An investment in STO is a bet on the rising price of crude oil, with it's oil and oil linked LNG production (as well as domestic gas).
Presently the market believes there is an abundance of cheap U.S shale oil which will cap rising prices in the medium term in the $50 - 60 (U.S Brent) range. At these prices STO makes little return on invested capital hence a share price in the $4 range.
I think the market is wrong because:
- In the core areas of the Bakken and Eagle Ford which account for 2/3 of U.S. shale production we are already seeing declining resource quality from depletion outweighing the now marginal improvements in drilling efficiency as this technology has become mature over the last 6 years.
- Most of the so called "efficiency gains" have come from industry cutbacks which will quickly reverse when the "glut" of around 1.5m barrels per day in a market of 78m bpd and the inventory of stored oil and drilled uncompleted wells is worked through.
- With peak production of 4.2m bpd there simply isn't enough cheap oil to balance demand growing at more than 1.5mbpd per annum due to low prices. Shale oil is now in rapid decline and worldwide production declining gradually with lack of investment.
While it's likely that prices above $60 U.S. will allow the previous peak to be regained (including 4000 drilled uncompleted wells) it will not allow a material increase at $60 and only for a few years. After that drilling willbe forced to move to less economical areas and the fields will gradually decline.
The reason the market believes in the new $50-60 normal price for oil is that they believe what the shale oil executives are telling them, that they have decades of low cost production. They are saying this because the reality is their business model is uneconomic.
The longer Brent Crude Oil stays at $50 U.S per barrel the larger the shock will be when it is revealed that the emperor has no clothes. I have already waited a year, I think only one more year for an excellent return here but I hold long term 3-5 years +
I wonder if anyone here can post a credible challenge to my thesis. Obviously I am aware of news articles and the glossy brochures that the shale oilers are peddling.
That STO went from $4.8 to $4.3 is not news, why would I fluff around with a 10% gain (less brokerage) when there's 100% gain to be had from here? What is very hard to find are reports from people "on the tools" without an axe to grind or vested interest.
Do your own research of course I am no advisor.
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