17 Nov Why I LOVE $80 Oil
I have been directly involved in this part of the market for over 10 years, and I can tell you, nothing makes me happier than $80 oil we’ve had for the past month.
Before I exclaim why, let’s talk about the dynamics of low and high oil prices and how it affects the upstream market as a whole.
Lease Acquisitions
Sure…if you’re a Buyer, $40 oil sounds like a good time to buy producing leases. But good luck finding it! Many Operators drill/re-enter/rework their own leases when oil price is low. Low oil market price is also correlated to prices of oilfield services and tangibles. If there no plans for development, many Operators will simply slow down or shut-in production until oil prices go up. This means Buyers really must hunt to find these leases.
For some reason, when oil hits $100, both undeveloped and producing leases go sky high in price beyond what can be expected for small to medium developments/holds. Buyers are wary (and should be) because historically those who purchase leases at this high rate lose lease value unless they increase production right away in the $100 space.
Lease Development
Let’s revisit $40 oil. For development, your AFE (authority for expenditure) is appealing. An Operator and Working Interest Investor can certainly get in on the ground floor on labor and materials. And if the economics work where an Operator can make profit at $40, then it’s great! The issue is when the oil price stays at this level for more than 6 months. Both labor and materials start disappearing as service companies cut back on employees and bulk materials orders. It takes a while for the supply side to ramp back up to meet demand in this space when oil does go back up.
When oil reaches $90, good luck finding either labor or materials! Everything is pretty much spoken for!
Why I love $80 Oil
· Producing lease supply is high – Sellers and selling, Buyers are buying…plain and simple.
· Producing Lease acquisitions get done – I cannot tell you how many times I’ve seen where deals fall apart when oil is above $90 and the market fluctuates even 15% either way (although most agreements have a 20% clause for price negotiation during due diligence period). Buyers can become skittish. I rarely see this at oil $80 or below.
· Oilfield services and tangibles supply and demand are optimized – When $$ is flowing steadily from Investors and Operators for lease development, both services and materials providers can count on contracts for new hires and bulk orders.
· Profit margins – If you can make $40 oil work, $80 oil is fabulous…and any Operator can make $80 oil work on paper today!
Most important – Energy in the upstream sector is high, optimistic, and stable
I’ve seen the highest highs and lowest lows being in the industry either directly or indirectly my entire life. If you are looking to invest or sell, you won’t find a better time to see what $80 oil provides tangibly and psychologically for the sector.
We are in the “sweet spot”.