Pounding the Table on Oil + My Top Oil Stock Pick

Warren Buffet once said:

“Opportunities comes infrequently. When it rains gold put out the bucket, not the thimble”.

I kept this quote in mind as I watched oil prices crumble last year amidst the pandemic and oil company stock prices reach depths not seen since the 1990’s.

After investing a modest amount of money in oil stocks during spring/summer of 2020, I made a big decision in fall 2020 of taking out a home equity loan to invest primarily in oil stocks as well as a few other beaten down value stocks (banks, REIT’s, and airlines stocks mostly).

This song from Justin Bieber featuring a laid-off oil worker signaled the bottom in oil for me:

In retrospect, this oil double down worked out splendidly, with some of my oil stocks up 3-4x from fall 2020 levels. But at the time I was definitely nervous although I still pulled the trigger. So why did I make this leap even though I’m not a degenerate gambler? It all comes down to supply and demand math.

When we put the pandemic in the rear-view mirror, global oil demand in 2022 is almost certain to recover to its 2019 levels if not higher. People are raring to travel by land, sea, and air after being locked inside for a year. Auto sales globally have surged as consumers reduced public transportation use. In the US, consumers have migrated from dense urban centers to spaced-out suburban homes, where you need to drive much more to get around.

But is oil supply ready to meet the challenge of recovering demand? It will all depend on North American shale production which has driven the large majority of total global oil production growth in the past decade. However, my bet is that US oil production may never hit the peak production rate of 12+ mmb/d hit in 2021 for a number of reasons:

1. Huge decline rates of legacy shale production

2. Forced capital discipline of production companies

3. Banks withdrawing reserved-based lending (RBL)

4. Best shale acreages already tapped out

In my view there is a looming oil supply crisis coming in 2022-2023, which may be one last hurrah before oil slowly descends into terminal decline in 2030+ with electrification taking hold. But even in a declining industry you can still make a lot of money - just ask shareholders of tobacco companies!

“The fear of peak oil demand is leading to the reality of peak oil supply”.

I have invested in a basket of oil companies that are highly torqued to upward prices movements of oil. Forget Chevron or Exxon - I’m talking about companies that could provide 5x returns if oil moves from $60 to $100.

My top pick in the oil space currently would be Oasis (OAS). The company emerged from bankruptcy late 2020 with a clean balance sheet. After monetizing some midstream assets in early 2021, the company now has zero net debt. If you strip out its ownership of OMP stock, the rest of Oasis’ upstream business is trading for less than 2x EV/EBITDA, which is much lower than the 3x-4x multiple you see its peers typically trade for.

My hypothesis for why OAS is trading so cheaply is that because the company recently emerged from bankruptcy, many institutional funds cannot invest in it due to investor policy mandates. And retail investors are staying away as the stigma of bankruptcy remains. But ironically, OAS is one of the safest and most investor-friendly oil stocks around, given clean balance sheet, dividends, share buybacks. Most of its shareholders are former debtholders, and therefore are keeping a tight leash on the company to remain disciplined, generate cash, and return that cash to shareholders in the form of dividends & buybacks.

As OAS continues to demonstrate strong financial results, institutional money will flow back in and the stock should benefit from a upwards re-rating of trading multiples. The stock has greatly outperformed its peers during the last 3 months and I expect the stock to hit triple digits by end of year.

All good things must come to an end, of course, and my oil investing journey will likely conclude once oil moves past $70-$75 range. At that point I’ll start scaling out of my oil stock positions with healthy profits and plan to be completely out at $80+ oil.