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Profit from the End of Cheap Oil
02/11/09 by Tony D'Altorio
Filed under Wall Street Elite
I knew I had made a mistake only seconds after I did it. I had decided to sit down and watch CNBC’s Power Lunch with the sound ON for a few minutes while I ate my sandwich. I figured – how many brain cells would I possibly kill off in just a couple of minutes?
However, I had forgotten about my high blood pressure. Bill Griffeth was talking to some oil trader about oil which was up a few pennies on the day. Bill Griffeth began lecturing the trader, “Why in the world is oil up? How can oil possibly be up in the face of deflation, demand destruction, etc.”
Bill Griffeth made it sound as if oil should go to zero immediately. I felt my blood pressure rising rapidly. I yelled at Bill Griffeth, “Get your head out of your short-term focused arse!” Then I wisely turned off the TV and muttered to myself “Never again watch CNBC with the volume ON!” How a loser like Bill Griffeth is still employed is beyond me.
Oil’s Long-Term Picture
Getting away from the morons at CNBC, the longer-term picture for oil is actually quite good. Oil is now trading well below its replacement cost, which most experts peg to be between $65 and $75 per barrel. In the long run, dwindling supplies and resurgent demand, along with a lack of investment will cause the price of oil to once again spike skyward.
I think that the key component to future rises in the price of oil is actually the low price of oil we have right now. These very low prices have shut down much of the desperately needed investment in new capacity. This lack of investment has sown the seeds of much higher oil prices in the future.
The International Energy Agency (IEA) recently came out with what I consider to be some pretty conservative estimates. The IEA believes that oil demand will advance on average by 1.6% annually until 2030. This would bring the total daily demand for oil to 106 million barrels.
On the supply side, output from the world’s oilfields is declining faster than previously thought. In its latest report, the IEA estimated that the annual decline in the world’s oilfields has accelerated from a decline rate of 3.7% per year to a decline rate of 6.7% per year. The rate of decline is particularly steep for some of the world’s major oilfields, such as Mexico’s Cantarell field.
In their latest report, the IEA estimated that China, Brazil and other emerging countries alone will need investments of $360 billion a year through 2030 to meet future demand for oil. The IEA went on to say that in order to meet future demand for oil, the world as a whole will need $26.3 trillion in supply-side investments over the next 21 years.
With the current depressed price for oil, along with the banks not lending out a dime to anyone, this much needed investment just will not happen. This will lead to the world once again seeing triple-digit prices for oil, probably within the next two years.
Investors looking to profit from this future price rise in oil need to look for a company that, despite the current economic crisis, is continuing to invest in exploration and development. Investors should also try to find an oil company that is actually adding oil reserves and not depleting their oil reserves as are most oil companies.
Petrobras – PBR
I believe that one company which meets these criteria is the Brazilian oil giant – Petrobras. The company is the only major oil company which is actually expanding their reserves. This expansion in the company’s reserves is due to the major oil fields that Petrobras has discovered in the deep waters offshore Brazil in the last few years.
These mega-oilfields are the largest oil discoveries made in several decades. In fact, British Petroleum’s CEO, Tony Heyward, believes that the waters off Brazil’s south-eastern coast hold oil reserves as big and important as those discovered in the North Sea in the 1970s.
Petrobras is in the early stages of exploring these pre-salt oil fields – discovered in 2007 under several miles of seawater, rock and a hard-to-penetrate layer of salt. The company itself has made no official estimate of the total size of the oil fields. However, Brazilian state officials have spoken of 100 billion barrels to add to Brazil’s proven reserves of 14.4 billion barrels of oil and natural gas equivalent.
Petrobras plans to spend a great deal in developing these fields and increasing their oil production. The company is expecting to increase their oil production from 2.18 million barrels per day in 2008 to 3.31 million barrels per day in 2013 and to 5.1 million barrels per day in 2020.
Recently, Petrobras announced their investment plan. The company’s strategic plan for 2009-2013 calls for investment of $174.4 billion, a substantial increase on the $112.4 billion stated in its 2008-2012 plan. This new plan is the first to include actual investment into developing the pre-salt fields.
With the current financial conditions, how in the world is Petrobras going to raise the necessary funds to fund their five year plan? Of the $174 billion needed over those five years, Petrobras could finance $120 billion from their own cash flow. This estimate is based on a Brent crude oil price of $42/bbl.
If the price of Brent crude goes above $42/bbl. and stays there, Petrobras may be able to fund their expansion plans entirely through their own cash flow. However, if the price of Brent crude oil stays at $42/bbl or lower, this will mean that Petrobras needs to find additional funding elsewhere.
Petrobras is exploring two possibilities for additional funding. One possibility is obtaining funds from other countries. Petrobras is currently in very intense talks with both China and the United Arab Emirates (UAE) about possible funding.
The second possibility involves getting funding and/or working closer with other energy companies that are also conducting exploration activities in the area. These companies include: BG Group of the UK, Galp Energia of Portugal, Repsol, Royal Dutch Shell, Hess and Exxon Mobil.
PBR – the Stock
The 52-week range for Petrobras’ common stock (PBR) has been between a high of $77.61 and a low of $14.73 which it hit during the dark days of November. In my opinion, I don’t believe that PBR will ever re-visit that level again.
The stock has rebounded nicely to over 30 recently, yet it still trades at a single-digit PE ratio. The Wall Street crowd, as evidenced by CNBC, still hate oil in general and Petrobras specifically. They say it’s still “overvalued”.
I am telling investors to ignore the short-term focused Wall Street crowd and to purchase Petrobras now (ideally, under $30). With Petrobras, investors will be buying a company that is actually increasing their reserves of oil in the ground and a company that will benefit greatly from the end of cheap oil.
Cheers,
Tony D’Altorio
Analyst, Wall Street Elite
geolog on Thu, 12th Feb 2009 1:49 PM
I would like to inform you that to significant increase of world energy potential and mitigate the economic crisis there is a new technology for oil/gas detection.
With new exploration technology (patented invention US 7,330,790) you could make up to three times more oil and gas discoveries than when using conventional technology. And the fact that new technology won’t need more investments is also very important. It can significantly mitigate world energy problems.
The technology is designed and successfully tested in the Barents and the Black Seas as well as in the Gulf of Mexico (see: http://www.binaryseismoem.weebly.com).
dave s. on Thu, 12th Feb 2009 6:30 PM
please god give us the alternative energy so we are not at the mercy of big business and governments
Leon H. on Thu, 12th Feb 2009 6:33 PM
$75 dollars a barrel for oil $75 dollars a bushell for corn for the camels thats my input
pcp on Thu, 12th Feb 2009 6:40 PM
Almost since its discovery, oil traded below $65 and producers and suppliers made profit off of it. The triple digit oil was a byproduct of a number of policies that are not going to have the same effect anymore. Needless to say, oil will not be going to triple digits within two years. It will only cost what people can afford to pay for it. Seeing how the biggest consumers of oil (US, Japan, Europe) are nearly bankrupt and staring at the front end of a long and deep recession, the ingredients to push oil to stratosphere are just not there. We would need to devalue the dollar by at least 50% to get oil to anywhere near triple digits.
Tom on Thu, 12th Feb 2009 7:09 PM
Ok heres the deal PBR is ok for a short term trade to 35.72 wh wave A up then a B wave down to slightly lower low probably in low 14′s may be high 13′s ,and then a c wave up to complete wave 4 up at 35.72 . Based on time relations ships will take at least twice as long as wave 3 down which ended in end of december. stochastics on a weekly are at 96.08 and RSI 2 is at 81.97 in a wave 4 up correction of the downtrend . So in conclusion oil probably going down due to dollar strenght. If dollar strong oil down ,if dollar weak oil up.
Mike G. on Thu, 12th Feb 2009 7:15 PM
I have been holding PBR since it was in the 50′s
due to the reasons outlined in Tony’s Oxbury email.
My main concern is that PBR will eventually come completely
under government control in the future & leaving the shareholders screwed.
What do you think of this risk?
Thanks very much,
Mike
john r. on Thu, 12th Feb 2009 7:16 PM
Boy! Did you tag those brain dead meat puppets over at CNBC. I think you have a very clear vision of the oil market and it’s future
Ray of Phila on Thu, 12th Feb 2009 7:17 PM
Im on the PBR bandwagon, also. …
Larry D. on Thu, 12th Feb 2009 7:19 PM
Couldn’t agree with you more. Have positioned myself in the USO and possibly looking for an entry point to PBR.
cpriester on Thu, 12th Feb 2009 7:23 PM
well said
clear thinking
the real crux however is “when will supply destruction overpower demand destruction ?”
Dr. Roy D. on Thu, 12th Feb 2009 7:38 PM
Oil has always been volatile. Sir Alexander Drake used a Rock salt drilling rig to drill the first oil well on Oil Creek, in Pennsylvania. The only use for it then was to make kerosene to use in oil lamps, in place of whale blubber.. When first discovered, oil was $10 a barrel, by the end of the first year it was $1.00 a barrel.
Dr. Roy Dowdell
Oklahoma City
Chris on Thu, 12th Feb 2009 8:06 PM
Peak oil is the myth of the share holders.
Daniel V. on Thu, 12th Feb 2009 8:31 PM
Tony,most of what you say is true,but your timescale is off.The supply measure presumably refers to reserves as opposed to production,which takes a little longer to fall off.The demand measure is an average over a long period.
Currently we are confronted with the grand-daddy of all recessions/depressions.The fall in demand has outstripped the fall in supply caused by fossil fuel exhaustion.It has even outstripped the oversoldness caused by oil’s plunge from its overbought peak.
Part of the problem has been market expectations of a bounce.This has led to a huge contango in the futures markets,causing oil producers to cling to uneconomic projects in the hope that these would become economic,even if they were not actually hedging the risk.That contango is currently being gobbled up,and the spot price is still hitting new lows!
Another problem is that,in the short term,the low oil price is actually forcing producers to increase production wherever they can.This could cause cheating amongst OPEC members.If that happens,OPEC could disintegrate altogether,and then even the Saudis might increase production.Also,that contango -the expectation of a medium term recovery in oil prices – is built into the share prices of the oil majors.
I own some oil shares.I believed that the prospects for oil companies were better than for other companies due to the reasons that you specify,and because oil was particularly oversold.I am beginning to believe that I was wrong.
Calvin W. on Thu, 12th Feb 2009 8:50 PM
Tony, I know you are right on your opinion of the future price of oil. I agree that the only price direction for oil is up. The world demand for oil is only going to increase until it is all used up and it will be years before we convert the US to CNG and LNG to power our automobiles and truck fleets. Our US mentality on energy is so stupid. We should have started weaning ourselves off fossil oil 30 years ago. Thanks for this article. CE
Serkes I. on Thu, 12th Feb 2009 9:49 PM
Hi,
Hope you are doing well!
I think everybody knows that long term oil is going to hike up. The question is what is long term, 6 months? 5 years? S.
JOHN M. on Thu, 12th Feb 2009 10:53 PM
GOOD ARTICLE, AND WELL WRITTEN. HOWEVER, WOULD HAVE BEEN MORE CONVINCING FROM A TRADER’S POINT OF VIEW, WITH ANALYSIS OF CHARTS, AND FROM FUNDAMENTAL POINT OF VIEW, WITH REVIEW OF THE NUMBERS.
Ravi S. on Fri, 13th Feb 2009 5:35 AM
Nice contrarian view. I hold a similar view oil and believe that we have seen the worst and should see a rebound after the current period of consolidation.
Further, PBR is one of the stocks for which my firm has extracted financial data from the SEC. I have kept track of the news releases from the company as well as the financial reports they put out. The company seems to be clean and believes in its business than a few other peers that seem to be more interested in managing EPS by buying back shares.
How would PBR cope with ethanol especially since Brazil is a large producer and consumer of ethanol as a fuel?
Any views on the oil services sector? If you do believe that investment in oil will continue after the current pause\slowdown would oil services companies especially the likes of OII that service the deep-sea market benefit.
ed m. on Fri, 13th Feb 2009 7:17 AM
I TOTALLY AGREE WITH YOUR REMARKS CONCERNING CNBC,BUT ABOVE ALL YOUR ASSESMENT OF OIL IS SPOT ON,EXCUSE THE PUN.PETROBRAS IS ONE OF THE BEST TO COME ALONG IN AWHILE, IT IS ONLY A MATTER OF TIME BEFORE OIL STARTS BACK UP AND THE WHINING BEGINS ANEW, WITH THE RESIDENT WHINER GRIFFETH FOLLOWED BY KERNEN…
Lars N. on Fri, 13th Feb 2009 10:02 AM
Let’s begin to start talking about BAKKEN. On USA soil, many billions of barrels, large employment increase in all phases, then Nuc power with new tech. Solar should be continued in the Southwest. Get out of IRAq, spent the money here on new manufacturing and Infrastructure. President O’Bama needs to negotiate with the greens ( I am one ) and explain what we can do once were aren’t dependent on anyone for power. Charge the bankers and Wall Streeters with treason and recapture any gains on credit default swaps etc. 5 depressions and many resessions are and were greedy and illegal. AIG was allowed to sell insurance with no surplus and reserve requirements, and HANK PAULSON knew this….
GEORGE D. on Fri, 13th Feb 2009 10:29 AM
I AGREE FULLY WITH YOU EXCEPT ALL THE TALKING HEADS SHOULD GO!
I HAVE READ THAT MEXICO’S BIGGEST OIL FIELD IS IN RAPID PRODUCTION DECLINE,THE TWO BIGGEST FIELDS IN SAUDI ARABIA AND
KUWAIT KUWAIT IS IN DECLINE AND THEY HAVE ASKED BIG OIL FOR HELP AND SAUDIS ARE LIEING ABOUT PRODUCTION AND RESERVES. IN ADDITION NO NEW HUGE FINDS.
WHY DOES THIS NOT HIT THE PAPERS?
IT MAY BE THAT THE CHEAPEST WAY TO FIND OIL IS TO BUY OIL COMPANIES ON THE EXCHANGES.
KEEP UP THE EXCELLENT WORK
GEORGE D.
Gene S. on Fri, 13th Feb 2009 7:51 PM
I have worked offshore in both the Mexican
and Brazilian oil fields and Brazil is by
far the most professional , well equipped
and well managed.
LEON C. on Sun, 15th Feb 2009 10:52 AM
How anyone employed by CNBC is still employed is beyond me.
They are all losers , IMO with Kudlow heading the list followed closely by
Cramer. I don’t know how CNBC can even stay on the air with the people and programs they offer.
I quit watching years ago except for an occasional check to see if they are still bad.
Davey J. on Sun, 15th Feb 2009 1:44 PM
Great article – I couldn’t agree with you more about CNBC, and their talking-heads. They are without a doubt, gloom-pedalling, fear-mongers! The one exception is Rick Santelli! Keep up the good work,and I can assure you, CNBC won’t be on at this house, even with the sound OFF.
Tony D'altorio on Mon, 16th Feb 2009 1:04 PM
To Mike G,
I agree with you that nationalization is a risk with PBR. However, I do think it’s a small risk as long as the current head of Brazil – Lula – is there.
Leon on Wed, 18th Feb 2009 7:20 AM
How anyone employed by CNBC is still employed is beyond me.
The are all losers , IMO with Kudlow heading the list followed closely by
Cramer. I don’t know how CNBC can even stay on the air with the people and
programs they offer.
I quit watching years ago except for an occasional check to see if they are still
bad.