The dollar price of oil has fallen substantially as of late…just like real estate did a few years back.
Does that mean it’s all over for oil? Or is now a good time to buy?
To explore this slippery topic, we take a trip to Texas to talk oil, gas and cash flow with our favorite oil man.
In the station pumping out broadcast brilliance:
- Your energetic host, Robert Helms
- His slimy co-host, Russell Gray
- Special guest and bona fide Texas oil man, Paul Mauceli
While it may seen obvious to some, in case you’re wondering, oil and gas can definitely fall under the heading of real estate investing.
We’re not talking about commodity trading, where investors are flipping in and out of futures contracts or options trying to skim a little profit from price spreads and market volatility.
We’re talking about buying or leasing a piece of land, digging a well, putting up a pump and sucking money out of the ground.
Most of the horror stories you hear about in oil and gas are rookies getting crushed by the pros in the paper markets…or by naive investors going into a high risk (and potentially high reward) exploration project.
Exploration is like venture capital investing. You’re buying into an unproven business plan. Of course, if you strike oil, you’re rich. Just ask Jed Clampett, But the odds are against you.
Our friend Paul Mauceli has a different approach that we like a lot better. It feels more like investing in an existing apartment building.
The concept is simple…
Instead of buying into one single point failure make it or break project hoping to hit a home run, buy into a pool of already drilled and producing wells…just like buying an apartment building that’s already leased up…and the oil (and cash) is flowing.
Your cash flow is based on the “rent” (the price of oil) times the number of units (barrels) less operating expenses. These are things every real estate investor understands.
Your profitability is based on the ratio between what you pay and what you collect. Obviously, the less you pay, the better your return.
The challenge comes when you buy and then later the “rents” drop.
Of course, this is a risk every investor takes, so it’s wise to build in a little wiggle room, so you can afford to stay in the game even if the revenue declines.
Obviously, buying when rents are low can be good if the price you pay is also low…which it should be based on the lower rents.
Then later, when the rents go up, you’ve already locked in your costs, so your profitability is actually better. So even though we hate to buy when prices are low (it’s scary), it’s actually the best time.
If you wait until the market is high, then you risk paying too much and not having enough cushion in case of a pull back in prices.
One HUGE difference between apartment investing and oil well investing is there’s typically no loan on the oil well. So you don’t have to worry about foreclosure or negative cash flow.
Something else to consider is the 100 year history of the U.S. dollar. In spite of its recent “strength” (really, a reflection of a weaker Euro and an even weaker Yen), the dollar has lost 97% of its purchasing power since 1931 (the year the Federal Reserve was created). The dollar has a 100 year history of LOSING value.
That means anything REAL purchased in 1913 (real estate, precious metals, gems, etc.) retained its value, while the dollar did not.
Right now oil is soft because of a weak domestic consumer economy, softness in China, increased U.S.production. and (allegedly) geo-political games intended to punish Russia for its aggression in Crimea.
But like real estate, you have to ask yourself: will the long term worldwide demand for oil is likely to increase or decrease? And is the long term strength of the dollar likely to increase or decrease?
If you think the world will use more, not less oil…and the dollar will eventually resume its 100 year trajectory down (remember, the Fed, the European Central Bank and the Bank of Japan are ALL TRYING to INFLATE…i.e., devalue their currency), then when would be a good time to buy oil wells?
Paul thinks NOW is a great time because they’re on sale. And that’s hard to argue with.
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