Oil trap or value trap?

The website “Oil On My Shoes” contains a short and excellent introduction to petroleum geology.  In particular, it explains how economic oil and gas reservoirs are often found in either structural or stratigraphic traps.  What I took away from the website is that petroleum geology is quite complex.  There are many factors that affect the exploration potential for a piece of land and therefore how much that land is worth.  Just because two parcels of land are close to each other (what I would call “closeology”) doesn’t necessarily mean that wells drilled on both parcels will have similar economics.

Many publicly traded companies avoid disclosing information about geology and would like investors to focus on closeology.  They want to trick investors into valuing acreage on the sale price of nearby land rather than the geologic potential of the land (or lack thereof).  Without knowing the geological details, it’s hard to say if closeology is a reasonable shortcut in valuing acreage. At the end of the day, I think that it is a red flag whenever an oil/gas company tries to steer investors towards closeology.  Usually it is an attempt to mislead.

3 thoughts on “Oil trap or value trap?

  1. what’s your opinion on RBY ? It seems that the bull case is built exclusively on the fact that the company has secured the mining rights to the land which is right adjacent to Goldcorp mines.

    • In mining, closeology makes sense and is often practiced. Whoever makes a discovery first will try to quickly stake as much surrounding land as possible. They have to try to keep it a secret and may be limited as to how much land they can afford to stake. Other companies will quickly rush into an area on news of a discovery (even fake ones like Bre-X). The ones who are there first will likely grab all of the best land, while the latecomers get second pickings. It’s not a terrible strategy and sometimes the second pickings turn into economic mines.

      I generally hate junior exploration companies. They aren’t serious enough about making money for shareholders. Too much fraud, too many overpaid insiders, etc.

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