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Dear Old Friend,
Despite Goldman Sachs’ new $90 price target for oil, West Texas Intermediate (WTI) crude is down 3% to start the week.
No surprise. As I said yesterday, ignore them. Invest in oil stocks as if crude will trade between $65 to $70 in 2023. From there, focus on names with strong management, juicy dividends, and low production costs.
That’s a very simple thesis – something that can make you a lot of money in the next 18 to 24 months.
And you’ll never guess who just confirmed that strategy.
JPMorgan Chase? Bill Ackman? No.
How about… National Public Radio?
It’s true – I couldn’t make this up. Here’s what you need to know…
Why The Permian is the Best Place to Invest Today
NPR wants its traditional audience to know there’s a “different” type of oil boom happening…
In a soft, soothing voice, NPR tells listeners that oil-producers are engaging in something that might scare the more progressive drivers into pulling off to the side of the road and sobbing into their latte.
Companies aren’t expanding oil production in the Permian Basin in the name of capital discipline. They’re sitting on their assets. They’re not drilling just to drill.
As the NPR report notes, when oil prices were higher in the past, shale producers rushed to expand production.
The goal was to make as much short-term profits as possible.
But things changed. Now they’re exercising patience with their shareholders’ best interest in focus. Naturally, this frustrates politicians who want cheaper gasoline prices as a talking point.
Sadly, government agencies from the Environmental Protection Agency (EPA) to the Department of Energy have made it harder for producers to justify expansion and produce new wells in undeveloped regions. In addition, rising inflation has increased the costs of simply maintaining previous production.
Producers are sitting on their hands. They’re idling their least productive or profitable wells.
During this oil boom there are in fact fewer rigs in operation.
This is proof that companies won’t make the same mistakes they did in 2014 when they overproduced and fueled a staggering oil price collapse, from north of $100 to under $40 a barrel in 18 months.
Of course, you already know this story.
I’ve been talking about it for six months.
NPR notes that breakeven prices in the Permian are $61 per barrel. But that’s the cost of a new well.
Companies like Exxon Mobil (XOM) are trying to get existing oil wells down to $15 per barrel. So, it doesn’t matter if oil is $65 or $100. It doesn’t matter if we face a recession or experience another decade of lackluster growth; they’ll be minting profits.
Now is the time to act, while oil prices are under $70 and Permian oil stocks are still very cheap.
The first tool you can use to find great oil companies practicing “moderation” and “capital discipline” is the Piotroski F-Score. Remember, this is a nine-point balance sheet analysis created by Stanford Professor Joseph Piotroski. We are always looking for names boasting a score above 7. That tells us the company is exercising caution and discipline as described in the NPR article.
Next, you’ll want to look for underpriced stocks. We use the Graham number, enterprise multiples, or buyout figures to determine which names are historically cheap and inexpensive compared to their peers.
Finally, we want to look for a strong history of dividend growth and buybacks. We want to own companies that prioritize returning capital to shareholders… instead of wildly speculative names.
These tools can produce a list of names that include Occidental Petroleum (OXY), Permian Resources (PR), PDC Energy (PDCE) and Ovintiv (OVV). Knowing the tickers is a great start, but this week, we’ll discuss how to start building positions.
See you out there,
Florida Republic Capital (Available on Substack)
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.