Some people say a picture is worth 1000 words.  I only need FIVE to explain this picture:  It’s all the same asset.

This map says that Advantage Lithium (AAL-TSXv; CAD$140 million Enterprise Value) will one day be worth as much as Lithium Americas (LAC-TSX; CAD$1 billion Enterprise Value or US$800 million).

LAC’s stock has had a fantastic run this year—tripling to $13 at one point this year, mostly on the strength of their 45% interest in the Cauchari lithium brine asset in The Lithium Triangle on the Argentina-Chile border.  Their partner—SQM Corp. (SQM-NYSE ADR)—a major lithium producer—had a 60% run this year on this same property.

LAC does have a secondary asset in Nevada, but there is really no value for that in the stock (even though some analysts have it as much as 34% of NAV; that’s just gravy for the future for LAC shareholders.)

LAC really is worth $1 billion just for its minority interest in Cauchari.  Chilean brokerage firm BTGPactual said in a Sept 29 analyst report that SQM’s Joint Venture (JV) with LAC was worth $2 billion for its 55% working interest.  It’s clear this brine asset is worth a lot of money.

Now go back and have a good look at that map. Here’s what this picture is telling me:

1. Advantage surrounds LAC on basically three sides—east west and south except for a little bit
2. This is the SAME ASSET.  There is no geologic fault or anything subsurface that prevents this brine from being the same across AAL land.
3. See the drill holes AAL is drilling close to the LAC/SQM part of the asset?  AAL has been pulling in great lithium grades, similar to the almost 700 mg/L  that LAC/SQM have been getting the same.

I REPEAT—AAL HAS THE SAME ASSET.  You can walk across the two properties and not know whose side you’re on.  (In fact, SQM/LAC have been caught trying to work on the wrong side recently.) Above ground and underground, this is One Big Brine Patch and each group owns a significant chunk of it.

The combined value of just the SQM/LAC part of the Cauchari brine asset is US$2.8 billion.  AAL owns 75% of their ground, with Orocobre (ORL-TSX; ORA-ASX) owning 34% of AAL and the other 25%.

This is simple and not so simple at the same time.

Here’s the simple part—and remember, when I do my financial projections, I keep one foot planted firmly in the air:

Assuming lithium prices stay up in the $18K-$22K/tonne they’re at now, AAL/ORL will at one point get the same valuation as SQM/LAC.  Just to be clear again, 75% of US$2.8 billion is US$2.1 billion or CAD$2.625 billion.

Right now AAL has 140 million shares out.  Management is hoping to raise some non-dilutive capital by getting the off-taker (industry term for lithium buyer) to build the production facility.  A Chinese lithium producer, Ganfeng, has already done that for LAC—so this isn’t something new or any kind of stretch.

The partner will likely want up to 9.9% of AAL equity, which is another 15 million shares.  Even if that gets done right here at $1 (honestly, it’s likely to get done a lot higher if AAL does get a deal like that) AND they raise another $15 million from the Market to top up the treasury…that’s still just 170 million shares.

$2.625 billion / 170 million shares = $15.44/share—a long way up from the current $1/share.  And let’s say I’m way off and they end up having 300 million shares out—more than double what they have now—that still works out to a value of $8.75/share.

If Chairman Dave Sidoo can deliver to the Market on his idea to get some non-dilutive capital, then the stock will start to run immediately.

What’s not so simple is when that will happen.  SQM/LAC are much farther ahead in their part of Cauchari; construction financing is basically raised by both parties, permits are in place, they have downstream lithium processors as shareholders  etc.  It is forecast to be a large scale (50,000 tonnes LCE/yr) low-cost (estimated to be US$2,500/t) lithium producer.

AAL/ORL doesn’t even have an official resource estimate yet. Will it be the same grade and size as SQM/LAC?  The grades they have been achieving so far—over much longer and deeper intercepts than ever before—give me very high comfort level that will happen.

SQM/LAC is at 11 million tonnes now of LCE—Lithium Carbonate Equivalent.  The Market is expecting a 2-2.5 million tonne initial estimate out of AAL/ORL by the end of Q1 18.  Drills are turning right now; it’s possible investors see the length of intercept and grades before year end.

At some point—likely the second half of 2018—the Market will gain a high degree of confidence that geologically, SQM/LAC and AAL/ORL are same-same.

And when that happens, AAL shareholders are going to be ecstatic.   The picture says it all. It’s all the same asset. One part of it is worth US$2.8 billion right now. The other part will be too…one day.

PS. One more thing.  Arguably, the Cauchari asset is so big that these two groups don’t need to merge.  ORL is already a producer here with their Olaroz mine (doing 14.5t LCE/yr), just north of Cauchari—again, see the map above.

But right now, AAL is by far the low market cap play in the area, and whomever owns it owns the balance of power in this very important lithium basin. This is the #1 lithium producing area in the world.
Keith Schaefer

While the S&P 500 has marched relentlessly higher over the past eight plus years the energy sector has had a terrible time.  The result of that is that investors have long since given up on the energy sector and instead enjoyed the easy ride that has been available elsewhere.

But the times they are a changing.

Look at the high valuation in the S&P  right now:

Source: Centaur Capital Value Fund

Five previous times in history the United States stock market has traded in the 90^th percentile of its trailing price to median ten year earnings.  In every single one of those instances the stock market subsequently performed extremely poorly.  There were no exceptions.

Now here we are today with the U.S. market trading in the 94^th percentile.  This is only the sixth time that this has occurred in the history of the U.S. market. How much upside is left in the 94th percentile?

Oil is at the exact opposite juncture.  The Market has given up…more on oil stocks than oil.

The truly exciting part is that the share prices of oil producers (even the best ones) are priced exactly as you would expect for a sector that investors have long since given up on.

They are dirt cheap.

Combine rock bottom valuations with surging cash flows juiced by a rising oil price and you have a powerful combination for big equity returns…while the S&P 500 struggles.

The stage for the oil bull market that is just beginning is based firmly on supply and demand fundamentals.

IEA data shows that global oil consumption has been growing very rapidly.  Over the past three years daily oil demand has posted increases as follows:

• 2015 global oil demand up 2 million barrels per day
• 2016 global oil demand up 1.6 million barrels per day
• 2017 global oil demand will have increased by 1.6 million barrels per day

That is a 5.2 million barrel per day increase in demand…and natural declines run about 2 million barrels a day per year.  over three years that’s 6 million barrels.  The industry has done an amazing job replacing 6 million and adding 5 million bopd.

But we have already seen that impact oil–in both fundamentals and prices. Steady growth in demand and restrictions on supply are now showing up in inventory numbers across the globe.  More importantly those inventory draws have finally appeared in the United States. Year to date the change in U.S. crude inventories shows a decrease for the first time since 2007 (when oil was surging over $100 per barrel).

Source U.S. Energy Administration

Making the story even more bullish (and what you can’t see in the chart above) is that finished product inventories (gasoline and distillates) have been decreasing even faster than raw crude oil.

While this tightening of the oil market has started to show up in the price of oil but it has yet to shows up in the share prices of oil producers.

This is setting up an incredible opportunity for observant, active investors.

While the rest of the world is mindlessly exposed to a stock market that is historically expensive we can actively pivot to this sector where a bull-run is just beginning.

The best way to make that pivot by owning the one company that I believe is the single best oil sector opportunity on the planet.

This company has the following attributes:

• Has more than 90 percent of its production from oil
• Runs its business with an extremely clean balance sheet
• Is founded and operated by a Tier One Management Team
• Has a rock bottom valuation
• Owns a huge land position in a top oil play
• Has critical mass…produces over 20,000 barrels per day
• Can generate IRRs of over 100% at sub-$50 oil
• Is growing by 15 percent per year while living within cash flow

This company was thriving with oil under $50 per barrel.  The higher oil prices go the more money this company makes and the faster it grows.

Rather than being part of the mindless herd of investors who are oblivious to the risks in the overall market you can take intelligent action.

You can avoid the frighteningly expensive overall market–valued in the 94^th percentile–and instead profit from the bull-run for oil through a dirt-cheap rapidly growing producer–Click HERE to get the best leverage to oil you will ever find.
Keith Schaefer

Ever wonder how accurate the EIA’s oil production numbers are?

The EIA is the Energy Information Administration, a federal government division that produces the most transparent and well researched data on oil production and storage levels—of any country in the world.

Their Weekly Petroleum Supply Report (WPSR) comes out every Wednesday at 10:30 AM  Eastern time, and is the most closely watched oil report in the world.  This report moves markets.  With derivatives and physical trading…its likely impact is in the trillions of dollars per week.

So yeah, it’s good to know just how accurate they really are.

Well, I sent my research team to grind through the data, and they came up with two very intriguing…ok just one conclusion was intriguing.

The boring conclusion was simple— the EIA has VERY accurate data, you just have to know where to look.

Investors should understand the weekly oil production number is a fully modeled estimate, which is a fancy way of saying it actually contains no new data from the previous week. That probably surprises a few of you.

However, the monthly data has real data, and as I will show you, is incredibly accurate. Folks, you can take those monthly numbers to the bank almost every month.

I did my best to keep this simple, but my young and under-paid researcher on this story did such a good job digging up data, I’m not sure I always succeeded.

The intriguing conclusion was really the reason I asked my team to look into this story.

And that second conclusion is…the EIA has never over-estimated weekly crude oil production as much as they are right now. Look at this chart:

Figure 1: Six-Month Rolling Average of Crude Oil Production Revisions

Bars above the line means the EIA is UNDER-estimating weekly oil production; the bars below the line indicate OVER-estimating weekly production.  This chart clearly shows the recent over-estimation.

Two high profile industry CEOs—Harold Hamm of Continental Resources (CLR-NYSE) and the legendary Mark Papa of Centennial Development (CDEV-NYSE)—have also been saying this.

Every month-end, the EIA releases their Petroleum Supply Monthly (PSM) report describing oil production, imports and exports, movements and inventories.  Note that this report has a two month lag, has more direct data, and is therefore a lot more accurate.

After looking at previous reports, we found the EIA has revised crude oil production downwards (overestimated) eight of the last nine months in 2017. This goes against the recent trend—because actually, the EIA has been consistently under-estimating US oil production since 2012.

In fact, the most recent PSM—which reported September data—revised  production upwards 131,000 bopd, but the August data reported the largest downward revision in the last decade.  As you can see from the chart above—we are still in the largest period of downward revisions since 2008.

So in one sense, Hamm & Papa are correct.  And it was that data-point that made me dive down this rabbit hole. To determine the accuracy of the EIA’s estimates, my team calculated the difference between the Weekly Petroleum Supply Report (WPSR) and the monthly PSM figures to find revisions.

They made an average of weekly numbers for each month—to better compare apples to apples—and then the WPSR data was subtracted from PSM to find the revisions. (Revision = Weekly – Monthly)..

Before 2012, the revisions were close to equal—up and down. But since January 2012 the revisions have been overwhelmingly upward—as weekly estimates continually underestimated crude oil production.

The only other time we saw the revisions with weekly data overestimating production was from October 2013 to February 2014.

How Accurate Is The EIA Data?

The short answer is: Very Accurate

The average historical revisions show The EIA has underestimated production by 102k b/d and 66k b/d per month since 2012 and 2008, respectively. Average revisions are seen in the third column of Figure 2.

Figure 2: EIA Accuracy Over Time

Source: EIA, Author Calculations

Figure 2 shows average revisions and average absolute revisions from 2008. In 2011 and 2013 the average revisions were low enough to conclude the EIA was really quite accurate in the weekly data–the WPSR.

But, the absolute revisions were much larger since the EIA simply overestimated and underestimated by similar amounts. These years show why absolute revisions are a better metric to evaluate accuracy than just average revisions.

The absolute revision from 2008 to present is a paltry 129,000 bopd.  We are talking about millions of barrels per day over years of analysis…that 129,000 bopd is basically nothing. This small revision proves the EIA’s weekly predictions are pretty darned good.

This absolute revision is less than 2% of oil production, so it’s small, but obviously there are fluctuations of higher and lower revisions. When looking at an almost 10-year average, the true volatility may be missed.

And then we have times like the last three months, where we just had the largest downward revision on record. The weekly estimates can miss.

To assess the accuracy of the monthly PSM data, we compared it to the yearly Petroleum Supply Annual (PSA) which is the final EIA report and will be assumed to be official data. The absolute revisions to the PSM have been less than 0.5% since 2008. In other words, the PSM is very accurate.

BACKGROUND–METHODOLOGIES

After explaining all this in the most simple language we could muster, it’s worth discussing how the numbers are originally generated by the EIA. The WPSR is released each Wednesday presenting the data from the prior week (five-day lag time) providing the source for US Oil supply and storage headlines. Seven supply surveys administered by the EIA at key points along the petroleum production and supply chain collect data from a sample size of over 90% of volume by region.

Since the EIA does not survey for crude oil production data each week, the EIA uses Short-term Energy Outlook (STEO) model estimates to help describe the full crude oil puzzle. Weekly crude oil production numbers are fully modeled estimates utilizing lagged data.

At the end of each month, the Petroleum Supply Monthly is released for the reporting period two-months prior. i.e. The September production report will be released at the end of November. The EIA calculates production in the PSM by distributing the EIA-914 survey to well operators who cover 85% of oil and gas production for each state/area.

This typically equates to a coverage more than 85% of oil and gas production tending to gravitate towards 90%. The PSM provides a more accurate depiction of the current crude oil production picture, albeit two months lagged.

The EIA claims a 98-100% response rate on the monthly surveys distributed to operators. The report “Accuracy of Petroleum Supply Data” is released to describe this response rate. However, no current or historical versions have been found for reference.

Final statistics from the PSM data series are published in the Petroleum Supply Annual, which is released in August/September each year. Monthly supply data are reviewed throughout the year and some estimates may be replaced with newly available or resubmitted respondent data in the PSA. The 2016 PSA was released in September 2017. The PSA revises the data from the year prior to the most recent release which effectively means official data requires a 20-month lag time. The revised PSM data is the most accurate historical information possible. PSA data prior to January 2016 is assumed to be official.

MONTHLY CRUDE OIL PRODUCTION ACCURACY

Where can the PSM miscalculate crude oil production? The PSM is still a “best estimate” due to state reporting agency time lags for data which could take up to two years to be reported. To account for the production not surveyed and submitted, the EIA uses models based on an average of the most recently reported month with full data and the 5 months prior, or a 6-month trailing average. Figure 3 shows the minimum state lag for data recovery.

Oil and gas operators producing less than 500 barrels per day aren’t surveyed, even if the operator is more than 85% of their respective state. The 914 Methodology states, “Very dynamic events can cause the [EIA-914 model] to behave abnormally and, particularly when combined with long time lags in the state data from DI, the model may deviate from reality. For example, the rapid development of the Haynesville shale in Louisiana caused a change in the State production trend that, in turn, caused the method to overestimate for a short time late in the 2000s.”

In other words, rapid development of a shale play may lead the EIA to overestimate production as the play returns to a more sustainable production growth rate.

The PSM has proven accurate over the long-run in comparison to the PSA. The absolute revisions have been 19k b/d per month since 2012 and 21k b/d since 2008. These figures are much lower and less volatile than the PSM revisions of WPSR estimates, and are included to show the PSM data isn’t perfect.

If history proves to be accurate going forward, the PSM is a very accurate indicator of US crude oil production.

Figure 3: EIA-914 State Lag Data

Source: EIA-914 Methodology

CONCLUSION

1. The average revisions seen in this report are smoothed to the point where true volatility (over a really short period of time) may be overlooked.
2. Weekly oil production numbers need to be understood as a modeled estimate with absolutely no current weekly hard (actual) data.
3. The first production data received by the EIA is released in the PSM reported with a two-month lag.

Having said that, the PSM has proven to be a very accurate predictor for the actual production released in the PSA.

What does this mean for the current state of US oil production? I’m not sure you can reach any Big Conclusion out of this data to answer that.

The data does show a historical skewness towards underestimating crude oil production. However, the WPSR estimates have overestimated production in seven of the eight months reported in 2017 and year-to-date 2017 data has shown the highest average overestimation in production since 2008.

The most recent (September) crude oil overestimation of 293k b/d was the largest single month downward revision since 2008. US crude oil production has been underperforming the EIA’s forecasts, but is still growing.

It is very unusual to have the EIA overestimating production this much—because overall, the EIA is very accurate.

EDITORS NOTE: That was a complex story wasn’t it?  Here’s something simple–a great oil stock with the highest Free Cash Flow percentage I see, increasing production, paying down debt and increasing shareholder value.  Now that OPEC has given oil stocks the green light, it’s time to look at My #1 Oil Stock – Click HERE to find out the name and symbol–RISK FREE
Keith Schaefer

A determined James Stafford of OilPrice.com just busted wide open an oil industry information cartel that has existed for decades.

Most investors look at WTI and Brent prices at Bloomberg or CME Futures, and figure the oil price is in the public domain.  You would be about 2% correct, because there are hundreds of different grades of oil, and hubs where it is bought and sold.  And they all have different prices.

Since the age of oil began until a few months ago, most real time oil prices were jealously guarded by marketers, who used it to their advantage in the daily multi-billion dollar physical oil trade.

But I’m going to tell you the story of how Stafford and his small team made 18 months of calls, cajoling and ultimately paying for an amazing service you now get FOR FREE.  It’s a true David vs. Goliath story.  And just like in the Bible, the little guy won.

What they have assembled to date is remarkable, and free.  You can access it through the link below:

https://oilprice.com/oil-price-charts

This is an incredible and unprecedented collection of information available for the public.

Stafford says that the feedback he has received has been exceptional.  With no marketing effort the oil price page is already receiving 40,000 visits daily.

It was an 18 month quest to democratize the world of oil pricing and bust the information cartel that has existed for decades.

A Simple Question – With No Easy Answer

Stafford’s quest started well over a year ago when he received a phone call from a reporter working for the Wall Street Journal.  The journalist wanted help finding a simple piece of information.

He was writing an article about the African oil industry and simply wanted to know the current price for Bonny Light crude oil (the main benchmark price for Nigerian crude).

Now remember, this is a Wall Street Journal writer with access to an incredible network of contacts and research.  This was not a casual retail investor sitting at home with pedestrian internet search skills and no industry contacts.  You would expect that finding the current price for Africa’s main brand of crude for a Wall Street Journal writer would be a simple internet search or phone call away.

You would be wrong.

The Wall Street Journal writer not only couldn’t find the current price for Bonny Light but the best he could do was get a price from six months ago!

We were passing information around faster with the Pony Express 150 years ago.

The trouble that the Wall Street Journal writer was having surprised Stafford, who then realized that he too couldn’t get access to the current price of Bonny Light.

As the founder of the very popular website OilPrice.com, not being able to find a price for a globally important type of crude did not sit well with him.

So he put his head down and got to work.

Information Held Hostage – The Ransom…

$30,000 Per Year

The internet has made information available to everyone…..with ease.

Nowhere is that more true than in the investment world.  I can tap into any SEC filing of any company within seconds.  It wasn’t that long ago that I would have had to request that information by telephone and wait to receive it by mail.

The internet has sent the encyclopedia the way of the dodo bird, ruined many a local newspaper and made the world a much smaller place.

It has also levelled the playing field in many cases, especially when it comes to investing.

When it comes to obtaining global oil price information however the internet has done nothing.  We are still completely in the dark.

Your first inclination may be to disagree with me.  You know that you can tap into the current (or historic) price of West Texas Intermediate or Brent crude any time you want.

What you are missing is that those are just two oil benchmarks out of hundreds — thousands likely.
Generally people believe that oil is a single completely indistinguishable, homogenous substance.  A barrel of oil is a barrel of oil is a barrel of oil.

That is not the case.

In its natural unrefined state crude oil differs in consistency and density from very thin, volatile and light oil to very thick, almost solid heavy oil.  It also differs in color with all kinds of shades from pitch black to a light golden yellow.

Each place where oil is found has very unique properties when it comes to volatility, viscosity and toxicity.

In Canada alone there are north of seventy different oil blends.  You read that correctly….I said seventy!

Knowing the exact blend is essential for the refinery process which has to account for the exact chemical and viscosity of the oil being processed.

Stafford knew that if couldn’t find pricing for a major type of crude like Bonny light that there were countless others that would be even hard to get.

His quest quickly led him to a discovery.  The only place to obtain a fairly complete set of current oil price data required a subscription—of $30,000 to $50,000 per year.

These sources knew they had the upper hand over people who had to have that data, and they exploited it.

Even that expensive cost the oil price info wasn’t complete.  It involved receiving only an end of day price for the various source of crudes – nothing real time.

This just motivated Stafford more. His focus now was on finding a way to open up the world of oil prices, to make the information available to everyone.

But it wasn’t easy, and it certainly wasn’t cheap.

It took Stafford and his team almost 18 months of making phone calls, getting rejected, making more phone calls – over and over again.

When he found the right people they were often reluctant to release the information for fear of ruffling the feathers of senior management.

Stafford ultimately succeeded simply by knocking on enough doors across the globe to find enough oil industry people who were sick and tired of this oil price information being held hostage.  Like Stafford these were people who felt that there should be transparency with respect to this information
Stafford will be out of pocket by a couple of hundred thousand dollars per year in order to secure the continued contractual commitments to supply this data.

The Result – Global Oil Price Information

For Everyone (Finally)

Stafford and his team aren’t done.  They are still making calls, sending e-mails and adding different blends to their pricing list.  There are a few blends that he knows they are still missing but are incredible hard to get ahold of.  Certain OPEC blends in particular have been hard to pin down.

Well done Mr. Stafford.

Keith Schaefer

Talk about a business failure!

Since 1888 the Texas Pacific Land Trust (TPL-NYSE) has been trying to wrap-up operations and go out of business.

That is 129 years of not accomplishing what seems like a simple goal.

It’s shameful really ;-).

If it is any consolation (and I’m sure it is), one thing Texas Pacific does do well is–making shareholders money; a lot of money.

This has been especially true over the last decade. Ten years ago Texas Pacific Land Trust–which is a regular corporation, not an MLP or royalty trust–was trading for $25 per share.  Today those same shares trade hands for more than $400.

That would be a one, two, three…….sixteen-bagger by my estimation.

Even the 2014 oil crash could not stop this company.  Texas Pacific Oil Land Trust shares have doubled since 2014 despite the price of oil being cut in half.

This has to be the greatest story of the shale oil boom that nobody has heard of.

So how did Texas Pacific do it?

A Going Out Of Business Sale Since 1888!

You remember 1888 don’t you?

That was the year that Thomas Edison filed a patent for the Optical Phonograph (the first movie).  The year when incumbent US President Grover Cleveland lost his re-election campaign.  The year when Jack the Ripper terrorized the city of London England.

1888 Incumbent President Grover Cleveland

Image Source: Wikipedia

Texas Pacific came into being on the bankruptcy of the Texas Pacific Railway.  The railroad had previously issued bonds to pay for the construction of a rail line to west Texas to connect with Southern Pacific’s line.

The collateral (security) for those bonds were 3 million acres of west Texas land which the state of Texas had granted Texas Pacific to incentivize the building of that rail line.

The rail line to the west was completed but Texas Pacific ran into hard times.  Flooding in Louisiana and crop disasters in Texas hit cash flows and forced Texas Pacific into bankruptcy.

When that happened the bondholders received the collateral that they were owed in the form of shares of the Texas Pacific Land Trust.

Texas Pacific Land Trust was actually not meant to be a long-term going concern!  It was meant to be a temporary vehicle from which the bondholders (now shareholders) were repaid some of their principal.

The trustees appointed to manage the trust were given three simple instructions:

Step One – Sell the land

Step Two – Repay the bondholders (now shareholders)

Step Three – Liquidate the trust

Pretty simple right?

The one specific instruction the trustees were not given was–a timetable.  An omission for which I bet some great-great grandchildren of the original bondholders are now very thankful!

Fast forward 129 years later and these guys are still hard at it winding up the Trust. Don’t rush yourselves fellas!

Few Shareholders, No Analyst Coverage, But A Whole Lot Of Land

If you are looking to attend a Texas Pacific Land Trust session at an oil and gas conference you will be disappointed.

They won’t be there.

You aren’t going to be able to read an analyst report on this company either.  Nobody follows them since there are no investment banking fees to be earned here.

Even press releases from these guys are few and far between.  They announce quarterly earnings and that’s it.

The corporate website is functional and nothing more.

There is an amazing lack of attention paid to a business that is one of the ten largest landowners in the United States.

Originally in 1888 Texas Pacific started off with 3 million acres and the objective of selling it.  At the end of December 2016 the trust still had 887,553 acres located in 18 counties in the western part of Texas.

Here is the map of exactly where that remaining land is from the trust’s 2016 annual report (focus on the dark blocks):

Source: Texas Pacific Land Trust 2016 Annual Report

If you are an oil and gas investor those dark blocks that indicate the trust’s surface acreage likely made you sit forward for a closer look.

The majority of that land is located in Culberson County, Reeves County and Loving County.  That would be the very core of the Delaware Basin portion of the Permian and extremely coveted acreage.

The Trust does continue to sell land, but at a very slow pace.  In 2016 total land sales amounted to 774 acres.  It would be hard to argue at this point that the trust isn’t fulfilling its fiduciary duties by holding onto that land and reaping the rewards that come from it.

Those rewards would be oil and gas royalties that Texas Pacific earns from leasing its acreage to Permian oil and gas producers.  Since the Delaware Basin has taken off the amount of production upon which Texas Pacific earns a royalty has also soared.

Texas Pacific’s royalty barrels have increased fivefold since 2012.

Source: Texas Pacific Land Trust 2016 Annual Report

As a royalty owner the Trust–of course–has extremely wide profit margins.  Cash comes in and very little goes out to pay expenses since it only takes eight people to run this business.

Full year 2016 revenues were $59 million and net income before taxes was $54 million.  All but $5 million of the cash that came in the door turned into a profit for shareholders.  Really, the only significant expense was $17.8 million in income tax.

Net income before taxes for the first nine months of 2017 was $85 million more than double where it was in 2016 on higher oil prices and higher production.

Most of the free cash that this high margin business generates goes back to shareholders–but in the form of share buybacks.  More than 17% of the Trust’s outstanding shares have been retired since 2010.

The company has no debt and roughly $70 million of cash on the balance sheet.  There is also a small dividend.

A New Trick For This Old Dog?

Texas Pacific Land Trust has been a great story and will continue to be as the interest in the Delaware is only increasing.

There is potential for another twist to the plot.

Last June in a very subdued two paragraph SEC filing, Texas Pacific said they were starting a new subsidiary called Texas Pacific Water Resources, LLC.  The plan for this company is to provide full-service water offerings to operators in the Permian Basin.

Services provided by this new company would include water sourcing, treatment and recycling, as well as associated infrastructure construction, disposal and even well testing services.  Leading the business will be Robert Crain who led the development of EOG’s water resource programs across the Eagle Ford and Permian basins.  That’s a pretty good resume!

As you may be aware, water is a big part of horizontal drilling and multi-stage fracturing.

With 887,000 acres of land Texas Pacific owns the water rights for a massive portion of the Permian.

Could this be a huge new revenue source for TPL-NYSE?

The investment firm Horizon Kinetics was onto the Texas Pacific Land Trust story years before anyone else, having owned shares since 2011.  Horizon now owns more than 20 percent of the outstanding shares of the Trust.

In Horizon’s second quarter investor letter this year the firm made a few observations about the potential for the new Texas Pacific Water Resources business.

“The water actually used in drilling generally costs $0.50 to $1.00 per barrel or more, with trucking costs often multiples of that.

Texas Pacific Land Trust, via its surface acreage, owns the ground water and water rights associated with that land.
This is an additional revenue producing resource that has yet to manifest itself in the Trust’s financial statements.

Next, along with every barrel of oil that comes to the surface, comes about 4.5 barrels of “produced” water, which is non‐potable, often containing toxic elements.

Something must be done with it. 

The price to dispose of it by truck is said to be about $1 to $2 per barrel of water; if 4.5 barrels of water are received per barrel of oil, the cost of disposal by this method is about $4.50 to $9 per barrel of oil. This is a very high additional cost of production.  Water disposed of by pipeline, is said to cost about $0.50 to $1 per barrel.  If recycled, for re‐use within the oil field operations, the cost is said to be about $1 per barrel.  

We believe Texas Pacific Land Trust will engage in water recycling, as well.”

Horizon’s conclusion is that the water business represents a free option embedded within the Texas Pacific Land Trust Business.  I would agree with that.

When thinking about Texas Pacific’s valuation investors need to be aware that this is not an MLP like Viper Energy where all profits are distributed to shareholders and tax isn’t paid at the corporate level.  Texas Pacific pays income tax, over $17 million in 2016 and will pay more than double that in 2017 on higher net income.

For 2017 it looks like Texas Pacific is going to generate after tax net income of over $80 million and cash flow from operations of roughly the same.  Against that Texas Pacific has a valuation of over $3.1 billion which would be 38 times earnings or cash flow from operations.

That seems steep, but you have to remember that the company is going to double earnings in 2017.  You would certainly be paying every bit of that 38 times earnings for a tech company that is growing earnings by 100 percent.

Whether or not this is a good price will also depend a lot on what happens to the price of oil in the coming years.  The other key variable the speed at which production rises in the Delaware Basin.

One thing that is certain is that it looks like these guys are going to continue failing at their objective of going out of business for a long time to come.

EDITORS NOTE: My #1 Oil Stock is not $400 like TPL. Nor will my #1 Oil Stock ever trade close to that…because it’s so profitable at $50 oil that I’m sure someone will buy them out first.  This stock is a Free-Cash-Flowing Machine, with some of the lowest cost production in North America, run by a team who has made shareholders HUGE money in their last two companies. Get the name and symbol on this rocket right HERE.

Keith Schaefer

Tell me—what do Tesla, Apple, and Samsung have in common?

1. They are global tech leaders
2. Their stocks have done incredibly well in the last 5 years
3. They all use cobalt

And as a group, they are about to cause one of the Great Commodity Squeezes of all time—in cobalt.  In fact, it’s already happening.  Look at this price chart of cobalt:

That is a bullish chart.  Just like the lithium price chart, there has been no meaningful pullback at all since a massive price increase in the last year.

The Great Cobalt Squeeze so far is fundamental, as I’ll quickly explain.  But the most intriguing part—and probably the most lucrative—will be political.  And this is happening right now too—it’s coming from the Apples, Samsungs and Teslas of the world.

I think the tight fundamentals of the cobalt market right now are well known to this audience.
Battery demand from Electric Vehicles (EVs) just rises and rises; cobalt supply will struggle to keep up.

In 2016 the battery market ate up 48,000 tonnes of cobalt. By 2020 that will have ballooned to 75,000 tonnes – 50% growth in three years.

By 2025 the battery market will need 123,000 tonnes of cobalt.

Yes, battery cobalt demand is going to grow 150% in just eight years.

As a result, cobalt production has gone almost straight up in the last 20 years—because it had to.

Fundamentally, the cobalt market is tight already.

And it’s getting tighter, thanks to a report by Amnesty International and the response by Fortune 100 Companies.

In February 2016—just as the lithium and cobalt stock market boom started—Amnesty International issued a report that documented in print and video that thousands of child laborers worked in dangerous conditions to supply a meaningful chunk artisanal cobalt supply in the DRC.  And they were able to trace it through the supply chain to companies like Apple, Samsung and Daimler.

These companies who were named in Amnesty’s report responded—and are now very aware that both investors, the media and society in general are watching them.

They are pressuring their supply chain—as are the American and Chinese governments—to only use “ethical” cobalt, that has no unsafe or unsavory business practices involved.

This is what is causing The Great Commodity Squeeze—and it’s in cobalt.

Asian, America and European companies are now working in the DRC want to source ethical cobalt.  In fact, they are desperate for it. The DRC government is giving them big pressure to prove—to get proper papered certification—that they are using ethically sourced cobalt.

And surprise surprise, that’s hard to do.

And you know what the ironic thing here is? There is actually spare capacity at the refineries in the DRC that produce cobalt!

Yes, cobalt demand is outstripping supply but refineries are running half empty because their owners can’t find enough legitimate ore.

The refiners can sell every pound of cobalt they produce, because the market is hungry. But lack of legitimate ore limits what they can produce – and is creating the Great Cobalt Squeeze.

That is a sure sign that Amnesty International’s campaign is working. And that’s awesome. But how does the industry—who desperately need supply—deal with this?

Well, I think I found The Company with the solution.  And not only is this Company going to be A Major Stock Market Win—it’s one of the best feel-good stories in the EV Trade; indeed in all of energy and mining globally.

This company is positioned to be THE outsourced group who develops ethical cobalt within the DRC.  They have a good team, who have been on the ground in the DRC for years.  They have a good plan—and they’re already working it.

That plan involves creating ethical cobalt and selling it to a hungry group of local competitors–and there are at least 10–in the cobalt refining sector in the DRC.

As the Market learns of this team and their plan, there will also be a lot of competition for the stock.  I’m going to give you the name and symbol of this soon-to-be-sought-after investment on Thursday.

Next year the International Energy Agency (IEA) expects global daily oil demand to exceed 100 million barrels per day.

That is 700 million barrels per week, roughly 3 billion barrels per month and 36.5 billion barrels over the course of a year.

At $60 per barrel that is a $2.2 trillion market.

The numbers are absurdly large.

Even more absurd?

The fact that the global price for oil is now fully in the hands of one 33 year old man.

Image Source: Washington Post

Finally Something To Talk About Around The Water Cooler On Monday

I don’t care how busy your weekend was you’ve got nothing on the Saudi Crown Prince Mohammed bin Salman.

What did Prince Mohammed get up to?

As part of what was called a ‘crackdown on corruption’ Prince Mohammed fired key senior Saudi ministers and had dozens of Saudi Arabia’s richest, most influential men arrested.

Included among those arrested were at least a dozen members of the current ruling family, globally recognized billionaires and key members of the Saudi business community.

In doing so Prince Mohammed has abandoned 70 years of a collective Saudi ruling policy that was designed to create stability.  He rounded up his biggest threats, locked them away and now has completely consolidated power for himself.

The current Saudi king is Prince Mohammed’s father.  Officially that puts the Prince second in line, but with the king in very poor health everyone knows Prince Mohammed is already in control.

What job did you have when you were 33?

Historically the ruling Saudi king has always had formal power. However the king was expected to (and did) consult with the other senior royal family members and govern the nation through consensus.

For the first time all three Saudi power ministries (defense, interior and National Guard) are under the control of one branch of the Saudi royal family.

Bold doesn’t begin to describe Prince Mohammed’s actions.  The fact that was willing to do it in such an open manner for the entire world to see is amazing.

Vision 2030 – Maximizing The Value Of Saudi Aramco Is Key

In April 2016 Prince Mohammed unveiled his “Vision 2030” plan for Saudi Arabia.

Vision 2030 aims to reduce the Saudi dependence on oil, diversify its economy and develop public service sectors such as health, education, infrastructure and tourism.

It is an ambitious undertaking and is going to require a lot of money.  Hundreds of billions to be sure.

A centerpiece for the plan is monetizing the country’s crown jewel, the national oil company Saudi Aramco.  As of today the first step involves Saudi Arabia planning to sell a 5 percent stake in Saudi Aramco through an IPO in 2018.

For Prince Mohammed it is crucial that the market values Saudi Aramco as richly as possible in the IPO.

In order to do that, the Prince needs the price of oil to be strong.

Fortunately for him, he can make that happen.

At the start of this year Saudi Arabia took production down from 10.7 million barrels per day to 10 million barrels per day.  Production has remained down since the initial cut.

With OPEC partners contributing cuts of their own global oil inventories have decreased significantly in 2017.  Those decreases really started showing up in the United States this summer which has finally put a bid under the price of oil.

With the Saudi Aramco IPO likely to occur in 2018 you can bet that Prince Mohammed is far more likely to tighten the oil market too much than he is too back off production cuts too soon.

That could make the next 6 months a rewarding stretch for oil sector investors.

He Is A Man Of Action – Which Makes These Words Concerning

It certainly appears that a very new Saudi Arabia has arrived.

The old Saudi Arabia was one that preferred caution over confrontation when it came to international relations.  The old Saudi Arabia focused on stability at home and kept Saudi royal family issues private.

Prince Mohammed’s Saudi Arabia is very different.

He was behind the military campaign against Houthi rebels in Yemen that began in March 2015.  That campaign still drags on costing the Saudis $200 million per day, has killed more than 10,000 people and left millions of people in Yemen facing famine and a cholera epidemic.

It was a bold move, but perhaps not a very good one.

Prince Mohammed’s involvement in Yemen is due to the Houthi’s being aligned with Shi’ite Iran.  Having ties with Iran is also his motive for leading a diplomatic campaign to isolate Qatar.

It is Islam’s civil war, Sunni (Saudi) vs. Shia (Iran).

The division dates back to 632AD and a dispute over succession following the death of the Islamic prophet Muhammad.

The Prince is a man of action, which has to make a person nervous about what he is saying about Iran.

Image Source: Almasdarnews.com

This week Prince Mohammed called the Houthi firing of an Iranian supplied missile at Saudi Arabia an “Act of War” on the part of Iran.  The Prince then stated that such an act would not go past without a response.

Those are bold words when you look at the tale of the tape.

Iran is much larger with a population of 83 million against Saudi Arabia’s 32 million.  Iran’s military personnel rings in at close to a million while the Saudi military has a quarter of that.

Saudi’s air force is larger, 709 military aircraft to Iran’s 477.  Both countries have a similar number of tanks with 1,100.

Iran has superiority in long range artillery though and is certainly more battle hardened, especially the 125,000 members of Iran’s Revolutionary Guard.

It is a war that everyone will lose.

For years the world has been able to rely on Saudi Arabia to be the calm head in this region.  With no calm heads remaining what will the future bring?

With Prince Mohammed now fully in charge one would have to think lower oil prices in the short term won’t be one thing.

EDITORS NOTE–If Prince Mohammed is smart, the oil price is going higher.  If he’s dumb, it’s going a lot higher.  Oil stocks are moving up–don’t miss out! If you stay disciplined with the low cost producers that turn into cash flow machines as oil moves up, you can enjoy great capital gains and sleep at night.  Get the name and symbol to my #1 Oil Stock–a cash flow machine even at lower prices...right HERE.

Keith Shaefer

Misunderstood stocks give investors the greatest gains.

Nobody understood ethanol when I bought Green Plains Renewable Energy in 2013 at $8.50.  The drought of 2012 had sent corn prices soaring, and sent ethanol stocks into the ground.

Everyone hated them.  Investors had been burned—like 3^rd degree to their entire wallet.

But there were so many signs the turnaround was happening.

The USDA said the drought would decline dramatically in 2013 and the corn crop would be great.

Ethanol stocks started moving.  Every updated crop report sent GPRE higher—in 18 months it hit $45—a 5 bagger.

Oil is now that misunderstood trade.  Nobody believes.   Just yesterday, two of my technical gurus called for a quick and sharp pullback in oil.

But just like ethanol in 2013, the signs are there for all to see…but Market Psychology hasn’t changed yet.

I’ve been long oil for 6 weeks…and the stocks are just starting to move.

The one that will move the most…that is now an incredible Free-Cash-Flowing Machine at $55 WTI…is ripe for the picking.  Get the name and symbol, risk-free, by click HERE.

Keith Schaefer