Publications: Notes at the Margin

Elon Musk and Harold Hamm: Twitter Probably a Better Investment than Oil (December 12, 2022)

It is rare that one can draw a comparison between a brilliant technologist who has revolutionized automobile manufacturing, space travel, and communications and a surly old fossil who helped expand oil production by fracking. However, Elon Musk and Harold Hamm have made essentially the same mistake.

 

Musk, as everyone must know, took Twitter^® private. According to the press reports, he spent around $40 billion to buy the company, completing the transaction on October 27.[i] Today, Musk would be lucky to get even $10 billion for Twitter should he attempt to sell it or go public again.

 

Ten days before the Twitter sale, Hamm finalized a deal to take Continental Resources private. That transaction will value the firm at $27 billion. Hamm and his family already owned eighty-three percent of it[ii] and so will need to spend around $4.6 billion to purchase the rest, roughly one-tenth the amount Musk spent.

 

The Continental transaction took a smaller percentage of the Hamms’ wealth than the Twitter purchase did of Musk since the Hamms’ net worth is roughly one-third that of Elon’s. However, in retrospect, both transactions were costly to the buyers.

 

Twitter’s market value has dropped sharply thanks to the sharp decline in the value of technology stocks and Musk’s chaotic management decisions. Continental Resources’ market value has fallen along with crude prices. If Continental’s share prices tracked the share price of Pioneer Natural Resources from the date of the acquisition announcement, Hamm’s firm would be worth $23 billion today rather than the $27 billion valuation noted by Reuters.

 

However, the true value of Continental may be closer to $10 or perhaps even $5 billion based on recent oil price movements. The decrease in key product prices has gone unnoticed. While diesel and gasoil spot prices dropped by almost $100 per barrel in a single month, analysts and forecasters have cheerfully been forecasting triple-digit crude prices in 2023 and warning of shortages created by the Russia sanctions. The decline in product prices, especially diesel, as winter approaches warns of a much more difficult market ahead.

 

It is a signal everyone seems to be ignoring. However, product prices will continue falling. Crude prices will follow as refiners cut their bids in response. The latter are not in the business of losing money to support the world’s crude producers, which include Russia, OPEC, and Harold Hamm.

 

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