WTI crossed $100 yesterday which prompted me to produce this little Oil propaganda video.
Oil producers have pretty simple business models. You own a claim on the oil price they realize minus their costs.
This oil producer today has a cash cost of $11 per barrel of oil equivalent. Realized revenue per barrel isn’t encumbered by too many hedges.
Based on my valuation model it is currently priced for $67.5 WTI oil, which tells you everything you need to know about this: people think the current spike in oil prices will be faded and prices will return to pre-war levels.
Which is exactly how I’ve been positioning in energy since we got shut down this summer with a fake MoU which postponed the inevitable.
Sure torque to WTI or Brent is nice, and to a certain extent, all of our energy positions have some, but more important than that is: what stocks do just fine, if post conflict, whenever it ends, oil stays high for a sustained period of time, as a bid to refill reserves meets operational difficulties in restarting production.
These oil stocks have only partially rerated, even though they are now bringing in big boy cashflows.
Any more quarters of this means: more debt repayments, more reinvestment, more share buybacks, more dividends.
All the things that make good companies BETTER.
I actually would prefer a world in which oil remains longer for $80 to $100, rather than one where oil is way into 3 figures. I could make a lot of money from these cashflowing businesses, and we wouldn’t have to endure a tough transition.
But if we go up to crazy prices, the tail of the curve will be repriced higher, and this will be a winning trade.
The only thing that kills this is a resolution of the conflict.
The stock covered in today’s article is priced as if oil is going to be $67.5 forever. It is giving no consideration to the fact that WTI closed at $100 on Friday. If you believe that the conflict will last longer than they tell you, then this is worth way more.
Heck at $75 oil this has 25% upside. At $100, it’s a double. It’s a very well run company that buys back shares, pays a dividend, and has a steady trustworthy management team that have been around the block a few times.
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