Interesting Tidbit on Ring Energy’s Purchase of Delaware Basin Acreage

Oil Rigs

Ring Energy (REI), one of the portfolio companies in our PM101 Speculate Portfolio announced today that it has signed a purchase and sale agreement to acquire producing wells and leaseholds located in the Delaware Basin. With the acquisition, which currently has net daily production of 1300 barrels of oil equivalent (boe) per day, Ring will have net daily production of 2, 750 boe/d. So if you’re adding this up at home, that is now double the amount it was producing yesterday.

Portfolio Strategy – Is it Time to Dip a Toe Into Oil?

The decline in the price of oil has occurred rapidly and has shifted the balance of power and wealth back to countries that are net consumers of oil after many years of accumulating benefits to countries that are net exporters. For several years, article after article was written about how the emerging economies were poised to surpass those of the developed countries due to the growth of the middle class, higher productivity, and GDP growth that was oftentimes twice that of the developed world.

But now that oil prices are at a multi-year low, the balance of power has shifted back to countries that are net importers of energy.

The Pros and Cons of Investing in Oil

Oil well

On November 5th, we wrote a piece titled  A Contrarian Might Be Looking at Commodities, about investing in commodities and how contrarian investing, done successfully, can result in very good returns. That being said, most investors don’t have the stomach or the skill to implement a successful contrarian strategy. The article was written when oil prices were at $77 and oil prices have continued to decline to the mid 50’s. We cannot say for certain whether it has hit a bottom or there is more downside to come, but we do know that there is plenty of pessimism about energy and oil in particular. So, has our opinion change on commodities and/or oil investing since we wrote the article? Not at all. In fact, we also wrote an article about  a small oil and gas exploration company called Ring Energy, Ring Energy: Digging for Black Gold in All the Right Places, on October 8th. Since then, Ring Energy stock has taken a beating, at one point having dropped more than 40%. We bought more!!! Because as our old friend Sir John Templeton was quoted as saying,

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.

We are certainly in an era of pessimism. But investing in oil or investing in times of pessimism isn’t for everyone. There are pros and cons to investing in any sector and any given point of the business cycle, and oil is no exception. 

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

REI Logo

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:

Ring Energy: Digging For Black Gold In All The Right Places

Oil Drilling

Some of the largest companies in the world operate in the oil and gas industry. Exxon Mobil (NYSE:XOM) has a market cap of $402 billion as of 9/29/2014; Royal Dutch Shell (NYSE:RDS.B) has a market cap of $243 billion; PetroChina (NYSE:PTR) has a market cap of $236 billion; and Chevron (NYSE:CVX) has a market cap of $230 billion. They weren’t always that big, even though it seems like forever that these companies sat atop the rankings of largest global companies by market cap.

Investing in any one or several of these companies is probably a pretty safe bet that you will generate some kind of positive return over the long-run. Sure, in the short-term, prices can fluctuate based on oil and gas prices or geopolitical tension across the globe, or even another war, as is the case in Iraq, Syria, Russia, Ukraine (it seems to never end). And while investing in some of these large mega cap names can reduce volatility and minimize the risk of losing your investment, the upside is limited by the fact that any new oil or gas discoveries made by these companies is a mere drop in the bucket and rarely moves the needle on their revenues and/or earnings. Investing in them would be a smart, albeit safe move. If, on the other hand, you’re willing to accept higher volatility or the risk of capital loss for a much higher potential payoff, you may also want to consider looking at the little guys in the oil and gas space.