For now, the planets seemed to be aligned for a resurging bullish oil market. First, a report from the US Energy Information Administration reported that the amount of crude in storage fell by 1.6 million barrels. The draw from inventories was directly connected to the rise of crude oil exports to over 2 million barrels a day during that time, nearing a record reached in October of last year, and to strong economic growth worldwide as the International Monetary Fund tabulated global GDP rose 3.7% last year.
Then, Suhail al-Mazrouei, Energy Minister of the United Arab Emirates and OPEC’s rotating president, said the 14-member producer group is working on a plan for an official alliance with 10 other petrostates—which included Russia—aimed at propping up oil prices for the near future. A deal of this nature would amount to a restructuring not seen since OPEC was formed in 1960.
Following this, Saudi Arabian Energy Minister Khalid al Falih declared that January-to-March crude production would be well below the output caps, and that the Saudis and their allies would look to create a permanent framework to stabilize cuts after the supply caps end this year.
It is important to note that the relationship with Russia is vital, albeit sobering politically, for Saudia Arabia. It is no secret that the two countries are often at odds in West Asia, but economic stability is a powerful motivator. Saudi Arabia now needs the Russians to help them keep the country’s finances and the oil market steady as the former prepares to backstop the IPO of the state oil behemoth, Saudi Aramco. Moreover, Russian President Vladimir Putin is facing an election in March and a solvent economy would hypothetically lend a hand to his campaign.
The US Shale Boom Changed the Playing Field
The aggressive moves by OPEC and other oil-driven economies stems from the shale boom in the United States. Furthermore, it could be said that both Saudi Arabia and Russia are using defensive logic as the International Energy Agency (IEA) believes that the US could outproduce Russia, currently the world leader, by 2019.
Lastly, there is Donald Trump and his administration’s impetus for US energy dominance. Outpacing Russia makes political sense as the US now has the ability to create a supply cushion as political turmoil rages in Venezuela, Libya and Nigeria, which normally would interrupt flows causing prices to spike. The US’s recent abundance of oil has given the administration the diplomatic capital it craves through an enhanced bargaining posture if fresh political tensions arise in the Middle East or elsewhere.
In light of all this, analysts across Wall Street are seeing these flags and raising price forecasts, specifically Goldman Sachs, who hiked their crude price as much as 33% to $75 a barrel by May and an astonishing $82.50 three months thereafter. Goldman joins Morgan Stanley and JPMorgan in ratcheting up its outlook, as economic growth and output cuts have helped to fast-forward a boost in prices. Morgan Stanley recently concurred that Light, Sweet Crude will reach $75 a barrel in 2018, while JPMorgan said it could rise to near $78 as oil markets tighten more rapidly than expected.
All things considered, the United States shale boom has effectively altered the oil landscape, not just across the markets, but also geopolitically. Particularly, in the past, Saudi Arabia kept prices low through oversupply in an attempt to price-out and kill off oil drillers in places like West Texas, Kansas and other fields across the heartland. However, in the end, this strategy backfired in their face as the survivors from the oil crash of 2014 learned valuable lessons about efficiency, speculation, staying lean and being hedged against uncertainty.
One company that is embodies this model and spirit is Viking Energy Group Inc. (VKIN).
Taking Lessons Learned and Turning Them into Profits
“The sector is cyclical and over the last two years—with oil prices falling to below $30 a barrel at one point early last year from over a $100 a barrel—it was a huge adjustment for existing players,” Viking CEO James Doris explained in an interview with Equities in May.“But for us, as a company in its infancy, and with low overhead and low infrastructure costs, it was a great opportunity to acquire assets at today’s prices.”
So, striking while the iron was hot, Viking constructed a robust portfolio of assets over the last five months utilizing the dips in oil pricing to scoop up oil and gases leases across Kansas, Missouri, Mississippi, Texas and Louisiana that just needed a little development. Doris and his team have a proclivity for finding low-cost, long-life oil acreage that were simply overlooked. The company has been on a tear since September of last year acquiring 60 working leases and buying out Houston-based Petrodome Energy, LLC.
For instance, when you look at the milestone Petrodome deal by the numbers, investors can get a sense of Viking’s business acumen and efficiency. The purchase of the privately-held conventional producer included current production of approximately 350 barrels per day (75% oil) and 11,629 in gross lease acres (9,360 net) as well as data pinpointing additional drill targets across Texas, Louisiana and Mississippi. Now, the estimated value of Petrodome reserves amounted to $16.3 million (with oil at $50 a barrel at purchase in October and using the discounted PV9 value), but Doris and company inked the deal at $3.7 million.
Not to mention, and as alluded to above, this deal was one of six acquisitions over the course of 130 days that included contracts with two commercial banks, three FINRA-member broker dealers and an energy-focused hedge fund. The remaining five purchases totaling above 5,000 acres are spread out across Kansas and Missouri. All of the properties coming under the Viking umbrella share similar characteristics: proven production with immediate appreciation, developmental potential and taking ownership of all the associated infrastructure, equipment, fixtures, personal property, etc. located on the properties. In addition, in the case of the Petrodome deal, the acquisition brought aboard more experienced veterans from the private company adding over a century of wisdom in petroleum engineering, geophysics and experience ascertaining the lucrative Gulf Coast oil market.
In short, Viking has mastered the conservative approach to the oil sector by always looking to maintain downside protection and create upside potential in every potential lease. While Doris and his team can boast over a century of experience in E&P, their savvy science – stockpiling wells at a bargain and squeezing more out of them while looking for more drilling targets in the area – was hard won in the challenging times when oil was down on its luck. Now, as oil prices rebound, Viking is hoping that the market will take a hard look at its proven portfolio at current prices.
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