Exxon and Chevron CEOs See Oil Price Upside Risk - I See Tremendous Opportunities
“An iron law of business is that growth eventually dampens exceptional economics.” — Warren Buffett
As we enter the fourth month of the largest oil supply disruption in history, global oil inventories continue to draw at a rapid pace, with no clear end in sight. And here in the US, oil & products inventory levels are falling to multi-year lows.
Despite these record inventory drawdowns, oil prices remain well below where leading industry executives believe they should be.
In a recent interview, Chevron CEO Mike Wirth said that prices around $80 per barrel were near the low end of the company’s scenario range, while the upside could reach “very high numbers” if the inventory drawdowns persist.
ExxonMobil senior vice president Neil Chapman expressed a similar view, warning that “we’re approaching unheard of inventory levels” and that oil prices will spike to $150-$160 per barrel when inventories hit all-time lows in coming weeks:
I agree with them that oil prices may be headed much higher from here. Fortunately, as a smaller investor, I can invest in small, off-the-run oil equities that trade at large discounts to intrinsic value and still move the needle for me. Chevron and Exxon, by contrast, need to make very large investments to move the needle, which typically means paying much higher valuations for reserves, production, and cash flow.
Chevron’s recent acquisition of Hess is a good example. Chevron effectively paid roughly $42 per barrel of oil equivalent (boe) of proved reserves, a much higher price than what I can pay by purchasing shares of some of the smaller, lesser-known oil producers that I’ve shared here on Bison Insights:
In other words, while Chevron paid roughly $42 for every boe of proved reserves acquired, investors today can buy proved barrels for $10 per boe - or less!
It’s not that this was a bad acquisition for Chevron. Many investors assume these large companies have a major advantage because of their scale and high valuations. I see the opposite - it’s much harder for them to earn attractive returns, because their opportunity set is limited to very large investments, which are typically much more expensive and take longer to implement.
As a smaller investor, I can look for individual stocks like the ones I’ve shared here on Bison Insights, which are often overlooked and can trade at large discounts to intrinsic value.
Those companies come with more managerial and operational risk, but they also offer much more reserve value and cash flow per dollar invested. I’ve found that the sheer under-valuation of a portfolio of these companies has the potential to meaningfully outperform the larger oil companies over time.
I’ve experienced this outperformance in my decade+ of professional energy investing, and I’ve seen this play out since launching Bison Insights, where the portfolio of the stocks I’ve written about have substantially outperformed large oil stocks and the broader market so far:
That being said, it is productive to study how these leading supermajor CEOs think about oil and their outlook for prices. I then consider their perspectives, as I build a framework to buy assets that are far too small for the oil majors to focus on, but still large enough for me to earn very attractive returns on capital (so far - past performance may not be indicative).
In this article, I’ll review the recent comments from these executives, and then walk through the implications for the smaller, lesser-known oil stock ideas I’ve shared here on Bison Insights with extremely high oil price upside.
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance may not be indicative.
