Oil Notes From Hart Energy SuperDug Oil & Gas Conference
Expect oil to be volatile for a long time.
From May 15th-17th I attended "the largest shale event" of 2024. Feel free to share a link to this page. I will be engaging comments and questions in the comments section below, so join in. Follow me in "real time" on Seeking Alpha for several more detailed articles planned in coming weeks.
At Margin of Safety Investing, I am covering the key takeaways from the conference, including updated information on several of the top investment opportunities in the oil and gas space.
Please enjoy these slide highlights. I am only publicly publishing the slides that we were encouraged and allowed to share publicly. The full presentations are available at Margin of Safety Investing behind the paywall.
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It seems to make sense to start with the general consensus of the analysts and press at the SuperDug conference. As I learned, private equity investors, arguably the best money stewards in the room, were more measured.
As we know, U.S. oil production has set another record with policy to constrain oil and gas not matching the rhetoric. Russia and Iran have circumvented sanctions with China's help and India's need for energy. Venezuelan production ticked up through a deal with Chevron (CVX) but has leveled off.
Crack spreads rebounded form a bottom, but are not near the levels seen at the end of 2021. A rebound to those levels seems a year off.
I am familiar with algorithmic trading through a hedge fund friend in Puerto Rico. What is clear is that futures trading is very impacted by traders who make about 70% of all oil trades - that is, the physical users of oil only account for 30% of the futures market now. Oil price moves can be sudden and violent. It is important for stock investors to take a longer term view.
It is important to understand that since Saudi Arabia flooded the market with oil in 2015, that long/short oil positioning often plumbed lows. Investors are simply wary of being long oil. I think that is changing, but I think Raymond James is about a year early.
I believe a Saudi and U.S. Security deal is coming soon and that will hold oil prices down through the election and going into winter. I think long oil positioning and oil price are more likely to move higher next year.
Clearly "the market" is bearish on oil to 2030. I think that is also early. I expect oil to be in the $80-120/b range from 2025-2030, partially as a way to push consumers to EVs. That is also the stated range that Saudi Arabia, the real global swing producer, is targeting.
I think global oil production surging is not possible in the short term for technical and financial reasons. Therefore, oil prices will end up being above the strip prices you see above.
I have discussed with members that I think "panic pumping" will occur from emerging nations once they see EV demand pick up. That is, when it becomes apparent that EV sales will eclipse ICE vehicle sales, nations with oil will get it to market as fast as possible. That is when we see considerable pressure on oil prices. I do not think that is until about 2030.
Interestingly, when you look at the proven reserves and likely to be proven reserves, the numbers are not favorable a decade out. That means that a surge in oil supply met with demand destruction would eventually be met by rapidly falling oil supply - think around 2040.
Given we will still be using oil after 2040, I do not see a glut of oil developing. However, less being used means some players will disappear, so not necessarily good for stocks in the very long term.
This is where Raymond James and I diverge on the short-term. While I am bullish on oil and gas intermediate term, I do not see a sudden rally coming.
I believe that the Saudi and U.S. security deal being discussed is finished soon and with it comes a slightly lower oil price short-term. That will drive trader narratives to be bearish for a while. That most likely will flip by next summer.
Consolidation And Rationalization
As mentioned above, private equity investors were fair and balanced in their assessments. One thing they all agreed upon is that the space is consolidating and there will be limited buyout opportunities going forward. They all see fewer private E&Ps of scale remaining to buyout.
What they do see are mergers and asset swaps as most likely. Primarily, we will see medium sized producers merging with other medium sized producers.
With Exxon (XOM) and Chevron (CVX) now comprising a quarter of U.S. production, up from 6% 20 years ago, do not look to them to be acquirers of anything else large. Rather, they will take part in bolting on small acreage holders.
The total number of "wildcatters" is down by over half since 2015. Many will not survive methane capture costs. If those tiny players are adjacent larger player, then they will likely get a small deal. Think the ranchers with a handful of wells.
There are about 3 dozen small, but scalable, private and public producers in the Permian likely to be acquired in the next few years. There are another handful in places like the Bakken. Focus is on the Permian though as that is the last place with growing production. Everywhere else is either flat or in decline as replacement costs exceed the economic value.
Matador Resources (MTDR) Chairman and CEO Joe Foran pointed to "rationalization" of assets in the Permian and elsewhere as the prevailing trend going forward. Think of this as asset swaps to permit longer laterals in wells. Laterals are headed to 3 miles this year and potentially 4 miles by next year. Larger acreage holds are required, thus, companies are swapping pieces of land. Matador plans to be an acreage acquirer, but, as Foran said, anything is possible.
The idea of the non-Majors consolidating continued today with the takeover of Marathon Oil (MRO) buy Conocophillips (COP). Exect Devon Energy (DVN) to potentially be involved in M&A soon. I am also very interested to see what EOG (EOG), Permian Resources (PR), Diamondback (FANG), Ovintiv (OVV), Apache (APA), Coterra (CTRA) and Occidental Petroleum (OXY) do.
Investment Quick Thought
So, in the short-term, buy the dips on short-term news or fears. Consolidation in U.S. oil is creating a much narrower supplier market. Expect a more oligopoly like pricing regime in U.S. oil and gas to develop in the next few years.
With mass consolidation in the space, the easiest way to invest is still to buy the Select SPDR Energy ETF (XLE) on the dips. We have several favorite companies that I believe offer greater upside and margin of safety based on their acreage, operations and balance sheets.
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