Booming North American Oil Production Won’t End The Era Of High Oil Prices $EOG $KOG
By Devon Shire
A few years ago, I set out to find the best investments I could to take advantage of higher oil prices. I looked at deepwater producers, international producers and oil sands producers. Eventually, I settled on investing in tight oil producers where I believed the stock market was greatly underestimating potential for massive production increases.
I think that I was correct in that most investors didn’t know the production ability of these unconventional producers. I’ve been very satisfied with how the companies I am invested in have performed (not so much with their stock prices).
According to Bernstein Research, that marginal cost of production influenced by tight, deepwater and oil sands production, is now in excess of $90 per barrel.
We can certainly have economic shocks that kill short-term demand for oil and periodically drive down the price of oil. But as soon as that happens, the companies operating in the Bakken and Eagle Ford are going to lay down their rigs. Because of the high decline nature of tight oil production (60% to 80% declines in the first year) that rig decrease will quickly cause a fall in oil production, resulting in prices bouncing back.
The age of cheap oil is over, in my opinion, and elevated oil prices should continue to make companies like EOG, Kodiak and Novus Energy good investments.
Author of the value investing newsletter detailing the formation of the “Punch Card Portfolio” called Value Investor Canada. Devon Shire is an accountant and an investor with 15 years experience managing a private portfolio. Devon Shire’s preferred portfolio management style is a concentrated approach, investing only when finding opportunities that offer a sufficient discount to the intrinsic value of a business.
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