The 10mbpd supply gap in oil that will create a boom for this niche sector

There is a widely misunderstood problem in the energy markets, and this problem brings a big opportunity.

I am talking about oil. Oil has largely been brushed off with the whole green revolution.

But if you believe that the days of oil are done, listen to this, and I’m quoting here: “While humanity may have the best intentions and strategies to save the world from itself, it simply doesn’t have the natural resources to do so over the next decade”.

This was said by Christopher LaFemina, managing director of the metals and minings equity research division at Jefferies, one of the best investment banks. To be a little bit clearer, here is Simon Flowers, chairman of Wood Mackenzie.

quote from Simon Flowers at Wood Mackenzie
quote from Simon Flowers at Wood Mackenzie

What I’m getting at is this:

The EV, electric vehicle, revolution is great. I’m not arguing against cleaner cars, especially if the energy for EVs is sustainable as opposed to coal-powered.

But since 2011, the growth of EV’s has only taken 400.000 barrels a day in demand out of the market. Simultaneously, the overall demand for oil in the same time period has risen by 12 million barrels per day.

Yes, a 400.000 per day reduction is good, but it stands against a 12 million per day increase.

The truth of the matter is, we still need the oil. And we will have to use more in the coming years, as oil demand keeps increasing.

This brings us to a very interesting situation.

The oil industry is facing capacity issues. The past decade has been marked by under-investment in new oil exploration. Simply said: in the coming years, the demand for oil will be higher than the supply.

Now take a guess what happens when there is not enough supply for the demand.

Prices go up.

As oil prices will increase, likely even to the 2013 levels around $100 per barrel, the cost of the gas you’re putting in your car will increase. Maybe even double.

The conversation will quickly shift from “the green revolution” to “oh shit, we gotta focus on energy security”…..

So, let’s make this situation more interesting.

We now know that there will be a supply gap, with the median estimate around 10 million barrels per day. The one oil giant who actually pinpointed it to the exact ten million number was Total.

Just for reference, look at this image, this is the Berkut platform in Russia, the world’s biggest offshore platform by construction size, yet it produces less than 100.000 barrels a day.

A 10 million per day supply gap is a big deal.

This means that capex is needed. Investment is needed. Oil giants need to focus on investment to produce more oil.

The only problem, to get a fully operational oil rig takes about 5 to 7 years. The supply gap is likely to come earlier than that.

Although in Western countries the initial investment stage will be a bit slower due to the ESG saga, it’s already going in full force in the Eastern world.  And the Western world has no choice but to follow suit eventually.

Because what if no investment is made…..

Here an article from Reuters summarized the view of energy experts that inadequate investment leads to a supply gap, and the transition to renewable energy is not possible without oil energy security too.

Even the sustainable favorite, Elon Musk, agrees with it, stating here that we need oil for a long time, otherwise we can’t survive, but we try to accelerate a greener transition. A green transition does not mean that oil is out of the game.

Now, what are the investment implications? As Rystad Energy says here, we need about $3 trillion of investment into oil exploration. This is a low estimate. Half could be for enhancing existing fields, and the other half for new exploration.

Now, what to do?

You could simply buy an oil index.

We’ve been recommending this since oil was at $20. It’s above $60 dollars today. That could still make some money.

But we are looking for asymmetrical bets, ones that can pay off a gigantic profit, with less downside risk.

An asymmetrical bet. Much upside, little downside.

The most interesting sector, in my opinion, is specialty services. Companies that stand to benefit from increased Capex, e.g. the construction of new oil rigs.

One such company is Flotek.

Flotek consists of two main divisions, the first is Energy Chemistry Technologies and the second is Consumer and Industrial Chemistry Technologies.

The first division is most important. The Energy Chemistry Technologies division specialized in designing, developing, manufacturing, packaging, and marketing chemistries used for oil and gas well drilling, cementing, completion, and stimulation activities.

Okay…. I got to adjust my sentence from before a little bit. A company like Flotek doesn’t just profit off new constructions. It can also profit from existing projects.

As Rystad estimated, $1.5 trillion needs to be invested in improvements on current exploration sites. Their specialty chemicals can be injected into reservoirs to recover more oil. The term for this is EOR, Enhanced Oil Recovery.

A company like Flotek can benefit from the supply gap by enhanced oil recovery on existing sites.

In short, oil firms looking for a low-cost method to increase production can use Flotek’s chemicals.

Now, this is where it really becomes interesting:

the depressed oil market wiped many indebted service firms off the market. Only the financially responsible are surviving.

Flotek currently has no debt, and a massive cash position to survive for a few more years. Aside from that, it only has a $160 million market cap. It’s a micro-cap stock. One single blowout quarter, which are just a few contracts for them, could gather enough momentum to make it a triple-digit winner.

And being based in Houston, there are enough locations around them requiring their services.

This is a map I just pulled off the Bloomberg terminal.

You can see by the dark yellow spots how many platforms are currently offline, and even the green active ones need enhanced oil recovery. And what about the whole Permian basin. There’s plenty of work to be done.

Here you have some more information on refinery activity and the prices in different regions, just pause the video if you want to have a better look.

But now…

The million-dollar-question is:

Do I put my money where my mouth is?

On Flotek? no.

Why? Well, it’s a great company, but there are even better choices.

Flotek is in a specialty sector that still has a few competitors around.

There however is another company, based out of the beautiful city of Houston Texas, that has an excellent product with as good as no competition. They used to have competition, but they either acquired them or went bankrupt due to being overleveraged during a downturn.

This company has zero debt and enough cash reserves for a few more years.

The current price is down 93% from its high in 2013 when oil was above $100.

This company stands to make a windfall with upcoming Capex by the oil majors. And by a windfall, I mean one hell of a windfall in a short period of time

This is the company where I’m investing my money too.

Unfortunately, I can’t share the name here on YouTube/Blog.

At Countach Research, my investment research firm, and publication, we shared this company in the latest March report and added a position to the model portfolio.

To offset the risk of an investment in traditional fossil fuels, we created a pair trade with a green biodegradable plastics company.

In the likely scenario, both will perform great, in fact, the plastics company is up 58% since recommending it 2 weeks ago.

But if there’s a clear shift to any direction we have the downside protected with a pair trade.

Oil services and biodegradable plastics were a big part of the newsletter this month, as there are amazing opportunities on both the green renewable side, as well as the old fossil fuel side.

If you wish to see more about our research publication, you can click the link here.

It will take you to a page on our site with a video. That video lays out the 3 key elements that every investor needs to build their investment portfolio after right now.

It’s really really important to follow these 3 key elements, and almost no individual investor is doing it right now. Honestly, You really gotta see this training.

It’s sort of a webinar, but not really. I don’t have the time for those 2-hour long stories. I hope that neither do you.

This will be like 5 or 6 minutes at most, really fast, and it will teach you how to build an institutional-grade portfolio that can outperform both bull and bear markets. In just 5 or so minutes.

It’s directly to the point. No time wasted. As I said, maybe 5 or 6 minutes, definitely less than 10 minutes. It’s absolutely worth it according to just about anyone who’s watched it.

The link to the video is here.

It’s short, you got nothing to lose, but a lot to gain. It’s up to you.

Thank you for reading.

Ps. if you want to read a great IEA (International Energy Agency) report on the oil supply gap, there’s a link here.

Pps. the link to the quick training video is here.

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