Is it time to buy the best energy companies? Maybe yes, maybe no. I imagine the price of oil will go back and forth for a few more months. You never know. But two things we do know:
- America will still need more oil and gas than it did last year, which was more than the year before, and that consumption was still higher than the preceding year.
- The Permian Basin of West Texas and Southeastern New Mexico, which produces 25% of all U.S. oil, is likely to grow that percentage and add significant natural gas production as well. The most prolific basin in the U.S. is the biggest beneficiary of advanced drilling technologies that didn't exist five years ago. We've always known the oil and gas were there – now the techniques exist to get to them.
Apache Corp. (NYSE:APA) just announced a huge increase in oil reserves based upon more thorough seismic mapping of its properties, sending its stock higher by 7% in one day. The graphic below comes to us from Apache via Marketwatch (along with the in-frame typo) and shows that its big discovery is in the Delaware Formation of the Permian.
The big news is that even this until-now slacker area of the Permian Basin looks as if it might become every bit as prolific as the Sprayberry and Wolfcamp formations that have seen the most successful production profiles in recent years.
As a result, most investors will simply pile in, hoping not to miss a big move from Apache, EOG Resources (EOG, Financial), Pioneer Natural Resources (PXD, Financial) or Resolute Energy (REN). Resolute Energy is already up 800% since July 5 based on its projections of a big find in the Permian. This has all the makings of a crowded trade and lots of disappointed latecomers.
I'd like to suggest two more conservative ways to play future discoveries in the Prolific Permian. One is an old favorite we have held in our managed portfolios previously and will again at the right price. The other is a current holding.
The oldie but goodie is Texas Pacific Land Trust (TPL, Financial). I originally learned about Texas Pacific Land from a fellow financial writer with whom I exchange newsletters, Bob Howard of Positive Patterns. Bob and I have been independently similar in each other's recommendations for years now, and I am indebted to him for Texas Pacific Land Trust!
Texas Pacific Land is the most successful company (trust) you have never heard of. Up 41% this year, it is actually up some 2,500% since 2000. They were seven then and are 185 today. (During this same period a passive investment in a Standard & Poor's 500 index fund would be up less than 85%.)
So what does a company with these sorts of returns do? Build a social media site that counts billions of people as subscribers? Design a smartphone so cool that it creates a new category of must-have devices? Create the world's biggest online superstore?
Nope. It sells (or leases) a bunch of ugly desert land. In Texas. Specifically in the West Texas area around the Permian Basin. On lands it leases, it retains oil and gas royalties and is the overall manager of the properties.
Texas Pacific Land Trust was organized in Texas on Feb. 1, 1888. Its charter is to sell itself out of existence.
It was formed as a result of the bankruptcy of the Texas Pacific Railway Company as a way of reimbursing, over time, the creditors of the defunct railroad. It employs, I believe, seven individuals whose job it is to sell land, lease land to provide cash flow and buy back stock to continually reduce the number of shares. This approach allows it to pay small dividends or buy out the "certificate" holders. That would be any of us who buy shares.
Texas Pacific Land Trust derives income primarily from land sales, oil and gas royalties, easements, grazing leases, and interest. There are no material liens or encumbrances on the Trust's title. The Trust also owns a 1/128 nonparticipating perpetual oil and gas royalty interest under 85,414 acres of land and a 1/16 nonparticipating perpetual oil and gas royalty interest under 373,777 acres of land in West Texas. Texas Pacific Land Trust's landholdings also include some in the path of urban development. It is a land company and, by virtue of its perpetual leases, an under-the-radar oil and gas company without the debt (which is zero) or risks of the explorers. Dry hole or gusher, Texas Pacific Land Trust gets something; it just gets even more when there are gushers.
I would caution against rushing out to buy shares, however. Savvy players have been bidding the stock up over the years and especially this year. (It sold for $116 in January.) It is also thinly traded with just 9,000 to 10,000 shares traded on an average day. I have orders in at $145 and $165 but won't be chasing it at these prices. Any general market malaise or energy decline will, I believe, give me the opportunity to own shares.
My second stealth way to play success in the Permian is via a closed-end fund, BlackRock Energy and Resources. It currently sells at a discount to NAV of 7.5% and yields 6.5%, paid monthly. Its top holdings include the very best energy firms in existence:
The No. 1 landholder (well, after Texas Pacific Land Trust) in the Permian Basin is Chevron (CVX.) It holds some 2 million net acres – the third-biggest holding of BlackRock Energy and Resources (BGR, Financial) after only superstars ExxonMobil (XOM, Financial) and Royal Dutch Shell (RDS.B, Financial). No. 5 among BlackRock Energy's holdings is Occidental Petroleum (OXY, Financial). Occidental Petroleum is second only to Chevron in the Permian, with 1.5 million acres, but it also enjoys the highest production of any company there, a whopping 255,000 BOE/d (barrels of oil equivalent per day.) It also counts EOG Resources and Pioneer Natural Resources among its largest holdings.
Regular readers will note an interesting coincidence (or not?). We have, in the past, owned every single one of the top 11 holdings of BlackRock Energy. All are favorites of mine. Since I know I want to own them again, we may as well start now.
Yes, energy shares may decline further. If I'm early in buying quality energy firms, well, I've been early before. The last time energy stocks were forsaken, I bought "too early" and it worked out wonderfully. So I am taking an initial position in BlackRock Energy & Resources. If it declines we'll buy more, all the while being paid 6.5% for our patience. We bought BlackRock Thursday at $14.36.
Disclosure: I am/we are long BlackRock Energy & Resources.
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