A Slam-Dunk Trade in the Oil Patch
I donít think I would be telling tales out of school to point out that markets are often irrational. Itís been said that markets can stay irrational a lot longer than you can stay solvent so the fact that markets are irrational isnít always a buy signal. However once a market turns, it tends to continue in the same direction.
Crude oil can be measured in BTUs and is used to provide energy. Natural gas is little more than an alternative form of the same energy and can be measured in BTUs. If anything, natural gas is generally a better form of energy so it should carry a premium.
If crude oil is selling for $120 a barrel, natural gas SHOULD be selling for $20 per mcf on a BTU basis. As I write, Light Sweet Crude is being quoted at $125.60 down from about $137 a week ago. Natural Gas is being quoted at $12.27. By the time you read this, each will have changed but my point is that the ratio should be 6-1 on a BTU basis and itís 10.23-1. Last week it was almost 12 to 1.
Ratio investments are often a good idea when markets become too irrational. Energy is energy and you can look for natural gas to go up and oil to come down. But ratio investments work even in declining markets. If you short crude and go long natural gas, the investment would work as long as crude goes down faster than natural gas. And I look for lower crude in the months ahead even if Peak Oil was in May of 2005. Crude got ahead of itself.
I was looking at our advertisers and trying to figure out a good natural gas play and I think I found a good one. Enterprise Oilfield Group (E-V) was the subject of a piece I did exactly a year ago. For two years, natural gas prices have been dreadful both on their own and especially in comparison to crude. I think the ratio peaked last week and for certain natural gas has been going up.
Enterprise operates a fleet of over 260 trucks and various pieces of heavy equipment in Central Alberta providing oilfield services. While 11 of Enterpriseís direct competitors have gone out of business in the last year, oilfield work is picking up and Enterprise is still highly profitable.
Since the downturn in natural gas prices starting about two years ago, drilling activity in the Canadian oil patch has hit a 10 year low. As oil sands production comes on line, more and more natural gas will be required in the Ft McMurray area. Production of a barrel of oil from the tar sands requires 1000 cubic feet of natural gas.
Enterprise has positioned itself perfectly to take advantage of the expected upsurge in oilfield activity as natural gas becomes economic again.
And anything selling at a PE of four canít be all that bad.
Enterprise is an advertiser and we are biased. Please look into them for yourself.
Enterprise Oilfield Group, Inc
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January 24th, 2020
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