From Blackstone to Bitcoin Mining | Sean Milmoe, Center of Hash E009

Sean Milmoe, co-founder and CFO of 360 Energy, discusses his transition from working at Blackstone financing conventional oil and gas businesses as well as wind and solar projects to building a bitcoin mining services company, why a combination of Fed money printing and the unsustainability of energy economics led him to bitcoin, what parallels exist between underwriting bitcoin mining sites and conventional natural gas well economics, and how he sees bitcoin mining upstream in oil & gas fields evolving from nascent to being a core part of drilling programs in the next several years.

Episode Transcript

(00:00):
sean welcome to the center of hash thank you it's good to be here your former home bitcoin

(00:09):
i was gonna say it's good to be back in the common or bitcoin park we miss you guys
i've only been away for a few weeks but i know there's a vacuum that we need to fill
a void yep how are things going at the new office oh they're great you know it's uh
It's sad to leave this space, but it's good to have our own space.

(00:29):
We've grown the team a lot, so it's nice to have conference rooms to take calls and things like that.
Signs of success.
Yeah, we hope so.
The team's grown a lot, putting deals out, so blowing and going.
Well, Chris, your co-founder and partner at 360 Energy, recorded in July.

(00:50):
and he and I were catching up
and I suggested that we should get you on as well.
You have a very different background from Chris
and I wanted to start out just talking about
the history in the oil and gas space on the finance side
and how you came to be working on Bitcoin

(01:12):
and specifically Bitcoin mining.
You were formerly at Blackstone.
So just talk a little bit about
and then investment banking at Credit Suisse before that,
both on the oil and gas side, energy side, I guess.
But yeah, talk a little bit about your history,
what you were doing,
and how you ultimately decided to become interested in Bitcoin

(01:34):
and then work on Bitcoin mining.
Yeah, definitely.
So started at Credit Suisse in the oil and gas group in Houston,
went to school in Dallas.
And that was what we talked about earlier,
pledge ship or finance.
Being an analyst in an investment bank is
a lot of grunt work,
but you do learn a lot over your two-year period
there. What years was that?

(01:56):
That was 16 to 18.
I've done my pledge
ship in investment banking as well.
New York, 2006
to 2009.
That was a pretty wild time.
I know what it's like.
That was great, but the goal
is always to get to the buy side.
I did two years
there and then moved to gso which was the credit arm of blackstone it's rebranded blackstone credit

(02:21):
now um in new york 25 person team across new york and houston um and we were investing when i first
joined in all oil and gas companies so investing across the capital stack mostly preferred equity
down to you're up to senior secured debt um and you know day one it was all oil and gas so a lot

(02:44):
of upstream deals, some midstream deals, a little bit of OFS. And it was just, if you need capital
as a business to, you know, expand your drilling program or buy more equipment, we would be a
capital provider to help them do that and make a return for our LPs. So that was a great experience.
You know, it's, it's a very intense environment for sure. A lot of very smart people. And I learned

(03:09):
a ton. I was there for six years overall, learned a lot my first three years. The first two years
are almost like investment banking all over again, but with a different skill set. You're just
working very hard, long hours as well, but your LP is capital you're investing. So the standard
is a bit higher on, you have to be really sure you're right. At an investment bank, it's kind of,

(03:35):
you're being salesy, right?
So that was a great experience.
So a question there.
One, just total as an aside,
what does GSO stand for?
The three founders.
So Goodman, Smith, and Ostrover.
And that was a unit within Blackstone.

(03:56):
Yeah, so those three guys were
DLJ Credit Suisse guys back in the 90s.
They started GSO early 2000s, I believe.
I think 2004
and then Blackstone bought GSO in 2008.
And then specifically talk about
in terms of the deals that you would work on

(04:17):
where you're typically working on
primary equity financings,
credit financing,
all throughout the capital structure
and just the nature of the type of deals
that you would have experience with.
An example, it was mostly credit focused
because GSO was a credit shop.
Um, we would do minority common equity, but we wouldn't do control common equity.

(04:39):
If there was anything controlled that would go to the private equity group.
The blackstone kind of has many business segments, right?
Private equity, real estate, and then GSO was the credit arm.
So a typical deal, for example, um, uh, midstream or sorry, an upstream operator in the Permian
needed a hundred million dollars to go drill 10 more wells.
We would give them a term loan, $100 million term loan, pretty expensive capital.

(05:05):
We targeted mid-teens.
And then we might co-invest $10 million of common equity alongside.
And were these typically, I mean, presumably if they're getting a $100 million term loan,
these are well-established companies or really often public companies, private mix?
It was a mix.
I would say most of the deals were private companies.
We would do some public stuff.
The biggest deal I worked on was a $1.6 billion preferred equity investment into a system called Target Badlands.

(05:34):
So Target is a massive midstream company publicly traded, and they wanted to monetize a part of their Bakken assets, their midstream assets there.
So we bought a 45% interest preferred interest for $1.6 billion.
And that's an example of a deal we would do with some public guys.
And Bakken's North Dakota owns oil and gas.
Yep, oil and gas in North Dakota.

(05:54):
So a gathering system means they have the pipes that actually connect to the wells.
So they're the ones that build out to the pad, connect to the actual wells, and get those hydrocarbons to market, both oil and gas.
And so you were there for six years.
You mentioned the first two years being very similar to an investment banking, first few years.

(06:17):
but in terms of exposure to different types of the energy markets how did that look how did it evolve
yeah yeah great question covid changed a lot for us um oil went negative that one day
our portfolio was you know not in shambles but there was a lot of stuff breaking at negative oil

(06:40):
right so we spent a lot of time triaging that that was probably a three-month period of just
making sure all of our portfolio companies had enough cash to make it through. And then when we
came out the backside of that, the group kind of made a pivot saying, hey, we kind of, the
administration was very anti-oil and gas. The senior guys at Blackstone were kind of leaning

(07:03):
away from oil and gas as well. So we actually rebranded the group from energy to sustainable
resources and started doing new originations on more energy transition and related companies.
So my background was oil and gas at Credit Suisse.
So it was interesting to look at a whole new sector of the industry in the energy industry.

(07:26):
So renewables, service companies that service those renewable projects, things like that.
And I was really excited about it at first, you know, to kind of broaden my horizons within energy.
But quickly became fairly jaded, frankly, with the whole renewable craze.
I think it was overhyped.

(07:48):
The asset of returns were just not attractive, frankly.
They weren't good deals.
But there was so much LP demand for this.
People wanted green investments at the time.
And ESG was all the rage.
So that's kind of the direction the group went in.
And that's a part of the reason I ended up leaving and making the jump to 360.

(08:08):
I just didn't feel like I liked the way the group was going.
how large within blackstone is that group just in terms of like total
assets that are under management capital being deployed just yeah blackstone credit as a whole
is pretty large so i'd have to look at the latest numbers but let's say blackstone is around a

(08:31):
trillion or a year ago is around trillion i'm sure it's more now of total AUM i believe blackstone
credit is around 400 billion of that 300 to 400 billion but then the energy and the energy group
we had 25 billion of AUM okay so maybe 25 percent of the credit and then yeah two and a half if on

(08:52):
that trillion dollar total two and a half percent of the total exactly and we were a bit unique
within blackstone credit we were the only industry specific group just because energy by nature is a
bit more technical and you need a little bit more industry knowledge.
The rest of Blackstone Credit was more industry agnostic and covered, you know, broad parts
of the economy.

(09:15):
You mentioned the preferred equity deals to credit.
Did you specialize on one or the other over that course?
No, you kind of got staffed on a deal that came in as you were available and would work
on various things.
So I worked on anything from just vanilla senior secured term loans to Harrier preferred equity stuff.

(09:40):
So now connect for folks, the transition from what you were doing, what got you originally interested in Bitcoin before even 360?
Yeah.
Or maybe they're intertwined.
Yeah, no. So my origin story, if you will, in 2016, my buddy at Credit Suisse, a fellow analyst, told me to buy some Bitcoin, you know, and I did just to appease him, but didn't understand it at all. Thought it was internet fake money, as everyone kind of does in the very beginning.

(10:11):
didn't really think about it again until 2020 i was at loxone at the time and saw the whole
covid response printing trillions of dollars and i just you know the finance background in me was
like if if they're going to print that much money something's going to go wrong like that that has
externalities negative externalities and i had my dad kind of like gold in the past so i had some

(10:37):
some gold exposure, just the ETF, and then kind of recircled around to Bitcoin.
Marty's podcast was one of the early things that kind of started getting me down the rabbit hole.
Read the Bitcoin standard and then just slowly fell down the rabbit hole, kind of 2020 onwards.
It was very similar for me in 2008, 2009, which I think is fairly common for people, which was

(11:03):
there's a financial crisis
and 2020,
2021,
the response was different.
I'd say it was much quicker,
but being in the middle of,
at the time for me,
investment banking,
it was that something's broken here.

(11:24):
I don't know exactly what,
but none of this makes sense.
And then for me,
it was at that time,
it was,
tail end of it i guess at the time where it was happening in 2008 early 2009 bitcoin was just
being launched i had no way to connect it to bitcoin but later came revisited to figure out

(11:48):
what exactly was broken but i think that's very logical where there's just an instinctive reaction
that something's wrong here right and it sets you off on a course to to figure out what that is even
if the immediate connection isn't directly there.
No, exactly.
And we were doing all this hard diligence,
all this hard work in making 11% yielding loans.

(12:11):
And everyone knew inflation was around that.
It's like, what are we spending all this time on
to make loans and make 11%
when they're just printing all that money anyways?
And you're going to be breaking even, really,
on an adjusted basis.
So, totally.
Yeah, and that's also something that...
I've talked about it in a couple episodes just very briefly.

(12:34):
Maybe we can talk about it in more detail.
But one of the ways that I'm describing Bitcoin to somebody that's new
is connecting that,
and I don't have nearly as much knowledge as someone like you might have
in terms of the operations of an upstream oil and gas business,

(12:57):
say if that was an example of a subset of the businesses that you were financing and working
deals on, but that it doesn't make sense if you think about all the complexity that goes into
those businesses, complexity to the supply chains, the amount of actual money required to make those

(13:17):
operations work, the human capital, the physical capital, and then to sell the output of it just
using the case of oil and gas, maybe gas that comes out of a pipeline or oil at a gathering
station, force some money that someone can click a button and print out of thin air.
You mentioned previously that when the COVID lockdown happened, a lot of the focus shifted

(13:43):
to making sure companies that were in the portfolio had enough money to survive.
what does that mean in practice for for some of the more like in a tangible case for the type
of companies that you would work on yeah for a tangible example was you know we were in a debt

(14:03):
position and so we are owed interest you know every quarter right we could go to them and say
hey for two quarters we'll pick this interest we'll let you not pay cash just add to the debt
balance to give you some breathing room proactively. We didn't have to do that, but we didn't want them
to default because of this really black swan event. Oil going negative is very rare. So give

(14:32):
them some flexibility from our capital is one thing we could do. That's an interesting... So
just as an aside can you explain contextually why oil went negative Yeah I mean it was a bit of a freak event But from my understanding there was so much
There's just no demand, right?
There's no one's flying planes.

(14:53):
There's no demand.
No one's driving cars.
So demand was so low.
Wells are still flowing.
And Cushing, Oklahoma, where WTI is cleared every day, for that one day, there was just no buyers and all the oil was still there.
And there was no place to store it.
Exactly. Storage was full, and there's a real cost to storing that.

(15:15):
So people were effectively paying to have their oil go somewhere, which is a negative price.
And there were speculators in that market that couldn't actually take delivery.
Exactly.
Okay.
Exactly.
And so would your group do the restructuring?
essentially if you were going to work on an amendment for a credit deal,

(15:39):
would your group within Blackstone work on that directly
or would that be outsourced to restructuring shops?
Yeah, we would work on that directly.
We would hire restructuring attorneys
to do the more technical document-related things,
but our deal teams, we had some bankruptcies
that we would have to work through.
And so if you connected in this period of extreme money printing

(16:01):
to thinking about the amount of effort and work
that went into your deals and the type of returns
versus how easily the money could be created to Bitcoin.
How, in a direct way, did that help inform
your understanding of Bitcoin
when you started to go down the rabbit hole?

(16:22):
Just like how you came, how do you think about Bitcoin?
Yeah, exactly.
I mean, again, we're spending all this brain damage,
all this effort on structuring creative deals,
and trying to make alpha,
risk-adjusted positive returns.
But at the end of the day,
like you said,
someone can print money
with the push of a button.

(16:43):
So once you learn about Bitcoin
and you ingrain in your head
there's only 21 million,
that's a fact.
It really changes the way
I thought about it.
You can own an asset
that can't be devalued by someone.
I would rather own that
than do all this work
trying to make 10%
in a currency that's being debased.

(17:04):
It's a lot easier to just go hold an asset that can't be debased.
So that was kind of my original path down the rabbit hole
was informed by that thought process.
And so when that started to click, you called Chris?
Yeah, so I was going down the rabbit hole.
Chris called me.

(17:24):
Yeah, Chris called me and said,
hey, I want to do this Bitcoin mining thing.
cheap electricity is the name of the game that's how you differentiate yourself as a bitcoin miner
i had this idea with natural gas he didn't know much about oil and gas at the time he knew i did
we went to smue together so kind of reconnected about that i at first thought he was crazy um

(17:46):
but then started running some numbers in excel and then funnily enough at the same around the
same time at blackstone we looked at a deal for crusoe energy who was one of the first guys doing
Bitcoin mining in the oil field. So the fact that Blackstone, you know, didn't make it through
investment committee, but the fact that Blackstone was at least looking at doing a deal with Crusoe,

(18:08):
which was doing natural gas Bitcoin mining, kind of made me think different about it too.
So I took another look at the numbers and said, Hey, there actually might be something here.
And Chris started the company. I was just helping him on the side in the beginning.
and you know over the next year i started spending more time helping him and it was much more

(18:30):
interesting and dynamic and exciting to work on the beginning of that company versus you know going
to credit committee for another 11 term loan um and at the same time at blackstone we started doing
more and more direct lending deals you know direct lending was kind of in its infancy back in 2019
but now it's everyone's doing it and those deals are generally more boring than some of the

(18:56):
carrier preferred equity mezzanine type stuff that i liked working on those deals are unique
there's a lot of structuring involved you know you have equity kickers warrants things like that
and your typical direct lending deal it's really just you know sofer plus six percent and that's
the return you're going to make so the interest in my blackstone deals was going down the interest

(19:17):
in 360 was going up and eventually made the decision you know i don't want to be a managing
director at blackstone you know i respect those people they love it i didn't love the deals i was
working on i was loving what i was doing at 360 with chris so you know decided hey now's the time
to to make the jump well you know again difference in time periods slightly but i remember in 2008

(19:44):
2009 when there were guys who were my age now that in my mind then seemed much older at the time
but I remember having the express thought that I didn't want to be sitting around waiting for
somebody to come tap me on the shoulder and say hey you're out after 10 years of service or 20

(20:06):
years of service and realizing that you're really at the center you know again at that time my
my reaction was just that like something's broken and I don't want to be
that guy.
Yep.
Not to,
you know,
there were a lot of good people there.
Right.
Later I figured out that not necessarily investment banking,
because it's more on the,

(20:27):
the,
the edge of the,
the bank I'd say in terms of money creation and the problems,
but it's all interrelated.
Yeah.
You mentioned looking at the economics of some of the,
traditional deals you were doing and looking at the economics and thinking to yourself they
weren't sustainable talk about maybe how that contrasted in your thinking looking at

(20:53):
the sustainability of the economics around bitcoin and bitcoin mining yeah i mean to
to give an example on the renewable side you know a typical renewable project has a lot of
debt on it that you'll sign a 15-year power purchase agreement to sell your power that you make

(21:14):
with hopefully an investment counterparty. So that's very financeable. You get a bunch of debt
and then there's an equity piece like any deal. Those equity returns over the 15-year period
were 0%. You were simply making your money back on the equity over 15 years.
And then all of your return was some assumption on year 15 to year 25. What's the merchant power

(21:37):
price going to be at that point in time so you're making a bet on power prices in 15 years and then
even then the equity returns at that point in time i don't know what they are now but still like six
seven percent on these deals and that just seemed crazy to me and then you look at the bitcoin mining
economics um at the time you're making forty dollars in mcf and making you know year paybacks

(21:59):
on your your infrastructure given you know granted it's a lot riskier because it's a fluctuating
commodity price you don't have a 15-year purchase power purchase agreement to finance but in my mind
and once you understand bitcoin it becomes a lot less risky compared to that you know 6% irr over

(22:20):
25 years how much of it do you think was say long-term power purchase agreements versus
the financing structures
and then pipeline
of money
to underwrite those deals that was
creating the
sustainability versus lack of...

(22:41):
The reason those equity returns were
compressed so low was because how much money
was chasing those deals.
A lot of this printed money was
flowing into these deals.
The equity returns
should not have gotten bid down that
low, but they were because everyone
wanted to own a solar farm.
And now, by the way,
those returns are after all the tax incentives.

(23:04):
Without the tax incentives,
they're negative return projects.
And so when you
pull it forward to what you guys
are working on at 360,
you went from this world
where when you started
a combination of Credit Suisse
going into Blackstone,

(23:25):
the
bulk or the volume was oil and gas shifted more towards wind and solar
wind and solar and ancillary businesses the guys who install the solar panels yeah and now
you start to figure out bitcoin start talking to chris more helping them out on the side

(23:47):
and Chris, maybe with your input
or maybe if you can share the thinking on it
in terms of how it evolved,
coming back to natural gas
and why natural gas as a long-term strategy
for mining Bitcoin makes sense.

(24:08):
Right, yeah.
So given my experience in oil and gas finance,
I at least knew a little bit about
the production profile of wells and how that works financially. So the idea originally for
the company was let's find the cheapest power. How can we do that? And the idea was let's get
to the source. Let's buy these unattractive upstream assets that other people don't care

(24:31):
about. The wells we bought originally were drilled in 2006. They're well past their flush production.
They're on their terminal decline. They're dry gas and they're selling into a high pressure
pipeline, meaning you're not making a lot of money. So from a traditional oil and gas standpoint,
it's not attractive. It's a cashflow breakeven asset that people are willing to sell for very

(24:53):
cheap. But we saw that as a opportunity to buy that very cheap and then monetize that gas
through Bitcoin mining, because you can control your own power. You make your power behind the
and you effectively have 30 years of almost fixed power costs, right?
Your only cost at that point is maintaining your generators and producing the wells.

(25:16):
You're not beholden to the market price.
I guess you are for Bitcoin price.
But again, at the time, it was $40 in MCF when Henry Hub was at $2 in MCF.
But in terms of your power costs, it's the capital you have invested in the well
plus largely fixed cost.
Exactly.
In any infrastructure that you need on site

(25:38):
and then the efficiency of converting natural gas.
Exactly.
So you can model your costs in a pretty tight band.
Unlike if you're on the grid,
you sign a three-year power purchase agreement.
In three years,
you really don't know what your power price is going to be.
And that was back in 21
when everyone was just trying to get ASICs plugged in.

(25:59):
It was, you know, bull market.
People were paying crazy prices for ASICs and just to get powered on.
So we at least knew that wasn't sustainable and figured, hey, let's figure out a way to get long-term power at a lower price.
if you were to have a conversation with one of your former colleagues at blackstone

(26:22):
making the case for why the economics of bitcoin mining
say you know not necessarily what you're currently focused on upstream natural gas
but just more generally how do you make that case
oh man or just like how would you explain it in terms of the opportunity and why

(26:42):
when i when i mean sustainable it's like why this will continue to exist yeah five years from now
10 years from now 20 years from now yeah i think an analogy that's good to use that we use with
customers is if you're mining bitcoin your largest cost is your electricity cost so how do you become
the low cost producer in oil and gas the low loe producer lease operating expense producer can stay

(27:07):
online when oil and gas prices go down as they all often do the same thing applies to bitcoin mining
you know the lowest cost producer is going to be able to weather the fluctuations fluctuations of
bitcoin so i would use that analogy but then you're going to have to explain to them why bitcoin
will exist in five years um and that is a whole another you know rabbit hole i'm probably not the

(27:29):
best person to orange pill people you know by the time i left blackstone i was the crazy bitcoin guy
trying to tell everyone about it.
And I found a couple other people within Blackstone
who also loved Bitcoin,
but there was real no way to express that
in the work we were doing at Blackstone.
Could you maybe elaborate on the parallels

(27:53):
and then maybe differences between those market dynamics
of being the low-cost producer in energy
and when the price comes down,
what happens in that market versus when the price goes up and then the parallel to Bitcoin mining.
And maybe just talk about similarities and differences.

(28:13):
Yeah, sure. So in an oil and gas well, let's just say an oil well, you have lifting costs,
which is how much are your expenses divided by how many barrels you make. So companies will say,
hey, for every barrel of oil I produce, my costs are $10. Some guys' costs might be $30.
dollars other guys might might be five dollars so the guys with 30 40 dollar lifting costs when oil

(28:37):
goes down to 40 dollars a barrel they're break even or cash flow negative so they have to shut
in their well the guys that are only their costs are five dollars per barrel can still make money
at 40 wti same exact thing happens in bitcoin if you're paying seven cents per kilowatt hour on the
grid hash price goes down to 40 which it did and it's not too far from that now um you're going to

(29:04):
be break even to cash flow negative depending on what machines you have plugged in so those guys
shut in same thing as shutting in a well you shut down the bitcoin mine because why are you going
to mine if you're cash flow negative um our all-in costs off the grid our loe is you know two to three
cents a kilowatt hour so we can stay profitable with hash price a lot lower but you know there no free lunch You do have to spend capital up front on generators and things like that But that the analogy

(29:33):
It's very comparable.
And so in the oil and gas world, let's just talk oil.
Price of oil drops.
Certain producers become unprofitable.
They physically have to cut off.
Turn off the well.
And that oil stops flowing.
Yep.
And the low-cost producer or those that are on the lower end that remain profitable functionally take more market share because other operators are turning off.

(30:09):
And those other operators, maybe they become unprofitable overall.
Maybe they go away.
Maybe there's consolidation in the industry.
I remember 2014, 2015 when I believe it was Saudi stopped or basically said they were going to continue to produce and not hold the target.

(30:30):
The weakest fail, consolidation, the world of Bitcoin, a mine will shut off.
And the amount of Bitcoin that are issued continues to remain functionally the same.
price might be lower
and those that
are continuing to operate

(30:52):
would get more nominal Bitcoin.
Exactly.
So in the oil and gas world
the direct feedback loop
is you're still producing
the same amount that you were
you're just able to continue
to do it profitably
albeit less profitably
and maybe in the future
you might be able to go
accumulate more assets
to expand your production footprint.

(31:15):
in bitcoin it's more dynamic where you might actually produce more bitcoin at a lower price
exactly and it's the same you know the saying goes the cure for low prices is low prices if
oil prices go down people shut in that'll eventually cause a supply crunch and prices

(31:36):
will go back up same thing in hash price you know hash price goes down people are going to unplug
at some point, which caused hash price to come back up.
So when you guys were looking at wells,
and you guys were looking at gas wells,
were they, for the initial well or set of wells
that you invested in, were they just gas?

(31:57):
They were dry gas only.
Okay.
And when you look at the economics,
who were the counterparties that you were buying from?
Were they just other individuals that you knew?
were they larger companies no it was a privately held fairly large oil and gas operator just in
the barnet and they were just were selling this package on energy net which is craigslist of oil

(32:22):
and gas assets you could log on today and there'd be 20 assets for sale so describing your terms
maybe this has evolved over time you come more from you wear the cfo hat at 360 energy you've
worked in oil and gas finance, but more broadly looking at a spectrum of preferred equity to

(32:47):
MES debt to term loans, you understand the financing structures of oil and gas deals
and the underwriting and then the assets that are attached to them through the financing
lens what do you look for in attractive assets that are particularly interesting for bitcoin

(33:11):
mining yeah it's a great question so the way pdp assets prove developed producing assets so
flowing wells are called pdp wells the way they trade on the market is a discount cash flow analysis
this. So say I'll buy that well for PB 15.
You model out the cash flows, the production of the well,

(33:34):
you assume strip pricing, you model out your costs,
you discount all those cash flows back by some discount rate.
That's what the market decides.
And you can buy it for the present value discounted back 15%, call it.
So, um, depending on the specific asset, it might be PB 20.
you're getting a little cheaper um but the the interesting part is the you're discounting back

(34:00):
just in oil and gas terms like you can buy stuff on the market on just oil and gas terms so since
these were unattractive wells the costs were very high the midstream cost was high so the cash flow
on oil and gas basis only was pretty low so the pb20 was cheap um no one else was thinking about
layering in the Bitcoin mining economics on top of it. So when you look at the present value,

(34:25):
assuming Bitcoin mining, you're getting a good price. You can layer in that capital and have
a present value uplift and say, I'm buying this gas asset for cheap, you know, on gas terms,
layering on the Bitcoin that no one else thinks about. And then you have upside for that asset.
Maybe elaborate on that for people that aren't as familiar.

(34:47):
because I think what you said there,
there was something implied about the fact that
if you're valuing net cash flows
on the oil and gas side
and what costs remain

(35:10):
if you were to mine Bitcoin
versus what costs would be eliminated
such that if these assets are being sold out to the market
and all of the market of potential buyers
are looking at it one way,
but you're looking at it through a different lens,
why you would value it potentially more

(35:33):
than somebody else that could only look through it
through the traditional lens?
Yeah.
So on the cost side,
a big cost you can eliminate with Bitcoin mining
is your midstream fees.
we have to pay you know call it 80 cents per mcf to the pipeline operator just to take our gas
so if you're using your gas on your own pad that's a cost item you can eliminate but the real uplift

(35:56):
comes in the revenue side of it right if you look at strip henry hub and it's you know call it three
dollars ish for the next five years everyone else is looking at three dollars of revenue
In the Bitcoin mining side, you have to invest capital day one, but your revenue is going to be a lot higher.
Today, it's $15.

(36:17):
When we looked at it, it was $40.
You can run sensitivities, but inherently your cash flows that you're looking at are going to be higher because your revenue side is higher.
That's what the Bitcoin mining brings.
Are you still paying the lifting costs that you mentioned?
You still have some lifting costs for the well.
Yeah.
You still have to put chemicals in the well.
You still have to haul water, things like that.

(36:37):
So those costs are the same.
You can eliminate the midstream cost, and then you have higher revenue.
With incremental capital.
Exactly.
So you do have to spend money to get that higher capital.
So that's just the math problem.
So if you can, without having to lose people in specifics of the individual dynamics,

(37:03):
at least kind of order of magnitude help somebody understand the biggest levers.
And then when you're thinking about bidding on an asset,
what you'd be willing to pay relative to somebody else

(37:24):
that was only looking at it through the conventional lens.
Yeah, so really round numbers.
let's say the oil and gas asset in a traditional oil and gas sense at strip pricing is expected to
make a hundred thousand dollars of free cash flow a year and strip pricing is the forward the forward
curve yeah of henry hub and then all your costs after all your costs after strip pricing after

(37:49):
the production curve hundred thousand dollars a year is what the gas wells will make so the market
is going to put a discount rate on that. And then that's what it trades for in the open market.
Someone's willing to buy that for a round number, million dollars. They'll buy that for a million
dollars in the oil and gas only sense. The beauty of it is we don't have to pay more than a million

(38:10):
dollars. We can still buy that for a million dollars. So that's the market price. We're not
going to overpay just because we're going to do Bitcoin mining, but we're willing to buy it for
million and then invest an additional 2 million, call it, to build a Bitcoin mine.
And then now instead of $100,000 a year of cashflow, it's $500,000 a year or whatever

(38:32):
the math is.
But you're investing, you're buying the asset for market price.
But because you can invest the money and increase revenue that other people aren't thinking
about, your return hopefully is going to be higher.
on a both an absolute basis and on a percentage basis yes as a combined function of eliminating
certain costs putting capital investment and to capitalize it but then when you reference a

(38:58):
cash flow increasing by five times but increasing your capital base by three times
the overall economics exactly the uplift is higher so if the strip pricing ended up playing
out exactly how it was and you were operating it as just a oil and gas asset you would make
whatever you bought it for 15 percent right because that's what you're buying the pv15
everything plays out as modeled you're making a 15 return and how do you think about obviously

(39:26):
bitcoin is volatile yeah but oil and gas are both volatile as well yeah
how does somebody think about
the
volatility
of gas because you talk about strip
but you don't actually know what that's going to be

(39:47):
maybe yeah it's never what strip
actually is right
is it from a from an underwriting
perspective I'm not talking about
ability to predict but
how the difference in
volatility
in the revenue side of Bitcoin
versus the revenue side of oil and gas?

(40:09):
How do you account for that?
Yeah.
On the natural gas side especially,
the volatility is pretty comparable
from just an absolute basis.
That's pretty wild.
It's extremely volatile.
And especially,
you talked about it with Chris a little bit,
but the various hubs are all different.
Waha today is at negative $2.
Henry Hub's at $3.

(40:30):
Wait, why is it negative $2?
Is that right?
Because I felt like two weeks ago, it was like a dollar.
Yeah, it was.
It's negative $2 today because Kinder Morgan has an outage in some plant.
And they're, you know, 2% of the volume of the Permian.
Even though they're only 2%, that shutdown has just caused more supply than there is demand.

(40:52):
And they're a processor.
Yeah.
They have a bunch of gas plants and pipelines.
They're a midstream company.
Yeah, it's really interesting because Bitcoin is clearly volatile and everyone generally knows that it's volatile.
And it's oftentimes difficult for people to be able to invest long-term, not just in Bitcoin, but particularly a business that is either a service company or more directly involved day-to-day in the Bitcoin world.

(41:31):
whether it's a Bitcoin exchange, custody business,
I'm working on payments, you guys are working on mining,
it's difficult for people to perceive how you can operate
in a world that is so volatile.
Cyclical is not the right, maybe cyclical is the right term,
but it's cyclical with long-term adoption going in your favor.

(41:52):
Yeah.
Without the appreciation that something as mature of a market
as natural gases is incredibly volatile.
So if, you know, some people might be familiar with when,
I think it was Henry Hub went from $2 or $3 to $9

(42:14):
when I believe it was Nord Stream.
Nord Stream and then Russia, Ukraine.
Yeah.
Yeah.
And that if you actually look at the daily volatility,
it's bitcoin's fairly comparable to natural gas for sure but the follow-up i was going to say is
the helpful thing in natural gas markets that producers utilize it's very hedgeable it's

(42:38):
extremely liquid market to hedge three years out so but not 15 not 15 no you could probably get
five seven eight years out um someone will buy it because there's a lot of natural buyers of gas
There's the producers want to sell into the future.
Power plants, things like that want to buy.
Oil has the same dynamic.

(42:59):
In mining, Luxor is working on some hash price derivatives.
It's nowhere near as liquid.
You can hedge out maybe six months, maybe 12 months, but not even close to five years.
And then since it's so illiquid, the bid-ask spread is wide.
You're not able to really lock in your hash price as well as these guys can lock in their

(43:20):
natural gas prices.
So producers can say, hey, I know natural gas is going to be volatile, but I can at least lock in 80% of my production at $3 for the next three years.
And they do that.
So the ability to hedge in the Bitcoin world, in my view, is functionally non-existent.

(43:42):
Correct.
When I've done the analysis of lending dollars in an over-collateralized way with Bitcoin as the collateral, the hedge has been cost prohibitive.
You functionally though trading Bitcoin volatility or natural gas volatility when you actually at the well site and owning the molecules Yep The decline of a natural gas well

(44:17):
the ones that you were looking at conventionally,
what are those typically?
And how do you think about that in the context of Bitcoin mining?
Yeah.
In a site.
So every well is different.
Our specific wells are on terminal decline,
which is three to 5% a year.
they're very old very steady decline uh when a shale well first is drilled the first year is

(44:41):
gonna have 80 decline that is not ideal for bitcoin mining because our generators and our
minds would like a steady flow of gas so you want a steady flow of gas as you can get and you want
to build your mine to where in three years you still have enough gas you might have to undersize

(45:02):
it a bit today to plan for where the decline curve will be in three to five years so if
a well was going to decline three to five percent for 10 years and it had a certain amount of volume
you might build your mind to a capacity of say 60 percent of today of today yep what do you do

(45:24):
with that excess or how do you account for it in your model so our asset was pipeline connected
so we would just sell the excess into the pipeline and take take that if there is no pipeline you have
to flare it or you can choke back your well um again every well is different but some wells
you can choke back the production a little bit to make it more flat and you know you have to keep

(45:48):
the reservoir pressure the same all these complicated things that petroleum engineers
are really good at um to keep production pretty flat um in the interim but you might have you
might not be able to do that it might have to just flare it that excess conceptually
now one might be more predictable than the other but is it fair to think about the decline curve

(46:13):
of a well with assuming hash rate is increasing the decline in production of bitcoin at a mining
site. That's interesting. I've actually never thought about those two compared. But yeah,

(46:33):
I mean, Bitcoin denominated hash price will go down forever pretty much in the long term
as hash rate increases over time, right? Yeah, because that's one thing,
and I've never participated directly in Bitcoin mining, but I've looked at Bitcoin mining models.
I've built financial models around Bitcoin mining. I think one of the other things beyond just the

(46:57):
volatility of Bitcoin, which somebody that is steeped in oil and gas and natural gas
specifically would recognize that, hey, if I look at the historical volatility of these
two things, at least over the last year, two years, three years, five years even, the volatility
is fairly comparable, that it's difficult to project what the change in hash rate is

(47:18):
going to be.
So how do you guys think about that, both internally to 360, but also when you're
And you're taking questions from customers that are looking at using your services.
Yeah.
For our customers, we think about things on dollar-denominated hash price.
And we try to explain it to them.

(47:40):
It's a little tricky.
But we basically just say, dollar-denominated hash price is the same as Henry Hub.
It is the clearing price you're going to get paid for the commodity you produce.
So as a natural gas producer, the commodity is natural gas molecules.
The price you get is Henry Hub.
for bitcoin mining you're producing hash rate and the price you're going to get is dollar per petahash

(48:01):
and we tell them just like natural gas we can't predict where it's going to go so what we do is
we'll run sensitivity tables for them and say hey here's the all-time low if hash price is below the
all-time low for five years your return is going to be this if it's at the all-time low it's you
know the five-year average and we'll run sensitivities because we're not smart enough to know where hash

(48:23):
prices no one is you know know where that's going to go um and they they appreciate that because
they're used to every hub right um they wish they could hedge it and hopefully over time those
markets get more built out in bitcoin mining um but they get that comparison because they're used
to the fact that they don't know what henry hub's going to be in the next three years when you're

(48:47):
underwriting a acquisition of a pdp portfolio something like what stone ridge just bought from
anadarko yep they would inevitably have to be doing the same exactly same exact sensitivity
analysis at blackstone we do the same thing you run henry hub from a dollar to five dollars
and you look at your returns and sensitivity table and then you basically say i need to account for

(49:11):
this range and so what do i think the downside is which in the case of bitcoin mining would be a
faster increase in hash rate
and then account for that
and what you're willing to pay up front.
Exactly.
Yeah.
Yeah.
So
now
coming into
where you guys started buying wells

(49:32):
and thinking about the financing of individual wells
and the economics of wells and well sites.
My discussion with Chris,
we talked about how
you guys have shifted to being more of a service company
to people that own assets in the oil field

(49:53):
rather than owning the assets yourself.
Talk about when you're discussing your services
and how you structure your services with customers,
how you actually approach the alignment of incentives
and the various different pathways you evaluate

(50:18):
and how you decide going down one path or another,
what those decision points are based on the profile
of the owners of the actual wells.
Yeah, definitely.
So started the company, we owned our own gas wells,
and we viewed it through the lens of Bitcoin mining.
We said, we want to achieve power.
Let's do Bitcoin mining to make more money on this gas.

(50:39):
Once we got good at that, it took us two years.
You and Chris talked about that.
um other producers came to us and said hey we want you to do this for us to make more money on our gas
so we saw a need in the industry for someone to provide that service other these oil and gas guys
don't want to learn how to be bitcoin miners so our original model was hey you can buy the

(51:00):
infrastructure from us we will build it to our spec that we know that works um and we'll operate
it for you it will take a service fee on that you're spending the capital you're the owner of
the generators, you're the owner of the A6. And then you get that same economic uplift that we
realize on our own wells. So in that model, the incentives are very aligned because the producer

(51:24):
is spending a bunch of capital that they need to make return on. We're building it for them.
And we are banking on the fact that they're going to flow gas to that system because they have
millions of dollars invested in it and they need to make return. So our service fees, a percent of
the hash rate we're aligned because we want to make sure the mine's running well to get our royalty

(51:46):
or our service fee um but that's how we align it for that business model the other business model
i think you and chris might have talked about if the producer doesn't want to spend a bunch of
money on bitcoin mining they can rent our infrastructure we own the the generators and
asics they pay us a fixed monthly fee to be out there no matter what they flow gas through the

(52:11):
system, they get 90% of the revenue back from the Bitcoin mine. In that case, incentives are also
in line. They have no capital skin in the game, but they're on the hook every month for this rental
fee. And if they want to break even to make a little bit of money on the gas, they have to flow

(52:31):
gas through the system as well. So we're also aligned incentive-wise there. There was a structure
that I know you guys had considered,
which was just going and buying the gas directly
from an asset owner.
Yep.
So rather than them send it to a pipeline or layer,

(52:53):
compare that and the incentives of that.
So basically looking more similarly
to the owner of the assets as gas offtake.
Why or why not take that approach?

(53:14):
And so that was the model Crusoe started with.
They would go to guys in the Bakken, North Dakota,
say, hey, you're flaring this gas,
Marathon or Exxon, EOG, whoever.
Instead of flaring it,
why don't we, Crusoe, buy your gas for 25 cents at MCF?
It sounds like a good idea.
you make a little bit of money, you're not flaring,

(53:36):
and we're getting really cheap power as a Bitcoin miner.
So they were just trying to find cheap power.
The incentives break down a little bit
because the upstream producer in that case
doesn't care about the 25 cents MCF.
That's nominal to them.
So if they have any operational issues,
they will shut off the gas in a second

(53:57):
because they don't care about the 25 cents at MCF.
So there's a misalignment of incentives
with the operator because they can just shut you down and if you have no gas off grid you know
you're not hashing and you're going to have bad uptime that's one main issue the other is
these producers aren't incentivized to lock up gas for long-term periods so they might only sell you

(54:22):
gas for a year so you're you know you as crusoe whoever bitcoin miner you're spending a lot of
capital to get your infrastructure out there. You're buying gas for cheap, which is great.
But then in a year they might have a pipeline built to them and then they can kick you out.
So, um, those are kind of the reasons that we don't just buy gas from people.

(54:45):
And we were talking before about how you guys go and, and actually communicate, communicate
around the incentives for both of these types of structures.
Where would you say the legacy oil and gas industry is

(55:06):
in terms of how receptive they are to these types of solutions?
And what, in your mind, the level of understanding of Bitcoin
someone would need to have in order to pursue?
Yeah, I would say we are still in the first inning of understanding the oil and gas industry broadly. I think people have heard about this idea, or they've had someone approach them, maybe. But it typically has not gone well, for various reasons, it's hard to do. Or they just shut it down instantly, instantly, because there's still a stigma around Bitcoin. And they're like, that's a scam, we don't want to do that.

(55:50):
That's often what we're up against.
What percentage these days is the response that Bitcoin is just no-go zone?
It's gotten better.
It probably was 50%, 60% a couple years ago,
and now it's down to 20%, 30% of just non-starter.

(56:13):
And I think the reason, the way we pitch it is we say,
it's not about Bitcoin mining, guys.
like you have a gas problem this is oil field infrastructure that works that consumes your gas
that monetizes it and oh by the way it happens to be bitcoin because this is what works in the oil
field like we tell them if we could do ai computing we would um but bitcoin can run on starlink and

(56:36):
there's no penalties for downtime so that's why we use it and they appreciate that they say okay
fine as long as it works it solves our problem it can reduce our flaring you know problems or we can
bring these walls on a production um that's what we care about so just because you mentioned it
what describe the nature of the work and the the nature of bitcoin mining that allows

(57:03):
a site to be viable for bitcoin mining upstream at the well site where it wouldn't work to
set up an AI data center just because you brought that yeah so bitcoin mining the the computations
at the ASIC level is very energy intensive you know running all those hashes per second

(57:24):
but once you find the answer or just showing your proof of work it's a very small amount of data to
actually transmit that to the to the network so we can run on Starlink because the bandwidth
with required to run Bitcoin mining is much lower.
If you're running complicated AI,
you need high speed fiber.

(57:47):
So that's why, that's a main reason why it doesn't work.
Also in AI, you have to have perfect uptime.
You're running these complicated LLMs,
it's all above my head,
but you can't just go down and lose a month of work.
That would not be acceptable.
So all of these data centers are on the grid,
They have backup diesel generators.
They have backup batteries.

(58:08):
They have many redundancies to make sure they never lose power.
In the oil field, you can't guarantee that.
The well can go down.
The generator will go down.
Things just happen in the oil field.
And then the third reason it doesn't work is the scale we're talking about is just much
bigger for AI.
You know, they're talking 20 megawatts plus.

(58:28):
Each of our units is, you know, 1.3 megawatts.
So it's connectivity, uptime, and scale.
And if you think about the trade-offs of the structure where someone's effectively leasing your equipment versus putting the capital in...

(58:54):
And also pairing that with the understanding that Bitcoin is still a non-starter for 20% to 30%, which means it's at least open to the conversation for 70% to 80%.
but is there any credit financing in that is helping to bridge the gap between somebody that

(59:17):
might want to own the asset themselves and take on the bitcoin mining risk versus not wanting that
risk and just wanting to to pay you at least likely for the reason that it's solving or reducing a
liability or unlocking say you know an oil asset yeah well the first thing i would say is oil and

(59:37):
gas companies especially large ones they like renting oil field equipment anyways that's what
they're used to they rent compressors they rent as much things as they can rent they like that
model simply for the fact that it is in pattern for everything else they do on the purchase side
um you asked about finance ability the generators are very financeable you know these are

(59:59):
generators that have other applications outside bitcoin mining so there are banks credit shops
they'll give you 80 ltv financing on that the asics are tougher you know back in 21
people were doing asic loans that went very poorly so there's a lot less um credit willing

(01:00:22):
to finance asics yeah nydig was lending against asics and now they're a large bitcoin miner which
I think it was the right move for them, given the circumstance of what had happened.
Yeah.
They essentially became a Bitcoin miner when ASICs were at, I don't want to say dirt cheap prices, but were at a bottom of a period of high stress.

(01:00:44):
Yep.
But in the absence of financing, how does that factor into the decision in terms of the typical customer that you're...
Yeah, since there's no financing for the ASICs.
And then also, what's the relative amount of capital?
If someone's looking at a site that's a megawatt or half a megawatt or 100 kilowatts,

(01:01:12):
what percentage is the ASICs and the mining infrastructure and the tie-ins versus the generator?
Yeah, so for a 1.2 megawatt site that'll consume 300 MCF a day,
if they want to buy it with no financing and use top of the line asics it'll cost 2.3 million

(01:01:33):
dollars call it that's the equity check that you're right if they want to finance a generator
that can get down to 1.4 1.5 million but out of that you know all in 2.3 million dollar cost
40 50 to 60 percent is the asics and the container um so and that's not financeable

(01:01:56):
So they're going to have to equity fund a big chunk of that CapEx.
And if they are spending CapEx on something, they're going to have to understand Bitcoin
mining.
So that's the purchase model is what we call it.
We have seen more success with smaller operators that are willing to learn and willing to take
that risk and say, hey, I do want to try to make $15 in MCF, which is if they buy the

(01:02:18):
infrastructure, that's what they're making today.
whereas if you're oxy or exxon it's going to be long putt to get approval capital approval
internally to spend that kind of money on something so foreign as bitcoin mining
so the the larger guys it's kind of ironic they have the capital but they don't want to spend

(01:02:40):
capital on anything besides drilling new wells so they're they say hey i'll rent this it'll solve
my gas problem and let's just see it work you know maybe in a couple years if they see it work
they'll look into owning it but um the dynamic today has been the smaller guys are willing to
you know take that risk they're kind of more the wildcatters um how much appetite has there been

(01:03:03):
to do the work on bitcoin in terms of people combination of customers that you talk to on a
day-to-day basis as well as folks that are in your network that are you know either working on
financing structures for for conventional assets so where is that that appetite to dig in obviously

(01:03:27):
i would always say that there's no more than one percent of people in the world that understand
bitcoin so obviously it's a small base but yeah the oil and gas space specifically seems like
the type of profile person that's more willing to take risk that the average person isn't yeah
so i'm just curious um of of where and how you see people yeah i mean it's a really wide range

(01:03:54):
we'll come across the the random person at xyz operator who's fully orange billed and they love
this and they're pushing internally and those are always the best companies to work for because you
have an internal champion who gets bitcoin who wants to try this on their assets so that's rare
but it happens then you'll have a bigger chunk of people who are willing to learn about it the last

(01:04:17):
really good questions we'll walk them through hash price walk them through how it all works
and they actually want to learn about it and we'll send them materials and things like that
we've gotten pretty good about educating these oil and gas people on bitcoin mining and how it
works and then you know bitcoin itself um so maybe it's five percent of people are orange
pilled a pretty good chunk of 50 of people willing to talk about it and then there still

(01:04:43):
are some people that just hear the word bitcoin and just shut off um and like i said that number
is slowly going down over time but there's not much you can do with those people um if they
are just shutting it down day one.
What do you think causes that to change
in terms of
shifting to looking at

(01:05:06):
Bitcoin as either reducing a liability,
whether they were flaring
and now they have a better way
to economize what they were previously doing
to get rid of what was a waste product
versus potentially enabling the ability to drill more oil in ones and twos,

(01:05:33):
then maybe shifting how the overall industry looks at Bitcoin mining to be a solution to you know look at the map differently yeah totally i think the first step is just solving their day problems even if
the person doesn't like bitcoin they're desperate for a problem in certain scenarios they have a

(01:05:56):
well shut in gonna make a bunch of oil they can't flow that well because there's nowhere for the gas
to go so if we bring them a solution for that gas they don't care if it's bitcoin mining um they
might be skeptical but they'll say fine let's put two units out there let's try it we'll rent it
and then once they see that work that'll slowly ease them into the fact that hey this is solving

(01:06:18):
a gas problem let's learn a little bit more about bitcoin so i think the biggest step that we can do
at least is educating these people on the operational benefits they'll get because that's
what they cared about day to day i don't think it's our job to go around trying to orange pill
people um that's probably not a good use of our time it's really just this is an oil and gas

(01:06:41):
solution that's going to help you learn less right so if there's people that are already curious about
bitcoin and get it we'll kind of nudge them down the rabbit hole a little bit um but for the
skeptical people they just need to see at work i think and it's fair to say that in the current
landscape there is still the no one got fired for buying apple stock or whatever the analogy

(01:07:08):
used to be microsoft whatever blue chip yeah with the certainly the people at large operators
but then to a large extent still folks that might work at private operators yeah i mean
if you're a middle level guy at oxy you don't want to go to your boss and say

(01:07:28):
hey i have this bitcoin mining thing you know if it works you're still a middle level guy at oxy
if it goes terribly um you know you're gonna get fired how fraternal is that business though in
terms of folks talking to each other yeah somebody seeing somebody take a risk
that normalizing that it's okay for me to take a risk versus seeing it working yeah and i mean that

(01:07:57):
is it's huge in oil and gas people are always looking at what their offset operators are doing
the first guys that drilled horizontal wells people thought they were crazy the first guys
that did the fracking you know george mitchell and the barnett people thought he was crazy like
there's no way you're going to get that gas out of that tight shale but he just tried it it worked

(01:08:18):
and now everyone is doing it and it changed the you know u.s global energy landscape it really did
um so we think hopefully if we can get in with the right guys make this work they'll see it work
their offset operators will see it work you know i was telling you earlier we we had meeting in
midland and a lady said yeah we think we want to try this out we're curious to see it work and by

(01:08:43):
the way we have three guys next to us that have the same exact problem um and they're very curious
to see it work too so we really do think it's going to be a snowball effect we've already seen
that with some of the early wins we've gotten inside the business itself you know if you are
a large operator one group might see it work then their other their barnett group or their

(01:09:06):
permian group will talk to the gulf coast group and say hey you know this is a solution that can
work now so it really is a copycat industry um that might be slow to adopt things at first
but once something's working people do it when you guys are thinking about repeatable opportunities
for the reason that this is still so nascent it has the opportunity to solve problems in a big way

(01:09:30):
but recognizing that you just can't go from where we are today to that future state and there needs
to be demonstrated track record of both solving problems and the economics being sustained
how do you guys because your time is scarce how do you guys create focus

(01:09:55):
around where you're able to have repeatable success talking to the type of people that
own the assets like that's a great example is it is it something of like there's a certain area
And if one person has a problem or a profile of a well, then they're likely to have other opportunities around them.

(01:10:15):
Or what are the different things that you, because you're not necessarily like needle in a haystack, but there's a lot of opportunities, but there's only a certain number of people that will say yes.
And then how do you look at the board to then focus energy?
No, you're right.
Our time is scarce and also our capital is scarce on the rental side.
Because in the rental model, it's our capital.

(01:10:36):
It's our equipment.
So we have to finance it with equity or with debt.
So there's a limited amount of dry powder we have to go deploy rental units.
So for that reason, we're very focused on focusing on the top 150 accounts for our rental product.
The big public guys, the big private guys are who we are spending our time trying to get in front of for this rental product.

(01:11:01):
And hopefully there'll be purchase customers one day too.
the purchase products you know we're happy to put in front of anyone frankly because um the smaller
guys are willing to spend the capital quicker than the bigger guys so that's kind of how we
bifurcate what we focus on between the two the two products we offer one of the things that i've come

(01:11:22):
to appreciate is just how dependent the legacy oil and gas business is to fiat financing and you
used to sit on that other side at Blackstone have any of the conversations has that been a
the nature of their credit relationships been an inhibitor saying yes and then on the other side

(01:11:47):
is it a potential opportunity where they could tap financing based on their borrowing base non
non-bitcoin yeah yeah no it's a great point i mean the oil and gas industry is built on
barring basis reserve-based lending right so you have explain a little bit how that works
yeah so high level you'll have producing wells you'll have some undeveloped acreage

(01:12:11):
and the bank will look at all of that in totality they'll get a reserve report done so they'll have
petroleum engineers look at all of the hydrocarbons that you have in the ground how much is producing how much is not producing And they look at all those cash flows again discount it back They say Hey all of your reserves are worth a hundred million dollars We going to advance you 80 of that in a credit facility So we give you

(01:12:37):
an $80 million credit facility that you can draw and pay down as you wish. So that's a really key
way that a lot of these companies finance themselves at the smaller level. You know,
the bigger guys use it more as just kind of a working capital facility because
they have access to institutional grade debt,
like bonds and things.
Um,

(01:12:57):
but a lot of the smaller guys,
their RBL is how they finance their business to drill more wells.
The RBL is their revolving facility.
So they basically have a revolver.
Yep.
And if the price of gas changes or the price of oil changes,
how does that come into play?
It'll get reassessed every year.
So it's a great question.
if gas prices go way down and strip comes down the value of reserves of your reserves is less

(01:13:23):
so they're going to haircut what was 80 million the next year might get cut to 50 million and then
you have less capital available it works in the reverse too um so it is a bit of a you know you
don't want to ever be fully drawn your revolver on your rbl because that could happen you could

(01:13:44):
get reassessed the next year and owe the bank money.
And if, say, an operator that had a credit revolving credit facility
or credit deals, loans owed to different banks,
even if Bitcoin mining wouldn't be the principal activity

(01:14:07):
that was being financed, maybe it's not financeable,
in your mind or does it come up of whether or not that increases the perceived risk you know in
terms of an operator maybe they haven't had a direct conversation with one of their banks but
saying hey if we go down this path and do this they might view us as less credit worthy or greater

(01:14:28):
risk does that come up it definitely comes it comes up all the time really i mean some guys
will say hey my bank's willing to finance five million dollars that's no problem some guys say
my bank would puke on this so every bank has different risk appetites or different views on
bitcoin and it also probably depends on the relationship and the size of the business

(01:14:48):
but some guys are very willing to put this on their credit facilities and use that a pretty
cheap cost of capital to do this others are just it's a non-stop with their banks so
um i mean even for our business like we to build out this rental fleet we're talking to banks and

(01:15:08):
credit shops and things like that and a frustrating aspect has been you know the bitcoin on our
balance sheet that we hold that we've accumulated over time is given almost zero credit in their
eyes they're like we don't have much cash like yeah we don't have much cash but we have a good
amount of bitcoin that you're giving zero credit to so um that's just a broader thing that i think

(01:15:29):
will get better over the next five years once banks come around to the fact that it is the
best collateral on earth you know um but i think we're still early it is interesting because i was
wondering why the oil and gas companies didn't start to accumulate bitcoin not necessarily running a
bitcoin treasury strategy yeah but then i came to understand that you know what you just described

(01:15:57):
which was if you would get zero credit for it to potentially borrow against,
that a lot of the free cash flow is swept through the credit facilities.
And the way the incentives in that legacy conventional business are
is that you're not incentivized to hold a lot of excess cash.

(01:16:19):
Yeah, for sure.
Based on how the credit agreements are structured.
Exactly.
so last question
to wind up
to wrap it up
is
over the next
one two three years
where are you guys focusing

(01:16:42):
because I would presume
everything is based on unit economics
but it's also strategically
of unlocking a much larger pie
and so
in terms of
really getting to that next step function
for this
industry, subset of the Bitcoin mining industry,

(01:17:04):
and the role that 360 is playing in it
on the strategic side of your business,
whether that's financing,
just kind of what aspect of the business
do you guys view as most strategic
to unlocking, say, a 10x wave of growth,
not based on anything about the price of Bitcoin,
but just in terms of the market of assets or capital to become interested and

(01:17:30):
view this face space as more investable.
Yeah.
I mean,
we kind of all focus on geography first.
Everything we've deployed to date has been in Texas.
We're based in Austin.
As we speak,
we're putting our first deal in Wyoming with the largest producer in the
Powder River Basin.
And that's going to be important for us because,

(01:17:51):
to your point earlier there's 10 other pads that are exact have the exact same problem there in
wyoming is interesting because their flaring rules are much stricter than texas so the pain
that producers feel is higher in wyoming higher in new mexico versus texas where they can just flare
with no real penalties so we're focused on getting into new mexico getting into wyoming

(01:18:12):
expanding their north dakota also has strict flaring rules um so focusing on the geographies
where the producers have the biggest pain because it's easier to rent our infrastructure if you're
feeling more pain. So that's where we're focused on on the geography side. And then on the financing
side, it's really about building a track record with these rental. This rental product is new,

(01:18:36):
like I said, showing people the track record. And then we believe and have already seen that
it is a financeable product because most of the capex we're spending on these rental units
is in this good collateral, which is generators
that banks understand.
And that's important for us
because we don't want to equity fund
our entire rental fleet.
That'll be expensive from an equity dilution standpoint.

(01:18:59):
So getting efficient financing on the rental fleet
is another big goal that we have And then broadly I mean it just getting our name out there getting producers positive experiences and hoping that their offset guys see them and say hey this works
This is a viable oilfield tool.
It's not some far-fledged, crazy Bitcoin bro thing.

(01:19:24):
It's an actual oilfield tool that works.
So that's what we're working on every day.
In the case where you mentioned in Wyoming, a large producer, just if you could, because you brought it up, what was the dynamic around that case specifically?
Not needing to understand who customers are, of course not, but just because there's signal there of if it's a large conventional producer rather than ones and twos or smaller operators.

(01:19:57):
yeah there's signal that's getting through even if it's not a you know fully seeing the field of
bitcoin yeah that's a great question so this specific example very large producer this is a
two well pad that they drilled i believe a year and a half ago and they produced the well when
they first drilled it but then they bumped up against their flaring permit and they weren't

(01:20:19):
able to get it renewed so they could not flare any more gas there was no gas pipeline so they
had to shut that well in. So there's been no oil or gas flowing out of the well for a year and a
half, which is very impactful for them. They can't flare the gas. So they are hiring us to consume
that gas, combust it with our generators, mine Bitcoin with it. And that is all to allow them

(01:20:44):
to flow their oil. So on the rental economics for them, they don't really care. They're going to be
happy if they break even on the gas because their alternative would be flaring it. But they are
unlocking 200 barrels plus a day of oil production that they can now flow given our units are up
there. Someone like that, do you think that the mindset is let's do this one with the mind that

(01:21:13):
they have a whole other portfolio where, again, it's not going to be every other well or every
other asset that they own but evaluating what they do have like is someone like this thinking
about it from that frame of mind of like hey let's test this out with the idea that we know we have
other opportunities if this proves to work yeah they've told us there's five other pads they've

(01:21:36):
already identified that are the same exact scenario and there's no line of sight in this area to gas
pipeline being built so they want to see this work and then there's a lot of opportunity to grow with
And then what it seems like,
it seems like everything is generally backward looking
in terms of this is how assets exist.

(01:22:00):
These are where pipelines either exist or don't.
So let's go out and find the wells that fit the profile
that best map to profitable Bitcoin mining.
Yeah.
So when do you think, just kind of, if you're painting a picture out into the future, I know we're not asking to predict Bitcoin prices, but are we thinking five years, 10 years, 20 years, maybe no horizon at all until the legacy oil and gas industry uses Bitcoin mining to change their development programs?

(01:22:43):
Yeah, on the drill program going forward.
Is that just too far out to conceive?
No, it's not.
Or is it like 10 years?
Maybe they're thinking we can go drill that well.
Being basically the difference of, hey, we've got a problem that we didn't foresee.
This can be a solution to it versus we can actually go drill where we couldn't or wouldn't have otherwise drilled.

(01:23:06):
So it's already happening today with small producers.
small wildcatters that understand this see the potential hey i don't need i can go wildcat in
a new location and have gas offtake where there's never gonna be a pipeline so i can plan a drill
schedule around that we've already had those conversations with people you know granted

(01:23:27):
they're smaller producers mom and pop type people um but again that's where a lot of the innovation
and oil and gas comes from.
The interesting thing will be
when is a big public guy
going to build this into the drill program?
And if I had to handicap a timeline for that,
I would say, I'd say four years from now

(01:23:50):
until a big public guy is actually
planning a drill program around this.
And I think that'd be amazing.
I was thinking you weren't even going to give me a forecast.
Four years.
No, I think that just in the spirit of wildcatting, I would think that, because I had conversations four or five years ago with someone who had assets in the Haynesville, I think it was northern Louisiana, about drilling a well specifically to mine Bitcoin.

(01:24:19):
and the idea that they might be the first to drill a well
and then exclusively mine Bitcoin on it
with the Wildcatter mentality
was something of interest to them.
Yeah, I mean, one of our clients drilled a well
specifically to mine Bitcoin.
So it's happened.
Whoever the next person is is not the first.

(01:24:41):
That's pretty amazing, though.
Yeah.
I mean, the fact that that type of activity,
that the fact that the example that you gave in wyoming the fact that somebody
in the world has drilled a gas well to mine bitcoin yep and in the future will drill an oil
well with bitcoin being the first off take yeah is uh is a sign of how far bitcoin and bitcoin

(01:25:07):
mining has gone totally and even if it's just a bridge right you can speed up your drill schedule
yeah the pipeline might be a year might be the permanent solution exactly but it reduces uncertainty
Yep. You can plan around it.
Yeah. Oh, Sean, appreciate you coming downtown from your new digs a little bit, uh, west of
downtown. Always enjoy conversations. The ones we have more frequently here, but excited for what

(01:25:31):
you guys are building at three 60 and just all the innovation that's happening in the oil field
and the gas fields from Bitcoin mining. So yeah, no, I appreciate it. You got to come by the new
office and grab lunch with us sometime.
Yeah, we'll have to do that.
Sounds good.
Appreciate it.