Energy & Commodities

The Return of Cheap Oil?

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Posted by Bill Bonner

on Friday, 04 May 2012 09:00

Will new energy discoveries and new technology sink oil prices? Will lower oil prices rescue the world from the Great Correction?

Maybe, say Porter Stansberry and a good number of the analysts and experts here.

We’re attending an investment conference — for professionals only. It’s a beautiful place for one. The island is a barrier island, mostly sand…surrounded by ocean or marshland. There is a golf course…tennis courts…bocce courts… Maybe even a kangaroo court. Or an appeals court. And a royal court. Not to mention a food court.

The lodge looks like it was built in the ’20s…it has that glamorous look that seems to call out for a white sweater and white flannel pants… You feel you should dress like Cary Grant and hope to meet Claudette Colbert on the lawn.

The rooms are luxurious…large and quiet, while the lobby is lush with rich fabrics and comfortable chairs. The staff is poised, gracious and almost genteel. They would be good people to look after you if you were going broke or insane. Not that we’re planning on either. But it’s always a good idea to be prepared. Whether you lost your mind or your money, the nice people running the place would probably wait a few days before kicking you out.

There seems to be almost no one here. The lobby is empty most of the day. We wonder how it stays in business.

This is also where George W. Bush convened a meeting of the G7 heads of state. In the room next to ours, the walls are hung with photos of Tony Blair, Silvio Berlusconi, George W. Bush…and others.

They’re all gone from office now. Except one, Vladimir Putin, a man who looks like he might never leave.

But the news down here is upbeat. Thanks to fracking and horizontal drilling. They say these techniques are making billions of barrels of oil available. Believe it or not, the US is set to be the world’s top producer by 2020, according to a Goldman Sachs study.

An oilman from Texas showed us a map. It included a large chunk of Southwest Texas, colored to show where drillers had bought oil rights and where they were operating.

Heck, there is hardly an empty county in the whole state! The expert took the map apart, analyzing who was working where…and how much oil they were likely to get.

The results were staggering.

“Oil will fall below $40 a barrel,” predicted Porter Stansberry, our host.

Whether that will happen or not, we don’t know. But it got the group talking excitedly.

“Cheap oil will set off an industrial renaissance in America,” one suggested.

“Sell the oil and gas companies,” recommended another.


West Texas Pumpjack

Energy & Commodities

Down-Under Energy Opportunities: Ivor Ries

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Posted by Zig Lambo of The Energy Report

on Tuesday, 01 May 2012 07:59

Ivor Ries Most investors may not have Australian resource companies on their radar screens, but that doesn't mean that there aren't some great opportunities worth pursuing Down Under. In this exclusive interview with The Energy Report, Ivor Ries, utilities and energy analyst at E.L. & C. Baillieu Stockbroking Ltd., one of Australia's oldest securities firms, describes the challenges faced by energy-related companies in his country and how they are taking advantage of the opportunities available both at home and in the U.S., Canada and South America.

Companies Mentioned: Approach Resources Inc. - BHP Billiton Ltd. - ConocoPhillips - Devon Energy Corp. - El Paso Pipeline Partners, L.P. - EOG Resources, Inc. - Karoon Gas Australia Ltd. - Molopo Energy Ltd. - Origin Energy Ltd. - Pioneer Southwest Energy Partners, L.P. - Red Fork Energy Ltd. - Rio Tinto - Woodside Petroleum Ltd.

The Energy Report: Your firm has been in the investment business for over 120 years. Can you give us an overview of the energy markets and the challenges and opportunities that energy companies in Australia face?

Ivor Ries: Australia has historically been the quarry and energy source to emerging Asian economies. As a result, our economy is inextricably linked with the progress of China, Korea, Japan, India and the other Southeast Asian economies. Initially, we were mostly a supplier of minerals, but in recent years, the liquefied natural gas (LNG) markets have become a very large part of our economy. We have two very large LNG projects in production and a third smaller one in Darwin. Another five LNG projects are now under construction, which will more than triple Australia's LNG output over the next five or six years.

The LNG boom has its pros and cons. The investment spending is a huge boost to our economy, but it also has caused a huge shortage of contractors and manpower. The price of labor has gone through the roof in any business related to oil and gas. An unskilled laborer working on an LNG project in Australia is probably paid somewhere between two and four times as much as he or she would be elsewhere. Australia has very tight restrictions on labor coming in. At the moment, the industry is forcing the government to change that. The government recently announced it is going to reduce the visa requirements for American and Canadian oil and gas workers, so they can help plug that gap. That would be a huge relief for the industry. We have a very heavy-handed set of regulations here, and there has been a lot of media hysteria surrounding fracking, particularly in the coal-seam gas areas and a very strong campaign to have fracking stopped. Anyone running coal-seam gas or unconventional gas here has to run through a very stringent and time-consuming environmental approvals process, which probably adds two to three years to getting a project off the ground. When it comes to the cost of getting things done, everything takes longer and is more expensive than expected. That's frustrating.

TER: What's the breakdown of Australia's energy production versus its consumption of oil, gas, coal and other energy sources?

IR: The domestic market in Australia is overwhelmingly coal driven. Australia is the world's largest seaborne coal exporter, and our domestic power industry runs about 80–85% off coal and to a smaller extent off hydroelectric power and gas. Cheap coal gives us very low-cost baseload power across the entire economy. A population of only 23 million (M) people is just not enough to create a significant market for gas, and that has resulted in a terrible oversupply. Until we started shipping LNG, gas prices were incredibly low. We're just now starting to see the connection between the domestic gas price and export prices. Typically, for the last five years, the price for gas on the east coast of Australia was about $3.50 per million British thermal units (MMBtu). Now we're starting to see some longer contracts being signed at about $7–8/MMBtu.

TER: Do LNG exports offer a big potential opportunity?



Energy & Commodities

What the “Real” Oil:Gas Ratio Is Saying about Natural Gas Stocks

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Posted by Keith Schaefer

on Monday, 30 April 2012 08:25

Intermediate natural gas weighted stocks in Canada are valued higher—sometimes a LOT higher—than oil stocks, despite oil being worth 35 times more than gas.

And that could mean significant price weakness for already battered natural gas stocks, says Haywood Securities analyst Alan Knowles.

“People think (the stocks of) gas companies have corrected, but they’ve only partially corrected,” he told me in a phone interview.  “The correction hasn’t kept pace with how far it should have gone,” given how low natural gas prices have moved.

At first glance, Knowles’ says the gas companies are NOT valued more highly than the oils—but that’s comparing the two groups at the industry standard of 6:1; where 6 barrels of natural gas are considered equal to one barrel of oil.  See his chart below that shows this.  The green dots are the leading intermediate oil producers—Crescent Point, Legacy Oil and Gas, Baytex and Petrobakken, and the red triangles are the gas weighted companies.

The gas stocks are clearly cheaper on this chart, which measures them in terms of the value of their production — $50,000 per flowing barrel up to $250,000; again all based on the industry standard 6:1 ratio.


Operating netbacks 6to1 2

Energy & Commodities

How to Invest in Record Low Natural Gas Prices

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Posted by David Fessler

on Saturday, 28 April 2012 09:48

There’s an old saying that goes something like this: “In the valley of the blind, the ‘one-eyed man’ is king.”

If you seriously consider what I’m about to show you, this old saying could well ring true for your investment portfolio at the end of this year. Perhaps even before. Let me explain…

At roughly $2.41 per million Btu, U.S. natural gas prices are in the dumpster. The truth is, they’ve been declining for years. But the recent shale gas boom accelerated their fall. Now they’re the lowest they’ve been in over a decade.

If it gets any cheaper, the companies that supply it will be paying you to take it. You see, they have a huge problem.

They have to keep producing in order to generate revenue, even in the face of declining prices. The problem here in the United States is that supply exceeds demand by a wide margin. And it’s getting wider all the time.

Why? Stores of natural gas at record levels… A mild winter… New wells coming online every month…

No wonder it’s eviscerating shares of explorers and producers. Take a look at the six-month chart for Chesapeake Energy Corporation (NYSE: CHK), for instance.

130 chart1

It looks like the first big drop on a roller-coaster. Shares are off 38% since last July.


Energy & Commodities

Five Tips for Natural Gas Investors

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Posted by Marin Katusa

on Tuesday, 24 April 2012 13:07

By Marin Katusa, Chief Energy Investment Strategist

I recently gave an interview on Business News Network (BNN) about natural gas. BNN is Canada's largest news channel dedicated exclusively to business and financial news, so all kinds of market players rely on BNN to provide them with comprehensive coverage of global market activity from a Canadian perspective. Like similar news channels in the US, BNN intersperses real-time news coverage with economic forecasting and analysis, company profiles, and tips for personal finance.

I have been interviewed on BNN numerous times over the last five years, quizzed on the impacts of fracking, the forecast for uranium following Fukushima, the potential of new frontier oil regions, and the future for coal. This time, the topic was "Five Tips for Natural Gas Investors." You can watch the interview if you want; I highly recommend it – the education is worth the time.

On-air interviews are usually pretty speedy affairs, so my BNN interview didn't give me enough time to discuss each point in depth. The Dispatch gives me that opportunity, so here are my five tips for natural gas investors in a bit more detail.

1.  Watch for Looming Reserve Writedowns

A resource estimate is a geologic best guess of how much of a commodity exists within a particular deposit, be it ounces of gold, barrels of oil, or cubic feet of natural gas. A geologist gleans information about the deposit's size and grade from drilling results and then creates a statistical model of the deposit. From that model he or she can estimate the commodity count.

However, the amount in the ground is not the amount that can be produced. That's where the reserve estimate comes in. Reserves are an estimate of the amount of a commodity within a deposit that can be extracted economically, which means reserves are a whittled-down subset of total resources. That whittling down process has two steps. First, geologic and technologic factors determine a resource's recovery rate, reducing the resource to the parts that are "technically recoverable." Then, economic considerations further reduce the resource to only the bits that are "economically recoverable."

With natural gas, the advent of horizontal drilling and multi-stage fracturing altered the first parameter dramatically, ballooning North America's technically recoverable gas resources to many times their earlier volume. And while gas prices held, reserves counts ballooned too.

The key bit there was "while gas prices held" – that honeymoon is over. Natural gas prices in North America have declined roughly 35% this year and are down approximately 60% over the last 12 months. Compared to the unsustainable highs reached prior to the recession, gas prices have fallen more than 80%.



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