Oil is selling at US$72 a barrel.
Our friend James Ferguson believes that one of the best ways to get rich now is to do what Jean Paul Getty did in the 1930s – buy oil in the ground. The basic idea is that oil has become a lot more expensive than it was in the Clinton years – nearly seven times more expensive. But the price you pay for a major oil company stock may not be seven times higher.
Some large, high-yielding, blue chip stocks are actually trading below where they were seven years ago, says James, “even when some of them have more than doubled earnings since then”.
Royal Dutch Shell is currently trading around US$80 a share. If you bought the whole thing, plus net debt, it would cost you about US$287 billion. But the “downstream” business of Shell – refining, marketing, transporting, power, etc. – is worth about US$174 billion according to Morgan Stanley.
That means that the rest of the business – the oil in the ground – is worth US$113 billion. Let’s see, the company has proven reserves of 11.8 billion barrels. That’s US$9.58 each. And with oil at US$70 above ground, these reserves are worth a lot of money.
But keep in mind that there are rules for reporting “reserves”. The SEC tells Shell what it can call a proven reserve and what it can’t. It also has “2P” and “3P” reserves – probable and possible. Altogether, it could have 30 billion barrels of 1P, 2P and 3P oil. That works out to US$3.76 a barrel. And Shell’s private estimates of what it owns is even more optimistic – it believes it has proven, probable and possible reserves of 60 billion barrels. At today’s share price, they’re available now…at less than US$2 a barrel.
If J. Paul Getty were alive today, says James, he’d be buying.
Markets and Money