal cost of electricity in the U.S.

The other reason he got out of the wind deal is even more instructive... and the public has no idea about it. He found oil again in 2012. A lot of oil. Boone told me the field he's working on right now is the greatest oilfield he has ever found. And you'll never believe where he found it...

Most people don't know how T. Boone Pickens made his billions. That's because he has outlived his media coverage. After all, he founded his first company – Mesa Petroleum – in 1956. He made his first big discoveries in Canada, where he drilled 98 successful wells in one year (1962), setting the foundation for what would become the largest independent North American oil company.

In the 1980s, Pickens radically changed his career path. He figured out that stocks had gotten so cheap (thanks to 10%-plus interest rates in the U.S.) that it was smarter to buy oil reserves in the stock market than it was to try and drill for more oil in the ground. He took over a series of larger companies and famously tried to take over Gulf Oil, the sixth-largest U.S. oil company.

Leverage and low prices for natural gas finally caught up to him and Pickens lost control of Mesa Petroleum in 1996. That's when he got out of the oil business and became a hedge-fund manager. Unbeknownst to most people outside the company, he had been trading oil and gas futures for decades at Mesa – and never had a losing year.

Boone told me his goal was to always earn enough money trading to cover the company's fixed overhead and that, on average, he had done so for decades. So when he lost control of Mesa, he simply invited his traders to come with him and open a hedge fund called BP Capital.

Trouble was, he kept betting on natural gas. And the price kept going lower and lower. Month after month, BP Capital lost money. Two years after the fund was launched, Pickens was down more than 90%. He lost nearly all the money he had in the fund – and all his friends' money, too. At the bottom in 1999, BP Capital was managing less than $3.4 million.

Think for a moment what that must have been like... Pickens traded oil and gas futures for decades and never had a losing year. Then, after losing control of his company, he nearly bankrupted himself by continuing to bet on his conviction – that natural gas prices were going to go way up. He went from flying in his own private jet to commuting on Southwest in coach. ("I met some really nice people on those flights," he says of the experience.)

Incredibly... he didn't give up. And finally, the price of natural gas began to rise. In 2000, it soared. Pickens' highly leveraged bets on natural gas futures exploded in value. In a little more than a year, T. Boone Pickens had turned his few remaining "nickels" of capital into a profit of $252 million – a 7,300% gain.

And again... he didn't quit. A lot of people (almost everyone?) having nearly gone broke speculating in oil and gas futures would have been quick to put a few hundred million in the bank and call it a day. Not Boone. He didn't stop. He continued to "pyramid" his gains by rolling over his futures contracts, betting on still higher and higher prices for energy.

As a result, BP Capital would go on a multiyear winning streak unlike any other in modern capitalism. BP Capital made another $146 million in 2001, $56 million in 2002, $432 million in 2003, and $340 million in 2004.

By the mid-2000s, Pickens was living the greatest modern comeback story ever. His fund had attracted billions of dollars in additional capital to manage. He was a billionaire again. And the fund continued to make huge returns. In 2005, Pickens personally earned $1.5 billion – paying $279 million in taxes that year. In 2006, he personally made more than $1 billion. He made an incredible $2.7 billion in 2007. From 1997 through the peak in mid-2008, Pickens earned total profits for BP Capital of around $8 billion.

I can't think of another person in the world who has made billions in three different kinds of endeavors – drilling for oil, corporate raiding, and trading commodities. But after spending some time with Boone, I can tell you why he has been so successful in these fields: All of these businesses require a total and complete commitment to "mission critical" capital-allocation decisions.

If you're drilling for oil and you need to drill 20 wells to measure the size of a discovery... would you quit if your first 10 wells were dry? Boone doesn't. He sticks with his conviction no matter what.

Likewise, if your equity research shows that Gulf Oil's proven reserves are worth three or four times the stock price, you buy the stock. And you don't stop buying until you own the business or until someone is willing to pay you a fair price for those assets. And if your research shows a fundamental scarcity of energy... you buy energy futures until you're proven right.

It's these kinds of fundamental, fact-based, decisions that have always driven Pickens' decision-making. But it is his total fearlessness and dedication to his convictions that's made him a billionaire in three different ways.

So... what happened? Why did Pickens go from being a major backer of wind farms to selling the deal at a huge loss? Pickens doesn't change his mind lightly. What changed is that huge new oil wells began producing all over Texas. His entire thesis – Peak Oil – was wrong. And without genuine energy scarcity, all the alternative power he had been betting on wasn't going to be economic.

The final straw, Boone told me, was when he discovered a large oilfield lying under his own ranch. It's already producing 6,000 barrels a day of high-quality crude oil.

"It's the best oilfield I've ever found," he says while looking at the maps of Mesa Vista in his boardroom. Each well is represented graphically, showing its position, its initial production rate, and its estimated reserves.

The field that lies under his ranch is part of the "Granite Wash" – a conventional deposit (not a shale field) that stretches from the Texas Panhandle into Oklahoma. At $60 a barrel, Boone's ranch is producing $131 million worth of oil each year. Even at $40 per barrel, the ranch will be generating almost $90 million a year in gross oil revenue. That's a lot of money... even for Boone.

This field was discovered because of a modern seismic technology and the long history of oil exploration in this area. The economics have been greatly enhanced by horizontal drilling and new well-completion techniques. And the wells are getting cheaper.

These wells cost about $5 million to drill today, down from $7 million only two years ago. A good well here produced 800 barrels of oil per day. Even after $40 oil, this well will return more than 200% of its cost in a year.

These numbers are extraordinary... And these kinds of discoveries are taking place all over Texas. More and more of these kinds of fields will be drilled. Energy companies report decades' worth of proven, high-quality drill target sites. U.S. oil production is going to continue to increase for at least the next 25 years.

Rather than Peak Oil, we're staring at a tidal wave of energy resources that will, without a doubt, make America the world's largest producer of liquid hydrocarbons for at least the next 25 years.

U.S. oil production was in decline from 1972 until 2005. But since 2005, U.S. oil production has doubled. We are now exporting a significant amount of crude oil – about 500,000 barrels a day. For most people, this new world of energy is hard to accept. After all, for the last 40 years, oil prices always trended higher. But that's unlikely to be the case going forward. And these facts are what really changed Pickens' mind about wind. Invest accordingly...

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In the mailbag, one of the many unintended (but obvious) consequences of Obamacare: When you force people to pay taxes that are outrageous and unfair, a lot of them will simply leave. That's why emigration from the U.S. has set new record highs every year Obama has been in office.

If you've thought about leaving the U.S. like the reader below has, the time to act is soon. As the emigration trickle becomes a flood, you can count on Congress to do something about it. After all, we're the land of the free. No one should have the right to leave. Send your e-mails to feedback@stansberryresearch.com.

"THAT'S IT! I am done with this country and government overreach. Tried changing my health insurance plan, that I've had since 2010, because my rates increased 49% in January. Called my health insurance company and asked for a less expensive plan. Due to the ACA I am NOT ALLOWED to change my plan, and either have to cancel it or wait until the enrollment period to open again. Porter, you've mentioned a nice South American country to invest in. Can I just move there now before things get worse???? I am 28, single, can liquidate my real estate and pack up what I need to make the trek, only thing is I won't leave my dog.

"I've had it with America and her politics. The mass population here doesn't see what is happening and hardly anyone is fighting back against the gov't regulations. When will people wake up! and realize that they can no longer make decisions for themselves? Now with Net Neutrality... 'if you like your Internet, you can keep your Internet.' That is what I plan on hearing from our congress and president in the future. Guaranteed. I've been a subscriber of your newsletters since 2010. So glad I found you and your editors. Keep up the good work and due diligence on all your recommendations. But really, where can I move to that is safe, for an American, to live and isn't so far away that friends and family can visit without breaking the bank on plane tickets." – Paid-up subscriber Austin

Porter comment: There are dozens of great places in Central and South America where you can live like a king for one-fifth the cost of the U.S. And you'll find that the health care is far better and far cheaper. No insurance required.

My friends have long recommended Chile for its great climate and American-like respect for property and the rule of law. I've also heard that Medellin, Colombia is one of the best low-cost cities in the world to live in right now. That might sound ironic, but Aaron Brabham (my radio show cohost) has been down there for the last two weeks. He'll be giving a full report on an upcoming podcast.

I'm also partial to Rancho Santana in Nicaragua, simply because I love surfing and this part of the world has great waves and offshore winds about 300 days each year.

Likewise, I've spent a lot of time in Argentina. My great friend and mentor Doug Casey has built a gorgeous ex-pat community in the Andes there – Estancia de Cafayate. You can get a first-class steak dinner at El Rancho in the city square down there for around $10 or $15 per person – including wine.

Or... there's one particularly interesting option for Americans who also want to legally avoid paying almost their entire income tax bill: Puerto Rico and the other American-held Caribbean islands (like St. Thomas) offer the only real, totally legal tax shelter for Americans who don't want to give up their passports.

A word of caution: Make sure you consult with a reputable law firm in those jurisdictions to make sure you qualify... and make sure you follow all the rules. You don't want the IRS coming after you. But I will tell you this... For a young man staring at a lifetime of income taxes, I believe these deals are simply too good to ignore. That's especially true if you can conduct your business from anywhere with a good Internet connection (like I can).

In regard to health care… in my view, there's no legitimate reason for a healthy 28-year-old man to buy health insurance of any kind. Whatever you pay in will almost surely be used to provide other people with health care. I have no idea what Obamacare imposes on you, but I do know the entire program is designed to force poor young people to provide benefits for old people who are, on average, far wealthier.

There are always winners and losers. In free markets, the winners are the producers who deliver benefits and rely on persuasion. In socialism, the winners are the politically connected people who distribute benefits taken by others by coercion.

America used to be the land of the free. It has become the land of the coerced.

Regards,

Porter Stansberry

Baltimore, Maryland

February 27, 2015