Oil & Gas Cycles: Market Trends, Innovation, and Investment Opportunities

During their recent episode, Taylor, Carlisle, and Joshua Young discussed Oil & Gas Cycles: Market Trends, Innovation, and Investment Opportunities. Here’s an excerpt from the episode:

Tobias: Yeah, I think small and micro– More generally, not just oil and gas, although there’s a big oil and gas component to the cyclicals that I look at, it’s looking more value and better value than I’ve seen in a long time. I think they’re looking very, very interesting and healthy at this point. But let’s talk specifically about oil and gas. For folks who are tourists in the oil and gas sector, maybe give us a little–

Jake: Like, history of the last 15 years or something?

Tobias: Yeah. Where are we going. Where are we and where we are going.

Joshua: Sure. So, what historically has happened, is you’d have a down cycle which would last for a while, typically around the discovery of one or more large fields, and you’d have development of those fields, typically, development costs were quite low. Way back when you’d have 1,000 rigs all on just one little area all right next to each other, and then as things progressed and there were better rules on these things, you’d have fewer rigs and more efficient development of fields.

That’s the down cycle is you have a discovery and you flood the market. And then, as those fields run out, you have a big upcycle that induces enough exploration and delineation to be able to crash the market again. And so, we had this big discovery which was a little different from what we experienced historically in the US with innovation from an engineering perspective for shale.

That really kicked off in 2010 or so, the innovations. It took a few years for it to get big enough to crash the market in, let’s say, 2014, 2015. And so, we’ve been in this really prolonged down cycle for oil and for natural gas because of this engineering innovation and because of the roughly 10 million barrels a day of production growth from the US, from Canada, from a couple other unconventional basins and then also a little bit of innovation around deepwater development, which has provided the rest of that marginal, let’s say, 10 million barrels a day of production.

And so, we’re at the tail end of that. There hasn’t really been much exploration or innovation outside of shale and outside of, to a much lesser extent deepwater drilling. And so, I think it’s getting really interesting. We’re seeing it already on the gas side where gas prices are higher, but the rig count isn’t up much and production has flattened out. And then, on the oil side too, there hasn’t really been much oil production growth for the last couple of years in the US, and either we’re at a geologic limit or we just need higher prices to get that next set of developments. So, very high level, that’s where we’re at and where we sit.

Just from a narrative perspective, every cycle at the bottom, people say, “Oh, it’s done and it’s over and you can’t invest in that and it’s trash and it’s terrible.” They come up with all kinds of, “There’s moralistic stuff, there’s economic stuff. Buffett would say this about airlines, but I’m sure, they would say it about oil companies too.” Like, “Oh, capitalism would have been better if they shot the Wright Brothers out of the sky.”

Jake: Yeah.

Joshua: So, anyway, that’s where we’re at. I think we’re very close to if we’re not at a bottom for the cycle because of the similarities to other bottoms as well as what we’ve seen with the production trajectory. And then, there’s weird narratives on demand every cycle. The reality is that demand for oil has grown by about 1% a year globally for 40 years other than COVID. Independent of narratives on electric vehicles, various other things.

And then, for natural gas demand is booming and supply is not. And parallel markets, some wells produce both oil and gas, some just produce one or the other. And so, that’s I think where we’re at in the cycle.

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