The most important trend of the coming decades...

The most important trend of the coming decades… How to profit from the shale boom… The ATP bankruptcy… Discussing Stansberry Alpha…

In today's Friday Digest, I'd like to review what I believe is the most important economic change happening right now... a change that I believe will drive the world's economy (and our own) for at least the next two or three decades. I'd like to give you some markers to watch... some things that I believe will confirm my view. I firmly believe that if you understand this trend, you can do very well as an investor... but if you don't... you're likely to suffer.

My thesis is simple: The world isn't running out of hydrocarbons anytime soon. Instead, massive capital investments made since 1999 will produce a veritable "tidal wave" of new supply. Expensive resources – like Canada's "oil mud" and Brazil's super-deep offshore supplies – may eventually become economic simply because the world has an insatiable appetite for energy. But in the short term, companies (and countries) that have invested heavily in hard-to-produce oil resources are likely going to be in trouble.

Likewise, many of the companies in the oil and gas exploration and production sector (known as E&P stocks) have taken on too much debt. If oil prices fall, these companies' shaky capital structures will cause the prices of their shares – and even their bonds – to plummet.

These aren't new ideas... I've been working on them since 2006, when I first noted the surge in natural gas production. Read my October 4, 2006 Digest – "The Oil Bust: How Bad Will It Be" – for an example of my early thinking. (This was the second Digest we ever published.)

And subscribers to my Investment Advisory can read the April 2010 issue, "All the Oil in Texas," for my further research. That's when I introduced my subscribers to the Eagle Ford trend in Texas, long before most people had ever heard of it.

The point is, these aren't new ideas to me. I've been working on this stuff for a long time. However, I know it's hard for lots of my subscribers to accept that we are not running out of oil. In fact, we're in the midst of the biggest oil boom in the history of our country. Lots of people struggle to get their heads around that fact…

Please, if you haven't yet, go back and read my previous work on oil. Think about the things I've written... the things I said would happen... and then look and see what's happening now…

We are still in the earliest innings of this new trend. Oil production continues to ramp up, approaching 6.8 million barrels a day.

And oil in storage continues to swell, closing November at 371.8 million barrels.

At more than $80 a barrel, prices haven't truly collapsed yet. (I expect oil to hit less than $60 a barrel.) Turmoil in the Middle East and financial speculation continue to support demand. But it will happen. It is inevitable.

My strategy in the sector now is extremely simple: I want to buy high-quality oil and gas assets only when I can buy them during a distressed sale price. I know the sector has lots of weak balance sheets. As the price of oil falls, these companies will face more and more pressure... and their securities' prices will fall.

It's important that you track the enterprise value of these firms, not merely their stock prices. In most instances, the debts of these companies are as big as (or even exceed) the value of their equity. Enterprise value measures the total cost to buy the whole company – all the stock outstanding (equity) plus all the debt. You must remember to always evaluate companies in this sector in this way.

Here's an example of my strategy at work... At several points earlier this year, you could have purchased shares of Devon Energy or Chesapeake Energy at a price that essentially valued all of their reserves for free. Chesapeake stock, for example, was trading for around $10 billion at one point this year. Meanwhile, the company sold off nearly $10 billion in assets this year – and continued to meet current earnings forecasts.

The point is, the underlying assets of many of these firms are badly mispriced by their enterprise value simply because investors got far too pessimistic on the price of natural gas. (I detailed this opportunity in natural gas for subscribers in my April issue.) The exact same thing will happen to oil stocks. We will get the opportunity over the next 12-24 months to buy oil-backed securities (stocks and bonds) at prices that assign no value to the underlying asset. In short, I believe we'll have the opportunity to buy oil – lots of oil – almost for free.

Two things have happened recently that support my view. First, as I long predicted would happen, ATP Oil and Gas filed for bankruptcy. Generally speaking, investors ignored this event. It hardly merited a mention on Bloomberg or in the Wall Street Journal. But ATP was the world's fourth-largest offshore oil driller. This was a major business.

Its ability to finance its debts disappeared as the market decided its balance sheet was too leveraged and its wells were too expensive to operate in this new environment. I thought we'd be able to buy the bonds after the bankruptcy filing for $0.25 on the dollar and make a killing... but the company's trophy asset, a huge offshore field in Israel, was seized by other creditors, making the unsecured bonds essentially worthless. (Just for the record, we never recommended them in our publications because we couldn't get to the bottom of who owned the Israeli field.) Today, the bonds are trading for only $0.11 on the dollar.

Second, Freeport-McMoRan just announced a deal to buy McMoRan Exploration (MMR) – a major offshore drilling and production firm. As of last week, MMR was one of the developing opportunities we noted in our Global Value Oil Monitor. (That's part of our new Stansberry Data service. In it, we track the enterprise value of every E&P company in the world.)

The managers at Freeport-McMoRan saw the same value we did. Rather than allow outsiders like us to pick up these assets for pennies on the dollar… they bought them instead.

We'll see more deals like this going forward. The best way to play them, I believe, is to buy the bonds of these E&P firms when they trade at a safe price. You do that by knowing what the underlying assets are worth in a distressed sale. A good rule of thumb is to buy the bonds when they trade for less than $0.50 on the dollar and when the company's enterprise value is less than 50% of reported asset value.

Yes, there's still risk in that strategy… just look at ATP. So you've got to make sure the assets in question are truly owned by the corporate structure you're investing in. No, this isn't easy... but it can be incredibly lucrative. Here are the E&P firms whose enterprise values are trading at the biggest discount today and their current bond prices (not counting ATP).

One last point... Currently there are several E&P firms that are highly leveraged whose bonds are trading at very large premiums to par. That is, these bonds are trading at $125 or even $130. But these bonds will only be redeemed at $100 face value.

They're yielding around 3%-4% and are backed by fairly risky oil assets. When the oil price falls, these bonds will get killed. If you have the ability to short bonds (which is something most individual investors can't do)… you could make a lot of money shorting the E&P bonds that are trading at a premium today.

I also want to take a moment to tell you about my new trading service, Stansberry Alpha. We're currently publishing "beta" issues of Alpha for our Alliance members. Before telling you how you can make sure you receive Alpha… I'd like to explain why I started this service.

From time to time – maybe twice a decade – there's a huge opportunity to make money in the market… I'm talking about a "free money" situation, where the gains are huge and the risks are negligible. These occasions are rare. So when one arises, you have to be ready to put money to work…

For example, in October 2008, the middle of the financial crisis, I saw a chance to potentially make millions in the market. (Some subscribers who followed my advice became millionaires… literally.) You see, investors were terrified. They were willing to pay huge premiums to insure their stock holdings against further market declines. You do this by buying put options (options that rise in value when the price of the underlying asset falls).

As a contrarian, when everyone else is rushing to buy put options – and paying any price – I wanted to sell. So that's when I started the Put Strategy Report. We sold put options on high-quality stocks. And we received huge premiums… Over the life of Put Strategy Report, we regularly made between 50% and 80% with little risk on trades we held for anywhere from six weeks to a year…

Well, today, I see another opportunity. And that's why I decided to launch Alpha. It's a sophisticated way to trade on my highest-conviction ideas. You can juice your returns… (Sometimes you can make three times what you would by simply buying a stock.) But you don't take on any more risk than if you just bought the stock. If anything, you're taking on less risk…

I'll publish one of these trades every month in Alpha.

Keep in mind, we only trade on my highest-conviction ideas. That means we're buying world-dominating, capital-efficient businesses at "no risk" prices. Take Chicago Bridge & Iron (CBI), for example…

CBI is one of the best ways to gain exposure to the shale gas boom happening in the U.S. today. CBI builds the infrastructure for natural gas terminals, pipelines, etc.

Our country needs more pipelines, LNG tankers, and terminals to transport and eventually export all the gas we're producing. And CBI will be the main beneficiary of this expansion. I expect the stock to provide steady returns for years. In fact, I recommended it to my Investment Advisory subscribers in June… and they're already up about 17%.

But using our Alpha strategy to trade this stock, we can receive an immediate payment… and potentially make a triple-digit return on CBI in one year.

New 52-week highs (as of 12/6/2012): Sysco (SYY), Alico (ALCO), Vanguard Inflation-Protected Securities Fund (VIPSX), Guggenheim China Real Estate Fund (TAO), iShares Germany Fund (EWG), and iShares Australia Fund (EWA).

Lots of positivity in the mailbag… It's been a good week. Give us something to read over the weekend… feedback@stansberryresearch.com.

"I measure your services by how much money it makes me, I keep adding on to the services as the stocks that your service recommends increases. If you didn't deliver on the promises then I would look elsewhere. If these people that are complaining they need to look elsewhere, for my money which I hold dear each dime that I am spending on your publications is returning many times the price of the subscription. I have lived in Texas for 35 years and we have a saying 'some people wouldn't be happy if you hung them with a new rope,' keep up the great service and as my fortunes increase so will my subscriptions." – Paid-up subscriber John Bowman

"So you know… I am blind and manage my own portfolio. I appreciate your candor, honesty, and not letting others opinions stop you from what you believe. After all if you can't speak with kindness and respect even if you disagree, then move on. I read everything and discard what I don't need or agree with and contemplate the rest. I'm grateful for special software that allows me to sit and listen to what is read to me and guys like you who have helped to increase my knowledge and have stimulating and educational topics!" – Paid-up subscriber Donna B.

"First, thank you for all your hard work. It truly is appreciated.

"The humorous complaints about incessant 'plugs' and not giving even more information for free remind me of discount coach fliers. A few decades ago, I put myself through university working part-time for an airline, and it was common knowledge among airline employees that the worst complainers were almost always those who had purchased the cheapest seats from the shadiest bucket shop.

"Passengers who were used to flying, especially first- and business-class customers, were usually quite courteous and appreciative. But oh boy, those coach passengers seated in the back rows... some people just cannot and will not understand that there are no free lunches in life – what you pay for is what you get.

"I would be surprised if most of those complaining are not only-one-or-two-cheap-newsletter-subscribers discount coach fliers who don't quite yet understand the real costs of doing business.

"I am currently a Private Wealth Alliance subscriber, and while quite satisfied overall, there are also times that I kick myself for not becoming a full Alliance member back when the price was much, much less, but that was my decision. If I want those extra newsletters and services, I need to pay for them, and if I'm not willing to pony up, then you won't find me whining about not getting first-class service (and prettier flight attendants – no offense Porter, ha!) for my business-class fare. But at least the pilots are largely the same, and I look forward to many more years of smooth takeoffs and landings with S&A. Maybe even a possible upgrade to first class in the future, but only for the better dinner service, of course." – Paid-up subscriber JM

Regards,

Porter Stansberry

Miami Beach, Florida

December 7, 2012

As we noted… on Wednesday, the world's second-largest copper miner, Freeport-McMoRan, paid $20 billion to enter the oil business.

Freeport announced it would buy Plains Exploration (PXP) for about $6.9 billion. Plains owns assets in Texas' Eagle Ford and a majority stake in the offshore driller McMoRan Exploration (MMR). Freeport is spending another $2.1 billion for the parts of MMR that Plains doesn't already own. Freeport would also assume around $11 billion in debt.

The market wasn't happy about the acquisition… Shares of Freeport-McMoRan are down nearly 20% since the announcement.

The question to ask is why would a mining company want to get into the oil business? Especially when Freeport spun off McMoRan Exploration in 1994…

We believe several factors come into play…

First, James "Jim Bob" Moffett is the CEO of McMoRan Exploration. He's also the chairman of Freeport.

The McMoRan takeover was likely a friendly "bailout." What's $2.1 billion of shareholder money to a $30 billion firm?

McMoRan Exploration was also one of the better values in the oil exploration space leading up to this deal… Its stock dropped from $12.45 on November 23 to $8.46 the day before the deal was announced on December 4.

Freeport believed what we believe… Offshore assets are undervalued right now. But Freeport was early…

We're happy owning a good, offshore oil asset. But we don't want to own it today…

According to our Global Oil Value Monitor – a proprietary screen we run on more than 70 oil companies – McMoRan's enterprise value (market capitalization plus debt minus cash) was at a 13% discount to its total assets. Typically, we like to buy these companies when they're trading at a 50% or greater discount to their assets.

Rather, we had McMoRan pegged as the next ATP Oil & Gas. We were looking at buying its bonds out of bankruptcy.

As we pointed out in Monday and Tuesday's Digest Premiums, U.S. shale oil is still wreaking havoc on more expensive producers (like offshore drillers and Canadian oil sands).

But we believe McMoRan Exploration will end up being a better asset for Freeport in the future… We'll discuss why next week.

Why we agree that Freeport-McMoRan's latest acquisition is a value right now… but we still wouldn't buy it.

In today's Digest Premium… we take a closer look at the assets Freeport-McMoRan just spent $20 billion on… and why we think it could have gotten a better deal down the road…

Click here to continue reading.

Why we agree that Freeport-McMoRan's latest acquisition is a value right now… but we still wouldn't buy it.