I've had a significant percentage of my portfolio invested in light oil producers for the past several years. I intend to keep it that way for the next ten years unless we have a giant spike in oil and get some opportunities to lock in some very nice prices.
The recent rapid drop in oil prices has (as usual) forced me to revisit my bullish oil thesis and see if I still believe in it for the long term.
In my efforts to revisit my thesis one of the first items I found was what some of the people (service company Core Laboratories) involved in drilling unconventional tight oil wells are saying. Core Labs confirmed what I have been hearing consistently from the industry for the past couple of years, which is that the North American oil boom is going to require $90 plus oil prices to continue.
That provided me some comfort. I then turned to respected investor Jeremy Grantham of GMO to see what his thoughts are.
Grantham too believes that higher oil prices are here to stay and that any drop is likely to be short lived.
Here are his words that come from the article in the link above:
I expect the continuous rise in the price of hydrocarbons as we continue to move through the cheap stuff and move on to the more expensive stuff in terms of getting it out of the ground.
In this interview with Charlie Rose Grantham was also asked if we could expect a return to lower oil prices. Grantham's answer:
No, this is cost driven, you go to Shell, go to BP, ask them what does it take in your mind to find a decent amount of old- fashioned oil? And they will tell you, $80, $85.
Grantham's opinion on the cost for a new barrel of oil which he sourced from BP (BP) and Shell (RDS.A) is $80 to $85. That is pretty much the same as what Core Laboratories (CLB) said in its conference call.
I like it when I get consistent answers from the people in the know. That is far better intelligence than the "gut feel" expertise from the traders on CNBC.
Why Oil Sands Producers Still Might Not Be Good Investments
If oil prices are going to be high for the next twenty years then Canadian Oil Sands producers like Canadian Oil Sands (OTCQX:COSWF), Canadian Natural Resources (CNQ) and Suncor (SU) should be excellent investments going forward.
All of these companies have access to massive amounts of recoverable barrels of oil and could potentially increase those amounts through improvements in technology or even higher oil prices making production more profitable.
Grantham, who believes in a continuously rising oil price over the next twenty years, thinks oil sands may not be a good investment even in a high oil price environment.
I would have thought that bullish on oil prices means you are bullish oil sands producers.
Here are his words on the matter:
I have written in Fortune magazine that those extreme, dangerous, carbon-intensive and polluting resources run the very substantial risk of being stranded assets because, on one hand, I think the progress of solar and wind is moving faster than most investors realize and, on the other, I expect the continuous rise in the price of hydrocarbons as we continue to move through the cheap stuff and move on to the more expensive stuff in terms of getting it out of the ground. And I don't think that if you put billions of dollars into a new tar sands project that you will see a decent return on it. It will be underpriced by solar, wind and other alternatives which are moving at considerable speed. And point two is they will slap a carbon tax on coal and tar sands which increasingly countries here and there will do - and, eventually, the US in the hopefully not-too-distant future - and that will be a death blow. If all this doesn't make these investments unprofitable, they will be very lucky. The probability of them running into trouble is too high for me to take that risk as an investor.
That is quite an interesting perspective from Mr. Grantham.
I don't really have a dog in the fight as I've focused on light oil producers, but it is hard for me to imagine that solar and wind energy could do much damage to the oil sands.
Oil's main use is transportation and as far as I know we are light years away from being able put our transportation fleet on solar or wind power. I also don't have much faith in there being the political will to carbon tax the oil sands to death.
But while I don't necessarily agree with him about the probability of the oil sands producers running into trouble being too high to invest in them, I do think the risks he raises are worth considering.
As a Canadian I know it the development of the oil sands over the next thirty years is huge for our economy. As a parent I think stopping their development might greatly improve the world for my kids. As an investor I think I'll just stick with my unconventional light oil producers.