10/20/2011 7:39 PM ET|
A global bidding war for oil
As the costs of producing oil grow and the places to hunt for new reserves shrink, Big Oil is willing to pay more for oil and gas resources. Investors, take note.
In June, Australia's BHP Billiton (BHP, news) bought U.S. tight shale oil and gas producer Petrohawk. In July, China National Offshore Oil Corp. (CEO, news) (883.HK) bought Canadian oil sands producer Opti Canada. This week, Norway's Statoil (STO, news) (STL.NO in Oslo) bid to acquire U.S. oil shale producer Brigham Exploration (BEXP, news).
See a pattern here?
Global oil companies and oil-consuming countries are looking past the current soft demand for oil created by today's global economic slowdown and lower oil prices. They see a future of rising demand and higher energy prices -- and of limited opportunities for adding to reserves and production. They also see an opportunity created by today's lower oil prices and oil-producer share prices to buy reserves and exploration opportunities. And these global oil producers and oil-consuming countries are moving aggressively to seize that opportunity.
Oh, and let's not forget that money is cheap right now (if you're a global oil producer, that is). Many of these offers are all-cash deals to buy shares of the acquired companies at depressed prices.
What are you doing about seizing this opportunity for your portfolio? Let me give you a few suggestions.
First, a look at Statoil
Statoil, Norway's state-controlled oil company, is an example of the larger story in microcosm. For decades, Statoil has been a leading producer of oil and natural gas from the waters of the Norwegian Continental Shelf. But, like the neighboring North Sea fields, these Norwegian fields have shown declining production as they've aged. In its most recent capital plan, Statoil announced a combination of spending on enhanced oil recovery in older fields and new exploration and production. These efforts are projected to stabilize the decline in production from the Norwegian Continental Shelf and actually lead to a slight uptick in production to 1.40 million barrels of oil equivalent in 2020 from 1.38 million barrels in 2010.
Stabilizing production in older fields is just part of Statoil's plan. It has also been spending big time to buy into areas that promise rising future production. That has included buying into joint ventures in unconventional resources in the U.S. Marcellus natural gas shale and Eagle Ford gas and liquids plays. And most recently, it has included the purchase of Brigham Exploration, a leaseholder on 375,000 acres of the Bakken and Three Fords tight oil formations in North Dakota and Montana. Current production from that area for Brigham amounts to 21,000 barrels of oil-equivalent a day. But oil industry analysts say Statoil will easily be able to increase production to 60,000 barrels a day over the next five years. Statoil has offered to buy Brigham Exploration in an all-cash offer for $36.50 a share.
That's not much higher than the recent price of a premium over the stock's recent price, but then Brigham is trading near its 52-week high of $37.87.
But what's of most interest to investors -- unless you happen to already own Brigham -- is the big jump in the price per acre that Statoil is paying for Brigham Exploration's Bakken acreage. The deal price works out to about $12,000 for each Bakken acre that Brigham has under lease. That's the most ever paid in a major Bakken deal, according to Bloomberg, and at least 50% more than Occidental Petroleum (OXY, news) and Hess (HES, news) paid for their Bakken acreage in the last year.
Record prices for oil reserves
I'm sure that seems odd to investors who have a short-term view of the financial markets and the economy. Why pay a record price for reserves and potential reserves when oil is selling for just $86 a barrel for West Texas Intermediate (the U.S. benchmark) and just $109 a barrel for Brent (the European benchmark)? We're a long way away from the heady days when oil sold for $140 a barrel. And this is before Libya gets back into production, adding more oil to global supply at a time when global demand is soft.
But oil companies aren't short-term investors, and the long-term picture looks very different. The costs of producing oil are rising -- whether you're a Statoil planning to spend more on enhanced recovery techniques or a Petrobras (PBR, news)trying to figure out how to get oil from salt formations deep under the South Atlantic. According to Bloomberg, the cost of finding and developing oil has climbed to $14.21 a barrel for Exxon Mobil (XOM, news) -- a tenfold increase in 10 years.
Those rising costs justify spending more to secure access to future reserves, especially if those reserves are in politically low-risk countries and come with relatively predictable production costs. Oil companies know what it costs to produce oil from the Bakken shales and to get it to market. Petrobras has only a guess on production costs and infrastructure needs in the South Atlantic. Exxon Mobil has only a guess on costs to produce oil and gas from the frozen Russian Arctic.
Fewer places to explore
But there's something else driving the price of Bakken and other potential production plays. Looking at the world, oil companies see a scarcity of promising areas for exploration and production. In their estimation -- especially when you factor in potential reserves that are off-limits because they're controlled by a national oil company in Saudi Arabia or Mexico or Venezuela -- there just aren't a lot of places to look for oil if you need to replace, let alone expand, reserves.
And that has produced a kind of global bidding war among oil companies eager to secure potential resources.
As an investor I think the strategy with the most potential profit in it is to think long term -- like a global oil company -- and buy what you think might be on their list of targets.
Invest in big oil's targets
In the United States I think that strategy means considering unconventional producers such as Pioneer Natural Resources (PXD, news) in the liquids-rich Eagle Ford shale formation. (That's the same formation where Petrohawk did business.) It's also worth considering other plays in the Bakken shale that operate next to Brigham Exploration.
Two stocks that I'd bring to your attention are Oasis Petroleum (OAS, news) and Whiting Petroleum (WLL, news). Oasis holds leases on about 303,000 acres in the 200,000 square-mile formation. Whiting has leases on 579,000 acres, mostly in the southern part of the basin. To date, most production has come from western North Dakota. The U.S. Geological Survey estimated in 2008 that the Bakken formation, the largest contiguous oil deposit in the United States, could contain 4.3 billion barrels of recoverable oil.
Here the game is big, new offshore discoveries that might be tempting to the international majors or to national oil companies looking to lock up future sources of supply. Talisman holds unconventional natural gas and oil leases in the U.S. Eagle Ford and Marcellus plays, but a bigger attraction is the company's 14.6-million-undeveloped-acre position in Southeast Asia. In 2011 Talisman has increased production in Indonesia and Vietnam and started new development projects in those countries and in Papua New Guinea. Talisman projects that production in Southeast Asia will grow at an average annual rate of 8% to 10% through 2015. Tullow's Jubilee field in Ghana is a major extension of the exploration horizon in western Africa -- it's not just about Nigeria anymore.
As acquisitions, both Talisman and Tullow would be bigger mouthfuls than an Oasis or a Whiting. But with cash so cheap, oil prices down and oil companies casting worried looks at the future, I don't think they're outside the current deal envelope.
And at the worst, you'd be buying stock in oil companies that are themselves expanding production and that can expect the future price of oil to be higher than it is in today's soft global economy.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Brigham Exploration and Oasis Petroleum as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
VIDEO ON MSN MONEY
ok Someone, you asked: A flat federal income tax of about 17% with about @ a $40,000 exemption/couple filing jointly with no other exemptions or deductions would ELIMINATE all the loopholes and special rates paid [or in many cases not paid] by all those corporations and billionaires who can afford to pay hundreds of thousands of dollars every year to the lobbyists and politicians who write the loopholes. The median income in the US is @ $48-49,000 so half of the population would pay $0 to $1530 total federal income tax. The tax could be filed on a postcard, eliminating the need to hire accountants[sorry!], and greatly reducing the IRS headcount. Billions more would be collected by ending the loopholes.
Also pass legislation designed to prevent Congress from continuing their practice of adding individual IRS loopholes to other bills -maybe a new amendment to the Constitution forbidding the making of any changes to the federal income tax code or any other federal taxes that are not brought up in a separate federal income tax bill before Congress, and such a bill not to be brought before Congress more frequently than once a year, and to be published to the public two weeks before being brought to a vote.
Also fix the loophole that a company is considered a 'foreign' co and exempt or partially exempt from federal income taxes if they have their co. 'headquarters' in a foreign country. Tie their taxes to the value of the business they conduct on US soil. Many companies list their HQ in different islands to avoid US taxes. Some time back [I think Geraldo] there was an investigation that revealed several hundred companies who gave as their co headquarters an address in ONE small, vacant building in the Caribbean.
Also a Constitutional amendment forbidding automatic budget increases for all federal departments and programs. Right now all federal departments and programs get automatic 5% annual budget increases, and these increases are figured into our national debt load. All of us taxpayers have had to cut back, why are we not only not cutting back all federal spending, but instead giving all departments an ADDITIONAL 5 % !
I do not think you get it. The gas bill for myself and my son is approaching my monthly house payment. High gas prices are a big drain on the economy. For every increase at the pump people have to cut somewhere else. That means that the oil companies get more and all others get less. All others includes charities and people helping their kids, friends, & relatives. The money I would normally give the Salvation Army last year went to buy gas. Today's kids are suffering because parents have to spend more for gas and are able to save less for college costs and their retirement.
This wasn't the forum for you to vent about not being given all the drugs you want. But since you did, Here's a little secret for you: The mandated 3 month narcotic reviews, yeah, your doctor can do it once a year. Same with the monthlies. UNLESS you have been 'flagged' as a junkie just trying to get drugs. I am a combat wounded veteran. I don't get a check for 'arthritis' like you. I work and pay taxes to support you. And the mental problems where you 'came off your meds', I go a little crazy too...........every time I see someone like you trying to ride your imaginary hero status. Those of us that support the people like you, we are getting really tired of it.
My word, but you people can't even wait DAYS to start rewriting history. Let's recap:
LIBYA: 1 dictator removed from power
COST = ~ 2 billion $US
US CASUALTIES = 0
IRAQ: 1 dictator removed from power (after the stated cause for the war changed TWICE!)
COST = ~ 2 trillion $US and counting
US CASUALTIES = 4000+ dead
The extreme right wing propaganda machine would have you believe that only they have the national security and defense credentials to effectively further strategic objectives in the world. Unfortunately the facts clearly show otherwise. Get cracking guys. You have a LOT of history rewiting to do...
How do we stop this? Voting for the third option on your ballot. Right next to or below your options for Democrat and Republican should be a third party. Usually it is Libertarian, and they want to shut down most of the government fat, saving our tax dollar in the process. Stop fueling the fires of big oil. Vote out the Republican and Democrat monkeys.
I am a disabled veteran with psych and physical ailments from my military accomplishments between 1990-1993. I was on 7 psych medications and chose to stop taking them over a year ago. I have a service dog (MARLEY) she helps with my anxiety levels but without me using “Black-market” marijuana its harder for me to control, without marijuana the ARTHRITIS in my back would be more painful. I have a young friend of mine who is diagnosed with MS (multiple sclerosis) he too benefits from the effects. I say to you the readers KNOW-THE-FACTS…..If it’s legalized it too would stimulate the economy by shutting down unneeded prisons and government spending on prison guards , low-level law officials and programs like” NARK” and “DARE” that eat at local community budgets(This would put the MONEY back where it came from Social Security, Healthcare and WEL-FARE). These are local programs formed by the government under the “war on Drugs” with money bribes to your local politicians. why do you think we all want to know now “WHERE DID THE MONEY GO ?” The budgets are done every year the money is hidden in programs!!!Have we forgotten we gave IRAQ “GRANTS” to rebuild not LOANS ? How about the tsunami $$ to Japan to rebuild or to Indonesia to rebuild OR HAITI after their earthquake to rebuild ? I have an IDEA use US tax dollars to help the US TAX PAYER……….The sad part is we the people didn’t vote for that congress did for us. when we have a crisis we don’t have the money . Not to mention the new STATE “regulation” on pain medication means I now have to drive to my doctors once a month instead of once-every 3. The raise they are considering for SSDI is a joke compared the the gas$ increases over the past 3yrs. WE keep writing laws that keep LOW-income, LOW-income. wall-street has the gas market cornered their job is to make their investors money, it’s congress that’s spending our money and draining the purse not WALL street. Try sleeping at night knowing the country i was injured protecting is the same country I’m now fighting to legalize an” alleviation” from my symptoms.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The major averages finished the Tuesday session near their lows with the Russell 2000 (-1.0%) leading the slide. The S&P 500 lost 0.5% with nine sectors ending in the red.
Equities indices started the day with modest gains and spent the first two hours of action in the neighborhood of their flat lines. Although the early trade lacked clear sector leadership, that could have been overlooked due to the strength among heavily-weighted sectors like health care (-0.3%), ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'