Portfolio Management 101 > Blog > Drop in Oil Prices Does Not Change My Opinion of Ring Energy

Drop in Oil Prices Does Not Change My Opinion of Ring Energy

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Earlier this week I posted an article on Ring Energy Inc. (Ring Energy: Digging for Gold in all the Right Places) In it I describe the attractive opportunity available to oil and gas drillers in the US, and particularly those that focus on the Permian Basin. With the sharp decline in oil prices, I’ve been asked whether the investment thesis is still valid and where oil prices might stabilize.

To the first question, the answer is yes, the investment thesis is still valid despite the sharp price in oil. In fact, the Wall Street Journal published an article on October 9th, that addresses the challenges for some of the oil and gas drillers if prices drop another $4-$5. Read Article (subscription required) The article specifically mentions the Eagle Ford Shale and the Permian Basin:

Some U.S. oil fields, including the Eagle Ford Shale and Permian Basin in Texas, would remain attractive for drillers even at much lower oil prices. An analysis by Robert W. Baird & Co. said prices could drop to $53 a barrel in certain parts of the Eagle Ford and still be profitable to drill.

The same holds true for Ring Energy, which has an approximate drilling cost of $51.70 per BOE ($9.00 operating costs, $29.05 Depletion, Depreciation, and Amortization, and $13.65 General and Administrative). With cash of $45 million and cash flow per share of $0.51, Ring has plenty of cushion.

The second part of the question is a bit harder to answer. Prices of WTI Crude have come down to the mid 80’s and there has been a sharp drop in just the last 10 days from $94.

Oil Prices

 

 

 

 

 

 

 

 

 

 

Can it continue to decline? It certainly can, and the rise of the dollar doesn’t help because the stronger the dollar is, the cheaper the price of oil in dollar terms. Look at the chart of the USD index below. Its almost the exact opposite of the price of oil.

USD Chart

 

 

 

 

 

 

 

 

 

Source: Marketwatch

The strength in the US Dollar is not the only reason the price of oil has declined. While most analysts focus their analysis on the demand for oil (emerging market growth, growing populations, etc.) the only time we hear about the supply of oil is where there is a potential or actual disruption. Lately, despite the turmoil in the Middle East and Ukraine, supply has been quite steady and demand has slowed. While this could change abruptly, so far, oil is still flowing.

So how far can it drop? It could definitely fall further from these levels, but I find it difficult to believe that it could go all the way to $50. Unless it does, I’m still very bullish on Ring Energy.

For more information on Oil and Gas Drilling, check out:
Oil & Gas Production in Nontechnical Language
Oil 101
Fundamentals of Investing in Oil and Gas

PM101

PM101

Investment Strategist at Portfolio Management 101
Patricia Moses has been managing investments since 2002 and has experience managing investments for individuals and institutions at all levels. She started her investment career in 1999 evaluating hedge funds and other alternative asset classes for a small regional investment consultant. After a brief time, she joined a family office as an Investment Advisor managing assets in excess of $300 million across a variety of asset classes.

Patricia joined Portfolio Management 101 in 2010 in a Portfolio Manager and Business Development role and became an Investment Strategist in 2014.
PM101
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