Author: Tyler Kocon, Split Rock Private Trading
Covestor models: Bakken Shale, Equity Rotation
Disclosure: Long OAS, KOG
If there is one phrase that can essentially sum up the entirety of the American energy industry at this stage in history, it could easily be “oil independence.” The concept of oil independence has been disputed and discussed for decades as the viability of the current American energy strategy is examined and criticized.
The truth is out, and it is well known. The oil industry will not exist forever. The very definition of the term “non-renewable resource” demonstrates this fact. However, oil is still a massive market and will likely remain as such while production numbers continue to skyrocket and oil consumption reaches new heights.
Domestic oil production out of unconventional shale deposits like the Bakken, Eagle Ford, and Permian Basin continue to drive production numbers skyward. The major underlying issue with America’s current energy plan is that this country relies much too heavily on foreign oil imports to satisfy our thirst.
The creation of the Split Rock Bakken and U.S. Energy shale model hinges on this concept. Will America eventually begin to support itself in the global energy landscape? The short answer is probably not, but the benefits of domestically produced oil can certainly be lucrative.
There has been a significant amount of attention devoted to domestic oil production, specifically from the Bakken and other U.S. unconventional shale oil deposits, and how this production will impact the current mix of American oil supply.
The fact of the matter is that domestically produced shale oil is quickly becoming less and less attractive from a price standpoint compared to foreign produced oil. Consider the recent trends surrounding three major oil spot prices; the Bakken Clearbrook MN Crude Oil Spot Price , the WTI Cushing Crude Oil Spot Price , and the internationally used Brent Crude Oil Spot Price.
Back at the beginning of 2012, the price of Bakken crude oil was trending very close to the price of WTI Cushing oil with the spread being only $3.7 per barrel (as of 1/3/12). Compared to international oil’s Brent crude price, the spread was a more significant $11.86 per barrel (as of 1/3/12).
In comparison, we have seen the price of Bakken oil plummet in early February to a 2012 low of $71.17 per barrel. This price represented a spread of $27.50 per barrel between Bakken and WTI Cushing prices, and a whopping $46.96 per barrel difference between Bakken and Brent crude oil prices as of 2/10/12. The spread on February 10th was the largest spread between Bakken and international oil prices for the entire trading season of 2012.
Since that date, the $46 price difference between Bakken oil and international oil prices has shrunk substantially. The spread was lowered to $33.42 per barrel by March 1, grew even smaller in April to $30.21 per barrel, and as of May 1, the spread was a paltry $15.41. At the same time, and over the same time frame, the Bakken and WTI Cushing oil spot price spread has diminished from a high of $27.5 on the same date in February, to only a $2 difference on May 1, 2012.
So what does all this data represent? In a nutshell, it demonstrates how the price of domestically produced Bakken shale oil has risen to a number more parallel with international oil prices. Unfortunately, this does not provide much relief in the form of energy independence, but it does provide a significant amount of opportunity for investors investing money in companies that produce oil from the Bakken shale oil field.
It is not difficult to notice the significance that this rise in prices has on companies that produce oil domestically. Smaller companies like Triangle Petroleum (TPLM), Oasis Petroleum (OAS), and Kodiak Oil and Gas (KOG) have the potential to see their profit margins increase greatly as the price of the oil they are producing becomes more and more valuable.
Adding to the mix is the reversal of the highly-utilized Seaway Pipeline, which was originally intended to transport crude oil from the Gulf Coast to the major crude oil distribution network centralized in Cushing, Oklahoma. The recent influx of domestically produced oil has put pressure on the Cushing hub and stretched to storage, distribution, and refining capabilities of the region to capacity.
Because of this, the operators of the Seaway Pipeline have decided to reverse the flow of the oil and essentially use the pipeline as a way to remove oil from the Cushing area and move it to the vast refinery complex situated on the Gulf Coast. Ultimately, this will reduce the massive supply of oil in Cushing and further push the needle on domestic oil prices as they move closer and closer to the international benchmark.
Therein lays the monetary benefit for domestic producers. These recent events have allowed us to capitalize on the domestic shale oil market and prepare for the road ahead. Likewise, investors are expected to do the same. The Split Rock Private Bakken Shale model is able to utilize all aspects of the shale oil spectrum to create a diverse portfolio of oil and service companies.
Diversity is paramount when investing in this arena as holding one or two small shale players in your portfolio can be very risky as opposed to investing in a separately managed account that is run by a professional Portfolio Manager. Investing in a separately managed account can dampen potential volatility by giving you exposure to numerous companies dedicated to this unique space.
In the current marketplace, there are very few (if any) investment vehicles that allow an investor to diversify so rapidly and so exclusively. The most important aspect of the portfolio is a focus on domestic, pure-play shale oil companies. These companies are the ones that stand to gain the most from the increased attractiveness of domestically produced oil.
In the end, the Bakken and U.S. Energy shale SMA is an excellent way for investors to immerse themselves in the ever-changing and exciting domestic shale oil and gas industry.
