Editor's note: With all the natural gas and oil we're producing… why can't we get a break at the gas pump? Why aren't we powering up electric cars with power generated by natural gas?
Those are among the questions S&A founder Porter Stansberry takes on in today's issue of the weekend Masters Series. Today, we present the second half of the December 13 interview he gave to Streetwise Reports' Energy Report. (You can read the first half, which we ran yesterday, here.)
Porter Stansberry:
End the Ban on U.S. Oil Exports, part II
By Karen Roche, The Energy Report
The Energy Report (TER): You've described shale oil and natural gas as one of the biggest investment opportunities in North America. How do you reconcile that outlook with depressed prices?
PS: You can be very bullish on production without being bullish on price. In fact, I think that's the only logical position. When natural gas was at $4-$5 per thousand cubic feet (mcf), I said it would go below $3/mcf. And people thought I was out of my mind. It's not only gone below $3/mcf, it's essentially stayed there since 2008 or 2009.
As you drill more horizontal wells, as production in the Eagle Ford and the Bakken and other places soars – just look at oil storage. We've never seen this much oil in storage in the U.S. There's no doubt the price will crack eventually. And when it does, it will crack hard.
I've been telling my subscribers not to buy the exploration and production (E&P) companies, but to buy the companies that are able to use lower energy prices to their advantage in their own markets, such as fertilizer companies and terminal and shipping stocks, such as Targa. You can find opportunities coming about in lots of little nooks and crannies because of the excess energy supply.
TER: What are some other examples of energy-related opportunities?
PS: The big way is to play lower energy cost in the U.S., or just to find any business that uses energy and can get a retail price for the product. Think about Calpine Corp. (NYSE: CPN), an unregulated producer that converts natural gas into electricity. The price of electricity in wholesale markets is dominated by coal-generated electricity, so Calpine stock price is essentially a way to arbitrage the price of natural gas and the price of coal. If gas remains cheaper than coal, Calpine's earnings will go up – and that's what I believe.
Another good example is fertilizer. About 75% of the cost of fertilizer is made up of natural gas, but the price of fertilizer is based on supply and demand. Global demand for food, of course, continues to grow quite rapidly, and due to the inflation of the dollar, farm prices continue to rise. So there's plenty of capital for buying fertilizer. This is another simple way to play and there are lots of good fertilizer stocks out there. The one we've recommended is called CF Industries Holdings Inc. (NYSE: CF).
And then, of course, look for companies that are constructing the pipelines, making the steel for them, handling the storage, building the terminals. We've recommended lots of those companies.
TER: When you mentioned businesses that take advantage of lower energy costs, you mentioned those building terminals. Why would we want more terminals if the law won't allow exporting oil?
PS: Terminals aren't necessarily just for export, but also storage and distribution. We need huge new storage facilities, huge new pipelines, and huge new terminals all across the country mostly to move gas but also NGLs and crude oil. Right now, we're using railroad cars to move crude out of the Bakken in North Dakota, which is very inefficient.
TER: Whereas producers need higher prices to sustain the production costs.
PS: Mostly, yes. Operating costs are actually very low once the wells are in place. To drill a well in the Eagle Ford, for example, costs about $7 million, but you can make that back from production in 90 days. The problem these companies face is the cost of buying additional acreage. As soon as people know oil's around, real estate prices go bananas and companies have to borrow tons of capital to buy the leases and drill before the leases expire. This puts tremendous capital pressure on their balance sheets.
The No. 1 thing to be careful of right now in this space is the oil companies that have been rewarded for building huge real estate portfolios, but have done so with tons of borrowed money. That puts these companies in a precarious financial position if the price of oil falls. It's not because they can't produce oil for $35/barrel. They can. However, they wouldn't be able to pay off the debt on their balance sheets.
TER: Considering the glut of natural gas, do you foresee changes in the way U.S. consumers use energy?
PS: We've already seen a huge shift in what I'll call the "robust transportation" sector – the big trucks and the buses – moving into natural gas. That's absolutely going to continue and it's going to grow. However, to build these things in a way that's safe requires a big, heavy vehicle. So I don't think you'll see that at the retail level.
Most people in the U.S. don't understand the role that energy plays in our economy. They don't understand that the boom from 1900 to 1925 was fueled mostly by the oil found at Spindletop in Texas. They don't understand that all the success we had in World War II and the boom that led to the 1950s and 1960s came from East Texas. Literally, the energy that drove all of that productive capacity came out of the ground with the East Texas discovery of 1930. The size of the discoveries found recently dwarf that.
East Texas ended up being a 4-billion-barrel field of oil. Every one of these new major shale plays contains 20 billion barrels of recoverable oil – all five times bigger than East Texas. And more than 20 of them are currently being drilled. We're sitting on the biggest economic and financial boom in the history of our country and we're strangling it.
TER: If indeed we're sitting on all this gas, why doesn't the price of gasoline at the pumps go down? And if natural gas can create electricity, why aren't we seeing more electric cars?
PS: Because electric cars don't work. How many dead Fiskers do you need to see before you realize they're not reliable? The hybrids are fine because they're still using gasoline to drive them. If it makes it good for you to turn gasoline into electricity before it spins your wheels, it's fine with me. But it's completely unnecessary.
In regard to electric power, we don't have the battery technology yet to make this work. It's not even close. That would be great, but it's naive to think we can plug all of our cars into the power grid. Can you imagine if everyone could overnight just plug all their cars into the power grid?
By the way, all those power plants would be coal or natural gas, so you'd still be consuming hydrocarbons. So electric cars are just fantasy devices. They don't make sense technologically, economically, or ecologically.
And as for prices at the pump, a very important thing that people don't get at all is that gasoline isn't oil. It's a derivative of oil. The lower price of oil will increase the "crack spread" [the difference between the price of crude oil and refined petroleum products], which will make refiners more profitable. But gasoline comes from refineries, and no new refineries have been built in the United States since 1974. If you want cheaper gasoline, guess what you have to build.
TER: Refineries – but earlier you said that's not a good use of capital.
PS: It is not a good use of capital for export, but it's incredibly important for the domestic market. And guess who sponsors the green politicians who don't want any refineries built? The refining companies. They don't want any more competition.
People think the Keystone XL Pipeline didn't get built from Canada to the U.S. because the Obama administration's full of these ecologist folks. No. The pipeline didn't get built because the E&P companies in America don't want to compete with Canadian crude.
TER: Any other insights you'd like to give to readers of The Energy Report?
PS: Yes. If they want to know what's ahead for the oil markets, study the natural gas markets from 2008 through 2010 because the same technologies are being used in the same fields and the result will be exactly the same. There's going to be a glut of domestic oil, and the oil companies that have leveraged their balance sheets to buy lots of acreage will have a very hard time.
TER: Assuming of course that we don't change some laws to allow exports.
PS: In that case, everything would change overnight. First of all, the global price of oil would equalize between West Texas Intermediate and Brent, at somewhere around $100/barrel. The profits these U.S. companies would make would be fantastic for our economy, and it would be great for the shareholders. Unfortunately, the odds say that American politicians won't make any kind of wise economic choice. That only happens by accident.
TER: Let's keep our fingers crossed for a serendipitous accident, then. Thanks, Porter.
Editor's note: Porter has called the issues he discussed in the interview the "biggest investment opportunity of [his] lifetime." He's written extensively about the vast wealth the oil and gas boom will create… the best ways to get your share… and how politics could ruin it all… To read more of Porter's research on the megatrend, click here.