March 13, 2020.
As Seen In Real Asset Adviser’s April 2020 Magazine: Access Digital Format
As fears surrounding the spread of Coronavirus (COVID-19) and what it could mean to the global economy reach new highs, financial markets across the world have been in decline. Adding to the stress of an already fragile global economy, the March 6 OPEC+ talks of reducing the supply of oil between the second and third largest producers in the world – Russia and Saudi Arabia – collapsed. Russia refused to cut its production, and Saudi Arabia announced its plans to increase production by as much as 3 million additional barrels per day beginning in April.
When oil trading resumed on March 8, the price per barrel immediately dropped 30% – it’s largest one-day decline since the Persian Gulf War in 1991. By the time the dust had settled, the West Texas Intermediate (WTI) benchmark for US crude oil had bounced nearly 8%, but oil was in the low-$30s.
While cooler-heads and common sense may prevail overtime, it appears that short-term assaults on demand from COVID-19, a global slowdown, and OPEC+ supply issues will ensure that the world will be swimming in large quantities of cheap crude oil. For the time being, $30 oil – whether fueled by a more short-term technical trading or a change in long-term fundamentals – should have direct oil and natural gas investors captivated by the prospect of new ways to capitalize on the sudden drop in price.
From Crisis Comes Opportunity
Over the past 40 years, U.S. Energy has not only survived multiple energy and market pricing cycles – we have thrived. While lower oil prices might be viewed as a threat to many in the energy sector, we have witnessed first-hand how sudden changes in oil pricing creates some of the best opportunities for direct energy investors.
For anyone who closely follows the oil and gas sector, you already know that high-leverage ratios and debt burdens have been a significant threat to oil and gas companies in recent years. If oil prices remain low, there is potential that hundreds of distressed sellers – those with weak balance sheets or lack access to financing – will inevitably capitulate energy assets.
Energy companies and funds that offer low levels of debt, technical expertise to operate assets, access to capital, and solid financial positions will be in a significantly stronger position for growth if sub-optimal oil pricing remains.
Expect to See More Acquisition-Style Opportunities
Over the past several years, there has been a steady transition from drilling fund structures – which are known for potentially high upfront tax advantages – to acquisition focused structures. While demand for drilling funds remain strong (and maybe even be a little inflated in recent years as high net worth investors continue to have a need to replace other tax deductions lost from the Tax Cuts and Jobs Act), acquisition style projects continue to become more mainstream. Acquisition projects provide a larger segment of investors with ownership in a wide range of energy assets that provide income and tax diversification. Acquisition projects are likely to provide investors with some of the most attractive opportunities to capitalize on low pricing.
Should $30 oil persist, 2020 could provide direct energy investors with some of the greatest opportunities to acquire assets.
Adding to the already attractive asset valuations we would expect to see at $30 oil, it is worth pointing out that several sought-after regions for oil and gas operations – including the Permian Basin and Eagle Ford Shale – are located in regions which have been designated by the US Department of the Treasury as Qualified Opportunity Zones (QOZs). Opportunity Zones Funds allow individuals and corporations to invest in an Opportunity Zone and receive significant tax benefits if they have a realized short- or long-term capital gains – an added benefit for some investors.
While oil prices this year may be bumpy, direct investors should be excited about the potential that $30 oil creates to capitalize on the current energy market and build a tax advantaged portfolio. Investors should be actively searching out opportunities to partner with companies who have shown an ability to create arbitrages and other opportunities from crisis.
What Is The Impact On Specific U.S. Energy Partnerships?
For specifics regarding how recent events impact past, current and future U.S. Energy investments, please reach out to us with questions and concerns by calling: 800-636-7606 | Wholesaler Territory Map
This information contained in this document is for informational purposes only. It does not constitute an offer to sell or a solicitation of an offer to buy any security. Such offers can only be made by a Private Placement Memorandum to accredited investors. Oil and gas investments involve a high degree of risk and are not suitable for all investors. You should purchase these securities only if you can afford a complete loss of your investment. Please refer to the Risk Factors section of any specific Private Placement Memorandum. The equipment pictured in this brochure is not owned by, and will not be owned by U.S. Energy Development Corporation or its partnership(s), unless otherwise noted. The assets pictured within this brochure accurately represent the assets U.S. Energy or its partnerships may own. Please refer to the Areas of Operation section of any specific Private Placement Memorandum. Past performance is not an indication of future results. Securities sponsored by U.S. Energy Development Corporation are offered through Westmoreland Capital Corporation (CRD 11469), Member FINRA/SIPC – an affiliate of U.S. Energy Development Corporation.