On the insistence from a friend and a colleague, I watched the movie There Will Be Blood over the weekend. I’m a Daniel Day Lewis fan from his prior works like Gangs of New York, so was excited to watch this odd story. Lewis’s character Daniel Plainview is a silver speculator turned oilman who comes across an oil opportunity in Little Boston, CA. He takes his son (HW) to a property, owned by the Sunday family, that they are told contains oil. He tells the owner that they are going quail hunting, which wasn’t true. While hunting, HW stumbles upon an oil seepage confirming the oil is present on the land. They are both excited and the following scene ensues with his son:
HW (son): How much we gonna pay them?
Daniel (father): Who’s that?
HW (son): The Sunday Family
Daniel (father): We’re not going to give them oil prices. We’ll give them quail prices.
While we are not claiming to be getting our oil companies for birdfeed, it brings up the idea of distraction for the Sunday family in the movie and investors now. The Sundays had strangers show up looking to hunt quail, not knowing they were looking for oil. Outside of one family member believing there was a ruse, they were willing parties when the sale price was negotiated at what looked like low prices in the movie. These people had never seen oil drilled on their land, thus didn’t understand the opportunity that lied ahead.
Today’s investors are different in their naivete. It’s not that investors are thinking they are getting a better secondary use (quail hunting) in today’s prices. It’s the view of what our world will be in 10, 20 or 50 years that is clouding their judgement. Little Boston had never seen oil. Investors and government of the world can’t see a world with oil at some point in the future.
Over the weekend, a Bloomberg article written by Jeran Weinstein and Michael Bellusci got to the core of this question. “Investors must now weigh the industry’s soaring revenue and improving profitability against the long-term prospect of a carbon-light world. The key is how long it will take for countries to phase out internal combustion engines in the coming decades and what kind of supply and demand imbalances occur along the way.”
The real question relies on when. For example, based on the large cash flows being produced in the energy space currently, investors can perceivably see investment returns that would pay back their initial capital in 5-10 years, based on current prices. They do not have to look deep into the future to understand success in investment returns.