The market for stocks right now is dominated by several major themes.
First, we are seeing a steady outperformance of so-called “value” stocks and “heavy cyclical” stocks when compared to “growth” and “big-tech” stocks.
Second, we are seeing an overall sideways range process dominate the major indices as the tug-of-war of this rotation plays out and big institutional investors brace for an eventual turn toward more hawkish monetary policy from the world’s major central banks.
Finally, we are seeing a steady boom in commodities plays, which is particularly evident in stocks in the oil patch.
The most important point to make in response to these facts is to understand that they are all related phenomena. In each case, the underlying culprit is an abiding faith among big money managers – supported by clear data trends – that the post-pandemic “reopening” process is happening sooner than expected and may be bigger and more dramatic than expected in economic terms.
For investors who are starting to catch on to this connected set of dynamics, there are huge implications for allocation of investment capital.
But there’s also a problem that needs to be solved: this whole scenario is being driven by surging demand and constricted supply. That applies to everything – labor, copper, oil, food, trade routes, semiconductors. It goes across the board.
The leading group right now is in the energy space, where this problem is perhaps most manifest. And we would argue that this poses a significant opportunity for stocks situated in the role of “alternative producers”.
In other words, we are talking about stocks tethered to the thesis that oil demand will continue to boom, but that mainstream oil producers won’t, for a number of likely interconnected reasons, step up to the plate and placate that rising demand, which creates a special opportunity for players like Allied Energy (OTCMKTS:AGYP), a small-cap in the energy space with an interesting angle on production that could prove to be significantly more responsive in monetizing the current macro context.
A Different Path
Allied Energy (AGYP) is engaged with a model for quickly juicing up production without having to discover, develop, and bring to market new oil wells.
This could be particularly important in the context of a world where the majors have abandoned their post as expanders of oil production while the oil market apparently sits on a glide-path toward a potentially historic oil shortage.
In short, AGYP is in the business of acquiring existing, developed wells and using industry-leading expertise to restore and optimize the production of those wells.
The company has acquired a number of promising candidates for this approach, with its most recent being its lease (financed through non-dilutive means) of 300 acres containing five oil wells in Crystal Falls, Texas, which are identified as part of the Annie Gilmer Lease.
According to the company’s most recent release last month, the Annie Gilmer lease is in the small community of Crystal Falls, Texas on the banks of the Clear Fork of the Brazos river, approximately thirty miles north of the town of Breckenridge, Texas.
The company notes that there are five wells on the lease that were drilled to the Mississippi formation, which is encountered at approximately 4100′ below the surface of the earth.
The Mississippi formation has been shown to potentially produce prolific oil and gas cumulative numbers. There were six wells drilled on the lease starting in the mid 70’s with the last being drilled in 1989. Since the initial well, the lease has produced over five hundred thousand (5000,000) barrels of high gravity oil and over five hundred million (500,000,000) cubic feet of very rich natural gas. There are two permitted saltwater injection well on the lease. One of the injection wells will be re-converted to an active oil and gas producer.
Allied CEO George Montieth elaborated on the acquisition: “We are thrilled to add the Annie Gilmer Lease wells to our ever-expanding portfolio of Texas oil wells. Allied currently has a crew on the ground this week at this new location and expects to release flow rates, videos and other pertinent data shortly. Investors can also expect updates about our Green Lease location as the workover rig is now just waiting on weather to move onto the lease.”
Abandoning the Post
In other words, AGYP specializes in the business of reworking and re-completing existing oil and gas wells located in the thousands of mature oil and gas producing fields across the United States, with the objective of mobilizing its expertise and technology to drive higher production volumes, longer well life, and more efficient recovery of proven and available oil and gas reserves in acquired wells.
This has special implications in a world where the major integrated producers have decided, apparently, to cut their exploration and production budgets in response to 1) the oil crash in 2020, 2) conservative lead investors concerned about a resurgence of the virus, and 3) legal and social activist moves to battle against the production of oil.
Just last week, a Dutch judge to ordered Shell to cut carbon emissions by 45% by the end of the decade. There are more cases like this pending against oil companies. Chevron also recently announced in its investor day that it will make last year’s 25% haircut on E&P investments permanent for at least the next five years. And Exxon just saw several board seats go to an environmental activist fund that plans to steer the company away from developing new oil supply.
At the same time, OPEC+ decided last week to push back against pressure to more rapidly increase production because, as stated, there are just too many risks of the emergence of a hit to oil demand.
The Big Picture
This is probably the Generals fighting the last war. It has become ingrained in the industry to see “leaning in” to increased oil production as a potentially catastrophic vulnerability due to the potential for a new Covid-19 variant – like the Indian variant – to emerge that could pose a challenge to current vaccine solutions, which might lead to a fresh round of lockdowns.
Given how difficult it is to steer the massive industry on a dime in reaction to sudden events, the risk is perceived as too great to really commit to pushing production higher.
As a result, we have a growing risk of a shortage later this year if nothing is really derailed in the reopening process.
That could pose a powerful opportunity for companies like Allied Energy (OTCMKTS:AGYP), who has specialized in a more flexible model of adding new production capacity to the system to the benefit of its shareholders.