Why The Saudis Folded Like a Cheap Tent

The volatility in oil over the last two weeks has been gut wrenching.
But an OPEC deal to limit oil production was reached.  The Saudis and the Iranians have always been the stumbling block for such a deal.

Why did the Saudis cave now?  I would give two reasons:

1. Last month they reported that reserves had fallen to US$562 billion, down from a peak of US$746 billion in August 2014. That’s a burn rate of about $8 billion per month, slightly more than sending a couple of kids to private school.
2. The Saudis realized there was another massive oil play that can make money at $45 oil.

Billions Of Barrels Of Oil With Saudi-Type Economics

The Permian Basin has been producing oil since 1921.

It is the only oil field on Earth that can rival the size of Saudi Arabia’s Ghawar.

It can now also match Saudi oil economics.

In 2014 the Saudis looked down the tunnel and saw that horizontal drilling had given a giant new life.  The Saudis saw that the Permian was barrelling right towards them.

They made a radical change to their oil market strategy as a result.

What the Saudis realized was that unlike the Bakken and Eagle Ford, the Permian could compete with Saudi oil production economics.  The Saudis realized that the Permian’s ten to twelve stacked oil formations allowed for incredible cost efficiencies.

And would generate a tremendous amount of production growth for years to come.

Take a look at the slide below from Pioneer Resources.

Source: Pioneer Resources Corporate Presentation

This is what Pioneer believes that the Permian is capable of doing at current oil prices–at $40-$45/b oil prices.

If the Permian can do this at $40 per barrel, what would it have been capable of doing if the Saudis had cut production and kept oil at $80 per barrel?   No wonder the Saudis changed course.  Cutting production would have delayed the inevitable and allowed the Permian to take their market share.

This is an oil play with Saudi-like economics located safely within the confines of the United States of America.  It is a dream come true for American oil producers.

No wonder companies are willing to pay $30,000 per acre for land even with oil prices at current prices.  For them this is the chance of a lifetime.

Just as it is for the tiny company that is the focus of my latest subscriber report.  It’s a company with a great land position that the market has completely overlooked.

The Permian Merger And Acquisition Rush Is In Full Swing

There are two main parts to the Permian.  There is the Midland Basin and the Delaware Basin.

The industry has known for a couple of years what the Midland is capable of.  That it could be profitably developed at very low oil prices.

It wasn’t until this year that producers figured out that the Delaware Basin’s economics are just as good.  OGIB subscribers and I were lucky to get in front of this trend by owning Resolute Energy (REN-NYSE) where Delaware Basin drill results caused the company’s stock price to do this:

These drilling results from Resolute and others has made the Delaware Basin’s economics crystal clear.  The result has been a mad scramble to lock down acreage in the Basin at eye-popping prices.

What companies realize (and rightfully so) is that there is one chance to secure acreage in this play.  A play that can actually make money at $45 oil.  An oil price that these companies may be faced with for years to come.

Most of the publicly traded companies with Delaware Basin exposure have seen their stock prices soar; Resolute being the perfect example.

There is however one little company that has a core Delaware acreage position that has to date escaped much attention.  The market is currently valuing this company at less than a third of the price of nearby (and very recent) acreage sales.

The company also continues to add to its land position.

The company has no analyst coverage.  And it hasn’t started drilling any headline making wells.

That is why it is priced the way it is today.

For the few of us who are aware of the company–the value here is clear.  We know exactly the acreage it owns, and we know exactly the prices paid recently for acreage around it.

All this requires is simple math and enough patience to wait until the market catches on.  The only variable is whether the market catches on three months from now or tomorrow.

That is why time is of the essence on this one.

Resolute Energy was my first big Delaware Basin winner.  I believe this little company will be my next.

The name and symbol for this Undiscovered Delaware Gem is right HERE.

Keith