Occidental just paid record Permian prices—but remember the Bakken?

By
Keith Schaefer
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Will Occidental Petroleum’s $2 Billion Permian Be Any Better Than The Company’s Disaster In The Bakken?

Occidental Petroleum (OXY-NYSE) just paid the highest price per acre in Permian Basin history at $50,000 per acre to get into that play—and that’s after backing out production.

Shareholders had better hope that turns out a lot better than OXY’s foray into the Bakken—which cost them nearly $2.5 billion.

They have a right to be nervous. OXY management built a big, shiny, new office in North Dakota.  They upped the rig count immediately.  But in less than three years—and $2 billion later—they were looking for anybody to buy them out of it.

Here Is How You Make A Lot Of Money Disappear – Fast

On December 10, 2010 Occidental Petroleum announced it was jumping into the Williston Basin in North Dakota with both feet.

If you will recall, December 2010 was not exactly a buyer’s market for Bakken assets.  The price of WTI oil at the time was $90 per barrel and North Dakota was booming.

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Companies were moving quickly to get a piece of the pie before it was gone.  The Eagle Ford was just barely on the radar and the fact that the Permian would turn into several distinct (and massive) horizontal oil plays was completely unknown.

It was get into the Bakken or bust.

Occidental spent $1.4 billion for 180,000 net acres, bought from a private seller.

Back then, that acreage had just 5,500 boe/d of production.  OXY’s plan was to grow it six-fold to 30,000 boe/d over the next five years.

With plans to become a serious Bakken player, Occidental planted long term roots in North Dakota building a brand new shiny 21,000 square foot office.

Occidental quickly went to work on the new acreage ramping up its rig count immediately to 8 and then to 13 by the end of 2011.

While it is hard to get the exact number pinned down since the company didn’t consistently disclose it, it appears Occidental spent upwards of $2 billion developing the Bakken from 2011 through 2014.

It was clear that by 2014 the shine had long since come off the play for the company.

As early as 2013 OXY was concerned with high service costs in North Dakota and was making some noise about selling.

It was a decision that the company should have jumped on.

By the fall of 2014 Occidental was completely open about the fact that it was ready to sell its Bakken assets.  Analysts at the time guessed the assets would fetch close to $3 billion.

With the $1.4 billion up-front investment to get into the Bakken late in 2010 plus the $2 billion or so that the company had since invested a $3 billion exit price wouldn’t be terrific….but it wouldn’t be a disaster either.

You know what happened next.  Oil crashed and didn’t come back.

With the entire industry hunkering dow—that $3 billion price was gone.

In October 2015 Occidental sold those Bakken assets to private equity firm Lime Rock Resources for just $500 million.

After five years of work and over $3 billion of money spent Occidental shareholders watched as the company received 15 to 20 cents for each dollar that had been spent on and in the play.

By anyone’s definition Occidental’s Bakken experience was a disaster.

This Permian Investment Should Work Out Better…..Maybe

Occidental could not have picked a worse time to spend big dollars on Bakken acreage.  They bought when the land grab was in full swing and acreage prices were close to their peak.

They didn’t just get the timing wrong.  They also settled for a less than ideal location.

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Source: Occidental 2011 Presentation

The Bakken land that Occidental acquired was in southern Dunn County.  That is south of the over-pressured core of the play that is located in Williams, Mountrail and the northern portion of Dunn counties.

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Source: Continental Resources

That $2.5 billion Bakken loss was due partially to the oil price crash.  But it also didn’t work out because the company paid too much for the particular land that it acquired.

All this history makes me wonder about the timing of the $2 billion Occidental just spent on acquiring more Permian acreage.  Is this a repeat of throwing big dollars at land at the peak of the market?

I mean the Permian is clearly H-O-T right now.

The good news for OXY shareholders in this case is that the company is already a huge Permian operator so it should know the quality of the acreage it is getting very well.

I would note however that these Permian operations of Occidental’s mostly date back to the pre-horizontal era and that the company was not early to ride the horizontal wave in the region.

So it’s not like Occidental was early to the Permian horizontal party either.

On the surface—with $2 billion being spent on just 35,000 acres—the deal certainly looks more than a little expensive at a gaudy $57,000 per acre.  Even assigning a reasonable price to the 7,000 boe/d of production that comes with the land we still see the deal clocking in at close to $50,000 per acre.

Those are incredibly high prices and Occidental is the only company paying them.

Occidental has lots of infrastructure already in place and sees 700 future drilling locations on the acquired land.  That works out to $2.857 million per location—which is again a record. That could help justify the purchase price over time.

Whether it can turn this price into a bargain…I just don’t know.

I’d Rather Own The Companies That Had The Acreage Before It Got Hot

I’m a big believer in the Permian and think that the market likely still doesn’t understand just how much oil the region has left in the tank.

What I’m not interested in doing is betting on companies that are coming in now and paying these kinds of prices for land.

The big winners here are going to be companies like Resolute Energy which was in the Delaware Basin portion of the Permian before the region took off.   I believe that is the true way to value creation in this business.

Generating attractive returns drilling horizontal wells is hard enough.  Having huge up-front land costs makes it that much more difficult.  Hopefully Occidental was factoring that into the $2 billion it just plunked down in the Permian.

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This Energy Market Desperately Needs Supply

By
Keith Schaefer
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The world needs a lot more lithium mines, after Toyota said on October 29 that it has mastered the Lithium-Ion battery.

And that’s a problem for the fast growing Electric Vehicle (EV) market, because even though finding lithium is relatively easy, getting a mine into production is not.   Adding Toyota’s huge global demand to an already tight market…will make lithium investors very happy.

Toyota is one of (and often is) the largest car companies in the world, and certainly has the most hybrid/electric cars–in April 2016 they surpassed 9 million sold.

They are now focused on lithium for the next 9 million.  So if you think this is the most bullish chart in energy right now–and it is–you just wait.  I think we ain’t seen nothing yet:

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Lithium prices soared in the last year—more than quadrupling from $5,000 per metric tonne to a peak of $24,000/t.  This happened as the Market realized that lithium battery demand would ramp up huge in the next decade–and the market realized lithium supply could not keep up.

That kind of gain rarely holds and indeed lithium prices have cooled some since.

But the fundamentals remain very bullish.

Lithium demand is set to grow 80% in the next four years. The driver: Electric Vehicles (EVs).  In 2015 less than 1% of cars sold worldwide were EVs.  By 2025 that is expected to rise to 14%.

That would mean EVs alone will need more lithium in 2025 than the entire market needs today.

One factor driving demand is that better technology is reducing lithium costs dramatically—six years ago lithium batteries cost $1,400 per kilowatt-hour (KWH); today they are less than $400 per KWH, a steep 70% decrease that is expected to continue.

By 2022 an unsubsidized EV will be cost competitive with a traditional internal combustion engine car. And it will be cool to own one.  What does this all mean in terms of demand?

The market was 176,000 tonnes lithium carbonate equivalent (LCE) in 2015. It is expected to reach 347,000 tonnes in 2020 and 687,000 tonnes by 2025–a 260% increase in ten years.

Chris Berry is President of House Mountain Partners; an independent commodity analyst that services institutional clients, and a lithium expert. His estimates for needed new capacity are a bit lower but remain very bullish regardless: “We will need to bring one new lithium mine on-stream every year between now and 2025 to meet projected demand.” (Emphasis mine-KS)

One new mine a year!  Is that possible? Just like oil and gas, there is lots of lithium in the world – defined resources are enough to carry us for 460 years! – but lithium mines are notoriously difficult to build and operate.

That applies to both kinds of lithium mines, brine and hard rock operations. New mines often fail and operating mines regularly produce way below nameplate capacity.

Why?

  1. Because there aren’t many lithium geologists/metallurgists/engineers
  2. Because the world’s best brines are where water is problematic
  3. Because the world’s best brines are where permits are difficult to get
  4. Because it’s hard to raise money for an unusual metal with opaque pricing.
  5. Because lithium is an oligopoly, and the four companies in control, work to stop others from gaining market share.

Berry says lithium prices will remain strong because “demand will outpace supply ensuring a tight market and it is remarkably difficult to bring a new lithium mine on-stream.”

All those challenges mean only two of the 60-odd lithium projects around the world are expected to actually start producing this year or next and only another four have a chance of achieving production by 2020.

That leaves us with a very tight market.

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The yellow line shows base case demand. The bars show supply. You can see modest supply surpluses over the next few years and then supply has to push to keep up.

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The dark blue bars show base case lithium surpluses or deficits while the light blue bars show a bull case market–big deficits in supply. Either way, one thing is clear: there is not a lot of room to give.

This is a market that needs a (much) stronger production pipeline.

And there is the opportunity: the market needs some lithium success stories, a few companies that can assemble the right people, projects, and capital to feed that production need.

The bull market in lithium is early days—the 2nd or 3rd inning—but already the Market has changed, says Berry.

“What we need are management teams that can raise the capital to bring new mines on-stream…”

The stock market winners have been the teams building a great property portfolio.  The next set of winners will be the teams who can develop the right properties quickly–then permit and build the mines.

That has me excited about a new lithium company—one with prime assets, an award-winning geologist and a board that has built and sold junior companies before.  Now they are focused on lithium and are raising millions of dollars very quickly.

What’s more, the biggest catalyst of its short life is happening within the next 30 days.

You can throw a baseball from their property to a producing well at North America’s largest producing lithium asset.  They have the water rights.  They have the drilling permits.

This company will be getting back their own very first drill results within 30 days—setting the stage for a potential re-rating by the Market.

In two days I’ll give you the name and symbol—for free.

This Coal Stock is up 500% in a Week. Here’s Why.

By
Keith Schaefer
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Peabody Coal (BTUUQ-NYSE) is a CRAZY, HIGH-RISK trade.  This stock was up 600% this week at one point on Friday.  But it could literally be worth almost zeroon Wednesday morning, after they report their quarterly.

But it could also be on the way to $43, as I’ll explain.

Peabody Coal’s stock is already up 500% this week.  The reasons:

  1. Australian coal prices are soaring
  2. The company received some extra time to put forward its re-organization plan

peabody-bankruptcy
And here is a chart of Australian thermal coal prices:

australian-thermal-coal-prices
and here is met coal–even more impressive.

autralian-met-coal-price
On the surface, this is a story and a stock I would love—it has just come out of bankruptcy, NOBODY follows it, and it only has 18.5 million shares out for a company that has $4 BILLION in revenue.  That creates incredible leverage for shareholders, as the stock chart attests—it’s up 500% in one week!

And on the surface, investors could argue (and obviously are, given the share price move) that the stock is worth $43.  Skimming some quick data points shows me $482 million in debt against $1.274 million cash for a cash value of $792 million—which divided by 18.5 million shares = $42.81.   The stock is  trading for $10—a big gap that clearly some investors in the market believe should be closed.

peabody-etbida

Another way of saying that is that Peabody has a NEGATIVE Enterprise Value of some $618 million.

And certainly, the increased cash flow that COULD or SHOULD be coming from higher coal prices recently has investors warming up to this story stock quickly.

Peabody produces about 3.6 million tons of met coal in Australia and about 5.2 million in thermal coal.   They are easily picking up $100/ton in overall coal margins (between thermal and met) in the last quarter from Australia.

That’s $520 million in extra revenue, and most of that should go to EBITDA.  Met coal prices are also up, and could add another $200 million in EBITDA.  And keep in mind this increasing coal price is also lifting the Aussie dollar.

Powder River Basin coal is also up at least $2/t off the bottom a few months ago, so the 22 million tons Peabody produces there is generating an extra $44 million annualized.

prb-coal-prices

That all sounds great, eh?  But I don’t know what kind of negative EBITDA the company had before there.

AND…as it comes out of bankruptcy there is still a lot investors don’t know—like, how the arbitration on the $643 million pension liability will go in January 2017.

Though the bulls would argue that the increased cash generation in Australia could pay all that off…if coal prices stay up here.

I don’t know enough about coal to comment on that. In fact, I don’t know ANYTHING about coal.  I just know a good stock chart and some basic math…with one foot planted firmly in the air.

Before entering bankruptcy, Peabody had an UGLY chart…as most coal stocks did/do (are there any left?)

peabody-ten-year-chart
Peabody reports on Tuesday—there will likely be some more clarity on the state of the company then.  That kind of makes this a binary trade very quickly.

But it sure is interesting.

DISCLOSURE–I put a small amount of fun money into this and may trade it out Monday.

Huge Play. First well. Results Soon. Here it is:

By
Keith Schaefer
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Where should you drill for oil?

How about right beside a deposit that has produced 850 million barrels so far?

And what if you had one of the most successful teams in the history of junior energy drilling it—a team that has built and sold juniors before and already made hundreds of millions of dollars for shareholders?

I’m making that bet.  I expect the first update on this drill program when the company announces their next quarterly results in a few weeks.

Their last well was a gusher—several thousand barrels a day.  It paid out in just six months—at oil prices less than $50/b.  Every other junior producer is ecstatic with 18 month paybacks on their wells.

This drill program—the first in this new play right beside an 850 million barrel play—is a game changer for this company and this stock.  To me, this play has more impact even at $50 oil than anything I see anywhere in the world right now. CLICK HERE TO READ MORE

3 Charts Explain Why I DON’T Own Oil Tanker Stocks

By
Keith Schaefer
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I’m always looking to invest my money in oddball places in energy; subs-sectors that are outside the mainstream.  That would include areas like ethanol, which I’ve done quite well at, and technology stocks–where I have sometimes lost a lot of money.

Other examples include small oil and gas trusts, small refinery MLPs, downstream power stocks…wherever I can make money.  My line is–there’s always a bull market somewhere in global energy.

And avoiding the losers is just as important as finding the winners.  I did my semi-annual look at crude oil tanker stocks this week and….yuck.  Tanker stocks would be companies like Frontline (FRO-NYSE), Euronav (EURN-NYSE), DHT Holdings (DHT-NYSE) and TeeKay (TK-NYSE) among others.

The first thing I do is check their stock charts–if they’re still going down and not even started to base yet…then forget it.  I have no intention of guessing a turnaround.

DHT is a good example here, as it now has a very juicy dividend yield, with higher revenue and EBITDA lately.

DHT financials Q2 2016

So why does its stock chart look like this?

DHT 5 yr chart Oct 16

When a stock can’t even catch a bid with…decent financial numbers…there must be something wrong.

And there is.

Here are three charts that show how the increase in the number of tankers–those that are

a) working
b) at anchor
c) on order

And they’re all high and rising.  Pay special attention to c)–the number of new tankers on order recently has SOARED–setting the industry up for a potential massive oversupply in the coming 1-2 years.  The only chart I don’t have is the number of vessels being scrapped–which would mitigate some of this new supply.

Crude oil tankers in service Oct 2016

crude oil tankersr at anchor Oct 16

crude oil tankers on order 6 yr chart Oct 16

That last chart…kind of says it all.  Those ugly stock charts on tanker stocks?–that’s the stock market pricing in a rough couple years ahead for tanker stocks–now.

Those fundamentals with those stock charts mean that–for now–I can start checking out other sub-sectors for other long trades (these tanker stocks are still possible shorts, but I don’t do much of that) , looking for under-the-radar companies, or just under-followed (example–most ethanol stocks still only have 3-4 analysts following them at most).

Gotta find the next Resolute Energy–which went from $3-$30/share in just 3 months earlier this year for me and OGIB subscribers.

You could hear about it as early as next week.  Stay tuned.

Keith Schaefer

There is Less Than ONE Day’s Surplus of Natural Gas

By
Keith Schaefer
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Natural gas supply and demand fundamentals have changed in a major way.  In March there was way too much gas.  By November there may not be enough…at least at these low prices.

NOW is the time to position yourself to profit from it…..BEFORE the money starts flowing into natural gas producers.

For 21 consecutive weeks natural gas inventories have risen by less than what we would expect in a normal summer and fall.

Every week…less and less gas for months…and once there was Big Heat in August and September…North Americva used a lot more natgas than anyone thought we would.

The result of this: the enormous natural gas storage surplus is vanishing–quickly.  The chart below shows how the surplus over last year is plummeting.

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Back in March we had a huge amount of natural gas in storage.  It was absolutely a glut.  At the peak in March 2016 there was 1,014 billion–over 1 TRILLION–cubic feet more natural gas in storage than there was a year earlier.

Today that year-on-surplus is all the way down to a paltry 69 billion cubic feet…….and it is falling fast.  To put that into perspective, the US uses about 70 billion cubic feet a day right now–so there is slightly less than  one day’s worth of extra storage this year over last. 

Nobody would have imagined that inventories could fall this fast over the summer.  It is what will come next that is going to make things really interesting.

Last year the US had a very warm winter in the densely populated east coast.  This year it is expected to be MUCH colder.  And each really cold winter day can add 10 billion cubic feet of demand.  One day, 10 billion cubic feet.

That giant surplus of natural gas in storage is already gone.  Soon the small surplus could turn into a BIG deficit.  When it does the market is going to quickly reach a very simple conclusion based on two simple facts:

Fact One – Natural gas inventories are falling at an incredible rate

Fact Two – Nobody is drilling for natural gas anymore.

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There are 92 rigs drilling for natural gas in the United States right now.  That is down 94% from its peak and down 50% from just a year ago.

Everyone has bought into the idea that the country is going to be flooded with natural gas for decades to come.  But guess what…..if we aren’t drilling wells the production just isn’t going to be there.

We are going to need natural gas production and it isn’t going to be available.

The market is going to need to do what markets do.  It is going to provide producers with a shocking price response in order to motivate them to drill.

The rapidly vanishing inventory surplus tells us that supply growth is rolling over.  Our problem is that the production decline can’t be turned around with the flip of a switch.

When the Market figures this out investors and consumers will get a reminder of how volatile this commodity can be.  It has been a while since we have had such a reminder, but when the market suddenly gets tight it’s a commodity that can double, triple or more within months.

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Don’t Waste This Opportunity On A Mediocre Company

Right now, natural gas producers are in a lot of trouble from the last few years of very low prices.

A countless number of mid and small cap natural gas producers have gone out of business during this downturn.  Even the big natural gas producers like Chesapeake Energy (CHK-NYSE) and Southwestern (SWN-NYSE) are so weighed down by debt that they only focused on survival.

Any extra cash flow these companies get from higher natural gas prices will help repair their balance sheets…not grow production.

That’s why natural gas production will respond very slowly when the commodity price jumps.

As an investor you can smell that fact that there is a rare short term opportunity to profit here.  You’ve got your head wrapped around something the market hasn’t…that natural gas production can’t turn on a dime.

That is what good investors do.  While everyone else has their heads turned around looking at what has happened we are using our brains and figuring out what is going to happen.

Investment decisions are made by looking through the windshield….not in the rearview mirror.
So how do investors take advantage of this opportunity?

It’s  NOT by owning a company like a Chesapeake or Southwestern that is handcuffed by debt.  That is risky and not what a good investor does.  Now is the time to be selective, to really take advantage of what is about to happen.

We are going to want to buy the best natural gas producer to profit from this.  You owe it to yourself to make the effort to find the absolute best opportunity possible.

I make my business out of finding these opportunities and I’ve got the perfect natural gas producer to own right now.

Tell me if this is what you think an exceptional opportunity might look like….

  • A pristine balance sheet with a less than one time debt to cash flow ratio, even at the very low average 2016 natural gas prices
  • The lowest cash costs of any producer in North America–a fact you can check out
  • An absurdly large 50 year inventory of drilling locations for future growth
  • A fully aligned (i.e. they own a lot of stock) and proven management team
  • Will grow production by more than 20% in 2017–even if natural gas prices don’t improve

Low debt, rapid growth, lowest cost play and a great management team.   This company is a good investment at low natural gas prices and an incredible business at higher natural gas prices.

The good news for you is that you don’t have to take my word on this.  You can take look for yourself because I’m going to give you free access to my full report on this company.

This is the way I personally am playing what it about to happen to natural gas prices.

Don’t sit on your hands and let a very rare chance to get on the right side of a rapid commodity price move pass you by.  And please don’t waste the opportunity by owning a mediocre company.

All you have to do is…CLICK HERE..to read my report–RISK FREE–on this incredible natgas stock.

Keith Schaefer

Where are the Bakken leaders Spending Money? Everywhere Else

By
Keith Schaefer
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Is The Bakken oil play dead in this low price environment?

Continental Resources (CLR:NYSE) and EOG Resources (EOG:NYSE) were two of The Bakken pioneers.  These companies were early movers in the play and amassed big, core land positions–and today have significant production.

The Bakken is what initially put these companies on the radar of investors.

You sure wouldn’t know that if you listened to their most recent earnings calls, or took some time to look through their corporate presentation.

The Bakken seems to be the last thing that these companies are interested in talking about.

That silence is screaming at us what the Bakken is worth at $45 oil.

It’s hard for investors to imagine, because The Bakken didn’t just transform North Dakota’s sleepy economy.  The million plus barrels of daily oil production that it added impacted the global oil markets.  Investors saw junior and intermediate producers from there get bought out for a total of tens of billions of dollars.  It was The First Big Shale Oil Play–and a truly incredible story.

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Source: EIA

The growth of the oily Bakken, the gassy Marcellus and now the oily Delaware/Permian are the three biggest inflection points in US energy in the last decade.

But that was then, and this is now.  And now it doesn’t look so good for the Bakken

The Economics Don’t Compare

The industry now has four horizontal oil plays that can generate acceptable returns at $45 oil.

The Midland Basin, Delaware Basin, Alpine High–all 3 of them in the Permian in SW Texas–and STACK in Oklahoma all now have economics at $45 oil that few thought the industry could ever achieve.

Continental has two oil weighted plays.  One is the Bakken, the other is the STACK.  Continental’s SCOOP is a liquids rich gas play.

It is the Bakken that–for now–dominates Continental’s production and cash flow.

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Source: Continental’s Second Quarter Earnings Release

Continental has completely stopped putting any new Bakken wells on production.  The economics don’t justify it.

The company has wells that have been drilled (165 of them), but it isn’t interested in fracking them and producing them at these oil prices.

Almost all of Continental’s Q2 conference call was dedicated to discussion of the STACK and SCOOP plays.  The SCOOP and STACK also get most of the attention in Continental’s corporate presentation.  The Bakken doesn’t get its own slide until page 14.

That’s weird, considering Continental’s CEO Harold Hamm is the “Bakken Billionaire”.

The Last Micro-Cap in the Delaware Basin

I just updated subscribers Sunday night on how this tiny company could explode—this week!

CLICK HERE for details.

The presentation shows the STACK at being able to generate a 70% rate of return at $40 if Continental hits its 2016 targeted well cost of $9 million.  On 2015 drilling cost those wells generate a 40% rate of return at $40 oil.

Generally, when I’m investing in a tight oil producer I want to see a minum 70% ROR or IRR, which usually equates to roughly a 12 month payback on well costs.  I want to see 12 month paybacks.

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Source: Continental Resources

For the Bakken, Continental’s presentation shows much lower returns.  At $40 oil 2015 well costs have little to no positive return on the money spent.  Even at Continental’s 2016 targeted well cost the rate of return is only 20%.

Those returns by the way are half-cycle returns.  Nothing in there for land cost, for corporate salaries, for interest on Continental’s debt.  An oil company with those kinds of half-cycle economics has big problems.

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Source: Continental Resources

The picture doesn’t get all that much better $50 oil.  Continental’s best case for the Bakken shows a 40% half cycle rate of return and only a 20% rate of return with 2015’s drilling costs.  I would also suggest that any number in a PowerPoint presentation is going to be more than a little optimistic.

The STACK meanwhile appears to generate quite acceptable returns at $50 oil.

No wonder Continental is spending its time, money and effort on the STACK and SCOOP.

They Aren’t Snobs….They Just Prefer Premium

I sat and read through the EOG Resources second quarter earnings call.  I could not find a single reference to the Bakken in the question and answer session.

Not one.

During the call EOG’s CEO was asked where the company would be allocating its capital in 2017 and beyond.  Here was his answer:

As we look into 2017 and forward, the capital spending will be – about 45% in the Eagle Ford, about 45% in the Delaware, and then about 10% in the Rockies. That’s a rough balance between each one of those areas.

Those numbers add up to 100%.  That means that EOG is not intending to spend any money in the Bakken in 2017 and potentially beyond.

Being the well-run company that it is, EOG has decided to allocated money exclusively to its “Premium” drilling opportunities.  EOG classifies a premium drilling opportunity as at least a 30% after tax rate of return.

Those opportunities in the Bakken are few and far between.  Well, not far between actually but isolated to the very core of the core.

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Source: EOG Resources

EOG lists 2,100 drilling locations in the Bakken.  330 of them are classified at premium.  EOG’s other plays meanwhile have 4,000 premium drilling locations.

The Bakken has become a small piece of the pie.

If you consider the ratio of premium to total drilling locations of each play the Bakken clearly has the worst economics of the bunch.

Back To That Question…

So is the Bakken dead?

For any producer who can direct its spending elsewhere–the answer is yes.  Sure, the companies will milk existing production for cash flow but now there doesn’t seem to be any reason to send new money in that direction.

In my next article I’ll look at a couple of companies that don’t have that option….and what exactly that means for them going forward.

Keith

Why The Saudis Folded Like a Cheap Tent

By
Keith Schaefer
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The volatility in oil over the last two weeks has been gut wrenching.
But an OPEC deal to limit oil production was reached.  The Saudis and the Iranians have always been the stumbling block for such a deal.

Why did the Saudis cave now?  I would give two reasons:

  1. Last month they reported that reserves had fallen to US$562 billion, down from a peak of US$746 billion in August 2014. That’s a burn rate of about $8 billion per month, slightly more than sending a couple of kids to private school.
  2. The Saudis realized there was another massive oil play that can make money at $45 oil.

Billions Of Barrels Of Oil With Saudi-Type Economics

The Permian Basin has been producing oil since 1921.

It is the only oil field on Earth that can rival the size of Saudi Arabia’s Ghawar.

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It can now also match Saudi oil economics.

In 2014 the Saudis looked down the tunnel and saw that horizontal drilling had given a giant new life.  The Saudis saw that the Permian was barrelling right towards them.

They made a radical change to their oil market strategy as a result.

What the Saudis realized was that unlike the Bakken and Eagle Ford, the Permian could compete with Saudi oil production economics.  The Saudis realized that the Permian’s ten to twelve stacked oil formations allowed for incredible cost efficiencies.

And would generate a tremendous amount of production growth for years to come.

Take a look at the slide below from Pioneer Resources.

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Source: Pioneer Resources Corporate Presentation

This is what Pioneer believes that the Permian is capable of doing at current oil prices–at $40-$45/b oil prices.

If the Permian can do this at $40 per barrel, what would it have been capable of doing if the Saudis had cut production and kept oil at $80 per barrel?   No wonder the Saudis changed course.  Cutting production would have delayed the inevitable and allowed the Permian to take their market share.

This is an oil play with Saudi-like economics located safely within the confines of the United States of America.  It is a dream come true for American oil producers.

No wonder companies are willing to pay $30,000 per acre for land even with oil prices at current prices.  For them this is the chance of a lifetime.

Just as it is for the tiny company that is the focus of my latest subscriber report.  It’s a company with a great land position that the market has completely overlooked.

The Permian Merger And Acquisition Rush Is In Full Swing

There are two main parts to the Permian.  There is the Midland Basin and the Delaware Basin.

The industry has known for a couple of years what the Midland is capable of.  That it could be profitably developed at very low oil prices.

It wasn’t until this year that producers figured out that the Delaware Basin’s economics are just as good.  OGIB subscribers and I were lucky to get in front of this trend by owning Resolute Energy (REN-NYSE) where Delaware Basin drill results caused the company’s stock price to do this:

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These drilling results from Resolute and others has made the Delaware Basin’s economics crystal clear.  The result has been a mad scramble to lock down acreage in the Basin at eye-popping prices.

What companies realize (and rightfully so) is that there is one chance to secure acreage in this play.  A play that can actually make money at $45 oil.  An oil price that these companies may be faced with for years to come.

Most of the publicly traded companies with Delaware Basin exposure have seen their stock prices soar; Resolute being the perfect example.

There is however one little company that has a core Delaware acreage position that has to date escaped much attention.  The market is currently valuing this company at less than a third of the price of nearby (and very recent) acreage sales.

The company also continues to add to its land position.

The company has no analyst coverage.  And it hasn’t started drilling any headline making wells.

That is why it is priced the way it is today.

For the few of us who are aware of the company–the value here is clear.  We know exactly the acreage it owns, and we know exactly the prices paid recently for acreage around it.

All this requires is simple math and enough patience to wait until the market catches on.  The only variable is whether the market catches on three months from now or tomorrow.

That is why time is of the essence on this one.

Resolute Energy was my first big Delaware Basin winner.  I believe this little company will be my next.

The name and symbol for this Undiscovered Delaware Gem is right HERE.

Keith

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