Last month, I visited a graveyard…
Specifically, I was just outside Abilene, Texas with my friend Cactus Schroeder to see firsthand some of the leftovers of the huge oil-patch growth that once was.
What I saw was a virtual graveyard of inactive oil-drilling rigs…
Cactus brought me there during my recent trip to West Texas. He is a wildcatter, and he’s one of our best contacts in the oil and gas industry. I wanted to see how low oil prices are affecting the Permian Basin, the most prolific oil-producing shale formation in the U.S.[ad#Google Adsense 336×280-IA]We walked across a vacant lot toward an old, chain-link fence.
Even from a distance, you could see the piles of steel parts resting on the other side.
“This is what $40-per-barrel oil prices look like,” he said.
Relics of $100 crude are cropping up all over Texas, as oil producers slash spending to shield their cash flow and maintain dividends.
And while some oil producers can store their equipment and wait for higher oil prices, many can’t.
Oil producers that go bankrupt have to raise funds to pay off their creditors. Texas bankruptcy attorneys at Haynes and Boone say 35 oil and gas producers filed for bankruptcy in the U.S. last year alone. And the pace is increasing… 40% of those filings occurred in the fourth quarter.
These companies reported billions of dollars’ worth of liabilities they weren’t able to pay. They’re reeling from collapsing oil prices over the last 18 months. They’re sitting on a huge amount of oversupply and waning global demand, so they’re getting rid of any unused equipment, like water trucks and drilling rigs. Some of the companies that file for bankruptcy will have to liquidate – meaning they will stop producing and sell their assets – if no other lenders will fund them.
With oil continuing to hit new lows near $30 a barrel today, the situation is bleak. But it does provide wealthy entrepreneurs with an incredible investment opportunity.
Smart investors who know what they’re doing are heading around West Texas going to the auction houses. Right now, things like oilfield equipment, trucks, mineral rights, and even production are available for pennies on the dollar. If they play their cards right, these investors will make outstanding returns on their money over the next couple of years.
A friend of mine runs a small oil-exploration company. He took advantage of a similar situation during the last downturn…
I never intended to get into the road-building business. I was at a heavy-equipment auction in 2008. A road grader came up… and nobody bid on it. I got it for $7,000. We were paying $30,000 per month building roads to our wells. Buying it was a no-brainer.
My friend replaced the road-building subcontractor with the road grader. It paid for itself with the first mile of road he built.
Today, business is brisk for auctioneers in the oil patch. One of the biggest beneficiaries is Vancouver-based Ritchie Bros. Auctioneers (RBA).
Ritchie is a global leader in used-equipment sales. In 1980, the company had less than $100 million in gross auction proceeds. It has grown that amount by 11.4% every year since – to $4.25 billion last year.
But while Ritchie reported higher auction proceeds last year, the pace of the growth is slowing. With oil prices so low, demand for this equipment is down… and Ritchie’s shares recently hit a new 52-week low.
When oil prices do recover, demand for equipment will rise… which will again increase auction sales… which will lead to bigger profits for Ritchie. For now, keep Ritchie on your watch list. When oil prices pick back up, shares should spike higher.
Source: Growth Stock Wire