Why The New Oil Boom Should Continue In 2023 (And My Plan To Profit)
The energy sector endured a brutal downturn in 2020 – one of the worst on record. The iShares Global Energy fund (NYSE: IXC), which holds integrated multinational giants like Chevron and Exxon Mobil, was cut in half in a matter of months. A $10,000 investment in January 2020 would have plunged to just $5,000 the following October.
Rarely have these reliable blue chips suffered that kind of pain.
Of course, we all know the reason. During the pandemic, non-essential travel ground to a halt, and global oil consumption collapsed. Awash in excess supply, commodity prices cratered to record lows.
Fortunately, the vicious down cycle was short-lived.
As you can see from the chart above, oil prices have fully recouped their Covid losses and then some – soaring to a fresh 7-year peak in 2022. Benchmark Brent crude doubled from a low of $17 to $35 per barrel, doubled again from $35 to $70, and recently topped $85 per barrel.
Prices may have retreated from their highs, but they are still elevated compared to where we were. And the profits are once again flowing freely.
Drill, Baby, Drill…
What’s driving that performance? Well, for starters, demand has come roaring back. According to the Department of Energy, global oil consumption is expected to rebound to 100 million barrels per day this year versus an average of 92.4 million per day in 2020.
Meanwhile, the flood of surplus inventory has receded dramatically. In 2020, land-based storage facilities were overflowing, and excess oil had to be stored in ocean-going tankers. Not anymore.
In late October last year, national oil inventories dwindled to just a three-week supply, the lowest level in three years. At the main storage hub in Cushing, Oklahoma, supplies dropped by 4 million barrels in a single week to 27 million barrels, the product of heavy demand from South Korea and other Asian buyers.
Today, Cushing’s giant tanks are a little fuller, but not by much. To put the current level of 35.69 million into perspective, there were more than 60 million barrels of reserves sloshing around not that long ago.
Needless to say, even at $80 per barrel, the calculus for capital spending priorities has changed. New projects that might have been marginally profitable two years ago will gush cash at this level and generate highly attractive returns. The collective response from producers has been just what you would expect: it’s time to throttle up.
Nationwide, the number of drilling rigs deployed in the hunt for new oil has more than doubled from 245 to around 771.
Nearly half of those rigs are deployed in the Permian. And rightly so. Daily output in this region along the Texas and New Mexico border has already returned to near-record levels of 4.8 million barrels per day, which accounts for about 40% of the nation’s total.
It’s the most productive oilfield on the planet — and it’s not about to run dry anytime soon.
The US Geological Society estimates there are 46 billion barrels of recoverable oil reserves and 281 trillion cubic feet of natural gas still waiting underground. Most analysts agree that this number is headed sharply higher. Citigroup, for one, has forecast Permian production to soar to 8 million barrels per day within the next few years.
Welcome to the new oil boom.
How We’ve Already Profited From The New Oil Boom…
To give you an idea of what is happening, I told my premium readers over at Takeover Trader in late May 2020 that it was time to step in to the carnage and buy some of the independent exploration and production names.
Our favorite of the group was Pioneer Natural Resources (NYSE: PXD).
The company had already amassed 680,000 acres in the heart of the Permian Basin. But that wasn’t enough. So it recently ponied up $4.5 billion to take control of Parsley Energy, which itself was still digesting the $1.6 billion purchase of Jagged Peak Energy. Almost as soon as the ink on the contract was dry, Pioneer then pounced on Double Point Energy.
Now, it has rights to more than 1 million acres. Pioneer has two dozen drilling rigs plowing full speed ahead, with a goal of completing more than 500 new wells. That will still barely scratch the surface of its 15,000+ identified drilling targets. The market price of these unmatched Permian Basin assets has exploded to nearly $56 billion.
Now, I don’t bring this up to brag. My point is that Pioneer isn’t alone here. And we’re just getting started with the new oil boom.
Private equity groups and other potential buyers are also being lured by the promise of lofty returns on invested capital (RoIC). Case in point, Andros Capital Partners recently invested $150 million to form a joint venture with Petro DC to exploit the latter’s acreage in the Spraberry and Wolfcamp formations.
The shopping binge has continued unabated.
I could run you through a laundry list of recent deals in the region. This swift price rebound has replenished exploration and production (E&P) budgets – and spurred drilling activity just about everywhere. But the Permian Basin has seen the fastest ramp-up, due in no small part to its low breakeven levels and superior well economics.
Action To Take
Now, you could probably do well with a pick like Permian. It’s a best-in-class operator that continues to deliver for shareholders.
The oil will flow from the Permian for years to come. But that won’t be the only thing flowing… so will the M&A dollars. And over at Takeover Trader, we intend to profit from this trend…
Back in October 2021, we released a report detailing this massive trend. Our top pick is already up by 50% — but we believe this is just the beginning…
That’s because we think it’s the perfect target for a takeover. And by getting in now before the rumor mill picks up, investors have the chance to pocket triple-digit gains.