“Boy, you can’t score a touchdown if you’re not in the game.”
My grandfather must have told me that a hundred times growing up. It was good advice for the gridiron. But as a kid, I never imagined it would apply to my career in the oil business.
[ad#Google Adsense 336×280-IA]But it turns out grandpa’s advice was useful beyond my playing days. As resource investors, we must always be looking for value. We can’t wait for good things to happen… because by then, the big opportunities will be gone.
Oil prices will move higher soon. And that’s why you want to be in the game now…
Today, you turn on the TV and hear nothing but bad news in the oil industry. Oil prices are down and going lower. Reports estimate that the U.S. has lost 200,000 oil and gas jobs since mid-2014.
There is some hope. Investment bank Goldman Sachs says half of those jobs might return by 2018. But I’m not sure where you’ll find the talent. Most of those folks have left to work construction or at the local car lot.
As prices fell to as low as $27 a barrel last year, revenues dropped, and debt crushed many companies. A wave of bankruptcies swept across the industry.
According to bankruptcy-law firm Haynes and Boone, 114 exploration and production (“E&P”) companies declared bankruptcy from January 2015 through last December. The combined debt for these companies totaled more than $74.2 billion. Over the same period, 110 oilfield-services companies went belly up… with total debt of more than $18.8 billion.
That’s 224 bankruptcies and $93 billion in debt.
But we’re just getting started… We’ll see another massive wave of bankruptcies before the oil and gas sector emerges from this ongoing bear market. The continued drilling and near-record production will keep driving oil prices lower. The companies with higher costs and big debt loads will become the next victims.
Two months ago, I attended the Oil & Gas Investment Symposium in New York. More than 70% of the companies presenting had debt levels that exceeded their market caps. Things won’t end well for these companies.
Today, oil trades around $45 a barrel. But as long as oil stays below $50 a barrel, almost every oil play in the U.S. is uneconomic. Low oil prices are killing entire economies. The cost of getting a barrel of oil out of the ground in Russia is about $70. In Iran, it’s in the mid-$60s. In the North Sea around Western Europe, it’s $55.
With a few exceptions, the Saudis – whose production costs sit around $25 per barrel – are in the catbird seat.
Meanwhile, global oil production is about 98.5 million barrels per day, while demand is about 97 million barrels.
And yet… despite all of these headwinds, I’m bullish on oil prices. You see, in the next few years, oil demand is going to absolutely skyrocket.
Today, the U.S. is the largest consumer of oil on the planet. We use about 7.2 billion barrels per year, or nearly 20 million barrels per day…
Meanwhile, our friends in Japan use nearly 5 million barrels of oil per day, or around 1.8 billion barrels per year…
Both countries have a high standard of living and industrialized economies. We make a lot of “stuff,” we drive a lot of cars, we watch a lot of TV, and we use a lot of air conditioning. So it’s no surprise that we use a lot of oil.
But as I’ll explain in tomorrow’s essay, this is a drop in the bucket compared with the demand we’ll see going forward. Some of the world’s emerging powers have the potential to kick this demand into high gear. Stay tuned…
Source: Daily Wealth