Three years ago I wrote an article on Seeking Alpha entitled Energy Secretary Steven Chu Should Be Fired for NatGas Views. His comments on being "agnostic" about natural gas transportation proved he was absolutely clueless about American energy policy. The subsequent Solyndra scandal showed why Chu was agnostic about natural gas - he was too busy figuring out how to funnel tax-payer money to Obama supporters.
But Chu is a minor player and President Obama must ultimately take the blame for his own refusal to fully embrace natural gas transportation. The result is that we now have WTI over $100/barrel, gasoline prices are over $3.50/gallon (and heading higher), we again hear the drumbeat of another war in the Middle East, and of course, the fragile U.S. economy could very well be chopped off at the knees (again) by its nemesis: a reliance on foreign oil.
But worst of all, we still have no alternative to gasoline refined from foreign oil. With oil trading at some 40 times natural gas on an energy equivalent basis, it is simply astonishing that the U.S. government is not developing an energy policy to take advantage of the phenomenal development.
Imagine how much better the U.S. would be today if, instead, Obama and Chu had actually worked to solve our foreign oil crisis. Step 1 would have been to adopt a strategic, long-term, comprehensive energy policy. I even wrote one for them: Fitz's Comprehensive Energy Policy. Step 2 would have been to focus like a laser on the only domestic fuel capable of significantly reducing foreign oil imports over the next 5 years: natural gas. Instead of blowing money on Solyndra and various stimulus programs, just imagine if that money had instead been used to build a natural gas refueling infrastructure on our interstate highway system! Imagine the jobs that would have been created in the energy, industrial, and automobile sectors. Imagine the benefits of keeping our gasoline dollars, now leaving the country, inside our boarders! Imagine the benefit to the American people for the next 100 years. This is a no-brainer, yet neither Republican nor Democrat administrations have taken action.
The biggest beneficiary of the past two administrations' views on natural gas transportation has been OPEC producers and domestic oil producers. Brent crude is now over $125/barrel. The U.S. is still reliant on foreign oil producers for 60% of its oil, and the geo-political risk premium on a barrel-- due to the U.S. drumbeat of another war in the Middle East-- is estimated to be $20-30/barrel. But no one is benefiting more from Chu's "energy policy" than OPEC. It's money in the bank for them. Our money.
Please, don't send me messages saying that we don't import much oil from OPEC. It doesn't matter-- oil is a global market. As long as we are importing oil, it takes oil off the market and keeps prices high - which benefits OPEC. So, let's not waste time debating that. It's a simple issue of supply and demand, and the U.S. still consumes over 20% of world oil production.
As a result, Energy Secretary Chu could well cost President Obama the election. High gasoline prices are a huge tax on middle class Americans already beaten down by the biggest recession since the Great Depression. If oil keeps rising and without a natural gas transportation infrastructure in-place (i.e. we have no alternative to gasoline) who can doubt unemployment will rise, tax receipts will fall, deficits will continue to soar, and someone else will be in the White House? We will be right back where we were in 2008, as high oil prices continue to keep the U.S. tethered to an economic yo-yo completely out of our own control.
As most of you know, oil prices averaged their highest levels ever in 2011. Yes, oil hit its all-time high in 2008, but if we take an average of the price of oil every day for an entire year, 2011 was tops. But wait - aren't we recovering from the harshest recession since the great depression? Isn't unemployment sky-high and isn't oil demand down in the U.S.? And isn't oil production higher in the U.S. due to the Bakken and Eagle Ford shale plays? Yes, yes, yes, and yes.
So why did oil prices set records in 2011? Here's my take:
1) Oil continues to be the most indispensable commodity on the planet.
2) In this day and age of fiat currencies, oil is now the world's reserve currency of choice.
3) There is a significant geo-political risk premium placed on each barrel of oil due to in part to:
- Security concerns in Iraq, Syria, Nigeria, Sudan and elsewhere
- Loss of Libyan crude
- Increasing tensions between the U.S. and Israel and Iran
4) Increasing oil demand from emerging markets including China, India, and the Middle East.
And the main reason:
5) Worldwide oil supply is having a hard time keeping up with worldwide oil demand.
So how should investors react to these events? By investing in oil and gas companies. My favorite is safe U.S. land-based oil producer Whiting Petroleum (WLL). Whiting just announced an outstanding Q4 2011 earnings report. In addition, the company's 2012 production guidance was significantly increased. With respect to its operations in North Dakota, here is the company's Williston Basin Overview:
"Whiting is one of the largest oil and gas producers in North Dakota. We ranked first in total production per well during the first six months based on information from IHS Energy, Inc. and the NDIC, with an average first six months production of 91,000 BOE. This average was 6,000 BOE higher than the second ranked Bakken operator and 30,000 BOE better than the average of the next 25 operators. We have achieved these rankings while having some of the lowest completed well costs in our Bakken peer group. We are currently drilling and completing wells in the Sanish field for approximately $6.0 million. Outside of Sanish, in other North Dakota areas, our completed well costs are currently running between $6.0 and $8.0 million and declining as we move into development mode. In addition, our average lease cost in the Williston Basin, where we hold 681,504 net acres in the Bakken/Three Forks Hydrocarbon System, is $432 per net acre."
Is that bullish or what? The full press release is here.
Also in the Bakken, I like GeoResources (GEOI), which has some nice operations in the Eagle Ford shale as well. ConocoPhilips (COP) also has large acreage positions and operations in both the Bakken and Eagle Ford. Plus, I expect the coming spin-off at COP will work as well, or even better, than Marathon's (MRO) recent split. COP pays a nice dividend of 3.5%.
For more income, I still like Canadian Enerplus (ERF) at 8.8% (monthly). The company's earnings report came out last week: View ERF Q4 and full 2011 Results. The big news was a $334 million non-cash impairment due to low natural gas prices. This action appears to be a logical move, as the company continues to move away from natural gas toward oil. As you can see by the results, the company continues to deliver excellent results from its operations in the Bakken.
The company recently issued some shares to Canadian investors. It now has the funding to expand its oil projects and secure the dividend. I expect the stock to move back to the $30 range while continuing to pay that nice monthly check.
I also like StatOil (STO) for safe income (usually around 5%). It issues a once yearly dividend. However, with the huge discoveries STO made in 2011, at some point the market is going to reward the company with a higher valuation. In fact, in just the last couple of weeks, STO continued its wonderful 2011 discovery record with a new 250 million barrel discovery off-shore Brazil and a massive natural gas find off-shore Africa. One day, the market will reward STO for these significant E&P results. The time to buy is before the market figures it out.
A note of caution here: oil prices are once again moving up into the range which is going to cause middle class Americans pain at the pump. Due to Obama and Chu's lack of an energy policy, we have no defense or alternative to these rising prices. At some point, the economy will snap again and the market will again suffer a severe contraction. As we saw in 2008, such an event can cause oil demand (and oil stocks) to come crashing down. So, investors need to be nimble and act before it's too late.
Disclosure: I am long COP, ERF, WLL, STO.
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