This week, an update on an investment I recommended last year in late May – Silver Run Acquisitions Corporation, then the SPAC of ex-CEO of EOG Resources, Mark Papa. That SPAC morphed into an 89 percent controlling investment in Centennial Resources (CDEV), with Mark Papa taking the helm at the Permian shale company. So far, the initial investment has paid us very, very well indeed, as the initial investment of shares has converted into a near doubling – from the original $10 rollout of the SPAC to the current share price in Centennial over $18. But on top of this, shareholders of Silver Run also gained warrants in the conversion for another approximately 1/3 of total shares at an exercise price at $18 a share.
And here, we have a great opportunity to talk about where crude oil is, where it’s going, and whether this piece of the Silver Run/Centennial puzzle is a do or a no do.
In the last few days, we’ve seen the rapid selling of energy futures, which we all noticed were well-nigh overrun with long positions. Here at the oil and gas insider, the ‘numbers game’ authors who write below my column did a tremendous job of showing just how strong the speculative long positions were in crude, in this case almost as deep a ratio as we’ve ever seen.
And as those energy futures unravel, today under $50 a barrel, we have to take a good hard look at how we’re going to manage our energy stocks – and specifically the case of the Centennial warrants, needing an answer later this month.
If we take, as a given truth, that the drop in crude prices is less about the increase in stockpiles or the incremental rise of production here in the U.S. and more about the long/short ratio in the futures markets, we should gain an insight about what to do with this drop in prices. Crude analysts are surely wringing their hands about U.S. production again, drifting towards 9 million barrels a day, and wondering, even now, whether OPEC will again extend production limits in May, more than two months away. But if we keep our heads, this drop in prices will appear to be more of an opportunity gained than a temporary loss to fear.
We’ve found a new sweet spot for U.S. crude, or at least shale production, that just barely tips the balance at over $50 a barrel. As crude drops below that level, producers must again turn off rigs or cancel the scheduling of new DUC’s that they had hoped to bring online. All of the work that’s gone into efficiencies in laterals and spacing is being felt today as only the most responsive acreage is appearing in new rig counts and production margins. But, that is a limited number of producers and a limited number of wells. While the markets and the analysts are focused on these few producers and their rigs and the temporary swelling of U.S. stockpiles driving prices lower, the demand curve for global crude continues to catch up with the global supply glut.
OPEC compliance, which in January was an unheard-of 90 percent, crept up to an even more unbelievable 94 percent in February. At the annual CERAweek, not only did OPEC beg for help in limiting global production to U.S. frackers, but some bigshot oil guys did too.
But we must remember that this dream of cooperation between the U.S. and OPEC is focused on only one area: The Permian. And this is precisely where we’ve focused all of our core energy plays and where Centennial is based, as well.
So, while oil markets can temporarily rotate under $50 a barrel at the same time as global markets continue to slowly, but surely, rebalance, and while OPEC might plead with U.S. producers during their own supply curb, we’ve surely got the inside track in long-term, profitable investments in oil when we continue to concentrate on Permian players.
Which brings me back to Centennial warrants. As crude prices have swooned, some U.S. oil stocks have swooned as well – like the aforementioned bigshot’s Continental Resources (CLR), down 6 percent yesterday alone. Less harmed, of course, have been the Permian producers – and Centennial itself is still marginally above that $18 strike price for those warrants. I believe it’s there for a reason.
This is a real opportunity – maybe the last one you’ll see. If you own these Centennial warrants, you need to exercise them. And if don’t own the warrants and not yet looked at Permian oil producers to start or round out your core oil portfolio, you need to do that now too.