The 2017 Oil Market is Full of Opportunities
The 2017 Oil & Gas market presents challenges and opportunities. The challenges are centered around the depressed oil prices and the cost of production. Companies with a high cost of production are in a lot of pain, particularly those where the cost to lift a barrel of oil out of the ground is over $50. As a result of low oil prices, there are currently abundant opportunities for acquiring prime oil & gas properties (assets) with a solid history of oil production and proven underground oil reserves, which is like money in the bank. They can be picked up at bargain prices due to depressed oil prices. That is what the smart money started doing in 2015 and is continuing to do in 2017.
Let’s try and put things in perspective as far as the oil market is concerned. The price of oil collapsed over the past couple of years. This took a toll globally on the economies of some of the largest countries in the world. Some economies like Russia’s are heavily dependent on oil and the effects of the collapse of the price of oil were dramatic and very painful. OPEC countries like Saudi Arabia are also heavily dependent on oil to run their economies and they are in a lot of pain right now. According to a recent article, Saudi Arabia needs $100 a barrel oil to support their economy.
The overwhelming majority of economists and talking heads on TV’s financial news shows never saw the collapse in the oil market coming. Why anyone would listen to them now is a mystery. No one can predict with certainty the global events that will take place over the next couple of years that will dictate where the price of oil will be. It is far too complicated and not a simple supply and demand equation. If the situation in the Middle East blows up and oil wells are bombed on a large scale, the price of oil would go up dramatically. The chances of this happening are unfortunately pretty good.
So that brings us to the question “how do we take advantage of the situation”? Warren Buffett says “Buy when there is fear in the market.” Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.” He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.” This is contrarian investing at its heart, which is the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit. Most people only want winners in their portfolios, but as Warren Buffett warned, “You pay a very high price in the stock market for a cheery consensus.” In other words, if everyone agrees with your investment decision, then it’s probably not a good one.
So our “blood in the streets” strategy for 2017 is going to focus on acquiring prime oil producing assets in Oklahoma and Kansas where the cost of production is among the lowest in the country. The assets we will pursue acquiring will have existing oil production with proven underground reserves, a good infrastructure, and lots of room for development when the price of oil recovers. The current oil production will be coming from existing producing wells that we can rework and increase their production. Also, we will want there to be existing non-producing wells that we can easily rework and put back into production. Our goal is to double or triple the initial production. If the price of oil doubled from where it is today and we doubled the initial oil production, the value of the acquired asset would increase dramatically and the production revenue would increase by a factor of 4.
Our overall strategy covers 5 years up to 2022. We, along with many industry experts believe that the price of oil will recover in the near future to the point where drilling new wells will once again be highly profitable. Over the 5 year period it is our plan to build up the value of the assets we acquire and then sell them at a considerable profit. That is our exit strategy. The timing of selling the asset could come much sooner than 5 years.