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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The Best Way To Invest In Modern Day Oil Exploration

Although modern oil companies operate in a very different world from that of the villainous oil baron JR Ewing, the fictional Texan character can still offer investors some inspiration or act as warning in an industry where share prices can soar or crash in a day, depending on whether an explorer strikes oil or comes up dry. 

Explorers love to frequently trumpet exciting prospects. The dirty truth, however, is that the typical success rate is just one in seven wells.

Yet, even that grim statistic might be getting worse. 

Just a week ago, IHS Markit released an alarming report portending doom and gloom for the oil and gas industries. 

According to the numerical navel gazer, conventional oil and gas discoveries over the past three years have hit their lowest levels in 70 years. 

What’s more, no significant rebound is in sight. The report blames persistently low oil and gas prices that discourage wildcatters and also increasing competition from cheaper (and dirtier) unconventional drilling (shale and fracking).

At times like these, we are tempted to walk down memory lane to a time when gushers--like those of the Spindletop fame that ushered in the golden age of oil--were the norm.

(Click to enlarge)

Source: US Funds

The Biggest Oil Discovery, Ever

It’s rather unfortunate that the biggest oil discoveries have more often than not been presided over by large, monolithic state-owned oil companies.

These giants don’t offer investors much leverage. 

Saudi Arabia’s Ghawar oil field is the grand-daddy of oil finds. The onshore field is the largest in the world and is located some 200 km east of Riyadh. 

It was discovered by the Standard Oil of California (forerunner of Arabian American Oil Company, later Saudi Aramco) in 1948. Standard Oil obtained concessions from the Saudi government for oil exploration and drilling.  Related: Is This The End Of The Lithium-Ion Battery?

Back then, Saudi Arabia was a backwater, sparsely populated country before a water-discovering expedition serendipitously discovered oil instead.

The 2,800 kmsuper-giant has been divvied up into six parts with total reserves estimates at a mind-boggling 162 billion barrels of oil at the time of discovery. About 70 billion barrels of  oil reserves and 90 trillion cu. Ft of natural gas remained at the beginning of 2013. Daily production is pegged at ~3.8 million bbl/d (barrels per day).

Public Companies: The Biggest Share in the Biggest Field

The prize for the largest ownership (among publicly traded companies) goes to Chevron Corp. (NYSE:CVX) which owns the biggest share of Kazakhstan’s Tengiz Oil Field, the sixth largest in the world. 

The Tengiz field is owned by a joint venture known as Tengizchevroil between Chevron (50%), ExxonMobil Corp. (NYSE:XOM) (25%), Kazakhstan’s state-owned oil and gas company KMG (20%) and LukaArco, a subsidiary of Russian oil company Lukoil (5%).

Tengiz was actually discovered by Soviet geologists in 1979 before Kazakhstan finalized the consortium agreement with Chevron in 1993. 

Tengiz has oil reserves estimated at 25 billion barrels with current production rate of 540,000 barrels per day. However, that figure is expected to rise to  approximately 1 million barrels of oil equivalent per day when Chevron completes its ambitious expansion project for a princely $37 billion sometime in 2022.

Investors went wild over this deal, which saw CVX shares jump 30 percent in 1993. 

The company’s value has grown tremendously over the years, up nearly 1,300 percent since 1993 after accounting for the 2 for 1 stock split in 2004. 

That’s nearly double the 680-percent gain by the S&P 500 over the period. 

That’s quite remarkable considering it paid $36 billion for Texaco in 2000.

The Next Big ‘Gusher’

Not all discoveries are gilt-edged, and big discoveries do not always translate to stellar share performance--at least for the supergiants.

Take Exxon Mobil, for instance.  

In May 2015, Exxon made what its executives described as a ‘fairytale discovery’ off the coast of tiny Guyana. At a time when discoveries are increasingly hard to come by, and almost certainly bound to be offshore in the deepwater in very complicated geologies, gushers don’t actually gush. Instead, they take ages to explore, develop and bring to production. 

Related: The End Of The Asian Oil Product Glut

By all accounts, Exxon’s 14-strong string of discoveries should have investor radar going wild.  

Exxon estimates its discovery contains more than 4 billion barrels of oil equivalent potentially producing 750,000 barrels per day by 2025. And it’s already developing for first production early next year. 

So why did XOM shares actually shed more than 12 percent from May to December 2015? And why are they now down 22 percent since the discovery announcement?

That’s the problem with diversified supergiants. Investors get no real leverage to a specific discovery. 

The real leverage is when a small-cap or a mid-cap makes a huge discovery and sets itself up to be acquired by a giant. 

For the supergiants, there are no more ‘gushers’ that can make stock prices pop. Here on out, it’s only geopolitics, war, and the macro-economics of supply and demand that can really move the needle. 

If you want to make money on exploration, look to the smaller players. 

By Alex Kimani for Oilprice.com

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