Over the past few years I have searched for undervalued opportunities in the oil sector. I believe the world is facing an oil crunch over the next decade and that current oil prices are going to seem rather tame in comparison to what is coming.
In this search I settled primarily on a specific type of investment: companies with large acreage positions in emerging light oil plays.
What I have found is that the stock market in most cases does not assign much value to large unproducing acreage positions that have considerable value amongst the oil companies themselves.
As these acreage positions are developed the stock market does recognize the value of the production, but until then remains suspicious as to the value of the land. I think it basically allows an investor to pay a fair price for the current production of these companies even though you know that production is going to triple over the next ten years because of the inventory of drilling locations in the undeveloped acreage.
It is growth at a very reasonable price.
But the kicker for me is that the technology used in developing these resource plays is very new and improving. As the companies learn to get more and more oil out of the ground the value of these assets increases. For example, a company I follow in Canada is basically valued by the stock market at its proven and probable reserves. However, these proven and probable reserves include nothing for about 70% of acreage that company owns within the defined borders of resource plays. Additionally the booked reserves assume only a 5% recovery factor. The company (and its competitors in the same play) believe 25% to 30% will be the ultimate amount of oil recovered.
So an investor pays nothing for the vast majority of the acreage the company owns (and could sell for considerable value in even an undeveloped state) and also gets the upside of a higher recovery factor.
I recently came across an article of how Brigham Exploration (BEXP, Financial) got in early on the Bakken resource play in North Dakota. This early entrance by Brigham is being repeated by companies in several new emerging light oil resource plays in North America currently.
Here is the article:
North Dakota is booming. Its unemployment rate is the lowest in the country, 3.7 per cent, and so many people have moved there for jobs that last year local officials declared a housing crisis. The new workers have been drawn by the Williston Basin, in the western part of the state, which holds the largest accumulation of oil identified in North America since 1968, when the Prudhoe Bay field was found, on the North Slope of Alaska. Oil companies have booked motels within two hours’ drive for a year in advance; last summer, relocated workers converted the lawn of a town park into a tent city.
About a hundred new wells are blasted into the ground every month. Seen from a distance on U.S. Highway 2, the derricks form a straight crease—giants reduced to props by a landscape that the novelist Larry Woiwode described as a vast plane, “its flatness tugging the sky tight at every horizon, as if it were tied there.” One day a few months ago, beside a trailer parked near the center of the basin, half a dozen men prepared to send enough explosives underground to dismantle an armored tank. The firepower consisted of twenty-four “shaped charges”—little cone-shaped shells housed in foot-long metal cannisters called perforating guns. When the charges were detonated by an electrical signal, each shell would explode into the surrounding rock, forming corridors through which oil could flow into the well.
The workers, who were mostly in their twenties or thirties, wore hard hats, steel-toed boots, and coveralls stained to the chest with crude oil. One of them screwed four perforating guns together, attached them to a heavy wire, then lowered them into a hole bored in the ground. As the wire unspooled from an enormous drum mounted on the back of the trailer, another man, inside, used a joystick to control the guns’ descent. It took almost an hour before the guns neared the far end of the L-shaped wellbore, an underground trip of nearly four miles, and began to withdraw. A third worker knelt on the floor of the trailer like a preacher and studied a column of numbers written on a window, down-hole distances where the men were to set off the explosions: 19,971 feet, then 19,909, then 19,850. On closed-circuit radio, a voice from a trailer across the lot addressed the worker on the joystick: “Steady, keep it steady.”
“He’s got to have a doctor’s touch on that drum wire,” the engineer in charge of the well, Russell Rankin, said. Rankin, who was clean-shaven and had on a class ring and a carefully ironed golf shirt, works for Brigham Exploration, based in Austin, Texas, one of some hundred and fifty oil companies that have entered the basin since 2006. “Everybody sent up here is on the same mission, which is: Solve the puzzle of this place,” Rankin said. “We know there’s oil there. But how much of it can you get out of the rock?”
Link to the entire article: http://www.newyorker.com/reporting/2011/04/25/110425fa_fact_konigsberg?currentPage=all
In this search I settled primarily on a specific type of investment: companies with large acreage positions in emerging light oil plays.
What I have found is that the stock market in most cases does not assign much value to large unproducing acreage positions that have considerable value amongst the oil companies themselves.
As these acreage positions are developed the stock market does recognize the value of the production, but until then remains suspicious as to the value of the land. I think it basically allows an investor to pay a fair price for the current production of these companies even though you know that production is going to triple over the next ten years because of the inventory of drilling locations in the undeveloped acreage.
It is growth at a very reasonable price.
But the kicker for me is that the technology used in developing these resource plays is very new and improving. As the companies learn to get more and more oil out of the ground the value of these assets increases. For example, a company I follow in Canada is basically valued by the stock market at its proven and probable reserves. However, these proven and probable reserves include nothing for about 70% of acreage that company owns within the defined borders of resource plays. Additionally the booked reserves assume only a 5% recovery factor. The company (and its competitors in the same play) believe 25% to 30% will be the ultimate amount of oil recovered.
So an investor pays nothing for the vast majority of the acreage the company owns (and could sell for considerable value in even an undeveloped state) and also gets the upside of a higher recovery factor.
I recently came across an article of how Brigham Exploration (BEXP, Financial) got in early on the Bakken resource play in North Dakota. This early entrance by Brigham is being repeated by companies in several new emerging light oil resource plays in North America currently.
Here is the article:
North Dakota is booming. Its unemployment rate is the lowest in the country, 3.7 per cent, and so many people have moved there for jobs that last year local officials declared a housing crisis. The new workers have been drawn by the Williston Basin, in the western part of the state, which holds the largest accumulation of oil identified in North America since 1968, when the Prudhoe Bay field was found, on the North Slope of Alaska. Oil companies have booked motels within two hours’ drive for a year in advance; last summer, relocated workers converted the lawn of a town park into a tent city.
About a hundred new wells are blasted into the ground every month. Seen from a distance on U.S. Highway 2, the derricks form a straight crease—giants reduced to props by a landscape that the novelist Larry Woiwode described as a vast plane, “its flatness tugging the sky tight at every horizon, as if it were tied there.” One day a few months ago, beside a trailer parked near the center of the basin, half a dozen men prepared to send enough explosives underground to dismantle an armored tank. The firepower consisted of twenty-four “shaped charges”—little cone-shaped shells housed in foot-long metal cannisters called perforating guns. When the charges were detonated by an electrical signal, each shell would explode into the surrounding rock, forming corridors through which oil could flow into the well.
The workers, who were mostly in their twenties or thirties, wore hard hats, steel-toed boots, and coveralls stained to the chest with crude oil. One of them screwed four perforating guns together, attached them to a heavy wire, then lowered them into a hole bored in the ground. As the wire unspooled from an enormous drum mounted on the back of the trailer, another man, inside, used a joystick to control the guns’ descent. It took almost an hour before the guns neared the far end of the L-shaped wellbore, an underground trip of nearly four miles, and began to withdraw. A third worker knelt on the floor of the trailer like a preacher and studied a column of numbers written on a window, down-hole distances where the men were to set off the explosions: 19,971 feet, then 19,909, then 19,850. On closed-circuit radio, a voice from a trailer across the lot addressed the worker on the joystick: “Steady, keep it steady.”
“He’s got to have a doctor’s touch on that drum wire,” the engineer in charge of the well, Russell Rankin, said. Rankin, who was clean-shaven and had on a class ring and a carefully ironed golf shirt, works for Brigham Exploration, based in Austin, Texas, one of some hundred and fifty oil companies that have entered the basin since 2006. “Everybody sent up here is on the same mission, which is: Solve the puzzle of this place,” Rankin said. “We know there’s oil there. But how much of it can you get out of the rock?”
Link to the entire article: http://www.newyorker.com/reporting/2011/04/25/110425fa_fact_konigsberg?currentPage=all
