Chart “How much does it cost to produce crude oil and natural gas? (From US Energy Information Administration (1))
As the 2015 news unfolds, there are three factors about oil and Russia, plus many other countries, to keep in mind.
#1: The price of oil versus uplift cost in the various oil producing countries.
#2: The price of oil.
#3: The price of oil for oil producing countries to balance their budget. This is a really important point because oil extraction when oil is selling at 60 dollars a barrel can be profitable in many countries (such as Russia), but not create sufficient revenue in countries where the political process and government are financed by oil sales.
For example Ecuador, OPEC’s smallest producer needs about an $80 dollar a barrel oil price to balance its fiscal 2015 budget. Ecuador has crude-oil reserves of 8.8 billion barrels and crude-oil production of a half million barrels a day which is a tiny 0.6% of total world production and 1.7% of OPEC’s production. Sustained low oil prices could put a lot of pressure on Ecuador’s government.
Russia, as shown below produces oil at about $8 a barrel overall, but needs a crude price of $100 to balance the nation’s budget. Price of oil compared to production costs is less important than price of oil compared to budget deficits. Keep this in mind as plunging oil prices create contrasts and distortions that equate to value and opportunity.
Chart from Economist “Black Gold Deficits” (1) Click on image to enlarge.
Here are some definitions you’ll want to know in the year ahead. This will help all of us to understand the news.
#1: Lifting costs are the costs of oil and gas wells and related equipment and facilities to bring oil and gas to the surface.
#2: Finding costs are exploring for and developing reserves of oil and gas and the costs to buy or lease oil and gas reserves.
#3: Upstream cost (also called Capex) and it is the total cost to produce crude oil and natural gas including lifting and finding costs.
#4: A brownfield is an oil or gas field that has proven production.
#5: A greenfield project is a completely undeveloped area of possible production.
#6: BOE is Barrel of Oil Equivalent.
We can see how opportunity will develop in an article “These countries are getting killed by cheap oil by Jesse Solomon” (2) Bolds are mine in all the excerpts below.
Here is an excerpt: The price is not right for many oil rich nations. That’s bad news for Iran, Nigeria, Venezuela, Russia, and Saudi Arabia, among others. They need the black stuff to trade at far loftier levels in order to balance their budgets.
Iran’s budget, for example, is built on oil at $135 dollars per barrel, according to data from Deutsche Bank and Thomson Reuters compiled by DoubleLine Capital. Russia has oil budgeted at $100, while Saudi Arabia will break even at $95 per barrel.
OPEC’s idea is to try to knock out U.S. shale producers by driving prices lower than they can afford. That way Saudi Arabia, the cartel’s biggest exporter, can keep its market share in the U.S. But the damage to its fellow oil exporters could be severe. In Russia, for example, the ruble is plummeting. Iraq is already having trouble fighting ISIS, and lower oil prices won’t help. Libya is in chaos. Venezuela’s economy, already on life support, depends on oil for 95 percent of its export revenue.
An Analysis by EY (Ernst Young) US upstream cost prices and the unconventional treadmill (4) say: As was reported in our US reserves studies, US upstream oil and gas spending has been increasing rapidly with the onset of the so-called “shale” or “unconventional revolution,” beginning in the middle of the last decade. We can also use the related reported data to estimate costs on a full-cycle basis, noting that notional full-cycle costs have surged (along with global oil prices) from an average of around US$20 per barrel of oil equivalent (boe) before 2004 to more than US$60 per BOE as of 2013. As shown in Figure 1, apart from the distortions related to the global financial collapse in 2009, notional full-cycle costs have averaged over US$60 per BOE since 2008.
Chart of US costs from EY Analysis.
The Bakken Magazine (5) says: The evolving Bakken story has just added a new, utterly complex twist. Crude prices—economically advantageous for the shale oil industry in the past five years—have fallen. Few, if any, can predict when the price bottom will be reached or what falling crude prices will mean to the Bakken shale play. And, although many have tried, few, if any, can offer an acceptable prediction on what falling crude prices will mean to the Bakken shale play.
Gazprombank Research Department writes in Oil and Gas Weekly (6) says: Lifting costs and upstream capex of Russian oil companies vs international peers:
Russian oil and gas companies the production of oil in Russia remains cheaper. Thus, average lifting costs per BOE $5.8 /boe for Russian oil and gas companies over the past three years, while lifting costs averaged $9.9 BOE.
The same is true for upstream capex per BOE. 2013 the average ratio for Russian oil companies stood at $ 7.6 /BOE, which is less than one quarter the level of Developed Market majors ($34.5/BOE) and less than one third the level of Emerging Market oil companies ($25.5/BOE).
The reasons are much higher rates of onshore production at brownfields in the overall production structure. As the depletion of currently producing major fields continues in Russia lifting costs and upstream capex increases at approximately the same rates as globally.
Oil cost chart from Gazprom Oil & Gas Weekly
How to take advantage of the situation. One way is to cash in on fear. An example comes in a recommendation from Eric Roseman at ENR Asset Management. Here is an excerpt of a note that Eric sent me: Gary, This is a special bulletin that deserves your full attention. With crude oil prices crashing more than 40% since June, the entire energy-related infrastructure, including oil drilling, exploration and development, has been threatened. The entire energy space has plunged since November with the latest leg falling off a cliff this month as oil continues its relentless decline, now at $55/barrel this morning for West Texas crude and $59 for Brent oil — compounded by a financial crisis in Russia as the ruble tanks. Crude oil now trades at its lowest price since 2009. The market fears a sustained price war where OPEC, led by Saudi Arabia, refuses to cut production while American shale producers flood the market at the same time. This game of ‘chicken’ will end badly for the shale sector, if oil continues to slide. I think Saudi Arabia is trying to put the American shale companies out of business. Already, bond prices for shale companies – responsible for about 20% of all high-yield debt financing over the last four years – are suffering from big redemptions from investors as cash-flow continues to threaten operations for the most marginal producers. We now foresee a wave of defaults by the most leveraged U.S. shale companies with oil prices at these low levels.
Although the bear market in oil is bad news for energy investors, it’s very bullish for refiners, or companies that refine and sell gasoline, diesel and other distillate fuels.
One of the sector’s true mavens is Tom O’Malley, who has spent more than 30 years in the business specializing in taking troubled refiners and turning their economic fortunes around. He’s made millions for his investors.
Today, Mr. O’Malley is the CEO of small-cap company, PBF Energy (NYSE-PBF). The company went public about three years ago and trades 35% below its all-time high and 20% off its 52-week high. The stock trades at just 6.3 times trailing earnings, 1.37 times book-value and yields 4.6% in annual dividends. This is a great value-and-growth story. With crude oil prices in the basement, growth investors should be accumulating a well-managed company like PBR Energy now.
My advice is to buy PBF Energy at market at Jyske Bank and place a 20% stop-loss on your entry price. This is the best time since the financial crisis in 2008-2009 to buy refiners.
I will provide an in-depth analysis of PBR Energy in the January issue of Advisory Extra. Regards, Eric
For more information contact Thomas Fischer at Thomas@enrasset.com
Reaction to oil prices may reflect political rather than market concerns. These reactions may be illogical and as the Bakken Magazine article stated: Although many have tried, few, if any, can offer an acceptable prediction on what falling crude prices will mean. This creates fertile ground for distortions that create value opportunity. We’ll watch for these situations and share what we find.
Global Earnings Seminar
Regain Real Security
There is a path to true security.
I was reminded of this once when I made a horrible mistake. Almost!
The supposed error? Letting my mind wander six decades back to an hour I spent with a girl.
Learn from this near disaster, seven most powerful sources of wealth, health, security and fulfillment in this era.
The girl was pretty and blond. Terry was her name. My imagination spanned decades returning to my Oregon roots seeing her as if she were there.
We were 11 or 12 and had known each other since we started Rockwood grade school. Just buddies, our non-romantic friendship lasted 12 years, from first grade till high school’s end. Then she went off to Pepperdine College in California. I started traveling the world. Never saw her again. I hope her life has gone well. But until that reflection I’d never thought much of Terry in so many years.
What could have been the tragic error was letting that memory touch my heart. Two kids, walking on a crisp, Pacific Northwest autumnal afternoon.
We walked down a sun filled, pine needle covered, dirt path. Huge, fat, green Douglas firs lined the road. Traffic was no problem, not many cars. Crossing Stark Street we turned left, hiking three blocks to 182nd. There we passed an old clapboard candy store. I can still hear the wooden sidewalk of that store slap beneath my feet, felt the soggy planks sag and smelled astringent pitch from the fir trees. Then we turned right, up 182nd for about a mile. There was Terry’s house.
I carried on, walking through a big field, waist high grass turned straw brown by an early frost. There were dozens of paths made by who knows what. Animals perhaps or countless generations of other kids walking home alone from school. I chose one following it to another wood of tall, rough-barked fir. Crossing one more field, I climbed a rock wall, struggled through a barbed wire fence (my Mom hated that fence ripping my jeans). I was home!
Sweet simplicity, that dream. Two kids holding hands, walking on a dirt trail under a crisp, but blue, sunny sky. Pure innocence.
My tragic error was looking back. I returned to Rockwood, Oregon with Merri and my kids to show them this part of their roots. Following the route, Terry and I had walked were the candy store, grange hall, old wooden buildings and their home spun honesty and charm.
Instead we found six lanes of fast, frantic traffic and road rage. McDonalds, KFC, strip shopping centers. The car radio blared warnings of local gangs and drive-by-shootings. Beauty, innocence, sweet simplicity, replaced by drive ins and drive bys. Gangs and drive-by shootings replacing a tender walk in the sun. Good bye memories, good bye.
How can our kids walk in places like this? How can we return to those old feeling of security and comfort?
How can any of us possibly keep pace in this world that’s moving so fast? Then something inside snapped. “There has to be an answer for honest, hard working folks to enjoy the wonderful opportunities of today and regain what we’ve lost over the past forty years”, I swore to myself.
How can we keep up, without having such a fast paced life we turn into machines? Where do we find time for God, family, charity, and our friends? How can we rediscover those sun filled, pine needle covered, dirt paths we want to walk?
“There has to be places that are still innocent and pure”, I thought. “There has to be a way of life that does not pound us with stress”.
This thinking led me to begin reviewing the thousands of economic and business experiences I have shared with readers over the decades. This started a search for a simpler way of life and a better place to earn and protect our wealth.
By digging, asking and observing, traveling and talking to investors and investment managers all over the world I found that there are true paths to real security in the here and now. That knowledge helped me develop courses on how to have natural health, everlasting wealth and purposeful investments.
This knowledge helped Merri and me invest in stocks and real estate all over the world. It helped us find and develop Merrily Farms into a sanctuary here on Little Horse Creek.
That almost error led us to create an entire portfolio of information on how to keep pace, get ahead, enjoy our modern society but, to enjoy life wherever you choose without having to move too fast.
I want to share this information with a special few in our summer course in the Blue Ridge Mountains where the air is dry, crisp, with a bright sparkling sun. Our North Carolina woods is a place where we can once again walk down sun filled, pine needle covered, dirt paths beneath huge, fat, green fir and hemlock.
We start the course with this question that can help us get our lives back.
“What would you think in the last 30 seconds of your life if you were the richest man in the world but were unhappy?”
This quote is from the opening slide of our Value Investing Seminar, “How to Secure Your Future With a Value Breakout Plan”. This a vital question because few investors think about the value of comfort and happiness. Yet the truth is, those who are comfortable and happy with their investments are likely to make good investment decisions. If not, no matter how much money an investors has, changes are, they’ll lose.
Bring Value and Purposeful Investing Together
Join us to learn how to make safety and profit easier and less time consuming so we can focus on our individual purposes in life.
Become an International Club member and join like-minded souls, who take a positive view and think outside the box for better health, greater income and safer, more profitable investments. Share ideas on how to add value to everything and make 2016 -2017 your best years yet.
In 2016 Merri’s, David’s and my mission is to share our 50 years of experience in international business, investing and living to make ourselves happier, healthier and wealthier.
To reach a wider audience we have shifted our seminars online including the seminar “How to Secure Your Future With a Value Breakout Plan”.
Here is a partial syllabus of this seminar.
- Three common sense ideas: Avoid lines. Go where you are a name not a number. Decide who you are and what matters to you.
- Why three economic trends that have make smart investors rich every 30 years are ready for cashing in now.
- How to look for short term problems that create long term value.
- Update on the best ten markets for safety and profit.
- How to diversify in value with Country ETFs.
- The value of time in investing and life.
- The economics in cyber wars. How to look back at the economics of war to see ahead.
- Great new innovations that will ignite a 16 year bull market from 2016 to 2032.
- The next great fuel.
- Timing long cycles, economic cycles and seasonality.
- Investing in Demographics.
- Trading Down, the biggest global trend ahead.
- Hidden Inflation .
- How to protect against pension loss.
- The Silver Dip 2016. When and how to invest in gold and silver . How to double your position with loans.
- How to spot currency distortions and borrow low to deposit high.
- How, Why When & Where to bank abroad.
Club membership is for an entire year and the recorded seminar is just one high point.
In 2016 and 2017 we are conducting online seminars about value investing, natural health and how to write to sell.
International Club members receive all the online seminars free.
In addition club membership includes:
- Personal investing Course (Pi), normally $297, FREE
- Self Fulfilled How to be a Self Publisher, normally $299, FREE
- Eventful Business, normally $349, FREE
- International Business Made EZ, normally $299, FREE
- Report “Three Economic Conditions for 50% or More Profit,” normally $29.95, FREE
- Report “Silver Dip 2015” normally $27, FREE
- Three online Value Investing Seminars, normally $477, FREE
- One online Natural Health Seminar, normally $119, FREE
- One online Writers Camp, normally $299, FREE
Merri and I have been organizing courses, seminars and newsletters about international and Super Thinking lifestyles for over 30 years. The importance of this sharing… by like minded souls… was reinforced when a delegate from a course sent an email that said:
My Dearest Merri and Gary, Thank you for your most gracious hospitality last weekend. I am just thrilled at being a part of your group. You and Gary were exactly as I imagined you to be, warm friendly, kind, considerate, genuine, helpful, fun, sincere, what else can I say……I felt so comfortable in your presence and learned so much in your course. I was sad to leave the farm that Sunday afternoon. You made us all feel so welcome and cared about. You were so kind to make arrangements for a ride with the other delegates from the Charlotte Airport. They were so nice to me and so helpful, by the time the weekend was over I felt like they were my long lost brothers. Monday morning we all had breakfast at the airport together and I was so sad to see them go, I was sad the weekend was over, perhaps sad is not the right word for how I was feeling perhaps Gratitude is a better way to describe it. Grateful for having the opportunity to share the weekend with such wonderful, like minded Human Beings, in the beautiful mountains of North Carolina. Thank you Merri and Gary. Thanks to you I now have new hope and a new direction to move forward in my life. I know by attending your classes and conferences that through education and due diligence I will make the right choices.
I invite you to be a member of the International Club.
Let’s prosper in these times of change. Won’t you join us in this exciting club and share Merri’s and my lifestyle for the next year? Join us online.
Club members receive everything we offer in 2016 and 2017.