The fall in the price of oil over the past several months and the accompanying drop in share prices of energy-related companies has certainly created a lot of interest with investors. After all, any time you find companies trading for 25% to 50% of what they were priced at in prior months, value-seeking investors start to take a closer look.
Most folks, however, are trying to figure when the price of oil will go up and using that time frame as a catalyst for investing. I don't have that answer. Oil man T. Boone Pickens thinks oil will be near $70 per barrel by the end of 2015 and back to $90 in a couple years. From his lips to the investing god's ears, I hope.
The future price of oil is the key unknown. And the current data produce a variety of viewpoints. The shale boom in the U.S. is well known to most by now. Thanks to technological advances in shale drilling, the U.S. is producing oil in massive quantities, as cheap as ever. Despite significant reductions in capital expenditures, most shale producers are expecting similar production levels in 2015.
Outside the U.S., the picture is different and one need only look at the data coming from the oil majors that have significant global operations. In aggregate, information from the likes of Exxon Mobil (XOM), BP (BP), Chevron (CVX), Royal Dutch Shell (RDS.A) and ConocoPhillips (COP) suggests oil is getting harder and more expensive to find. The organic replacement ratio, or the ratio between annual production and annual reserve replacement, is at its lowest point in over a decade. Chevron, I believe, was the only company that had a ratio above 100%. In other words, the major oil producers are finding it harder to economically replace reserves.
In that case, the long-term outlook for oil seems to suggest higher prices, not lower. Even though the U.S. is not having this problem, since oil is a global commodity, unless the U.S. begins exporting huge amounts of oil and gas, prices will likely rise over the long run. Secondarily, the oil giants will undoubtedly be looking to acquire smaller player with healthy reserves in this environment. Acquisition has become the cheapest way to replace reserves today. It's just a matter of when the trigger will be pulled.
Ultimately, investing in energy today is going to require a great deal of patience. The oil majors may be waiting for the floor to collapse before making deals, but deals will be made. Unless the price of oil starts to rise again.
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