Although ever since the predictions and paroles have been that the world is running out of oil soon, from time to time big new discoveries have been made. Brazil has vast known reserves that could last for 50 years. Offshore the coast of neighboring Guyana, a reservoir of an estimated double digit billion barrels of oil equivalent is being already extracted. There’s a good chance, Namibia, a country in Southwest-Africa, could become the “next Guyana” – maybe even a better one!

Summary and key takeaways from today’s Weekly
– Big energy discoveries can meaningfully boost a company’s reserves, but also its stock price like was the case with Hess.
– For the big Supermajors, even huge discoveries are barely moving the needle.
– That’s why I have dug out a new stock idea that is good enough to multiply over the next years.

While there’s no denying that commodity investing is basically about the price of the underlying resource – unfortunately being vastly out of control of the companies – honestly I think that we as small private investors should have higher ambitions than just to invest in the big names.

It is true that they in the long-term more or less follow the price of the commodities and if timed well, i.e. not buying at very high commodity prices and a supply glut flooding the market (think of the first fracking wave up to 2013–2014 or more recently lithium), the returns can be really great.

Just think of buying oil stocks in 2020.

Had you bought shares of Exxon Mobil (ISIN: US30231G1022, Ticker: XOM) around the low, you could have made 3x plus some 30% in dividends on top until today.

Not bad for only buying a blue chip!

Unfortunately, such occasions come only now and then.

But what to do in a situation like now, where the Supermajors are likely fairly valued, depending mainly on higher oil and gas prices for their stocks to climb higher? Frankly, shareholder returns on the current levels can be expected to be about 7–10% p.a., assuming the current stock and energy prices. That’s fairly okay, but also only the long-term market average (see here my take on risks of average returns).

Many will claim that these stocks are at least safe with proven businesses and that smaller companies are way too speculative.

I highly disagree with that, given a few boxes are checked.

In fact, there are very attractive opportunities around that offer way more upside at not necessarily higher risks. Or in other words, the dramatically higher potential compensates for the slightly higher risk. If you have a handful of such candidates in your portfolio, you’ll likely do pretty well. I am not talking about pre-revenue exploration companies where hope is the biggest asset.

Speaking concretely about energy stocks in general and oil stocks in particular, my conviction is that we should add a second component to the equation of commodity and energy investing: growth!

Commodities and growth?

Sure, all my members received last August a report about Petrobras (ISIN: BRPETRACNPR6, Ticker: PBR.A). This idea so far has done pretty well with a total return of +36%.

While growth is often mainly associated with tech stocks which in most cases are too richly valued for me from a risk and reward perspective, I am fairly open towards energy and especially oil-heavy companies with a strong growth component.

My Argentina-pick (see here) and my offshore service idea (see here) for my Premium PLUS members have done pretty well so far with each being up by at least 55% in less than a year. I am going to send my next high-profile idea with huge upside potential later today exclusively to my Premium PLUS members.

Like both bases above, I am expecting the stock to multiply over the next years as it has a gigantic growth opportunity in front of it.

The average total return of my best stock ideas is ahead of the S&P500 and the iShares MSCI World ETF. With my risks-first approach (paired with high upside), I am able to find stocks with great returns.

^{both as per 24 April 2024 market close – since August 2022}

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

Entering Namibia in search of the next Guyana

Everyone’s on the hunt for a huge new reserve discovery.

This is simply necessary to not go out of business, as existing reserves are being extracted and depleted. If not replaced with new reserves, then the time is ticking.

There are two ways to fill up the tank: exploration and making a major discovery or simply acquiring assets and reserves from competitors. This is what I think the big Supermajors will be more and more forced to do, as we have seen bids from

• Exxon for Pioneer Natural Resources (ISIN: US7237871071, Ticker: PXD) – a former idea of mine, until I replaced it through Petrobras
• Chevron (ISIN: US1667641005, Ticker: CVX) wanting to gobble up Hess (ISIN: US42809H1077, Ticker: HES), likely mainly for its Guyana assets
• there have been a few phantasies that Shell (ISIN: GB00BP6MXD84, Ticker: SHEL) could be taking rival BP (ISIN: GB0007980591, Ticker: BP) under its wings, but so far nothing has happened in this regard

I have a few problems with these constellations.

First, acquisitions especially of such a size, have the risk of seeing the acquirer overpaying and in the worst case even writing down assets later. I am even almost sure this will be the case with the combination of Exxon and Pioneer.

Second, both have huge exposures to US shale which I am far from bullish on. That’s why I changed from PXD to Petrobras.

The expected returns for all the above (except Petrobras) are not that spectacular. The thing is, even such major success stories like Guyana likely are not going to decisively move the needle for any of these gigantic companies involved to suddenly make them growth stories in the double digits.

These entities are simply too big. I don’t care about growth rates of +3% or so.

I even suspect that Guyana with the exception of stand-alone Hess will only replace what’s emptied-out elsewhere, maybe with a temporary and short-lived boost as I am rather skeptical about US fracking which is showing signs of peaking while becoming gassier, i.e. natural gas gaining in share of the total output. That’s bad news when one wants to invest primarily in oil.

Speaking of Guyana: the small South-American country has experienced an economic boom due to the gigantic discoveries that went into production offshore its coast.

The only company that really experienced a boost and would likely do so even more, if it remained independent, is Hess.

However, a takeover battle erupted. First Chevron placed a bid of 53 bn. USD (see here), but suddenly Exxon is trying to interfere by wanting to get a hand on Hess’ Guyana assets with which it is active there (see here).

I don’t know how this will end, but one thing is for sure: certain assets like the ones in Guyana are in high demand. In their presentation, Hess shows that at current expectations, Guyana is likely having reserves of more than 11 bn. barrels of oil equivalent (boe) with lots of exploration upside for even more.

Just for reference and as you will see below, entire-Exxon has reserves of 16 bn. boe.

So far, Hess had a great run and the stock even has a rather unprecedentedly high valuation with almost double the usual PE ratio its bigger peers have.

In the last years, Hess temporarily even had a PE ratio in the high 20s. That’s a lot for an oil and gas company (for simplicity, I left out the midstream business of Hess).

Marked below is the production start in Guyana. You can see how it put wind under the wings of Hess which was stagnating and trending side-ways for many years due to its matured and peaked legacy shale assets, only to tripple later as the Guyana operations gained traction.

It shows how a new growth driver can lead to multiple expansion on top of earnings and cash flow growth. Growth almost always gets a higher multiple, so one benefits in both ways if such an opportunity is spot before it makes big waves.

A lot is being expected from Hess with its 30% working-interest (WI).

How much does Guyana contribute to Hess’ reserve base? In their latest annual report, we get the following figures:

• on an oil and condensate basis (first column below), 35% of their total reserves from that category
• on a boe basis 23% (barrel of oil-equivalent, last column), as especially the US shale reserves are gassier (and becoming even more so, diluting the overall figure)

Adding a third to the oil reserves is quite a lot.

Also, further exploration is ongoing so that with time, even more should be added to the expected reserves.

This is close to impossible for the Supermajors to achieve.

Let’s take a look at Exxon who has a 50% stake in the Guyana blocks as the main operator:

You can see that Guyana is only a part of “Canada / other Americas” and that by far the majority of reserves is Bitumen, which is an extract likely mainly from Canadian oilsands.

Doing a back the envelope estimate using Exxon’s acreage numbers above, from the total acreage of 14 mn. acres, 4.6 mn. or 33% fall on Guyana. So, a third of 15% of oil reserves (developed and undeveloped / total reserves) gives us a rounded 5%.

So basically, Guyana is for Exxon, though not necessarily a rounding error, certainly not a booster like in the case of Hess. And with its looming acquisition of Pioneer, it will grow in US fracking, as Pioneer is together with Chevron the biggest player in the Permian Basin in Texas.

As exploration work is ongoing and reserves alway being best guesstimates, there are of course no final numbers in that sense. Here is a source, where the author thinks that 25–30 bn. boe could be possible for Guyana. Likewise interesting is his historical excursion about the former super-continent of what is today South America and Africa.

A lot is known and likely already priced in, respectively not moving the needle for the companies like I would like to see it develop meaningful torque.

Speaking of the former super-continent, maybe you know of the theories that the east of South-America is said to have been stuck in the bent of Africa.

This could be an explanation for why the already proven oil-rich South America could be a poster-child for what’s to be expected from the western offshore coast of Africa.

Whether true or not, Namibia and also partly South Africa are viewed as potentially new interesting places for major discoveries.

Over the last two years, TotalEnergies (ISIN: FR0000120271, Ticker: TTE) as well as Shell made quite a few interesting discoveries and announcements.

TotalEnergies has a working interest of 40% and Shell in its block 45% (see here).

That sounds much, but it will depend on the final numbers and how their other projects evolve until first oil gets produced. This can take maybe three to four or even more years, depending on the confidence, the making of the final investment decision (FID), construction, equipment availability, etc.

TotalEnergies’ CEO for example is quoted to have said that “at least 2 bn. boe” can be expected from their drilling results. With total reserves of 10.6 bn. boe, respectively 4.7 bn. barrel of oil, an addition of 2 bn. mainly oil barrels would be quite a find.

I expect this to be more a conservative guess. There are voices guessing that TotalEnergies is potentially sitting on even 10 bn. boe which would be almost a double of its current official reserves.

However, regarding production goals, it seems that according to their current plans, even over the next years barely anything will happen on a broader basis for TotalEnergies.

As if this weren’t enough, the focus seems to be more on liquefied natural gas (LNG):

That’s not the type of investment I am looking for when dealing with a potentially life-changing source of discoveries and being on the hunt for oil.

There are voices estimating that Namibia could be even a bigger success story than Guyana.

In my upcoming research report (exclusive for my Premium PLUS members), I discuss the case of a way smaller energy company that is also exploring in Namibia as an addition to its other projects. Just recently it made a truly eye-popping announcement where I am convinced that this was the starting signal for its stock to advance meaningfully over the next years.

My latest stock idea has a high chance to become a multi-bagger with the potential to 3x over the next years. Everything you need to know and a whole set of important numbers and facts will be in my report.

If I am right, this one idea alone could pay the membership for several years (besides the fact that on average my Premium PLUS ideas have done pretty well so far).

Conclusion

Big energy discoveries can meaningfully boost a company’s reserves, but also its stock price like was the case with Hess.

For the big Supermajors, even huge discoveries are barely moving the needle.

That’s why I have dug out a new stock idea that is good enough to multiply over the next years.

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