Have You Considered Land Banking?

landbankland-bank-ing is the practice of buying land as an investment, holding it for future use, and making no specific plans for development, says Google.

This is only a partial definition.  I have experience in acquiring over 70 land parcels.  Sometimes the play was to aggregate several parcels to increase value.  However, many times the play was to subdivide into smaller parcels.  We would often work with a land planner before the purchase to know what our exit strategy would be.

Now I have a new definition for land banking.  Purchasing property or mineral interests at today’s low oil and gas prices (WTI $44.66, gas $2.783,) then holding the land or lease with today’s production to get a ROI.  Then when we have future oil price increases sell or develop additional production.

If you don’t think we’ll have oil price increases in the future, the  EIA has confirmed U.S. oil production has peaked…at least for now.

EIA affirms peak production in the second quarter of 2015, the fall in output over the next few quarters should bring supply and demand back into balance, or at least close to it. Supply exceeded demand by more than 2.5 mb/d in the second quarter of this year, but that gap will narrow to 1.6 mb/d in the third quarter and just 500,000 barrels per day in 2016.

The oil majors have cancelled or delayed a combined $200 billion in new projects as they seek to rein in costs, according to Wood Mackenzie of the Wall Street Journal.

So, here is a strategy.  Buy oil properties based on today’s low prices that has sufficient production currently or can be inexpensive to increase production.  Then when prices rebound, develop or sell additional acreage.

This strategy has worked for land investing and developing for decades.  Why not apply it to oil and gas production where we get a current return on our investment.