Four Oligopoly Opportunities from America’s Cheap, Unloved Energy Source

“Whoever controls oil controls much more than oil.”

-John McCain

 

June 13, 2025 — When it comes to oil, Americans may first think of big gushers from a drill site, likely somewhere in Texas. Perhaps, last night’s events in the Middle East will make investors take another look.

The Lone Star State is home to the Permian Basin, America’s largest petroleum-producing area. Texas laws are favorable to production, too. Whatever it takes to get out of the ground quickly.

The Denver-Julesburg (DJ) Basin, largely in Eastern Colorado, is a different story. But one worth a closer look…

Created by the uplift of the Rocky Mountains and an area that was undersea millions of years ago, today, the land is flat — flatter than Florida.

But under that land, at least a mile down, is one of the largest oil fields outside of the Permian.

Colorado has pumped oil out of the ground since 1901. And it’s the fifth-largest state in terms of oil production. This long period of production means that the area has been thoroughly surveyed, and that resources are well known.

Politically, however, the state of Colorado is run out of Denver and Boulder. The left-leaning political orientation of those cities tip the state governance towards environmentally sensitive rules and regulations for mining and drilling natural resources.

For instance, what happens if you hit a natural gas pocket as you’re drilling? Don’t think about burning it off – a process known as flaring. While flaring may light up the night sky in otherwise desolate parts of West Texas, there are only a few limited times flaring is allowed in Colorado.

That may sound like a good reason to invest your money in a good, old-fashioned Texas company instead.

Yet that’s one reason why the energy companies that operate out of the DJ Basin are bullish. These regulations create some of the cleanest fossil fuels you’ll find today. But the higher regulations, and uncertainty of future regulations, keep competitors out.

In fact, that leaves the DJ basin with four companies operating today.

There’s a term for this kind of situation: An oligopoly. It’s not quite a monopoly, but it doesn’t come with the antitrust issues that a monopoly has. It simply means a few players run the game. In this case, the top three players have about 75% of the market.

But a fourth player is looking to grab some sizable market share in the DJ Basin. Let’s take a closer look…

The Power Four in America’s Forgotten Oil Patch

The biggest player in the DJ Basin is a household name: Chevron (CVX).

Chevron has about 600,000 net acres in the area, almost half of which came through the acquisition of PDC Energy in 2023.

The oil giant expects to produce up to 400,000 barrels per day from the region, and has invested heavily in pipelines and infrastructure to reach that production and keep costs down.

The second-largest player is Occidental Petroleum (OXY). However, they may soon slip into third place. In March, they sold off over 200,000 acres to a royalty company, netting nearly $1 billion in the process.

Occidental is also a company that is a potential takeover target. A full 34% of Occidental shares have been bought by Berkshire Hathaway, and Berkshire CEO Warren Buffett has authorization to buy up to 49% of shares from the SEC.

Buffett has historically bought companies by first buying half, including railroad Burlington Northern Santa Fe, and insurance firm GEICO. Plus, in April, Occidental’s CEO stated in an interview that she would love for the company to be wholly owned by Berkshire.

A third player is Civitas Resources (CIVI). They managed to buy up several oil properties in the DJ Basin, ramped up production, and now kick out heavy cash flow. When oil was last booming in 2022, it was a growth play.

Today, shares are down over 50% from their highs. But the cash flows make this a massive income play, with a dividend yield north of 7% today.

Note: I’ve followed Civitas for years, and it’s been a recommendation in prior newsletters that I’ve authored, edited, and produced. Their assets have decades of life ahead of them, and shares look like a strong income play today… but more on that later.

Bringing up the rear is Prairie Operating Company (PROP).

Prairie is effectively a startup that launched in 2023. Today, it has a market cap of about $200 million, less than 1/1000th the size of Chevron, currently sized at $240 billion.

Shares have taken a substantial hit over the past year, as they’ve issued stock to acquire further assets in the DJ Basin. However, the value of those acquisitions total about $800 million, or four times the market cap. As production grows, the acquisition cost will be well covered.

Prairie broke ground on its first well site last year, which I had the privilege of seeing. Today, they’re working on several new sites, and they invited me out for a tour the last week of April.

Every chance to see a business at work gives considerably more perspective than reading analyst reports or deciphering a cash flow statement. And what Prairie has going on right now looks considerably like a “roll-up” growth play in a commodity that remains out of favor with investors right now.

State of the Art Tech Brings Today’s Oil Opportunities

Let’s start with a simple observation: the ideas and technology behind pulling oil out of the ground today boggles the mind.

Many of today’s oil wells go down a mile or more through solid rock. It takes lab-created diamond drills to push through that rock.

A diamond drill bit used to cut through rock. Today’s drill bits are less prone to breaking or overheating thanks to diamonds as a material.

And after going down, the pipeline can gradually bend, extending out miles in several directions. Today, one well site can actually be home to multiple wells. Prairie’s well sites do just that.

Instead of the infamous “I drink your milkshake” line from There Will Be Blood, think, “I drink nine milkshakes.”

Plus, AI software can parse through geological studies to find the optimal place for drilling and fracking, the process of opening up bedrock to get to the oil underneath. Today’s drills can detect issues in the ground and work around them as needed with little input from a human operator.

In the meantime, Prairie is taking a page out of the playbook that turned Civitas into a growth story a few years back when oil was still booming.

They just completed the acquisition of Bayswater, a private operator, which substantially increased total acreage in the DJ Basin, including several drilled wells.

All told, Prairie’s sites now include land the size of Miami.

Assets in the DJ Basin, showing Prairie’s rapid expansion since its founding just two years ago.

While Prairie may be the smallest publicly-traded operator in the area, they can buy up smaller private players like Bayswater, which would work out to a rounding error for the likes of Chevron or Occidental.

This is similar to when private equity companies do a “roll up.” That’s where they buy several companies in the same industry, and consolidate the back-office operations.

When I did research for a boutique private equity firm nearly 20 years ago, that included everything from consolidating doctors’ and dentists’ offices to organic pet food providers. Consolidating oil properties is no different. It’s just a matter of combining assets in a way that helps keep costs down.

Low Debt and Low Costs: The Secret Sauce for Today’s Oil and Gas Companies

Operationally, today’s energy companies focus on costs. If costs can be kept down, any increase in oil prices can go directly to the bottom line.

Strong hedging also helps energy companies bring in consistent revenue and take some of the wilder swings out of the oil market. Prairie has hedged about half its production for 2025 and a quarter of 2026 production, so there are few downside surprises there.

Prairie estimates that their cost per barrel is in the $30 range, providing a substantial margin of safety from current oil prices near $60.

Further innovations in drilling and well management technology could help drive down costs further. The costs to set up its second well site were less than its first, with the work also being done more quickly.

How to Play the DJ Basin Oligopoly:

All four of the energy companies operating in the DJ Basin are worth further consideration. And a mix of investments in these companies should prove attractive over time.

●       Chevron is attractive as the energy blue chip play today, not just for its DJ Basin holdings, but its overall global holdings. With the energy sector out of favor today, it also pays a 4.9% dividend.

●       Occidental is also a blue-chip play, but has a smaller dividend yield of just 2.4%. It could see better returns in the short-term if it proves to be a takeover target by Berkshire Hathaway.

●       Civitas is definitely the high-yield play in the area for income investors today with a hefty 6.9% payout. Its smaller market cap of $2.6 billion could make it a takeover target from any of the major players in the oil and gas space looking to add to their reserves.

●       Prairie is the growth play for the area. It’s got the smallest market cap, but is moving smartly to acquire assets at a reasonable price, while keeping the total production costs per barrel down. Once sites are up and running, it could become a dividend payer in time, or also become a takeover target.

Andrew Packer
Grey Swan Investment Fraternity

Full disclosure: Andrew Packer owns shares of Chevron via family holdings and Prairie stock in a trust, and has options trades on Civitias.

P.S. from Addison: Andrew’s research above first appeared in the May issue of the Grey Swan Bulletin. Since then, energy prices have been trending higher, with oil spiking over $70 following Israel’s missile and drone attack on Iran.

(Mr. Packer will also be attending the Rule Investment Symposium in Boca Raton FL, July 7-11, 2025. Click here to view the stellar speaker line up and learn how you can attend yourself.)

Regarding John Robb’s piece yesterday on a Zero-Day War scenario, the timing couldn’t have been more prescient, given the nature of and planning that had gone into Israel’s attack.

“Here in the U.S.,” writes Bill H., “our greatest exposure to a Zero-Day war strike is in our electrical grid.”

Mr. H continues with some alarming confidence:

Of the thousands of electrical substations in the US, FERC power flow analysis identified 30 critical high-voltage transformer substations. A coordinated attack on as few as nine of these critical nodes could cause a nationwide blackout lasting months. HV transformers can be irreparably damaged by a well-placed high-powered rifle round or drone carrying a small explosive charge, allowing the perpetrators of the attack to slip away undetected. Such a coordinated attack could be arranged and carried out with ease by any one of, or a combination of, China, Russia and Iran. They each have the means, motive and opportunity to do so.

As all essential elements of modern life require power (food and water supply, transportation, communication, banking and commerce, healthcare, etc.), it would not take long for society to completely psychologically, morally and physically break down.

Under such conditions, China could take Taiwan, Russia could take the old Soviet Republics by threat of or actual nuclear force, and/or Iran could nuke Israel and possibly the US. We could strike them back from nuclear subs, but we may have no idea who actually conducted the attack on us and we would be helpless to defend against a counter-attack. I hope I am wrong, but if I put myself in the head of Putin, Xi or Khamenei and want to conduct an asymmetric Zero-Day operation, that is what I would do.

Your thoughts? Please send them here: addison@greyswanfraternity.com