WHY A SUPERCYCLE IN OIL PRICES MAKES LAND THE BEST INVESTMENT OF ALL
The easiest way to play the potential for a supercycle developing in crude oil prices is to take the no-brainer approach and buy stock in major oil players. The biggest no-brainer is to go the mega-cap route with XOM, CVX or BP perhaps. You can be confident that these stocks will continue receiving a steady bid for the majority of this decade, as energy prices, and the politics surrounding the entire sector become a major issue of our time.
I've never been one to enjoy the no-brainer approach. Irrespective of the fact that names like XOM will be fantastic machines of wealth creation over the next 3, 5 or 10 years. The larger gains will be in the small-cap companies that are planting seeds today that could possibly sprout into literal money trees over the coming years.
One of the greatest opportunities lies right here, within the borders of the United States. Advancement in the technology, namely hydraulic fracking, has allowed large areas that were previously inaccessible to suddenly become vast stores of dollar bills that are simply resting in the ground, awaiting their rescue.
The most promising find has been in the Bakken Shale, primarily located in North Dakota. Oil companies both small and large have been converging upon the area for years now. As the technology improves so has their success rate in getting the oil and natural gas located in the shale and turning it into actual profits.
Crude oil prices are in the beginning stages of experiencing a massive expansion in their historical trading range. What has been occurring since 2005 is a readjustment of prices. This readjustment will continue for a majority of this decade and completely redefine what we see as a normal in terms of oil prices, gasoline prices, natural gas prices etc. Just as the thought of gasoline being 20 cents a gallon in the 1950's seems unfathomable to us today. So will the thought of $60 crude oil and $3.00 gasoline in 2020.
What if oil prices go to $250, $300 or even $400 per barrel? Oil companies and those countries with vast reserves will become the power players of the world. Drilling technology will experience such an advancement due to the potential for profit that every single barrel of oil the lies underneath the ground in the United States will be up for grab.
What effect will this have on land values in those regions that have vast stores of oil such as Bakken? Does any logical person with a rudimentary grasp of economics believe that land values will appreciate commensurate to oil prices? I don't. Land values in those regions will end making the gains in actual crude oil prices look like child's play. The reserves will be start becoming exaggerated. The oil companies will be falling all over themselves for pieces of the pie. All of the attributes that come along with a bubble will begin making the rounds. Lies, exaggerations, absolute confidence and trust in anything having to do with the values being assigned to the acreage in North Dakota or Montana.
Land doesn't have an organized market. It doesn't have the efficiency in pricing that comes along with crude oil prices that are traded on the NYMEX and various exchanges throughout the world. It doesn't have the analysis and attention of millions of people per day. Land prices in the areas with vast stores of oil will be derive their value 100% off of the price of crude oil. Even organized markets that are made to be as efficient as possible with billions of shares or contracts traded per day have difficulties during such times. Land prices will explode.
And that's where the greatest possible potential for profit lies: in companies that own or are leasing land in regions that contain vast amounts of oil. Bakken/Three Forks according to all estimates has the greatest amount within the US.
At present, I see a number of small-cap names that deal in the Bakken/Three Forks area that are undervalued by as much as 50% based on the amount of land they hold in the region and the value the markets are assigning them. That is based on current land values that I don't believe have even started factoring in the potential for the expansion in the price of oil that is coming.
Yes, energy stocks will be fantastic over the next several years. You will be able to create gains that far exceed any of the popular market averages. However, the real gains are going to be made in the land that will be impossible to value correctly and those companies that own the land.
