On July 20th, Bank of America/Merrill Lynch (BAC) issued a chilling research note with a prediction that Brent Crude Oil (which closed at $118/bbl in London today) will spike to $175/barrel sometime next year. Not five or 10 years from now but NEXT YEAR!
- “If Libyan production doesn’t return in 2012, monetary policy remains ultra loose, and real global economic output accelerates to 4.8% as our economists project, Brent crude oil prices could briefly spike to $175/bbl next year,” it said in an analyst note Wednesday.
- The bank went on to say that they currently see the Libyan oil gradually returning to the market by the second half of 2012, but warned that risks of delays to the return of output “remained firmly skewed to the upside”.
My personal portfolio (which is heavily weighted to domestic oil producers) should do quite well if BofA is right; but at what cost? I certainly don’t want the global economy to crash and experience hyper-inflation just to harvest some capital gains.
To see my opinion on where oil prices are heading, read my newsletter, “The View from Houston”.
I do believe that oil prices are going to drift higher and they could go a lot higher if the Libyan oil stays off the market and OPEC cannot come up with enough to meet demand.
I’m recommending to our EPG (www.energyprospectus.com) members that they stay heavily weighted to oil. Below are a few of my top picks from our Sweet 16 Growth Portfolio. They will all remain extremely profitable as long as oil stays over $90/bbl.
My focus is on finding companies with exceptional production and proven reserve growth. Oil prices will take care of themselves.
Disclosure: I am long all of these stocks.
Brigham Exploration (BEXP)
Brigham Exploration is a pure play on the Bakken Shale and it is heavily weighted to oil. In 2010 Brigham tripled their proven reserves and they are now on-track for approximately 80% production growth in 2011.
Due to weather related problems in North Dakota during the first half of this year, production is only up about 15%. The weather has improved in July and Bakken production is going up. Brigham is now completing eight new high rate wells per month and I expect them to double production over the next 12-months.
To date, Brigham has completed more than 70 consecutive long lateral high frac stage wells in North Dakota at an average early 24-hour peak rate of approximately 2,900 barrels of oil equivalent. Production does decline rapidly, but not until the wells payout in about 15 months.
In the Williston Basin, BEXP is ramping up from seven to ten operated drilling rigs by July 31. They continue to expand their acreage position in the Bakken / Three Forks play and will be adding two more operated rigs during the first quarter of 2012. Brigham now holds 224,400 acres in the core area of the Bakken with more than 780 net remaining drilling locations. The Three Forks could add another 500 drilling locations.
Continental Resources (NYSE: CLR)
Continental Resources is heavily weighted to oil with an impressive acreage position in the Bakken Shale, which they are aggressively developing.
The Company announced a 42 percent increase in their proven reserves, to 364.7 MMboe as of 12-31-2010. That is impressive by any measure. The increase is primarily the result of their extensive drilling program in the Bakken Shale, where independent reserve engineers are now giving the Company over 500,000 bbls of recoverable oil reserves per proven locations. Note that more recent wells with longer laterals and more frac stages are being assigned recoverables up to 1 million bbls per well.
CLR’s First quarter production was 51,662 boepd, a 7.5% increase over the 4th quarter despite weather related delays in North Dakota. Production was up 34% from a year ago. Continental is on-track to meet the company’s guidance of 35% to 37% year-over-year production growth this year. They are well on their way to tripling production from what it was in 2009.
Continental Resources is the second largest crude oil producer in the Rockies, with additional operations in the Mid-Continent (Oklahoma) and the Gulf Coast region. They now have 35 operated rigs running.
Denbury Resources (DNR)
Denbury Resources continues to grow production from mature oil fields in the southeastern U.S. that they are developing via CO2 flooding. Denbury is an industry leader in Enhanced Oil Recovery (EOR) giving it a solid base of very long-lived oil reserves.
DNR is selling 40% of their oil production into the Gulf Coast markets, getting better than a $15/bbl premium to West Texas Intermediate (WTI)*. Combined with the fact that they have approximately 90% of their natural gas production for 2011 hedged at $6.25/mcf, I’ve raised my Fair Value estimate to $31.00 per share.
* WTI is the benchmark crude oil for the U.S. market. It is the front month NYMEX contract for WTI that you see quoted on the business news each day. To see what crude oil is selling for around the world, you can go here.
Denbury is our “Stealth Bakken Shale” play. A few months ago Denbury announced that they believe their 275,000 net acres in North Dakota’s Bakken Shale contains recoverable oil of approximately 350 million bbls of light oil. This is significantly higher than previous estimates, putting Denbury in the upper half of independents operating in the play, yet you seldom hear the company mentioned as a player in the Bakken.
Denbury’s current production from the Bakken is approximately 5,000 bbls per day but it will be ramping up to over 10,000 bbls per day by year-end. DNR will have seven operated rigs running in the Bakken / Three Forks play by December.
NiMin Energy (NEYYF)
A small-cap that looks very interesting to me is NiMin Energy. They have hosted two of our EPG luncheons in Houston over the past 18 months and they have accomplished all the goals they set out to us. I’m impressed by their asset base and by their technical team.
NiMin’s current production is up to 1,200 bbls of oil per day and they should be ramping up to around 2,000 bopd over the next six months. All of their production is in Wyoming and California.
Some final remarks on what happens if oil does spike to over $175/bbl next summer.
- Gasoline prices will be up near $6.00/gallon, so an investment in manufacturers of high mileage hybrid cars might work.
- Mr. Obama is a one term president if oil is this high next November. Record unemployment plus record fuel prices is not a good recipe for re-election. If he decides to sell more oil from the U.S. Strategic Petroleum Reserve (which I pray he does not), you will know his campaign is in “panic mode”. Mr. President, “Please don’t deplete our emergency oil reserves.”
- There will soon be a lot of discussion about moving to natural gas powered vehicles. It is already underway for large trucks. Compressed Natural Gas (“CNG”) is definitely our transportation fuel of the future. CNG has higher octane than gasoline so cars actually run better on it. We just need a lot more infrastructure (i.e. – CNG service stations).
Good Luck and do your own due diligence before you invest in anything.
Dan Steffens, President www.energyprospectus.com
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