Oil’s last stance

Wednesday, 17 April 2019
Melbourne, Australia
By Selva Freigedo

  • From a few dollars to hundreds and thousands…
  • Oil’s Last Stand

Back in the 1870s, the native North American tribe, the Osage, were on the move.

It wasn’t by choice.

The US government was forcing them to relocate from Kansas to Oklahoma, into a piece of land that nobody wanted. It wasn’t the first time they relocated — this was their third time moving in 46 years.

The Oklahoma Historical Society described the latest expulsion as ‘worse’ than the previous ones. As they recount: ‘In terms of lives lost and hardships. This move almost destroyed the Osage people.

But fast forward to a few decades later and the Osage people’s luck had completely turned around. In a twist of fate, they had gone on to become some of the richest people on Earth.

How did they do it?

Before we get into it, let’s look at the markets first.

Markets

Overnight, the Dow Jones Industrial Average closed 67.89 point higher, or 0.26%.

The S&P 500 gained 1.48 points, or 0.05%.

In Europe, the Euro Stoxx 50 index finished up 12.90 points, or 0.37%. Meanwhile, the FTSE 100 was up at 0.44%, and Germany’s DAX closed up 81.04 points, or 0.67%.

In Asian markets, Japan’s Nikkei 225 is up 63.28 points, or 0.28%. China’s CSI 300 is down 0.45%.

In Australia, the S&P/ASX 200 is down 13.25 points, or 0.21%.

On the commodities markets, West Texas Intermediate crude oil is US$64.45 per barrel. Brent crude is US$71.96 per barrel.

Turning to gold, the yellow metal is trading for US$1,279.80 (AU$1,776.98) per troy ounce. Silver is US$14.98 (AU$20.90) per troy ounce.

One bitcoin is worth US$5,230.00.

The Aussie dollar is worth 71.90 US cents.

From a few dollars to hundreds and thousands…

Back to the Osage.

How did they become one of the wealthiest people in the world?

Well, it turns out that their new land in Oklahoma wasn’t worthless after all…it had a huge oil deposit under it, one of the largest in the United States.

And to get the oil out, prospectors had to pay the tribe for leases and royalties.  

So, each person in the tribe started to get a steady paycheck.

As David Grann described it in the book Killers of the Flower Moon:

The amount was initially for only a few dollars, but over time, as more oil was tapped, the dividends grew into the hundreds, then the thousands. And virtually every year the payments increased.

According to Grann’s account, in the year 1923 the tribe received over US$30 mln. In today’s terms that would be over US$400 mln…in one year.

It is not surprising then, that the Osage were very wealthy.

They wore diamond rings, French clothes and lived in mansions. They were driven around by chauffeurs and their kids went to the best schools.  

The Osage people’s story brings us an interesting idea. That is:

Tapping into the income generated by the oil industry can be far more powerful than speculating as to what’ll be the “next big thing”.

This is what we heard from James Allen, our colleague in the UK. James is editor of Exponential Energy Fortunes and Power and Profits.

We had the pleasure of meeting James at last year’s ‘Paradox of Prosperity’ event.

And, as we heard from James, we could be looking at a big change in the oil industry, something that could bring what James calls ‘Blowout Royalties’. Here is James:

[T]hanks to a major strategic shift signed off at the highest levels of big oil firms, you can now pocket some of this cold, hard cash […]. In fact, though most people outside the oil and gas industry would never know it, this distribution of cash forms one of the biggest and most lucrative income streams in the world today. As one analyst put it, “It started as a trickle in 2017… now it’s a gusher [of extra cash].”And as a Bloomberg piece put it, “The dark storm clouds that have been hanging over the oil industry… have suddenly started raining cash.”[…]Personally, I call these cash payouts from the oil industry “Blowout Royalties”.

To my mind these Blowout Royalties are the desperate, rear-guard response of what you might think of as “Oil’s Last Stand”.

Oil’s Last Stand

The truth is that the oil industry is in a much different position today than back when the Osage people made their discovery.

Remember the Osage were profiting from oil in the 1900s. The automobile was starting to take off, and nobody realised back then how big oil would become.

Much of our modern world today depends on oil. In fact, oil and natural gas provide over 55% of the world’s energy.

But the outlook for oil is much different today than it was in the 1900s.

Big oil is facing several threats. There is decreasing supply, more government regulation and the threat of electric vehicles. And, because there are more risks, investors are demanding more incentives. As we heard from James:

See, for most of the last century most of the enormous cashflows generated by the oil and gas industry were pumped into exploration… new growth projects… and high-risk new ventures. That makes sense if the industry is growing at a healthy pace. But the rise of renewables, electric vehicles and new government policies supporting green energy are increasingly eating into oil’s growth. Due to these fears over long-term oil demand, Big Oil investors are now demanding unusually high dividend yields to hold the stocks […]

See, when a major industry like this sees its growth prospects decrease, investors start demanding extra incentives. Beaten down stocks in industries out of favour have to actually start paying dividends to attract investors. Without the hype of future growth in the industry, reinvesting capital won’t be rewarded. Theoretical gains don’t look plausible. Cold hard cash for investors does though. […]In other words: you want cash. Lots of it. And not in the future. You want it right now. So now, instead of pouring cash back into the ground in the search for more oil… Big Oil is “blowing out” that money to regular investors like you and me.

As we heard from James, it is something we saw a few decades back with big tobacco.

When big tobacco got hit all of a sudden with anti-tobacco campaigns, health warnings and more regulation, their outlook for growth changed. So, investors demanded more rewards for their risks.

Big oil is very much the unloved child today.

And, we could see a lot of cash flowing to investors as big oil makes its ‘last stand’. Here is James:

Oil and gas companies know they are in trouble. All have taken out hedge bets by buying clean-energy assets. Some have already stated they will end the pursuit of oil and gas growth and chase energy transition instead. But their main tactic is to dish out dividends to investors like there’s no tomorrow (pun very much intended).

The oil industry is changing. With more risks we could see, as we heard from James, big oil ‘shifting from a growth business… to one of the biggest income streams of all time.’

We could see more cash flowing from oil companies into investors’ pockets.

Please note that the issue above was based on extracts from an article published on 22 March 2019 in Global Investor. Global Investor brings you the best ideas from Port Phillip’s global network.

Listening to different opinions and ideas could be crucial, not only to accumulate wealth, but to help it stay intact, for you and your family for generations to come.

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All the best,

Selva Freigedo,
For Port Phillip Insider