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Strategies & Market Trends : Value Investing

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To: Harshu Vyas who wrote (75646)	5/17/2024 12:14:28 AM
From: FIFO_kid2	4 Recommendations Read Replies (1) of 78954

Harshu -The problem with BP and Shell and the majors for that matter is you are kept in the dark performing a bottoms up analysis of the company as an outsider. For instance on the upstream part of their business one metric I prefer to see is depletion rates on individual fields which you will never obtain. Low depletion rates indicate minimal sustaining capex expenditures and a very high ROIC on the project and a cash flow machine. Another problem with the majors is the pressure allocating capital into very low return renewable projects to appease the critics where the average ROIC on those kind of projects average only 3%. So you have certainly hit the major problems with them. Honestly with them I prefer the downstream operations i.e refining and petrochemical part of their business but that is plenty of work in its own right as you need to know the spreads of different crude grades at different locations. At your age if I were you and have interest in upstream oil and gas I would be digging the small cap sector looking for situations of production leverage, low depletion rates for producers which are much easier to obtain, strong balance sheets and be very early on exploration successes and yes I tend to favor basins outside the western nations. In the past I mentioned Gulf Keystone producing and developing a very high quality asset in Kurdistan and personally I would currently monitor it daily for a breakthrough in relations with Iraq since there has been a standstill in a contract. The company is producing oil locally getting only $27/bbl yet still can generate a decent amount of positive cash flow at that price and the depletion rates of their wells are 1-3% per annum which is very low. At $27 realized price most companies would be literally failing. In 2022 the company paid .97 US in dividends so if things become "normalized" you can see the potential. I also mentioned Valeura Energy well over a year ago on seeking alpha during its first earnings report and acquired this in Dec 2022 given it had lots of production leverage on an acquisition relative to its market cap at the time and has also done well but I think the easy money has been made there. Honestly, it is just a process of digging information on a timely basis and knowing what to look for and in the case of the price cycle of the commodity patience of waiting for the sector to become way out of favor where the cost of production exceed the price then clean balance sheets become especially important.

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