I am a certified news junkie and have been for most of my life. As such, I have been paying close attention to remarks and recaps coming out of Davos Switzerland and the World Economic Forum.
There have been some interesting exchanges already, and one of the more interesting set of comments concerned oil prices. Claudio Descalzi, the head of Italian oil giant ENI SpA (ADR) (NYSE:E), said that the recent price cuts could have unintended consequences leading to a massive oil price shock, with crude reaching $200 per barrel in the next few years.
The cutbacks in capital spending leaves the world in danger of a severe oil shortage in a few years according to Descali.
Patrick Pouyanne, CEO of Total SA (ADR) (NYSE:TOT), the French oil and gas giant, agreed with Descali’s outlook. According to Reuters, Pouyanne warned of upcoming production shortages:
“There is a natural decline of five percent a year from existing fields around the world. That means by 2030 more than half of the existing global oil production will disappear. There is an enormous amount of money that needs to be invested to get another 50 million barrels per day of new production.”
OPEC disagrees with calls to cut production, thinking that other producers like the U.S., Canada and Russia will fail to follow suit. OPEC Secretary General Abdullah al-Badri told Davos attendees, “If we had cut in November, we would have to cut again and again as non-OPEC would be increasing production.” He also said that prices would recover in due time: “Prices will rebound. I saw this 3-4 times in my life.”
Saudi Aramco CEO Khalid al-Falih agreed with that sentiment, saying that oil prices will rebound, but it will take time.
Unbelievable Opportunity
If these outlooks are correct, they set up a potential wealth-building opportunity of epic proportions for aggressive investors willing to commit to a long-term plan of buying energy companies. This strategy is built on patience and concentrated buying — it’s not for everyone. However, if done correctly, it could lead to enormous returns over the next five to 10 years.
There is plenty of disagreement about how we get there, but everyone involved in the discussion feels that oil prices eventually recover. Watching how fast rigs are coming offline in the U.S., I lean a little closer to the views of Mr. Descalzi and Mr. Pouyanne than the OPEC officials, but the strategy will work either way.
The strategy doesn’t involve rocket science, but it is fairly bold. You have to totally ignore the swings in total account value and stay committed to the approach. At times, you will probably show losses — possibly even significant ones. You need a really long time frame, but a decade from now, you will be a lot wealthier than you are today.
How It Works
Here’s what you do: Identify the large, integrated oil and gas companies that been around forever and will probably be around for the rest of our lifetimes. Companies like Total, Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B), BP plc (ADR) (NYSE:BP) and ConocoPhillips (NYSE:COP). When they trade in the bottom decile of stocks as ranked by Enterpise value to EBITDA, buy them.
Each month that these companies remain below that valuation, buy as much more as you can afford. Put the shares in the dividend reinvestment program at your brokers. Ignore short-term moves in the price — just keep buying when the valuations are low. You can add to your long-term return by picking just a few stocks and buying the one that was the worst performer in the past month.
When oil does get back up $100 per barrel (and higher), you will have made an enormous profit in your shares. If Descalzi is correct about oil reaching $200, we’re talking “I’m done with the world and moving to an island of my choice” rich if you invest a meaningful sum each month.
It’s bold. It’s aggressive. You will see some wild swings in your account balance. But with both the oil company executives and OPEC leaders in agreement about everything but the finest details, odds are very high that this strategy will work.
