Jan 20, 2025 · 1h 11m · capital-allocators
Striking Oil – CrownRock by Lime Rock Capital (EP.428)
Jay McLean · 27m spoken Jonathan Farber · 13m spoken John Reynolds · 13m spoken Ted Seides · 10m spoken Eric Seides · 29s spoken
0:00 / 0:00
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Lime Rock Capital managing directors Jonathan Farber, John Reynolds, and Jay McLean to dissect CrownRock, a historic private equity investment that transformed a $96.5 million entry into a $12.5 billion sale to Occidental Petroleum. The discussion covers their patient 'forever hold' mindset, grassroots Permian Basin development, crisis management across volatile commodity cycles, and the current landscape of energy investing.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 16.8% of the talking time here. How this is scored →
Ted as informed peer 3.4 Guest teaching 2.7 Guest disagreement 0.4 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 55:05 Pushing back on the 'shale is a scam' narrative
Jay McLean forcefully rejects mainstream media and book narratives claiming the shale revolution was a scam, contrasting CrownRock's 79x return with legacy capital destruction.
Hardest push from Ted ▶ 1:00:13 Questioning return expectation anchoring post-79x dealTed presses the partners on how an investment firm psychologically resets baseline underwriting standards when the portfolio includes an unrepeatable 79x outlier.
Biggest teaching moment ▶ 55:20 Explaining the XOP index vs CrownRock return divergenceJay McLean delivers a masterclass on energy economics, detailing why the broader E&P index generated a 0.9x return over 17 years while CrownRock generated 79x due to capital turnover and shale efficiency.
Ted holds their own ▶ 4:25 Framing top-tier historical private equity return metricsTed demonstrates deep private equity domain expertise by breaking down CrownRock's net IRR, MOIC, absolute gain dollar figures, and historic ranking among all-time fully exited buyout deals.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Episode Overview: The Historic CrownRock Deal | 0 | 0 | 0 | 0 | Ted opens the episode with a structured solo monologue detailing CrownRock's transaction stats (79x MOIC, $7.5B profit) followed by an entrepreneurial comedy pitch from his son. As a monologue segment, host interactive and dynamic metrics are zero. | |
| Origins and Founding of Lime Rock Capital | 3 | 1 | 0 | 0 | Ted asks open-ended foundational questions inviting the partners to trace their backgrounds from Goldman Sachs equity research to launching Lime Rock Capital in 1998. | |
| Lime Rock's Core Energy Investment Strategy | 4 | 2 | 0 | 0 | Ted probes on Lime Rock's core sector strategy and how the CrownRock opportunity emerged. The guests explain backing small focused teams and absorbing early dry holes like the Gothic Shale. | |
| Capital Recycling and Grassroots Land Leasing Strategy | 4 | 3 | 0 | 0 | Ted asks the guests to explain the specific unit economics behind leasing raw land directly from ranchers versus acquiring existing producing wells. Jay outlines the 100%+ returns on grassroots leasing. | |
| Surviving the 2008 Global Financial Crisis | 4 | 3 | 0 | 0 | Ted inquires how CrownRock navigated macro volatility to evolve into a multi-decade hold. Jay details surviving the 2008 crash by forward-hedging 90% of production and securing low-cost oilfield services. | |
| Navigating the 2014 OPEC Price War and 2020 Pandemic | 3 | 4 | 1 | 0 | Ted asks about subsequent crises, and Jay details the 2014 OPEC price war and 2020 negative oil pricing, highlighting how each shock catalyzed operational discipline and the horizontal drilling shift. | |
| Conservative Leverage and the Forever-Hold Philosophy | 4 | 3 | 0 | 0 | Ted explores how organizational culture and leverage policies supported resilience. John highlights Tim Dunn's forever-hold philosophy and the shared mutual ownership structure. | |
| Long-Term Asset Development vs. Short-Term Gains | 4 | 3 | 0 | 0 | Ted probes the operational tension between managing for quarterly production metrics versus maximizing long-term ultimate recovery. Jonathan contrasts CrownRock's disciplined development against peers drilling one-off horizontals. | |
| Employee Equity Ownership and Liquidity Programs | 4 | 2 | 0 | 0 | Ted explores employee retention and internal LP alignment during an 8x mark in 2013. Jay and Jonathan explain the internal 100-page presentation that fought cognitive anchoring bias to keep compounding. | |
| Sponsor Message: Ridgeline | 3 | 2 | 0 | 0 | Following a sponsor read, Ted asks how Lime Rock solved the duration mismatch of a 10-year fund life. Jay explains orchestrating a landmark 2018 continuation fund at a 20x entry mark. | |
| Evaluating Market Timing and Sale to Occidental Petroleum | 4 | 3 | 0 | 0 | Ted asks what triggered the final exit decision. Jonathan and John explain realizing that technological efficiency gains were plateauing just as corporate M&A appetite peaked. | |
| Deal Postmortem: Capital Respect and Structural Simplicity | 3 | 3 | 0 | 0 | Ted invites postmortem reflections on structural takeaways. Jay highlights management's acute respect for capital costs, while John cautions against over-applying bespoke Midland outcomes to standard deals. | |
| Macro Perspectives: Shale Disruption and LP ESG Pressures | 4 | 5 | 3 | 0 | Ted asks how the deal intersects with macro narratives around shale and ESG. Jay vigorously pushes back against authors claiming shale was a scam, highlighting consumer savings and productivity gains despite poor benchmark index returns. | |
| Lime Rock New Energy and Natural Gas Emissions Impact | 3 | 4 | 2 | 0 | Ted asks about environmental dialogues, prompting John to discuss Lime Rock New Energy and Jay to forcefully emphasize that US natural gas displaced coal and achieved twice the CO₂ reductions of solar and wind combined. | |
| Current Energy Landscape and Risk-Adjusted Returns | 4 | 3 | 0 | 0 | Ted asks how Lime Rock resets return hurdles when standard deals cannot match a 79x outlier. John and Jonathan explain that market conditions today offer strong cash-yield and favorable risk-adjusted returns. |
Statements from this episode (34)
Reynolds: In May 1997, Santa Fe's $1B IPO overshadowed Amazon's debut
“We had just taken public Santa Fe drilling, which was a billion dollar IPO that Goldman Sachs was the lead manager of. Two weeks prior, Amazon had gone public. No one paid attention to Amazon in May of 97. Everybody paid attention to Santa Fe.”
Reynolds: Energy volatility demands long-term private capital over quarterly public equity
“There was just far too much cyclical volatility that you needed to invest through cycles with long-term capital. Think long-term, not think about the next quarter.”
McLean: CrownRock lost half its Gothic Shale capital, carried by Wolfberry
“The gothic shale was a complete bust. We lost half of our capital. Then we invested in that part of the play, but the wolfberry was so profitable so early that it carried those other stumbles.”
Farber: Wolfberry was historically a promoter's paradise that produced oil without payout
“For many years, this was known as a promoter's paradise because you could drill a well in the Wolfberry and you always produced oil. It just typically didn't pay out.”
McLean: CrownRock required only $100M of primary equity in total
“We committed seventy-five million dollars. The management team contributed twenty-five million dollars in properties, so the only primary equity that was ever invested in the business was a hundred million dollars.”
McLean: Early Midland wells recycled CrownRock's capital in 3 to 6 months
“The oil wells that we were drilling right around Midland, Texas were insanely profitable. I mean, we were essentially able to recycle capital With the use of leverage in a three to six month period of time, which really carried those early losses.”
McLean: Direct raw acreage leasing yielded 100%+ returns vs 10-15% on producing assets
“If you were to go buy producing assets, you would effectively get a large base of producing properties that would be earning a 10%, call it 15%, rate of return on something. And as a sideline of investing the capital to get access there, you would get some und…”
McLean: US active drilling rigs dropped from 1,800 to under 600
“I mean, there were 1800 rigs running in the United States at that point in time. Last week, there was less than 600 rigs running in the US.”
McLean: CrownRock sold forward 90% of crude production entering 2008 crisis
“We had already sold forward in the financial markets, 90% of our next year's crude oil production, so we had a lot of ballast and resiliency through that period.”
McLean: 2015 OPEC War Dropped U.S. Rig Count to 300-400
“The rig count went from 2000 rigs to get as low as 304 hundred rigs. More bankruptcies than you had ever seen in the oil and gas business since the 19 eighties.”
McLean: Permian Shift to Horizontal Drilling Yielded 3x Capital Productivity Uplift
“And it also prompted an acceleration of a big industry shift in the Permian Basin from the vertical drilling, which we had been doing since our founding in 2007 to horizontal drilling, which proved to be effectively a three X uplift in the productivity of the …”
Farber: Lime Rock avoids aggressive debt, relying on heavy hedging
“And I think one of the calling cards of Lime Rock as an investment organization is we're reluctant to use aggressive leverage structures. We used leverage less aggressively, and when we did have leverage, we used hedging aggressively to ensure that we had the …”
Farber: Horizontal wells drove CrownRock's value, enabled by vertical drilling
“If you just look at the absolute breakdown of value creation in terms of vertical wells versus horizontal wells, Almost all the value creation ultimately resulted from the horizontal wells. We wouldn't have had the land to drill those wells on unless we held t…”
Reynolds: CrownRock used mutual ownership rather than tiered PE waterfalls
“This was not a term sheet that said, hey, under certain circumstances, the management team take is X percent of the profits, and above that level, it's Y percent of the profits. It was a mutual ownership structure from day one, where the management team and th…”
McLean: Most PE exits happen because management wants to sell
“The vast majority of the deals that we're in when we actually exit is because the management team wants to sell more so than us.”
Farber: Early one-off horizontal drilling boosted short-term output but damaged ultimate recoveries
“One of the ways that a lot of our peers adopted was when horizontal drilling was quite early, before we had really refined the well design and the fracking methodology, people went and drilled a lot of one-off horizontals in virgin acreage on drilling units th…”
Farber: Lime Rock funded CrownRock land buys by selling packages to MLPs
“We sold a number of packages early on in the investment to MLPs, to these production-based partnerships that were public trading at good values, and we were able to lock in a lot of capital to cycle into land over time, and that's how we kept the initial inves…”
McLean: CrownRock investment created well over 200 millionaires
“Well, ultimately every employee of Crown Rock was an equity holder. I mean, that was a big part of the overall compensation scheme that we had there. Well over 200 millionaires were kind of birthed from the Crown Rock investment.”
McLean: Offering liquidity makes employees value equity and hold it
“What you find when you do that is almost no one wants to sell. As soon as you offer the ability to sell it back, They can see that it has real tangible value. They could make the election to sell it and realize some cash, but it's very rarely that they would e…”
Farber: Private equity investors irrationally sell 3x to 5x winners too early
“There's an anchoring effect in private equity, like in every area of investing, that is not rational. It's a very real and tangible thing. In our business, That's manifested by people looking at a three bagger or five bagger and saying, well, that's a great de…”
Reynolds: Lime Rock exited two early investments that went bankrupt within five years
“We owned an oil sands company in Canada, first deal we did. We owned a shallow water jackup drilling company in the Gulf of Mexico, and our second fund outsized ROIs in both cases. In both cases, within five years of our exit, those companies were bankrupt.”
McLean: CrownRock grew from under 40k to over 160k barrels per day
“And at that point in time, we were producing a little under 40,000 barrels a day, and we had projections to get well over 150,000 barrels a day if we held it for another five years. We briefly got over 160,000 barrels a day right before we sold the investment.”
Farber: CrownRock exit driven by completion tech reaching theoretical maximums
“There's only so much resource that you're ultimately going to recover, and we just felt like we were getting closer to the sort of maximum economic recovery point, and that, that changed the risk calculus. You had this big asset, you had market risk in retaini…”
Farber: Exxon's Pioneer deal removed two of CrownRock's best potential buyers
“The flip side of that was the business had been so successful that we got to a size that very few companies could afford to bid in that process. And the deal that John was talking about with Exxon taking out Pioneer, that took two of our best buyers off the ta…”
McLean: CrownRock's management had greater respect for capital than any team Lime Rock ever met
“I think their biggest differentiator relative to every other management team that we've ever dealt with is Tim Dunn and his lieutenants and partners had a greater respect for capital than any other management team I've ever met.”
McLean: Most management teams make poor decisions by prioritizing growth over cost of capital
“Most of the time, management teams are so focused on growth and so uninterested in the cost of capital it takes to achieve that growth.
They end up making really poor decisions along the way”
Reynolds: CrownRock's success cannot be replicated across standard energy PE deals
“There are attributes of the people, the Midland Basin, that you just don't replicate.
It's a very special case, and there's probably some danger in thinking there's an application in a postmortem for everything we do going forward, because there's certainly no…”
McLean: U.S. oil production share reached 70-year low in 2007 before rebounding
“2007 U.S. Oil production as a share of global production hit its absolute minimum that we've seen over a 70 year time span. And at the moment that we sold it hit a local maxima that spanned 30, 40 years.”
McLean: Without shale technology, oil prices would be $50 higher today
“In the absence of shales, I'm very confident that the oil price would be 50 dollars higher than it is today.”
McLean: CrownRock returned 79x while the public XOP index returned 0.9x
“If you looked at the E&P oil and gas index, the XOP of independent producers over the ownership period of Crown Rock, where we realized on that one specific investment, a 79 X ROI, The return on that index was .9 X. You lost 10% of your money.”
McLean: US Is One of Few Countries Meeting Paris Per Capita Targets
“The United States is really one of only a very small handful of countries that has actually lived up to Paris commitments in terms of per capita CO₂ emissions reductions.”
McLean: Natural gas emissions reductions beat solar and wind combined by 2x
“When you account for natural gas emissions, the total emissions reduction that has been allowed by the increase of natural gas Because of shale development is two X that of solar and wind.”
Reynolds: Fled institutional shale capital will not return anytime soon
“That capital's all fled. It just did not perform well in aggregate, and it doesn't look like it's coming back anytime soon.”
Farber: Current lower ROI energy environment offers peak risk-adjusted attractiveness
“I think we're very driven by conditions in the industry today, and ironically, that is probably creating an overall lower ROI scenario, but one which on a risk-adjusted basis, we think is among the most attractive periods of investing that we've seen.”