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If you believe that, as most rational investors do, and since compacted energy sources are likely to remain important in the coming years, you may be looking at the very best of the integrated large oil and gas companies.
Here is an alternative to consider.
The West Texas Permian Basin has enormous potential to drive the United States even further in supplying the oil and gas that an energy-hungry world needs.
Note these facts:
In calendar 2019, Saudi Arabia produced 12 million (mm) barrels per day (bpd). Russia produced 11 mm bpd. The United States? More than 14 mm bpd. In 2019, the US became a net exporter of oil for the first time since 1953.
I think Russia's production is likely to decrease due to not investing in new technology. And Saudi Arabia, which has squandered one of the world's largest aquifers, must now use more than 1 million barrels of its production per day to desalinate seawater.
The Permian Basin in Texas, once thought to be largely played out, now produces as much as the oil-rich OPEC member Kuwait!
There are approximately 26 exploration and production companies with active wells in the Permian Basin. But many of them have their own problems, even though they produce more oil and gas from the region. These include:
Debt: Many of these companies, even some of the best known, have far too much debt and far too little reliable cash flow. Since rates were low, they borrowed as if there was no tomorrow. Well, it is tomorrow.
Prices: Their continued ability to survive depends on a relatively high price for their product. It's not $ 41 a barrel.
Parent-Child Problems: We all know about this … only here I am referring to something other than people. Someone got the smart idea that if it was right to get one product from a well, place another next to it – or nearby – and double the output. It doesn't work like that. In fact, they ended up spending more, just to properly cannibalize their existing "parent."
Increasing Decay Rate: Everyone in the company knows that there is a decay curve in extracting the carbon residue from ancient plants and dinosaurs through fracking. But in their enthusiasm, they did not allow the drop.
Pipeline congestion: Permian oil currently sells about $ 10 off per barrel compared to the US West Texas Intermediate benchmark. The reason: They just can't get enough of it through existing pipelines, so they compete to sell cheaper than their neighbors to at least make some profit and move a product.
Which company is not saddled with these problems?
Texas Pacific Land Trust (NYSE :). Well, today it is a country trust, but after a nasty years of proxy fight, it will be converted into a corporate structure by the end of this year.
People complain that they sold Amazon (NASDAQ 🙂 too fast or Apple (NASDAQ 🙂 too fast.
Heck, my biggest regret is selling TPL after I had a 300% profit. That would be 700% today!
Just a few words as a refresher for those who have forgotten or are new to TPL: It is a trust that was formed when the Texas Pacific Railway Company was founded in 1871 to build a southern transcontinental railroad between Marshall, Texas and San Diego, California. At the time, this was not a particularly lucrative business and the railroad went bankrupt.
The bankruptcy judge ordered the company to start selling its Connecticut-sized land to repay the original bondholders. It was crappy scrub back then, so sales weren't exactly spectacular. Or even as proof.
However, all that changed with the discovery of oil and gas in this amazing basin. What did not change is that TPL is still the largest landowner in and around the Permian. It possesses all mineral rights in those areas and, even greater, all water rights, a very precious commodity not only for frackers but for every living thing.
TPL has a total workforce of less than 100 people – most of whom have only been added since the company started selling water, as well as mineral prices and the occasional piece of land. (The original bondholders or their heirs were repaid a long time ago.) In 2016, there were a total of 10 employees. Not much overhead. It just doesn't take that many people to ring the doorbell when Exxon Mobil (NYSE 🙂 or Chevron (NYSE 🙂 call to ask if they can lease some of TPL's property in 20 West Texas counties .
Texas Pacific lives on the royalties it collects. No time limit was set for the sale of the properties according to the original court order, so only when El Paso, Odessa or Midland burst at the seams and pay way more than the royalty income can TPL sell some more real estate.
Texas Pacific is the closest thing to an ATM in the country. The only other equally brilliant cash flow machine that I have often written about is Franco-Nevada Corporation (NYSE :), headquartered in Canada, but just as easy to buy as TPL.
I think the TPL stock is a bit ahead at the moment, given the abundance of oil and gas in the Permian and the congestion in the pipelines to take the product to the refineries. At yesterday's closing price of $ 549, it sells for less than 20 times the profit. I have a few in our model portfolio for $ 366.15, so I might be a little biased here. Whenever TPL shares go below $ 500 I will buy a little. I will support the truck for less than $ 400.
Disclosure: I have been TPL for a long time. Unless you are a Stanford Wealth Management customer, I do not know your personal financial situation. Therefore, I offer my opinion above for your due diligence and not as advice to buy or sell specific securities.