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De-teased: Street Authority’s “The Mother of All Oil Booms” and “1 Sure-Shot Play” for Rockefeller Riches

This article was originally published on December 7, 2021. It has not been updated, but we’re re-posting it here thanks to a surge of new reader questions. The “secret” stock teased is up about 30%, roughly keeping up with the surge in oil prices into late February, before the Russian invasion of Ukraine (though oil prices have surged again in the past ten days, so WTI and Brent Crude oil prices are now up about 60% since this teaser was originally covered.

Today we’ve got a new ad to look at from StreetAuthority’s Takeover Trader ($1,950/yr, no refunds), a teaser pitch from Nathan Slaughter that hints at huge profits ahead from a small oil company that owns a chunk of the Permian Basin in Texas.

And it’s kind of a breath of fresh air, frankly — we haven’t been teased with commodity riches in ages, other than the occasional lithium boom story. Ten or fifteen years ago when Stock Gumshoe was really just getting started, every other tease was from someone telling an Indiana Jones story about helicoptering in to some inhospitable land to find the next great gold mine, or oil well, or whatever else. It was kind of fun… but then the commodity boom collapsed (thanks, China) and spoiled our fun, and the pitchmen for junior miners and junior oil companies have been slow to dust off and get back to their feet.

Oil has staged a huge recovery from the pandemic lows, and that seems to be getting everyone excited again… so will we hear more stories of great adventure and exploration? More photos of intrepid newsletter dudes wearing dirty boots and climbing out of helicopters? One can only hope. This, at least, is a start… even if it’s teasing a slightly more established company, and one in the relatively civilized country of West Texas.

Here’s the juicy intro to the teaser pitch:

“BREAKING NEWS FROM THE U.S. GEOLOGICAL: Texas is about to bend OPEC over America’s knee… and dig up what top government officials verify is the largest natural oil reserve in history…

“The Mother of All Oil Booms (And The 1 Stock Set to Profit)

“On January 20th, 2022, one little-known Texas company could uncork nearly a billion barrels of oil… and unleash a 4,022% surge of mega-profits…

“Make one simple move today and you could see every $1,500 invested spike to more than $61,832…

“You’re looking at enough good-old-fashioned Texas “black gold” to independently power America for the next 49 years – and have global oil cartels groveling at our feet”

The first few pages of the “presentation” are mostly manipulative patriotic images and bluster about “energy independence,” trying to get you excited about the fact that this little company is going to stick it to the Saudis and make the US independent of all those bad guys who pump oil overseas. Whether or not that has any bearing on the company in question, we can ignore it… just remember that whenever an ad gets you pumping your fist and saying “yeah!” and scaring the cat, you’re probably being played.

True patriotism is a lovely thing, but Samuel Johnson was right about that whole “scoundrel” thing, too, whether it’s the used-car salesman flying the flag over junkers on Presidents Day or a newsletter pitchman trying to get your trust by saying what he thinks you want to hear about a politician or a foreign country. If there’s a hot-button political topic or political figure in an ad, it’s there just to get your attention and raise your ire — at worst, strong statements get readers’ attention, and the enemy of the ad copywriter is apathy… at best, they’ll have judged their audience right and pushed your personal hot buttons, and you’ll be much more likely to pull out your credit card.

So we’ll skip right over that and move right to Slaughter’s talk about the specific stock, shall we? Here’s a little excerpt from the ad:

“Now, let me break down why I’m so bullish on this small-cap oil company.

“Like I said, they’re a measly 0.6% the size of Exxon…

“Meaning the room to grow is nearly unlimited.”

And we know they’ve found some oil, or maybe are likely to find oil, in Texas… but we do also get some more specific hints to feed to the Thinkolator:

“… they’re one of the premier landowners in Texas with 81,700 acres of oil-rich land and over 2,400 drilling locations in – you guessed it: The Permian Basin.

“One glance at their balance sheet, and you’d be stunned.

“Because in a cycle where The New York Times reports most oil companies have cut back drilling, laid off workers, and written off assets to survive…

“The oil company I’m about to share with you is thriving.

“In fact, they’ve generated $10,600,000 in free cash flow for the third consecutive quarter…”

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And it turns out they’re not just exploring for oil, they’re already producing some, too… more from the pitch:

“What’s more, this hidden gem of a company is currently averaging a total of 54,202 barrels of oil a day…

“That’s before tapping the massive oil discovery the U.S. Geological Survey just found.

“One that sits in part smack dab under their 81,700 acres….”

And the January 20th tease is really just there to bring some urgency — every ad needs a deadline, otherwise you would take your time, think it over, maybe pop over to your favorite Gumshoe’s place and discuss it with your friends, and every moment that ticks by makes it less likely that you’ll think sending $1,950 to someone to get a stock tip is a wise idea. Deadlines inspire action, because nobody wants to miss out. From Slaughter:

“… according to my latest research deep-dive:

“This little company could break the news of the historic oil discovery – in their next quarterly announcement on January 20th, 2022

“When that happens, I believe one of two things will follow…

“One – it’ll create an all-out bidding war amongst every Big Oil company to acquire this tiny company. Big Oil will do everything in their power to be the ones to uncork a historic amount of oil themselves.

“Two – even if for some odd reason this company doesn’t get acquired, the drilling process still has to begin. Progress can’t be stopped because as a country, we need oil – no two ways about it.”

So what’s the stock, dear friends? We pulled the Thinkolator out of the garage, since it doesn’t seem like we’ll get snow today here in New England, and got her purring along nicely before we fed the clues in… so the answer came out nice and quick and clean this time. Slaughter is teasing Centennial Resource Development (CDEV). They were indeed producing 54,202 barrels of oil per day back in the first quarter, and they do claim access to 81,700 acres of (mostly contiguous) land in the Delaware Basin.

So yes, Centennial is indeed a Permian Basin oil company, with a market cap of only about $1.9 billion, so it’s currently trading at well under book value because they have only $1 billion of debt on their balance sheet, and claim $3.8 billion of property value — presumably that’s something close to what they paid for it, though judging the value of oil properties is an art that depends on some key inputs… especially the oil price. They aren’t always profitable, but they do generate a good amount of cash flow — it mostly goes back into capex at this point, they’ve spent something like a billion dollars a year for four years (through 2019), with most of that presumably going to drilling and acquiring properties, but it looks like they have a good base on which to build a business if the oil price stays reasonable.

On the other hand, we also all saw what happens when the oil price goes surprisingly low — a year and a half ago, in the demand destruction cycle that was stay-home COVID, CDEV became a penny stock, briefly trading down to have a market cap below $100 million and a share price below 50 cents (it’s around $6.50 now). With explorers who are spending on land and development, the leverage to the price of oil can be pretty extreme… and that’s even before you account for stuff like disappointing wells or production problems. It’s not an easy business.

And though it doesn’t really matter at this point, it’s also interesting to note that Centennial Resource Development came public through a SPAC merger in the years before SPACs were cool, back in 2016 — they were a mash-up of a couple oil companies, merged with a SPAC to get additional funding and go public after the disastrous collapse of oil prices in 2014 shocked the system. They’ve since shed their CEO, but otherwise it’s essentially the same management team at the helm that enjoyed the run from $10 to $23 and then back down to $3 before the COVID collapse. I don’t know what the back story might have been in 2019, I didn’t dig that deep, but here’s the share price of CDEV since its SPAC merger, compared to both WTI oil prices and the big oil companies (That’s the oil and gas ETF XOP in green, the S&P 500 in orange, WTI crude oil spot price in blue, and CDEV in purple):

So the path isn’t easy for a small oil exploration and production company… but still, hope springs eternal. It’s true that the inky black stuff pumped up from underground has been powering most of the modern economy for a century… and it has certainly created plenty of wealth for those who dug the right wells.

And things have been looking good this year — CDEV has been on a tear in recent quarters, as increased production and the recovery of oil prices has brought pretty dramatic revenue growth. Analysts don’t know what the price of oil will be next year any more than you or I do, but going by their assumptions today they expect CDEV to report $1.14 in earnings per share next year, which makes the stock downright cheap, with a forward PE of about 6. That’s about half of the valuation at which the more established oil and gas companies trade, and it’s also cheaper than Magnolia Oil & Gas (MGY), a more recent but somewhat similar SPAC-formed company in the oil space that’s working in South Texas and has a forward PE of about nine (ConocoPhilips (COP), Pioneer Natural Resources (PXD), Chevron (CVX) and ExxonMobil (XOM) and Diamondback Energy (FANG) trade at forward PE ratios in the 10-13 range, for example, they’re all 10X the size and more diversified, but also active in the Permian Basin). And CDEV has hedged about a third of their expected oil production for next year to protect from any disastrous collapse in oil prices, so that should absorb at least some of the potential market shocks over the next six months or so.

Will the company be a great investment? I don’t know. Their latest investor presentation gives some reasons for optimism, so that’s a good starting point if you want to start digging (or drilling, I suppose). They are reducing their leverage, in part by selling some non-core assets, and the valuation is very easy to like at current prices, and my snap judgement about the company is that they’re probably in solid shape, they’re generating good free cash flow (200 million or so in 2021), and they’re not under any immediate pressure from their balance sheet (most of their debt doesn’t begin to come due for five years or so). They’re in a relatively low-cost area for oil production, though I’m sure costs will rise with inflation and the challenge of finding enough oilfield workers, and they’re drilling in locations in a pretty well-understood oil basin (the Delaware Basin, which is sort of the center of the Permian Basin, and maybe the best part of the basin, depending on who you ask).

If you’re looking for exposure to a smaller oil company that’s growing production and levered to the price of oil, with relatively manageable capital needs (they don’t have to go drill in the middle of the ocean, or build new roads or power lines to the middle fo Alaska, or whatever else tends to be a challenge for the more exciting “discovery” stories), you could certainly do worse than Centennial Resource Development. And despite oil’s recovery this year, the ESG mantra and the push for clean and green energy does probably mean that investor demand for oil companies is lower than it typically has been in the past, so the prices are still somewhat discounted — which is probably an opportunity. We are certainly moving toward cleaner and greener, but the petrochemical complex isn’t going anywhere anytime soon, and it’s extremely likely that 90% of the cars on the road will still be burning gasoline in ten years.

Oddly enough, though, I don’t know where Slaughter gets that January 20 date from — Centennial Resource Development will not be reporting until the third week of February next year, if they stick to their historical schedule. Maybe they’ll announce some updates to their reserves or their production outlook in January, I don’t know, but that’s not part of the story they’re telling about themselves right now, and there’s nothing on their schedule.

Sound like your kind of story? Like other players in the oil patch, or prefer to avoid them entirely? Let us know with a comment below.

P.S. Slaughter teased a US Geological Survey update, too — when it comes to the USGS and the official updates about major oil regions in the US, or about new discoveries or assessments, I’m not aware of any shocking “new news”. The USGS did upgrade its assessment of the “undiscovered” contiguous oil reserves in the Delaware Basin a few years ago, but the last update I’ve seen from them was in November of 2018, and I don’t think it came as a big surprise to the many companies who’ve been trying to build land packages in West Texas (and New Mexico) over the past seven or eight years. I expect the ad is trying to wring some more juice from that 2018 assessment, but really, investors in CDEV already know that they’re likely to keep producing oil from their properties in that rich oil patch, and West Texas has been the center of US oil activity and a point of lust for energy investors for a long time… so I’d think of that as just a little a secondary endorsement of the area’s continuing potential, should you need it.

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Val
Member
Val
December 7, 2021 3:23 pm

Travis, thanks for yet another analysis.

PED is operating with about half of CDEV’s acres in Permian Basin too, with a market cap that’s 20 times smaller. I’d rather bet on PED, considering the increasing insider ownership, the experience of the CEO and the new wells expected to become operational soon.

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edw2269
edw2269
December 7, 2021 3:27 pm

I think oil will hit $100 a barrel by next summer so I like it. Currently in $LPI $CPE

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Carl M. Welch
Member
Carl M. Welch
December 8, 2021 2:54 pm

If I had the money, I’d take CDEV private. I already produce oil and gas, but not that much.

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sri gull
sri gull
December 9, 2021 11:58 am

I got into CDEV this year and I’m up almost 50% and holding long term.

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merc
Member
merc
March 13, 2022 4:19 pm
Reply to  sri gull

Most oil stock energy stocks are up 50%

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parkdoc
parkdoc
December 9, 2021 5:25 pm

I always wonder when insiders are selling CDEV:
iling Date
Trade Date
Ticker
Insider Name
Title
Trade Type
Price
Qty
Owned
ΔOwn
Value
1d
1w
1m
6m
M
2021-11-24 18:16:48
2021-11-22
CDEV Tepper Jeffrey Dir S – Sale $6.95 -59,263 182,612 -25% -$411,635
2021-11-15 17:32:35
2021-11-11
CDEV Silver Run Sponsor, LLC Dir, 10% S – Sale $7.43 -38,096 87,930,565 0% -$283,030
2021-11-15 17:31:44
2021-11-11
CDEV Riverstone Non-Eci Usrpi Aiv, L.P. Dir, 10% S – Sale $7.43 -38,096 87,930,565 0% -$283,030
2021-11-15 17:30:54
2021-11-11
CDEV Rel Us Centennial Holdings, LLC Dir, 10% S – Sale $7.43 -38,096 87,930,565 0% -$283,030

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timcoahran
Irregular
December 10, 2021 2:35 am

I must read things a little more closely than the writers intended. It always keeps happening.
This time, a sentence up near the beginning of the tease: if we’re having “The Mother of All Oil Booms” — how can there be only “The 1 Stock Set to Profit” !?

Pitchmen (&, incidentally, railroad officials) should try a little proofreading sometimes…

Last edited 2 years ago by timcoahran
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The1Moonbeam
The1Moonbeam
December 10, 2021 4:49 am

I’m not an oil expert & admit to being confused on a many oil issues. First this idea of reaching “Oil Independence”. Implying US oil stayed in US reducing imports. However a year or 2 ago ( not sure of exact time) but I Vividly remember the Nation News saying “US hit a milestone (sited period of time) in which we Exported more oil than we imported “. So why we exporting while at same time importing? Do they just like seeing tankers pass in the night OR getting a better price paid than in US & simply selling to highest bidder? So apparently oil independence doesn’t mean we keep US oil & at a lower price despite pushing for US oil independence with less restrictions on where drilling allowed such as offshore
Had a friend who worked on Alaska pipe line years ago who said Japan was largest of benefactor of that not the US, I don’t know if that proved true or not. Perhaps Travis & Gumshoe family could enlighten me in my areas of confusion. .

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DanM
DanM
December 11, 2021 2:17 pm
Reply to  The1Moonbeam

First you should understand that there are many different grades of crude oil. Most of the oil production in the US are relatively light grades, and the US-based “shale” oil from fracking which is solely responsible for the massively increased US production over the last few years is extremely light. However US refineries were built long before the fracking boom and therefore were designed to process heavier grades of crude which were the dominant product available to import. Additionally, some products like diesel can only be made from heavier crudes. So US refineries need to import heavier crudes to blend with lighter ones. So in reality, actual oil independence is a fantasy.

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povhq1
March 7, 2022 2:14 pm
Reply to  DanM

Great answer and right on target.

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merc
Member
merc
March 13, 2022 4:22 pm
Reply to  DanM

not if we tap into Alaska for oil copper gold silver etc

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mmagnor
Member
mmagnor
March 23, 2022 9:54 am

What ever happened to Baron Energy, Inc (BROE) ?

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