Ok. So I have an opinion that we are finally seeing some real market analysis of the current tight oil environment. Inflation is here and we do not have enough oil to meet supply in the short term.
BRING ON THE REST OF THE POST.
First off TLDR: XOM calls 1/22/22 $70-$80 and OXY 1/22/23 calls $40.
UK in the past week has shown what happens when you do not have a steady supply of LNG.
Currently, BOFA just announced that if we have colder than normal winter that the UK plants will switch from LNG to Oil which is literally bonkers. Based on their analysis oil would get to $100 in Q1 2022 and gas would run to $10 per gas.
While I love reading what if scenarios, lets talk about the current supply and demand situation. Today, the EIA posted details about where we currently sit. (picture) As you can tell by reading numbers we are decreasing in storage in crude oil. Put simply we now are 20 million barrels away from the most bullish outlook that BOFA is speculating on for Q4 21 - Q1 22. In case you really want to dive in deeper here is a direct link to the EIA article posted about the Cushing storage in OK. https://www.eia.gov/todayinenergy/detail.php?id=49636
Put plainly, the reason I say that we are 20MMBO, (currently at 32.9 MMBO in storage), away from extremely bullish scenarios is that the graph through that link shows the storage levels from 2012-2021. This reduction would put the total around the 2014-2015 inventory level. (Roughly around 19MMBO in storage). The last time we hit this level of storage decline we saw in June was back in 1981 when the EIA started collecting data. Back during that time the price of oil increased from $94 per BO to $105 at the peak of low in storage. Currently at our pace of use due to exporting barrels and consumption I would roughly guess that we begin to have a "crisis" after the US E&P operators report Q3 earnings.
Last time I spoke on this, I was posting information about the Rig count and drilled inventory (drilled but uncompleted wells) and true to that post the Rig Count has only slightly increased and the drilled count has reduced significantly. Meaning, if operators would like to keep the current production flat and return capital to shareholders we should begin seeing more rigs get added and the drilled count flatten.
Now on to the fun stuff. Remember this is the musings of a madlad.
Hurricane Ida should have been a simple hurricane with little to no real damage to the offshore production and refining capacity. However, Shell has already stated that they are at 60% Gulf of Mexico production and it will not return to 100% until Q1 2022. Alongside this was the amount of barrels that were offline for 2-3 weeks outpaced 2-3 months of OPEC+ increases in BO supplied to the market. Thus, we are in a deficit of supply and we should see decreasing inventories over the next couple of months. https://www.eia.gov/todayinenergy/detail.php?id=49576
Finally, in regards to the elephant in the room, OPEC+. They continue to state that OPEC+ has the capacity to produce significantly higher barrels of oil. Please read this beasts post about how they don't have that capacity. https://twitter.com/BisonInterests/status/1440308387292475393
So lets combine the 3 criteria that I have listed in short hand.
Low US crude 2. Shut off production 3. Falsified OPEC+ true max production Just like a steamroller coming head on we can see the impending issues but for some reason we can move out of the way. (Austin powers https://www.youtube.com/watch?v=y_PrZ-J7D3k)
Implied demand for oil is returning to the 2019 values and will continue to increase as we gear up for the upcoming holiday season. Not only will the vaccine induced holiday demand we saw over the summer continue but I would expect it to increase further.
All of the above market/macro information is required to understand the current energy market. While earlier in the year I was confident that this was going to happen sooner life just doesn't work that way. Right now, we have a couple companies that I think are undervalued and worth taking a look at:
OXY calls 1/22/23 $40 XOM calls 1/22/22 $65 CPE calls 1/22/23 $45 Each are a little different and currently I am still up in the air about the 3rd option. But its worth mentioning.
Starting with OXY, it is a very simple story of debt reduction, execution and FCF. OXY in this environment of $72 oil and $4.80 gas literally can paydown a couple billion dollars every quarter. Currently this year they have reduced debt by $3.0 Billion and $1.5 billion of extending debt further into the future. I do not like the management but the assets they own are incredible. Recently, the wells they turned online are outperforming their expectations (something they should highlight) by 20%. Essentially these well are making what other wells make in 8-10 months in 3-4 months. As long as they keep paying down debt and holding production flat they will payout more than almost any other company. (maybe the new ConocoPhillips will give them a run for their money). XOM is turning online their lowest cost barrels in both the Permian Basin and Guyana. In fact, they have found additionally pay zones that makes Guyana in development until the 2030's. That oil works at 38-45 per BO. Not to mention that they sell barrels around the world at Brent pricing. ($2-$3 per BO higher.) Last quarter they highlighted their refinery's making a significant amount of money but using a large portion for upgrades. But we should expect that they are the largest US E&P to return to form. Expectation is that post Q3 report we get debt reduction, increase in dividend (6.4% annually), and production increase. CPE. Honorable mention because they have 22% short interest and are a terrible company that needs $70 oil and $4 gas to survive. Surprisingly enough that's where we are at. Maybe they make it maybe they dont. Great news for you is that these companies can also be bought with shares for the sweet sweet dividend. That's nice too. Oh and inflation means that real assets do pretty well. If we keep inflation high expect these motherfuckers to run even higher.
Good luck to you all and may the barrels flow in your favor.