This nothing that I haven't lived through before. Let me tell you how it is. Oil is a very volatile commodity. When it corrects to the upside, it goes to far. When it corrects to the downside, it goes to far. There are many, many reasons for this that I won't get into now. I view this as more of a geopolitical maneuver than anything else. The dollar is up, worldwide demand has paused for the time being. The dollar will remain strong in the short term, but not the long term and worldwide demand will increase at some point in the not to distant future. The geopolitical games will also come to an end. While I'm not saying that the price of oil will skyrocket, it will get itself back into a very profitable range for the smart, low leveraged, core positioned company's to drill and produce. There are going to be many casualties of this price drop / manipulation over the next 6 to 8 months. This will also open up the door for the healthy, well run company's to take full advantage of. My phone is literately blowing up with opportunity's at this time. These opportunity's will increase and the deals will get sweeter as time passes. This drop was well anticipated by the astute in the industry, as usual only the dopes and mainstream media got blind sided.
This brings me to Superior. I'm a big fan of a non-operated business model when building a E&P company, especially where there is forced pooling. This is the model that Superior is being constructed under. It lessens the risk exposure of the company greatly. Here are some reasons why.
1) Superior can be nimble and smart. The company can be very selective in the areas that they choose to acquire leases in. LOCATION,LOCATION,LOCATION!!! They can study the past well results and various operators in a given area and only choose to participate, when you can not come up with any valid reason why not to. Then Superior only needs to acquire the amount of land needed to satisfy the existing investor base. This also enhances the chances of giving investors the highest rate of return project possible. That's just old fashioned oilfield common sense.
2) Accredited oil investors are a unique group. Most oil investors that I have worked with in the past have at least 3 million in liquidity and a very long term view. They love to invest in oil and gas because of the very substantial tax benefits that can be had, that are not available to any other investment. Those tax benefits coupled with putting your money into an investment (hard assets) that will produce income for 8 to 12 years and sometimes longer, just makes great sense to do even in times of oil price volatility. You cut your tax burden while getting an income producing asset. It can be a very smart deal. I'm willing to bet you that oil will be higher in 5 years than it is today.
3) Under this business structure, Superior does not have costly lease expenses like the others. Superior does not have to spend millions on seismic surveys. Superior does not have to shoulder the cost of geophysical work. Superior does not have the hassle or expense of operating the project. Superior can operate as a lean, mean, cash harvesting machine, just by following the best operators, in the best areas.
4) Superior is rewarded handsomely with a free carry from it's investors for putting together quality projects, that produce better than the industry average. At this point in time Superior has one well out of 5 that has not exceeded the average production for the play. That's pretty good in my book. When I started in the business, we were hitting 6 out of 10 wells and that was considered exceptional. ( 4 dry holes for every 10 drilled )
5) Lastly, lets not forget that when an investor participates in a section, that gives said investor the right to participate in the drilling of every well in the section. Some of these sections could have as many as 12 to 20 wells on them because of the stacked sources of supply. So, as you can see, this is a very long term investment that requires a very long term businesslike approach. The day to day gyrations of the market will not have a long term effect on quality projects, operated by quality E&P company's. It's all about the long term outlook and for that I'm very bullish.
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