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Investing in Oil: Tiny wildcatters are the key to future gains

Posted January 15, 2008

 

"Chevron is the most bullish of the major (oil companies). They’ve spent $17.5 billion to buy Unocal in 2005 when oil was at historic highs – a huge risk at the time. Today’s $90 per barrel oil makes Chevron look like a genius on that deal." — Chris DeHaemer

 

by Chris DeHaemer (from the TFN financial video 60-Second Buzz filmed earlier this month).

Baltimore — (TFN): Hello and welcome TFN’s 60-Second Buzz. I’m Chris DeHaemer.

Chevron spends $22.9 billion in 2008 to get more oil. Is Chevron a savvy market player picking up assets in a long-term oil boom… or are they a loose cannon overpaying at the top?

Up at the Taipan HQ on the second floor of our St. Paul Street offices in downtown Baltimore, there is a constant debate as to whether the market is at the top of the oil cycle, or are we using up the last of our precious hydrocarbons in a peak-oil frenzy of waste.

As Adam Smith’s invisible hand would have it – one hundred dollar oil and sky-high commodities prices will eventually prove to be a drag on the world economy.  These same prices will then fall due to lowered demand from an economy that isn’t growing quite as fast.

The flip side of the “business cycle argument” is called “peak oil.” This term refers to the exact point at which maximum worldwide oil production is reached. After which the total amount of oil left in the world declines to nothing. 

It got its name from the Hubbert Peak Theory after M. King Hubbert – a geologist who correctly predicted the peak of U.S. production in the 1970s. His theory now estimates that global peak oil will occur in the next five to fifteen years depending on global growth.

Crips v. Blood, boarders v. skiers, oil cycle v. peak oil… I don’t know who’s right. But given the fact that there is no sign of a global slowdown, the two theories are not mutually exclusive at this juncture. The oil bull market will go on until there is a recession and then it will decline. 

And at some point it will go up again because the global economy takes off, or its becoming more rare, or perhaps both. Then maybe I’m stating the obvious.

No time to read? Watch the financial video…

Chevron Corp. (CVX:NYSE) is among those who believe that the oil bull will continue unabated and they are willing to spend a lot of money today to insure a maximum revenue tomorrow.

Chevron announced last week that they would spend $22.9 billion in 2008, up 15% from 2007 and up 175% from 2004. Part of the spending increase is simply because everything costs more. Rig rates are up, steel prices are up, and labor costs are up. Across the board costs are up 67% since 2000 and 30% since last year.

That said, Chevron is the most bullish of the majors. They’ve spent $17.5 billion to buy Unocal in 2005 when oil was at historic highs – a huge risk at the time. Today’s $90 per barrel oil makes Chevron look like a genius on that deal.

Other companies like Exxon are holding off on takeovers and acquisitions at a time when their production numbers are dropping. Exxon believes that you buy low and sell high – even though this means they might not have anything to sell at some point in the future. 

Now, Chevron has these same problems. Production for 2007 is down slightly and 2006 wasn’t great either.  Their solution is to buy more oil assets.  The #3 U.S. company, ConocoPhillips, is chasing Chevron with a 2008 estimated capex of $15.3 billion.

The upshot is that all of the easy oil has been found or is controlled by nationalized energy companies. Free independents are a vanishing breed. The oil that’s left to find is in hard to reach places like deep water, under the ice caps, or in politically unsavory places like Somalia. And yet oil has a very real and increasing value. One way to make money is to buy the small companies that have rights to these oil assets before the majors swoop in and take them over.

I’ve found one company off the coast of South America that you might want to check out. A recent maritime border dispute has been resolved by the U.N. The U.S. Geological survey calls it the second largest under explored oil field in the world. Just click on this screen to learn more or go to http://www.crisistrader.com/.

That’s the TFN 60-Second Buzz, I’m Chris DeHaemer.

Christian DeHaemer is a regular contributor to the FREE daily e-letter, Taipan Daily. Sign up here to get the late-breaking investment opportunities to help you beat Wall Street to the profits.

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Make Exxon Beg!

As global oil supplies dwindle, Big Oil companies like Exxon are desperate for new sources of petroleum. Now, a U.N. verdict has put a massive new oil basin in the hands of a tiny $4 wildcatter. Early investors could see a 10-fold gain as Exxon gets on its hands and knees and begs for precious black gold. Here’s the full story…

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Posted by Christian DeHaemer · Filed Under Oil and Energy 

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