Fri Jun 06 2014
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3 Huge Disconnects in the Shale Oil Industry

Shale oil has been touted as “the” resource that will singlehandedly lead the United States to energy independence.

With such insane levels of reserves being reported – 1.8 trillion barrels worldwide – it’s difficult not to buy into the hype.

No doubt, there are untold riches waiting to be unlocked in the sector.

At the same time, however, it’s important to be extremely cautious when deciding when and how to make your move.

In fact, I’m convinced that the only way to get the real story is to actually visit wellheads and drill sites in person. You’ll never know the whole truth until you can see the whites of their eyes.

That’s why I’m constantly traveling around the world doing my own unbiased prospecting. I make it a point to meet with geologists and CEOs before I make a final decision about any company.

With that said, today I’m revealing three massive “disconnects” in the energy industry. That is, key differences between what the press says and what I hear on the frontlines. Especially concerning the “dark pool” in California.

Disconnect #1: Taking Energy Companies At Their Word.Like companies in any industry, shale oil firms love to put out rosy numbers. It’s how they can borrow more money from Wall Street and the banks to finance their drilling and exploration.

A positive outlook also serves to jack up stock prices. That generates bigger payouts, parachutes and options-related compensation.

I know firsthand. After going through several private meetings with company executives, let me tell you – they’re excellent at pitching exciting stories. Especially when they have millions of dollars in future profits at stake.

Honestly, it’s no different than the financial engineering that torpedoed the market five years ago.

There are companies that are more forthright with their projections, though. The key is to know what to look for…

Disconnect #2: Following Wall Street’s Lead. Wall Street analysts are falling head over heels for every shale oil play you can find.

Don’t just follow their lead blindly, though!

They tend to be an optimistic lot. It’s much easier than putting in the work to be a skeptic.

That means they love to be fed information that – on the surface – sounds almost infallible. They eat it up, and expect others to, as well.

I like to temper all information given to me with a healthy dose of realism.

Disconnect #3: Taking Government Data Seriously.Government agencies are guilty of getting swept up in the hype, too. And many times, the “data” it gathers is later proved worthless.

For instance, The Los Angeles Times recently reported that the EIA has “slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national ‘black gold mine’ of petroleum… Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable.”

A 96% adjustment to the previous estimate? Talk about a swing and a miss!

How can these estimates be so far off?

Well, the billions of barrels might actually be there. They’re just not technically recoverable at current prices. In other cases, the amount of oil reported is simply a figment of the imagination of overzealous analysts who lifted the numbers from company presentations and industry claims.

Either way, it means that any company involved with the project is about to take a serious hit.

And the carnage isn’t over yet…

In June, the EIA will release more revised estimates, which will similarly downgrade shale oil reserves at other locations.

It’s certainly going to be a wakeup call for much of the shale oil industry – and for the investors who are simply going along with the hype.

Bottom line: There is money to be made in the shale oil industry – lots of it! You just need to be cautious, as the sector comes with its fair share of pitfalls.

And “the chase” continues,

Karim Rahemtulla

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