What You Need to Know Before Jumping into Oil and Gas Investing During Low Oil Prices
The year was 1990 and the price of crude oil spiked when Saddam Hussein invaded Kuwait.
Prices were as high as the desert heat.
A sweltering $23.19 per barrel was the average for the year.
In December, it was a stunning $26, up $6.50 from the prior December.
Now, what does this have to do with oil and gas (and should I invest in oil)?
Who’s Afraid of Low Oil Prices?
A Brief History of Oil Prices
The history of oil prices is fascinating.
The average oil price for 2015 is roughly double the average price in 1990.
The CPI Inflation Calculator at the Bureau of Labor Statistics says that one 1990 dollar has the buying power of $1.83 of today’s money.
So, what’s the problem?
Well, to put it delicately, it’s something like this:
Lots of people got drunk on high prices and made bad decisions.
What About Today’s Market?
Since 1990, technology has improved substantially.
It’s cheaper than ever to drill a standard well.
Our understanding of geology is better than it’s ever been, thanks to greatly improved seismic imaging capability.
Why are so many people losing their shirts on oil prices?
Let’s pose another question: Why is no one talking about the people making fortunes when oil prices averaged from $70 to $90 a barrel from 2010 to 2014?
Eagle Ford Shale: A Closer Look
The Eagle Ford Shale region had lots of leasing activity in 2005 when oil was at $50 a barrel.
It was leased specifically for Eagle Ford shale production as early as 2007 when oil was at $64 a barrel.
But, they didn’t just wake up one morning and decide to drill when it reached $64.
A project of that magnitude is years in the making.
That means people were laying the ground work for a south Texas bonanza when oil was at $50 a barrel for the year.
Re-read the above sentence.
Now, let that sink in.
They were laying the groundwork when oil was at $50.
If we’re being honest, they were probably thinking about it all the way back in 2004 when oil was at $37.41 for the year.
PetroHawk, the company that discovered the Eagle Ford Shale, didn’t pay $60,000 per acre when acquiring 160 acre drill sites all over south Texas.
They paid as little as $200 an acre and not higher than $1,000.
Then everyone started copying them.
Then everyone and their mom started copying them.
Then oil and gas executives started getting Christmas newsletters from both their grandmothers telling them to go buy oil and gas leases in south Texas.
And the price shot up.
And, by the time prices fell, everyone had been overpaying by bundles to get into one of the biggest fields in the world while commodity prices were high.
So, yes, it’s hard to make money when you’re Johnny-come-lately at the tail end of a huge boom.
But, here’s the kicker.
The big winners in the Eagle Ford won because they paid a smart amount for their acquisitions that made sense in their existing price environment.
They didn’t need $100 oil to make a killing in South Texas.
You don’t need $100 oil to make a killing on smaller projects, either.
After reading that, it seems pretty silly to wait for high prices to invest in oil.
Should I Invest in Oil?
What you should be doing is finding deals that make sense on their merits in any price environment.
When you negotiate deals for a low-price environment, you can’t get hurt if prices stay low.
So, while the whole world burns – as the talking heads would have you believe is happening – oil and gas investing experts are making smart decisions and going about their business intelligently.
Smart investors are doing what they have always done in every price downturn in human economic history.
They are buying.
They are investing.
They are laying the groundwork.
But I’m overexposed, you might say, should I invest in oil?
If you don’t feel comfortable with oil and gas investing, by all means, do what makes you comfortable. You need to evaluate, however, if you’re overexposed to oil and gas or overexposed to oil and gas deals that you overpaid for.
Because we’re not about overpaying, and oil and gas is still making money.
Oil and Gas Investing: Not a Fad
Crude oil isn’t like beanie babies that will go out of style tomorrow.
Wells are still pumping.
Buyers are still paying.
Oil is still fueling our cars and jets, and it’s still a key raw material driving the information age.
Obviously, diversify. I mean, obviously. We’ve always said that. But, don’t be afraid because the people who overpaid are taking a bath.
The companies still standing when the music stopped playing are in for some harsh realities.
But, someone will buy their distressed assets for a good price. Someone will finance those great deals that are economical in low prices.
And someone will reap a major windfall if prices shoot up again (just not you if you jump out of the game now).
So, who’s afraid of low oil prices?