What's Really Responsible for America's Current Boom
What's really responsible for America's current boom?... What ever happened to Peak Oil?... America is producing more oil than OPEC... Nobody reports the good news...
It was the biggest story of my entire career...
It's the biggest change in the global economy in my lifetime. And it's the second-biggest investment opportunity of my life (after the Internet).
I (Porter) am talking about the shale oil and gas revolution.
What's amazing is, almost no one talks about it. That means huge opportunities are available for investors.
Back in April 2010, I wrote an issue of my Investment Advisory ("All the Oil in Texas") about the huge increases that were inevitable, thanks to a revolution in extraction technologies – horizontal drilling and hydraulic fracturing (or "fracking").
The claims I made in the letter seemed ridiculous to most readers. After all, virtually every major media outlet and politician, and even Warren Buffett had pushed "Peak Oil" hype. No one could believe we were on the verge of the largest production increases in history.
I returned to the theme many times over the subsequent months and years. For instance, in the November 2011 issue of my Investment Advisory – titled "America's Oil Boom" – I wrote...
We are seeing the first trickle of oil from these fields, where drilling is now going on night and day. Tens of thousands of new wells will be drilled over the next decade. The amount of new oil that will be produced can't even yet be imagined.
Trust me on this... every projection you'll see over the next 12-24 months about the amount of future production will end up being woefully, laughably conservative. The amount of oil and gas that will be produced from U.S. shale plays over the next decade cannot even be imagined today. My bet is U.S. production at least triples over the next 10 years.
No one could believe we had discovered the equivalent of 20 new Persian Gulf oilfields right here in America...
No one believed that U.S. oil production would double by 2015... or that we would soon be producing more hydrocarbons than Saudi Arabia. But that's exactly what had happened.
I covered the three leading "frackers" in that issue – EOG Resources (EOG), Continental Resources (CLR), and Range Resources (RRC).
Range Resources hasn't done well for investors. Super-low natural gas prices have hamstrung the company.
On the other hand, the companies that focused on oil have flourished. EOG is clearly the best-managed company in the industry and owns many of the most valuable fields (in Texas' Permian Basin and Eagle Ford Shale). Its shares have moved from around $50 a share in 2011 to nearly $120 today. Likewise, Continental Resources shares have gone from around $30 to about $65 today.
And guess what? These changes are still only in their infancy. There's still far more to come as America becomes more and more dominant in the global oil industry.
The biggest and most important change to the industry came in 2015, when the U.S. lifted its ban on oil exports...
Since 2016, prices of West Texas Intermediate ("WTI") crude oil – the domestic benchmark – have been steadily rising. Why? Just look at the growth in our oil exports. In June, U.S. crude oil exports hit 3 million barrels per day, higher than 11 out of 14 OPEC producers. Only Saudi Arabia, Iran, and Iraq export more oil than the U.S.
Remember the old political canard about making America 'energy independent'?
It was a bunch of nonsense back in the 2000s, and it still is. As with any product or service, the economic goal should have never been to be independent. Closing off any segment of our economy to trade is just stupid. The economic goal should always be to become integrated with the rest of the world through trade.
Most people don't understand the concept of comparative advantage and, of course, politicians could never campaign on the idea. But it's critical for investors to understand. Trade allows the most wealth to be created by allowing the greatest possible specialization of labor and capital.
Take bananas, for example. Obviously, growing bananas in Iceland is a poor use of labor and capital. Likewise, fishing for salmon in Costa Rica is unlikely to be profitable. But through trade, both of those industries can maximize their comparative advantages.
The same concept applies to energy...
We're among the world's most efficient producers of light sweet crude, natural gas, and natural gas condensate. But most of the refineries we've built in America require heavy crude. It will take decades to refit our refineries or to build new ones.
Meanwhile, trade allows us to maximize the value of our oilfields through markets around the world, while at the same time providing us with the heavy crude we need for our existing refineries. Our economy's comparative advantages are being maximized. That's great for our economy (which is booming) and our currency (which is much stronger because of smaller trade deficits, thanks to our oil exports).
What should you do?
I'd consider making a semi-permanent investment in one of America's leading shale producers. These can be difficult stocks to own, because they are volatile. But going forward, I expect the price of oil to be more stable than it has been in the past.
We've drilled a tremendous number of new wells over the past decade. That pace of drilling is unlikely to decline because of our booming export markets.
What I think will happen, more and more, is a tighter range of prices for crude oil, with producers more able to manage their production relative to prices. That should allow the best-managed companies to increase their margins and reduce the volatility of their earnings.
We've long thought that EOG is one of the best ways to play the energy revolution...
In fact, earlier this month, we re-recommended shares in my Investment Advisory. It's a great long-term investment that we feel should be part of every investor's portfolio.
However, my team recently spent some time in Texas and uncovered what could be an even better way to play the ongoing oil boom. This company's production, acreage, operating margins, dividends, and returns on assets are all soaring. For our money, it's the best growth opportunity in the oil sector.
Stansberry's Investment Advisory subscribers can learn all about it in the August issue right here.
I'd also encourage you to review our Global Oil Value Monitor, which is part of our Stansberry Data service, available to lifetime subscribers of Stansberry's Investment Advisory. (You can learn about a lifetime subscription by clicking here.) There, we input the key production, reserve, and margin data points for every North American energy producer. Then we rank these companies for quality and price.
Buying a handful of our top-ranked names and putting them away for the next decade is likely to be a great approach.
Whatever you do with your investments, at least make sure you know what's happening in Texas and the other American oil-production hotspots.
This is a tremendous economic revolution...
Shale energy is producing incredible amounts of wealth for America. This is a bounty created by dedicated entrepreneurs who didn't listen to any neo-Malthusian nonsense about running out of oil.
Nobody ever reports the good news. The oil boom is the best thing that has happened to America's economy in our lifetimes. We're going to produce staggering amounts of wealth in our oil and gas industries over the next several decades.
Just wait...
It won't be long until some low-life politician tries to take credit for it all. Just remember: It was the ban on exporting oil that smothered our industry for decades.
Meanwhile, rather than screwing over their fellow citizens by taking government-subsidized loans and tax credits to create a bunch of nonsense solar cells, windmills, or battery-powered cars, our oil and gas entrepreneurs built the world's best and most productive energy infrastructure, using private capital, in about a decade.
Keep that in mind the next time you fill up...
As you're paying among the lowest non-subsidized prices in the world for fuel (after subtracting for all the taxes)... Or the next time you notice how little inflation has emerged in our economy, despite runaway government deficits... thank the drillers.
Remember this lesson the next time some dopey college professor tries to tell you we're going to run out of something... or the next time the government says we should mandate using corn for fuel (as former President George W. Bush catastrophically did in 2007).
What really saved America's oil industry?
Not a damn thing. All we had to do was get the stupid "world improvers" and the government out of the way. Entrepreneurs, capital, labor, and free trade took care of the rest. Let's celebrate that success!
New 52-week highs (as of 8/30/18): Apple (AAPL), Amazon (AMZN), Becton Dickinson (BDX), Eaton Vance Enhanced Equity Income Fund (EOI), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), and iShares Nasdaq Biotechnology Fund (IBB).
If you work in the oil industry, we'd love to hear from you. Drop us an e-mail at feedback@stansberryresearch.com. We'll publish some of our favorite notes next week. And please note that our offices are closed Monday, September 3 in observance of Labor Day. We'll pick back up with our regular fare on Tuesday. Enjoy the holiday.
Regards,
Porter Stansberry
Baltimore, Maryland
August 31, 2018