New Global Energy Sector Profit Opportunity of Our Lifetime
Commodities / Energy Resources Jul 05, 2010 - 07:21 AM GMTBy: Money_Morning
William Patalon III writes: Oil prices will reach a record $150 a barrel, sending gasoline prices to $3.80 a gallon. Commercial nuclear power is making a comeback - but in "nuclear batteries," instead of in hulking power plants of the past. New global-warming regulations will turn air-pollution credits into financial assets that can trade like stocks or bonds. And China's zooming growth will turn the global energy sector upside down.
If this sounds like a view of the distant future - the global energy sector's own version of "Future Shock" - think again.
All of these "predictions" are becoming a reality, even as you read this. And while these transformative events will likely make the global energy sector more volatile and confusing than ever, they are also creating the largest wealth-creating opportunities that most investors will ever see, says Dr. Kent Moors, a career energy-sector consultant who works with governments and corporations throughout the world.
"It's the profit opportunity of our lifetime. Investors who understand the energy-sector shifts that are taking place will make more money in energy investments over the next several years than in any other sector during any other period in their lifetimes," says Dr. Moors, who is also the editor of the Oil & Energy Investor newsletter. With the changes he's currently projecting, "a large measure of energy independence for the U.S. becomes possible. And I'm not just talking about a mere economic 'recovery' here. We'd be looking at a standard of living that's 60% higher, an economy expanding at 5% to 7% a year and - most important of all - a future that we could dictate."
In an exclusive interview with Money Morning last week, Dr. Moors said that
•The "Big Oil" companies such as Exxon Mobil Corp. (NYSE: XOM) will be supplanted as the "blue chips" of the global energy sector. Investors will be surprised to discover the identity of their successors.
•Wind, thermal and solar energy technologies may not shape up as the fossil-fuel replacements that many investors expected, although they will play a role.
•But commercial nuclear power is making a major comeback.
•Oil prices will hit $150 a barrel a year from now - setting a new all-time high - which will send pump prices to a national average of $3.80 a gallon.
•And new U.S. carbon-emissions regulations could vault this country into a global-technological-leadership position, affording investors profit opportunities that don't exist right now.
Here is a partial transcript of our conversation.
William Patalon III (Q): You've said that the looming changes in the energy sector offer investors the biggest profit opportunity of their lifetimes. Why are we looking at profit opportunities of that magnitude?
Dr. Kent Moors (A): We are about to experience genuine change in the energy sector. Two things are coming at a rate and scale not experienced before.
First, the supply of crude will begin to have difficulty meeting projected rises in demand. That will create price appreciation, regional differences and a major new round of mergers and acquisitions among oil companies. All of this will provide investment opportunities unlike anything we will see again in our lifetimes.
Second, the energy balance will change - we will have more sources of energy providing portions of that mix - hydrocarbons, alternative, renewable, unconventional - than we have ever seen before. This will create new targets for investment as well as increasing ability to move from one energy sector to another. Exchange-traded funds (ETFs) will be making such moves more accessible and easier for the average investor. Playing ETFs against private portfolio holdings will be an increasingly effective way to tap into the profits coming from such changes.
Here's the bottom line: It's the profit opportunity of our lifetime. Investors who understand the energy-sector shifts that are taking place will make more money in energy investments over the next several years than in any other sector during any other period in their lifetimes. With the changes I'm currently projecting, a large measure of energy independence for the U.S. becomes possible. And I'm not just talking about a mere economic 'recovery' here. We'd be looking at a standard of living that's 60% higher, an economy expanding at 5% to 7% a year and - most important of all - a future that we could dictate.
Q: What are the Top Three trends investors need to be aware of and why?
Moors (A): The top three trends are: First, increasing returns from smaller, focused, companies; Second is an explosion in service-, field- and support-company returns; And third, unconventional production - shale gas and oil, coal-bed methane, tight gas - inside the U.S. market.
The first trend arises because large companies cannot pull adequate profits from smaller projects, while well-run second-tier companies can do so, and do so more efficiently.
The second trend results from the need for additional volume. Operating companies - those that extract the oil and gas - no longer drill their own wells, maintain the fields, shoot the seismic or analyze the test results. All of this is done by the specializing companies in the field-service sector. Business there will be booming.
The third trend reflects a significant change that's taking place in the U.S. market, where unconventional [production] is rapidly moving to replace conventional production.
Q: That's fascinating, and actually leads us into my next question. You've said that this "New Energy Sector" may afford the United States a shot at energy independence. How could this play out and how likely an outcome do you believe that to be?
Moors (A): So long as the U.S. economy remains dependent upon crude oil, energy independence is not possible. However, the rise in unconventional hydrocarbon production - from shale coal seams [and] tight gas formation in sandstone - allows us to increase domestic production of these (and we have a lot of reserves in each category). As we pursue genuine alternative energy, therefore, these new sources of oil and gas may provide an expanding domestic bridge to new energy sources that make us less reliant on foreign sourcing.
Q: The new carbon emissions legislation puts Washington in the driver's seat globally. That's fascinating. Could you explain how that plays out?
Moors (A): We must wait upon what carbon regulations actually emerge from Washington. However, this much is already clear. Carbon capture technology - using the CO2 for feeder stock or to enhance pressure at existing fields, putting a carbon capture and sequestration (CCS) as a central element in an ongoing national energy plan - put American approaches to carbon at the forefront of worldwide attempts to reduce greenhouse gases. Washington's regulations will open up the market opportunities for hundreds of companies in carbon capture, biofuels, environmentally sensitive energy production, as well as wind, geothermal and solar. What happens here is going to dictate how other markets globally deal with the carbon issue.
Q: Is oil or natural gas the bigger opportunity at this point, and why?
Moors (A): Natural gas, at the moment, is the preferable move, given the move to shale production, the rising dependence of electricity production on gas and the plentiful supplies of gas in the U.S. and Canada. However, increasing concerns over adequate supplies of crude oil in the face of expected rising demand will shortly increase profitability of operating companies and processors. Here we will be particularly interested in tracking those operators of medium-sized fields having efficiency advantages and those refineries able to benefit from the currency swings between the dollar and the euro - that is, those providing oil-product flows or swaps involving both continents.
Q: What's your outlook for oil prices - near and long-term? How about gasoline prices at the pump?
Moors (A): Once we stabilize the oil market - that is, once the outside pressures of credit crunches, financial meltdowns, countries like Greece threatening to fall off the map, and an artificially low forex value for the euro ease - demand returns and supply will be hard-pressed to meet it. Oil prices will start rising. The rise will accelerate more in paper barrels (futures contracts) than in the wet barrels (actual oil consignments). That means the price increase will be greater than the actual underlying market dynamics would justify.
A new bubble is in the making that will make the price of oil very volatile. However, prices will be going up steadily. For each $1 rise in a barrel of crude, we can expect a $0.012 rise in average gasoline prices. We could easily be [at a new record high of] $150 a barrel by July of 2011, with a national average (without California) of about $3.80 a gallon.
Q: You say it's no longer enough to just buy the oil majors: Who takes that place as the energy-sector blue chip? If there is one...
Moors (A): The new "blue chips" in the energy sector are going to be energy-sector indices - ETFs and ETNs (exchange-traded funds and exchange-traded notes). I will be setting up my own for our use in the new Energy Advantage advisory service and also will be breaking down those used by others. The key to the "New Energy Sector" is to ride the wave of sectors more than individual stocks. More frequently, appraising individual stocks in this environment will involve our contrasting them to indices, [as opposed to] other stocks.
Q: You see China playing a major role in all of this. While that's no surprise to Money Morning readers, I'm willing to bet that investors who rely on the mainstream media will find that to be a revelation. Could you give us the basic blueprint for what you see happening?
Moors (A): The answer here is simple. The energy market will be driven by demand and China is the new 800-pound gorilla in the room. It is a barometer of demand activities globally.
Q: Does commercial nuclear power finally make its long-awaited comeback in the U.S. market? Who stand to be the leading players here?
Moors (A): Nuclear is back (the stigma is gone). However, the lead time for a traditional nuclear reactor coming on line - combined with the regulatory requirements and the expanded up-front capital requirements - will limit the ability of large-sized nuclear power plants to make a significant impact in the next five to 10 years.
The same is not true, on the other hand, in the rapidly expanding mini-reactor market. These are actually self-contained, maintenance-free "nuclear batteries," able to provide power to communities and rural areas for 30 [years] to 60 years before replacement. Babcock & Wilcox Co. - a soon-to-be spun-off unit of McDermott International (NYSE: MDR) - and Toshiba Corp. (OTC: TOSBF/Tokyo: 6502) are the early leaders here.
Q: Wind and solar have both had their moments with investors in recent years. Are they real investment opportunities? Anybody you like here?
Moors (A): There are some [players] that are coming into focus. Electricity produced by either remains less-cost effective than power produced by more traditional means. There remains some question about how much of the energy mix will actually end up being provided by wind and solar. Nonetheless, while there are some regional plays that may prove enticing, I would remain an investor in a broad ETF weighted for better performing wind and solar opportunities. Two fit well currently: PowerShares WilderHill Clean Energy ETF (AMEX: PBW) and First Trust Nasdaq Green Energy ETF (Nasdaq: QCLN).
Q: What are the signs we need to watch for that will signal us when these "New Energy Sector" trends are really ready to take hold?
Moors (A): When NYMEX and Brent crude oil prices sustain closings above $125 for five consecutive trading sessions, combined with the most liquid energy-based ETFs all moving across their 120-day moving averages. Once again, the Energy Advantage advisory service will be tracking these developments and establishing what amounts to a directional "index of indices" to plot the acceleration.
Q: Anything else investors need to watch for/ be aware of?
Moors (A): With apologies for deliberately misquoting Bette Davis ("All About Eve," 1950), let me just say: "Buckle up, it's going to be a bumpy ride." (What she actually said was, "Fasten your seatbelts, it's going to be a bumpy night.")
[Editor's Note: Dr. Kent Moors, a regular contributor to Money Morning, is the editor of "The Oil & Energy Investor," a newsletter for individual investors. In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. His experiences - as well as his unrivaled industry access, contacts and insights - will serve as the foundation for the Energy Advantage, an advisory service that debuts this week. For more information on that service, please click here.]
Source : http://moneymorning.com/2010/07/05/global-energy-sector/
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