Marc Lichtenfeld has a new promo out for his Oxford Income Letter ($49 first year, renews at $79), and much of the first part of it is focused on the strategic petroleum reserve (SPR)… and how desperate things will get if we need to tap that reserve in an emergency. Here’s how the ad begins:

“The Untold Story of America’s Energy Emergency

“Most Americans Will Be BLINDSIDED by a New Oil Shock… But It Could Trigger a Massive Payout for a Select Few on March 21, 2024.”

The SPR is crude oil that is stored a series of salt dome caverns on the gulf coast, in the heart of US oil and gas country, and was created as an emergency reserve after the US economy was decimated by the OPEC oil embargo in the 1970s. The SPR is both a strategic reserve for the US, and part of the International Energy Agency’s common effort to meet emergencies (all IEA members are required to keep a strategic stock “no less than 90 days of petroleum imports”). Here’s how Lichtenfeld describes the situation…

“Combined, they have enough capacity to hold 714 million barrels. That’s the equivalent of about 3.5 years’ worth of petroleum imports.

“Millions of Americans will be counting on this stockpile the next time there is a hurricane, war or major pipeline disruption.

“But unfortunately, when Biden calls to use these important reserves…

“The other end of the phone line will be silent.

“Because according to a recent Bloomberg headline, these skyscraper-sized caverns…

“‘Sit empty.’

“One oil executive called it a ‘disaster for America.’

“Yahoo Finance quotes another expert who says we’re ‘playing with fire.’

“And former House Speaker Kevin McCarthy said that our stockpile ‘is down to nothing.’

“In fact, our current emergency stash is so low… it’s only enough oil to last us 17 days.”

Fact check? To be clear, those scary-sounding numbers, 3.5 years and 17 days, are two different measures. It is true that the Strategic Petroleum Reserve has been tapped in the most substantial way in a very long time, particularly in 2022-2023 in an effort to rein in inflation, but it has tended to be a convenient piggy bank for the government and a political focal point every now and again, and the “strategic” part of it has become dramatically less important over the past few decades as US oil production has soared. 

The recent history? The government released about 75 million barrels from the reserve during President Trump’s term, and has so far released about 235 million barrels under President Biden, which I think is the biggest release ever from the reserve.  There is always quite a bit of political hand-wringing about the reserve, but it was intended to be a bulwark against things like the OPEC embargo of the 1970s, a way to cushion against oil imports that fail to arrive.  That’s much less of an imperative when the US is largely self-sufficient in oil and gas, as it is these days on a net basis, but it does certainly represent an insurance policy.

So yes, the SPR is down to about 1/2 of its “full” level as of the latest update (357 million barrels was the most recent inventory, as of last week, when a few million barrels were added — the full authorized capacity is 714 million barrels).   The last estimate is that the US imports about 8.3 million barrels of oil per day, roughly half of that from Canada, so by that measure 357 million barrels would be about 42 days of imports.   The US is also the world’s largest oil producer, though, producing something like 20-21 million barrels/day of petroleum products, and has recently been a net exporter of oil, with exports of about 9.5 million barrels per day… so if you use the terms we’ve sometimes seen used to assess the SPR, how many “days of net imports” the SPR represents, that would have been more than 1,000 days a few years ago, roughly that “3.5 years” number, but now it’s essentially infinity, since the US exports more than it imports.   

But yes, if the SPR were relied on to provide all the oil consumed in the United States, we’d be in trouble — but that has always been the case, and it is not designed to do that. It really cannot do that. All the oil is essentially in one place, for one thing (a series of caverns, but all near each other), and reports I see indicate that it can only be extracted from those reserves and put into the pipeline network at a rate of about 4 million barrels/day even if all is going perfectly (which it probably won’t, the infrastructure is old and probably also needs investment). Four million barrels a day is only about one fifth of the oil that American consumers and businesses burn in a day. But that’s where the Lichteneld “17 days” number comes from, the current inventory of the reserve is equal to about 17 days of US oil consumption… it’s just that we can’t compare that to the 3.5 years number, they’re not related. At the peak, a few years ago, the last time the SPR was at maximum capacity, the SPR would have represented 30-35 days of consumption.

Oil production has gotten more efficient and more controlled, just like any other industrial process, so I guess it shouldn’t be surprising that it has also become even more of a “zero inventory” business these days — there is always oil in the system, being moved and refined and shipped, but it’s a pretty constant process. Just like with food production, or even with stuff as mundane as car parts, if we stop producing for a few weeks there would very quickly be no availability. It is true that a major catastrophe — a couple refineries or major pipelines shut down, Permian Basin production halted for some unknown reason, Canada blocking its exports to the US, etc. — would probably create an oil shock. But that has pretty much always been true, and the ability of the SPR to cushion that shock has always been pretty limited — as we saw over the past couple years, releasing all that oil from the reserve did cushion consumers from gas price inflation by a little bit, but it wasn’t particularly dramatic. I assume the SPR was tapped after the Ukraine invasion and with inflation spiking because of political reasoning along the lines of, “we’ve got to try to do something about inflation, or at least look like we’re doing something, because it’s a midterm election year and people are freaking out.”

So anyway, that’s the “fear” part of the pitch… that the SPR, which at full capacity equals about a month worth of oil consumption in the US, will fail to save us during the next oil crisis, whatever that might be, and that we’ll then see oil prices spike higher. That is probably true, and the cushion is smaller now, but that was true before the SPR was partially drained, too — even at full capacity the SPR would have been at best a small and partial insurance policy in the face of a meaningful oil shock. When you think of the SPR as “insurance,” think “crappy dental insurance,” not “AAA-rated life insurance.”

Yes, that example comes to mind because I just went to the dentist. Insurance might pay 5% of the cost of the new bridge I need, woohoo! And that’s only if my wife or kids don’t need to get a root canal first, and use up the family maximum. It’s better than nothing, but not a lot better.

So that’s the state of the SPR. Back to the ad:

“The fact is, Americans should prepare for a serious oil shock.

“But as with all crises, there’s also opportunity.

“Look at 1973 when the price of oil surged 300% in just 12 months…

“It was enough to plunge the U.S. into a recession.

“Retirements were destroyed as the stock market collapsed 50%.

“Meanwhile, those who saw it coming could have cashed in on BP and Halliburton… two of the best-performing U.S. stocks of the year.

“And this same scenario is set to play out again…

“In a moment, I’ll share details on my #1 oil and gas investment for huge income.”

Well, he won’t share it, exactly, he’ll sell it… which is why we’re here, to give you some answers for a more reasonable price (how does “free” sound?), and give you a little leg up when it comes to thinking for yourself about your investments.

More tease:

“This time, though, the big winner won’t be a company like BP or Halliburton.

“While they’ll do well, there’s a smaller, lesser-known company that I believe will come out as the single greatest stock for the oil crisis of 2024… a company so well positioned that in the last year, it’s outperformed crude oil by more than 2,100%.

“And when oil climbs higher, I expect this company will continue to outpace it by an enormous margin.”

So what other clues does Lichtenfeld drop about this stock? Here’s what we gleaned from the ad:

“It’s a new company that runs a unique program that can help you create a massive income stream in energy…

“One that a Forbes contributor agrees is “unorthodox” and that Barron’s calls “the new thing”….

“It could help set you up to receive income checks on a huge scale for the rest of your life.

“While capturing massive capital gains.

“But that’s just the tip of the iceberg. Because the little-known company could also play an important role in getting us out of this new oil shock.”

Lichtenfeld makes a lot of hay out of his big “value will prevail in 2022” prediction from late 2021, which included a prediction that oil would double to $140 as inflation soared and many of the big oil producers expected gradual production declines and a shortfall by 2025. So we should recall that yes, Lichtenfeld was correct — even if it wasn’t primarily production declines that created the spike in oil prices, it was the supply shock after Russia invaded Ukraine and Russian oil imports were blocked by many major economies (Russia is the second-largest oil producer in the world, behind the US and just a hair ahead of Saudi Arabia).

Today, though, oil prices are back to about where they were when Lichtenfeld made that “oil will double” prediction in late 2021, and he’s doubling down…

“… oil is about to hit an all-time high in the U.S.

“Higher than $147 a barrel back in 2008.

“Much higher.

“The good news is that this will create a once-in-a-generation wealth-building opportunity for those in the know….

“Record oil prices represent one of the most predictable profit opportunities I’ve seen in a long time.

“And I’ve found the single best way to play it.

“A stock that I believe every American should be holding in the year ahead.

“This under-the-radar company is in such a strong position that it could turn a relatively small stake into a windfall in the next 12 months… and beyond.”

So… are we heading into an oil “supercycle” that will send prices soaring to $150/barrel or above? No idea, but that’s Lichtenfeld’s forecast, that oil will top the old record of $147 sometime in 2024, driven by US production declines, China’s middle class, perhaps an expansion of the war in the middle east or some more OPEC production cuts, whatever. And he points out the power of oil stocks as a “safe haven” for investors over the past couple years — which, thanks largely to Vladimir Putin, is arguably true. This is the chart he shares:

Which is true, energy stocks did well from late 2021 (which was the S&P 500 peak, until recently) until late 2023, though the outperformance has been erased in the past month or two, during which almost all stocks have surged… and more importantly, we should note that energy has been a lagging sector for much of the recent past, this is the performance over the past ten years (S&P 500 in blue, Energy Select Sector ETF (XLE) in purple, WTI crude oil spot price in orange):

As we should all know by now, though, you can make a chart say anything you want — and charts in ads are always designed to make an argument. The same is true of articles, and the chart I shared above is not necessarily fair, either, because it so happens that the starting point, ten years ago, was also very close to a high for oil prices, that was right before oil collapsed from close to $100 to about $30 in less than 18 months, destroying lots of oil companies. If we go back about 25 years, to the introduction of the XLE ETF in the late 1990s, this is what that same chart looks like:

Which means I’ve probably just wasted 100 words telling you that when oil prices are relatively high or rising, oil companies make more money and oil stocks usually go up.

So finally can we get some more clues? Indeed, here’s what Lichtenfeld tells us about his “massive game changer” company:

“My #1 energy company is a little-known oil and gas operator… although I don’t expect it will stay that way for long.

“Earnings are up 142% per year, on average, over the last five years.

“Since inception, the stock has averaged a 48% annual return.

“If that keeps up, a small $10,000 investment would balloon to over $70,000 in just five years.

“Of course, there’s no guarantee the stock will repeat that same success. As with anything in the markets, you should never invest anything you can’t afford to lose.”

That last line is a reminder that the Oxford Club probably has a solid legal team that reviews all their promos and makes sure that the things that sound like promises, aren’t actually promises. Not that it’s untrue, but there’s a reason it isn’t in the headline.

What else do we learn about this stock?

“This overlooked company currently boasts a treasure of proven oil worth more than $26 billion based on today’s prices. That is almost quadruple its current market cap.

“And growing!

“It’s seen a 48% increase in proved reserves since just 2020.”

OK, so that means this stock had a market cap of close to but under $6.5 billion whenever Lichtenfeld pulled his data. That’s a solid clue. What else?

“This company is the top producer in the Bakken, one of the biggest deposits of oil right here in the U.S… and it’s high-quality crude at that….

“As Rep. John Shimkus, a senior member of the House Committee on Energy and Commerce points out, the Bakken region could easily be tapped as a ‘de facto’ emergency reserve when the SPR is depleted.

“It holds an estimated 413 billion barrels. To give you an idea, that would be enough oil to fuel the U.S. for 56 years.”

More hints:

“Thanks to a recent acquisition, it now holds over a million acres in the region….

“It pays out a strong, regular quarterly dividend – more than double the amount of the average stock… a base dividend that’s only gotten bigger and has never been cut….

“In addition to its outsize regular dividend, this company also distributes a bonus payout each quarter like clockwork…

“It’s simple enough of a concept.

“Oil goes up, and so do these unique payouts….

“And if oil doesn’t reach new heights?

“Then you’re still part-owner of a top-tier company that has delivered 225% growth per year in its income payouts over the past two years.”

And there’s the usual pointless tease about “institutions” buying in, which always really ends up being just a reference to the biggest asset managers and ETF managers who own a big chunk of almost every stock.

“BlackRock just upped its stake in the company by 50%. It now holds $650 million worth of stock.

“First Trust Advisors just increased its stake by 514%.

“And Charles Schwab recently acquired about $60 million worth of shares.”

We’re told that the company is buying back stock, too..

“It just boosted its share repurchase program from $300 million to $750 million….

“… this company is returning more than 75% of its free cash flow to shareholders.

“That works out to $1.45 billion in the last 15 months.”

Lichtenfeld says it’s also a potential takeover target, with a Truist analysts naming it as a potential target, so that’s another possible catalyst if the M&A boom continues among US oil companies.

So which stock is he really pitching in ins ““Earn Massive Income From the New Oil Shock” special report?

The Thinkolator sez this is Chord Energy (CHRD), which is effectively a new company that was created about 18 months ago from the merger of Oasis Petroleum and Whiting Petroleum. They do own the largest acreage position in the Williston Basin, spread across North Dakota and eastern Montana.

This is a company that, like many these days, is trying to be disciplined with capital spending, keeping production “flat to slightly growing” and returning 75% of their free cash flow to investors, including the dividend and, yes, their recently increased share buyback authorization, which does now stand at $750 million (over the past four quarters, as of September 30, they had bought back $184 million worth of shares and paid total dividends of about $550 million — both very high numbers for a $6 billion company, though much lower than they were during the boom year in 2022).

And yes, Neil Dingmann, an analyst at Truist, did say that CHRD is a potential takeover target in the wake of the surge of oil acquisitions last Fall — in a CNBC interview he said Permian Resources (PR), Chord Energy and Magnolia Oil & Gas could be “very interesting targest because they all have very good inventory.”

Chord doesn’t have a ton of debt, only about $400 million, and they say their wells are performing a little better than expected, with longer laterals helping to improve efficiency, and they believe they have “a decade of low-cost inventory” that will be profitable to produce as long as WTI crude oil prices remain above $60… with about 25% more that would be profitable and viable if oil prices climb to $80. And they do believe that they’re cheaper than peers and have good free cash flow leverage to higher oil prices… here are a few key charts from their latest investor presentation along those lines:

Chord’s base dividend is $1.25/share, so that gives us $5 per year which the company seems to believe is pretty assured, assuming that oil prices don’t collapse below $60 and stay there. Last quarter they also paid a special dividend of $1.25, for a total of $2.50, but the dividend has been quite variable — the total payouts for the previous four quarters were $1.36, $3.22, $4.80 and $3.67. The share price is currently just a whisker under $150, so the trailing dividend of $11.88 for the past year would provide a yield of 7.9%… and if it just keeps up at the level of the last payment, we would then receive $10 over the coming year, for a yield of 6.7%.

And you’ll be unsurprised to hear that “massive March 21 payout” is really just “the next dividend.” And we don’t know what that will be — they should release their fourth quarter earnings, and announce the size of that next dividend, sometime in the next few weeks (it was Feb. 22 last year). And the dividend will probably be paid on or near March 21, that’s the date on which they paid last year. The “base dividend” of $5/year will probably stay the same, they set that in August of 2022 and it has remained unchanged for six quarters, but they’ve paid an extra variable dividend for the past five quarters on top of that, and I imagine that’s what will happen this quarter, too… I just can’t guess at what it might be.

I also don’t know which way oil will go, of course, but this one seems pretty rational if you’re looking for a smallish oil producer — the Bakken is a higher-cost production area than the Permian, so it would probably hold up worse than some oil companies if oil drops dramatically… but at $60+ they’re probably doing just fine (WTI crude oil today is around $73 — off the highs of last week, when it hit $78, but about where it was a month ago). Pretty much all small-to-midsize oil companies (and a lot of the big ones) look quite cheap at the moment, single-digit PE ratios and 5-10% estimated dividend yields are pretty common right now, but Chord Energy is, at least, priced at a meaningful discount, generating good cash flow and profits, and carries a pretty small debt burden.

Oil producers can be quite volatile, and drilling for oil and maintaining production are capital intensive activities, so I’ve never found it to be a particularly appealing business through the up and down cycles of energy prices, but it’s certainly true that buying cheap and profitable oil companies with a lot of reserves and “location inventory” is likely to set you up for good returns IF oil prices surge higher. And it’s been a short history so far, but Chord has caught the eye of investors — since the March 7, 2022 announcement of the Whiting/Oasis merger, here’s what the stock chart has looked like compared to the S&P Oil & Gas Exploration and Production ETF (XOP, in purple), which is a more direct comparison for CHRD than the broader XLE Energy ETF I mentioned above:

Just note that exploration and production companies, in general, tend to be a lot more volatile than the other players in the energy market — the XLE ETF is much more heavily weighted in the more stable large integrated oil companies, like Exxon Mobil and Chevron… so, just as an indicator of the (mostly smaller) exploration and production companies have done over longer periods of time, here’s the total reutrn chart going back to 2006 for XLE (orange), XOP (purple) and WTI Crude oil (blue)… with the S&P 500, in green, as a reminder that energy is generally a much smaller part of the stock market than it was 20 years ago:

So… we can be pretty sure that Chord Energy will have good investor returns if oil prices stay somewhere near where they are now or rise. We can’t know what the oil price will do, though, so the first question is whether you want exposure to oil producers and oil prices in general, and the second is whether Chord sounds like the kind of oil company you’re interested in. I can’t answer that for you, but I’m also not very active in this sector, with most of my exposure in the form of pipeline MLP investments… so I’ll leave it there. It’s your money, and you get to make the call. Expect a booming oil market this year? Like the setup for Chord Energy? Let us know with a comment below. Thanks for reading!

P.S. Lichtenfeld also teases his “#1 Oil and Gas Royalty for Huge Monthly Income” in this ad, and it looks like that’s just a repeat of his pitch for Permian Basin Royalty Trust (PBT), which had previously been his #1 Oil income stock in teaser ads he pushed aggressively over the past year or so. We first covered that one here, and never really liked it because their so-called “royalty” is really a net profits interest, and has been largely consumed by heavy capital spending by the operator. That “huge monthly income” has mostly been very disappointing relative to Lichtenfeld’s hype, it did finally reach “reasonable” dividend levels in November and December but is now much lower again. I most recently updated our coverage of that story back in October… the main bit of news since then is that the dividend did finally pop up to the “expected” for a couple months but has now come back down, but the other point of interest is that in December PBT sued the operator of their key Waddell Ranch property, Blackbeard, and essentially seems to be claiming that the “royalty” is being underpaid because Blackbeard claimed some operating expenses as capital expenses. Or vice versa. Something like that. No idea when or if that gets resolved or leads to a higher future dividend, but over the past 12 months this “huge monthly income” play has paid out about 56 cents in dividends, total… which at the current price would be a 4% yield, and if you bought when Lichtenfeld started pitching it, at about $23 in March of 2023, your “income” would have been around 2%, and your total return would be a negative 36%.