Pockets of Promise in Natural Gas and Crude Oil
Commodities / Natural Gas Dec 23, 2009 - 03:21 PM GMT
Cheap and attractive, especially in contrast to high-priced oil, natural gas holds some appeal for Stansberry & Associates Investment Research founder Porter Stansberry. He's not exactly a hearty bull about it because the supply glut will keep prices depressed. But on the other hand, he definitely likes the looks of natural gas in emerging markets. As for oil, Porter expects it to do very well if inflation follows what he sees as inevitable declines in the value of the U.S. currency. Read on to learn what he describes in this exclusive Energy Report interview as "probably the best opportunity for oil investors in a very long time, maybe 40 years."
The Energy Report: As someone who invests in many sectors, Porter, what major trends are you watching in the global economy?
Porter Stansberry: The U.S. dollar is falling apart. There is no doubt that today's paper monetary standard will fail. It's not a question of "if" but "when." I know my view is pretty far outside the mainstream, but historically, paper monies don't last. It's really an anomaly that for 35-plus years, there has been no challenge to the U.S. dollar standard. Our paper money, which has been exclusively a paper system since 1971, is getting long in the tooth and U.S. creditors are beginning to seriously doubt its sustainability. You're seeing all the signs of a monetary collapse, where enormous debts are made because paper currency is very flexible and can be expanded. Those debts can never be repaid. This is always how paper monies collapse and that's exactly what's happening to the dollar today.
TER: If the major trend is the demise of the dollar, are there really any investment opportunities in energy?
PS: I think so. I was very bearish on natural gas for many years, pretty much from 2006 on. There was a tremendous natural gas bubble in the United States. Now, although there are great opportunities still in natural gas, I'm not altogether bullish on natural gas in the U.S. The pipeline companies should continue to do very well, but natural gas prices probably will remain depressed for some time in the U.S.
Relative to oil, however, natural gas is very cheap and very attractive. And I think that natural gas in emerging markets is very attractive. There is very little natural gas infrastructure in places such as China, where there is tremendous demand for natural gas. They will be doing deals for natural gas, which is popping up in really large quantities in Papua, New Guinea. InterOil Corporation (NYSE/Euronext:IOC) has an enormous new discovery there that I'm sure the Chinese would be interested in, and Exxon Mobil Corporation (NYSE:XOM) is building natural gas pipelines there.
So I think that, selectively, natural gas investments globally are going to be very good performers over the next decade, much like they were in the U.S. over the previous decade.
TER: So the appeal is really more on an international front, not domestic.
PS: That's absolutely true. One brief observation would be looking at Mexico, for example. If you look at the amount of on-shore natural gas drilling in Texas, you can go to these places on the web that will show you all the little dots where there are natural gas wells all through the Gulf Coast of Texas. Although that entire exploration trend just stops when you get to the Mexican border, you know that the geography doesn't change on the other side of the Rio Grande. You know that Mexico has enormous natural gas reservoirs that have yet to be tapped and the technology for tapping these alternative reservoirs continually needs to get better and better.
I have friends who are investing heavily in natural gas in Eastern Europe, for example, where Russia has had a stranglehold on the natural gas supplies for many years. But there's a lot of coalbed methane (CBM) gas in those countries, so those investments can yield very nice returns almost immediately.
TER: You said that natural gas is cheap and attractive relative to oil. Even though you may not be so bullish on oil, many people are expecting it to appreciate. What are you thinking about oil at this stage?
PS: Obviously, if inflation follows the decline in the value of the U.S. currency, oil should do very well. As you inferred, I'm not terribly bullish on oil because there has been an enormous investment bubble in an oil discovery over the last 20 years. Sort of like what happened with natural gas, where we found natural gas in lots of places where we had no idea there would be so much. Looking in coalbeds, for example. Likewise, with oil there are lots of places, particularly offshore under salt domes that we're finding enormous oil reservoirs, where we never thought we would have the technology to drill.
I think you're going to see the number of big discoveries growing in places such as the West Coast of Africa and like the East Coast of Brazil. Expect big new numbers and lots more production over the next five or 10 years. I also think that Iraq is going to come on line.
For people who want to be investors in oil, I think that Iraq is not only the best opportunity in the world today, but I think it's probably the best opportunity for oil investors in a very long time, maybe 40 years. There is a tremendous amount of oil in Iraq and it's still very, very cheap due to all the political uncertainty. So if you want to be a serious oil investor, I would say get yourself to Iraq in person and look around to find great opportunities. We've already made a killing on Addax Petroleum (LSE:AXC), which was bought out because of its Iraq potential. Our newsletters have included lots of other names out there relative to buying into Iraq.
TER: Given what you just said, you are a contrarian to the peak oil pundits?
PS: Absolutely. Peak oil is an economic impossibility and so it kind of makes me chuckle. It's the kind of story told to get people to pay way too much for oil resources, as they've been doing over the last decade. For example, Chesapeake Energy Corp. (NYSE:CHK) paid way too much for its natural gas resources precisely because its CEO is a complete believer in peak oil. Chesapeake Energy is going to do terribly over the next 10 years and will, I believe, go bankrupt.
TER: Why do you describe peak oil as an economic impossibility rather than a supply impossibility?
PS: It was the same way when people worried that the national phone networks would never survive the incredible demand for copper, because surely we couldn't find enough copper to string telecommunications networks over the entire world. Okay, maybe there isn't enough copper for that—but about 40 years ago people figured out how to use fiber optics instead of copper. Even before that, people figured out how to communicate wirelessly.
Oil is a valuable commodity because it provides us with energy. Energy is really the key issue. It does not naturally follow that a limited supply of oil would limit our production of energy. The idea that we would lose the ability to create energy in an economic way, in my mind, is absurd. The entire history of the human population is nothing but falling prices for valuable commodities—not measured in dollars, but measured in real terms. I have no doubt in my mind that by the time I'm dead the price of energy in real terms will be far less than it is today.
The people who are afraid of running out of oil, in my mind, are afraid of a ghost. Even if we were to run out of oil, it wouldn't mean we're going to have higher energy prices. And by the way, we're not going to run out of oil. There is a lot of oil out there. We have tremendous amounts of oil reserves.
In fact, if you look globally at the known oil reserves, they have basically kept pace with production for the entire lifetime of the entire oil industry with the exception of maybe the last 10 years. Everyone's fear was that we wouldn't be able to find enough oil for the reserves to keep pace with demand. I don't believe that's the case. We're now finding huge new reservoirs of oil and global demand for oil is falling. Things are coming back into balance.
TER: If we find huge reserves for oil and technological advances make extraction more cost-effective, are all of these alternative energies that Congress is trying to put in place are necessary?
PS: Of course not. There are probably places in the world where wind power makes sense if there's no electricity grid and no power plant nearby. At some price, having energy from a windmill is better than not having any energy at all. But for most places in the world—the developed sides of emerging markets or the developed countries—there is no economic reason at all to have alternative energy as part of the energy mix. It is a ridiculous, absurd, expensive proposition that could only be backed by governments that are being bought off by the promoters of these schemes. The entire solar industry is nothing more than a fraud. If you look at the people who are behind promoting these solar stocks, you'll recognize the names if you've been around stock promotions for long enough
TER: Do you include nuclear under the alternative energy umbrella?
PS: No. Alternative energy simply means energy that no one in their right mind would pay for. A large-scale coal plant and a power grid is the cheapest way to get electricity. The second cheapest way is natural gas under the same circumstances. The third cheapest way is nuclear. And those three are relatively equivalent, depending on the price of coal or natural gas at any given time.
People who talk about moving the entire U.S. economy away from coal have no idea what they're talking about in terms of expense, none. And those who think that everyone can plug a car into the power grid without building a lot more coal-fired power plants are out of their minds. The lack of knowledge of basic physics is really stupendous when you start talking to people about so-called alternative energy.
There simply isn't any way, barring destroying the world's economy, to move any major country off of coal, period. It's just not going to happen. They can talk all they want, but it's not going to change anything. The largest operator of coal power plants in the United States is American Electric Power Company, Inc. (NYSE:AEP) and AEP has been investing in these huge systems to put the carbon emissions from the coal plants back into the ground. I happen to be shorting AEP, because they're going to put an enormous amount of capital into these carbon recycling systems, which are completely uneconomic and unnecessary. Meanwhile, the stock has negative cash flow and has for the last five years and I think it's in dire straits. The CEO now said publicly that they're going to move forward as planned and that it will only double the average person's power bill.
And he apparently believes that the demand for electricity will be unaffected by a doubling of the bill. I don't think there's any way in the world that any consumer would vote for a doubling of their power bill. What I would really like to see is simply people being allowed to make the choice. You can choose on your power bill whether you want to buy green power or whether you want to buy coal power. If we let everyone in America make that choice, I wonder what percentage would choose green power?
TER: We haven't touched on geothermal yet. There's been a lot of consolidation in that arena since your Energy Report visit in May. Does that consolidation signal good investment potential or is it more a matter of achieving economies of scale?
PS: I recall thinking and writing that the geothermal industry was in for a big crackup because the valuations of startup companies had become almost absurd and none of them had any money. But I don't really pay attention to the sector because when I last looked, it didn't really make any sense.
Call me a skeptic, but I don't think that geothermal power is the answer to any of our most pressing energy questions. For sure it's a great way of generating electricity and it certainly can be very, very cheap because you're dealing with basically a free natural resource, which is volcanic heat. But geothermal power can really play a role in limited areas of the country and certain grids. It won't be a dominant or major part of our electricity mix in the next 50 years, and probably never. Although I don't personally spend time there because I think it's a relatively minor investment trend, I certainly believe that there may be good individual opportunities in developing geothermal plants, and I also think that the consolidation will be good going forward for investors.
TER: Other than international natural gas, do you see investment opportunities within the energy sector?
PS: I really don't think now is a great time to be an energy investor. There are pockets of opportunity; there always are. But the big story in energy is oil; it's always going to be oil. Oil is the most pourable, dense form of power that we have and therefore it commands a premium price. I think that's probably going to remain the case for a very long time.
So certainly, buying oil and finding oil are good long-term investments, especially if you believe (as I do) in the collapse of the dollar. I'm not suggesting that I believe the price of oil is going to go substantially lower. Nor am I suggesting that oil investors won't make a lot of money. I just don't think that today happens to be a great point for a new, large investment into either oil or the energy sector in general.
I say that because compared to natural gas, oil is still very, very expensive, which reflects a real glut of natural gas in lots of places, the United States in particular. Because of that relationship, I just don't think oil prices can take off in the short term, especially considering the amount of investment that has gone into those discoveries and those facilities over the last decade.
I would much rather have been an oil investor maybe 10 years ago, when the cover of The Economist magazine said we were drowning in oil and there was a risk that Saudi Arabia would go bankrupt. I don't think we're there yet. I think it's going to take us a long time to work off the new discoveries that have been made, and it will be long time before there's any kind of real shortage in oil infrastructure globally.
TER: You've always said that at any point in time there is a sector that is moving. What sectors are you looking at for the next six months that are going to provide investment opportunities?
PS: That's a great question. I've actually been struggling with that. With the exception of some very particular natural resource discovery companies, I just don't see a lot of value out there right now. Truth be told, I have been converting my portfolio slowly from equities to cash this year as a lot of my recommendations have been bought out. That's a great problem to have and I've been replacing my existing long positions with short sells. For example, I said I'm shorting AEP, and I'm also shorting General Electric Company (NYSE:GE). GE has an enormous amount of debt that is going to roll over in 2012 and the government backing of its debt securities ends prior to that. I think that's going to be very painful to the equity holders.
I'm actually really focusing on companies that have way too much debt and cannot possibly afford interest payments on any real free market basis. I believe interest rates are going to rise substantially over the next five years as the dollar falls and I think all these companies that borrowed a ton of money are going to end up going bankrupt. So I'm actually really positioning my portfolio more to be long precious metals and to be short these overleveraged, overvalued equities.
TER: Any other investment observations you'd like to provide?
PS: I think probably the best bet in the world right now is shorting elongated U.S. Treasuries. I think it's an absolute one-way bet. If you know what you're doing in terms of futures trading, you can get very leveraged by shorting these interest rate futures. You can really have some leverage to the fall of the dollar. And you have to ask how the U.S. Treasury is going to finance $3 to $4 trillion of new deficit spending and debt maturities in the next 12 months when creditors are beginning to bail into gold.
TER: Rev up the printing presses.
PS: I think we're going to try to inflate it away. But sooner or later that's not going to work. Ultimately, I believe that there will be at least a de facto default. But there's not a big difference between an actual default and a de facto default. Either way, the currency and the credit of the country is destroyed.
TER: Which brings us full circle, to the point you made when we started. Thank you so much for your insights, Porter.
After serving a stint as the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter, Porter Stansberry put out his shingle at Stansberry & Associates Investment Research, a private publishing company. Celebrating its 10th anniversary this year, S&A has subscribers in more than 130 countries and employs some 60 research analysts, investment experts and assistants at its headquarters in Baltimore, Maryland, as well as satellite offices in Florida, Oregon and California. They've come to S&A from positions as stockbrokers, professional traders, mutual fund executives, hedge fund managers and equity analysts at some of the most influential money-management and financial firms in the world. Porter and his team do exhaustive amounts of real-world, independent research and cover the gamut from value investing to insider trading to short selling. Porter's monthly newsletter, Porter Stansberry's Investment Advisory, deals with safe value investments poised to give subscribers years of exceptional returns, while his weekly trading service, Porter Stansberry's Put Strategy Report, shows readers the smartest way to book big gains during the ongoing financial crisis.
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DISCLOSURE:
1) Karen Roche, of The Energy Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) None of the companies mentioned in the interview are sponsors of The Energy Report.
3) Keith Schaefer—I personally and/or my family own the following companies mentioned in this interview: West, Petrominerales, Bankers, Painted Pony. I personally and/or my family am paid by none of the companies mentioned in this interview.
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