GENERAL MARKET OVERVIEW – Q2 2023

From our Q2 report to our investors

There are always many currents in world markets and anyone who says they can predict the future with precision is a liar or a fool.  But it is possible to describe the larger swells and trends and attempt to wisely align your decision-making with them.  One of the bigger swells that we see right now in the oil and gas industry is actually quite a big one and is worth naming.  We believe we’re in the early innings of potentially a decade-long horizon wherein we’ll experience Structural Deficits. In short, the abundant energy we’ve all been privy to over the last several decades will begin to decline and that will intersect with the continued appetite around the world for energy consumption.

Hubbert’s Peak, also known as the peak oil theory, is a concept that predicts a point in time when the world’s oil production will reach its maximum level and start to decline. One of the key components that resonates with me is that oil is a finite resource, meaning there is only a limited amount of it in the Earth. As we keep extracting and using oil, we will eventually reach a peak where we can’t produce more oil than before. After this peak, oil production will gradually decline, which could have significant impacts on our economy, transportation, and energy sources. Here’s a simple illustration of the theory.

Certainly there’s a margin in this theory for argument’s sake: timeline of the forecast, the introduction of new technologies, and the inclusion of OPEC oil to name a few moving variables.  As we find ourselves further out on the timeline, we have the advantage of now looking back at our historical production and judging whether or not this theory holds any merit. 

Here’s an overlay of the United States Production (supply in the blue line) with Hubberts Curve overlaying it.  Quickly you’ll see that without the advent of the shale revolution (noted by the redline) our supply would have diminished to dangerously low levels many years prior.  Principally however, it’s clear to us that no matter what the industry does to bolster supply; either by wellbore efficiency gains or new field discoveries, the facts remain…our resources are without question, exceptionally large—BUT THEY ARE NOT INFINITE!  

Here’s another chart that illustrates the principle well.

Supply is heading downward

The thesis  of Hubbert’s Peak, in its most basic form, is still true and reliable. So, what does that mean for us and our claim that we’re entering a period of structural deficits?  Well, currently, all U.S. fields that were opened during the horizontal drilling boom except for one (the Permian Basin) have reached a productive curve that’s flattening or in the natural decline mark.  Therefore, unless some surprise new technology unlocks another revolution in extraction, or a new field the size of Texas pops on the radar somewhere, domestic production is going to be heading in a downward direction.  At a basic structural level, we are heading into a period where less and less production can be realized.

Demand keeps going up

Supply is only half of the story. On the demand side, there is an ever-increasing demand for hydrocarbons. Internationally, China continues to grow, which demands significant energy. Domestically, Americans are just as keen to travel as they ever were, even in the face of higher-than-ever costs for air transportation. But these are only tiny snapshots of the market. To give you a big picture sense, the world uses 101 million barrels of oil per day and next year we are expected to use over 103 million barrels, with some estimates of our global demand exceeding 110M barrels by 2030. Our need for energy to fuel our lifestyle only increases, and renewables—while necessary—are nowhere near charging in to take the place of hydrocarbons based on merits alone.  As more people turn to electricity to power life (cars, devices, etc.), that electricity still needs to come from somewhere. Natural gas will be that “somewhere” for many, many, years to come, serving as the bridge fuel to renewables.

Now, stack these two dynamics on top of each other, waning supply and growing demand, and think about what that means for MAEVLO.  Owning hydrocarbons in the ground is the place to be in the early days of a period of structural deficits.

Who’s your “Guy”

So what should an investor do in this environment? Invest in oil company stock?  Well, given the fact that stock values trade on public sentiment and optics as much as on objective value, we don’t think that’s a compelling bet these days. Rather, you want someone on the ground who has experience in deal-making and a working knowledge of the geological and legal constructs of the most productive areas in our Country. You need a ‘Guy’…Because we all love to say, ‘I got a Guy…’ at the next dinner party, golf outing, or business meeting.  You want–you need that ‘Guy” who can forge relationships with small local landowners who are interested in selling. You also need a vehicle you’re a part of, that’s guided & stewarded intentionally with capital on hand to close those deals. 

In other words, you need something like MAEVLO. We’re happy to be playing that part; being your ‘Guy’ in the energy space.

A few graphics to give some color to the current market

Historic Oil Prices

Historic Gas Prices

Oil prices and well counts