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Energy

Energy investing

The Next U.S. Shale Oil Boom Could Be in California

The U.S. shale oil boom has hit Texas and North Dakota – and is now looking to take over the Golden State of California.

California's Monterey Shale formation covers 1,750 square miles from southern to central California and is believed to contain more shale oil than North Dakota's Bakken and Texas's Eagle Ford combined.

The potential of the Monterey Shale formation is enormous. According to IHS Cambridge Energy Research Associates, Monterey may hold about 400 billion barrels of oil – roughly half the amount of conventional oil that Saudi Arabia has.

The energy research director at IHS, Stephen Trammel, told CNNMoney, "Four-hundred-billion barrels, that doesn't escape anyone in this [oil] business."

Even if that is an overly optimistic estimate, there is enough recoverable oil there to make it worthwhile.

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Energy Investing

Natural Gas Companies: Shell's Huge LNG Win

Royal Dutch Shell (NYSE: RDS.A) last week inked a $6.7 billion deal to buy Spanish energy company Repsol SA's (RPYY) liquefied natural gas (LNG) business.

Shell will buy a portion of Repsol's LNG assets for $4.4 billion in cash and $2.3 billion in financial leases and assumed debt – more than double pre-sale estimates, according to Bernstein Research.

Tuesday's deal underscores the looming importance of LNG to natural gas companies and the global energy market.  

"LNG overcomes the primary problem faced by natural gas users," explained Money Morning's Global Energy Strategist Dr. Kent Moors earlier this year. "Available supply is traditionally limited to where pipelines are running. LNG, on the other hand, cools gas to a liquid, allowing it to be transported by tankers almost anywhere by water, regasified at an import terminal, and then injected into the local pipeline network."

This opportunity means huge profits for companies – and investors – who get ahead in the LNG market.  

Shell's Big LNG Win

Shell believes global consumption of LNG will double from now until 2025. Earlier this year, Shell's ECO Peter Voser said he expects gas to play a significant role over the next 40 years, with much greater growth rates than oil.

Voser said in November 2012 that Shell plans to invest $20 billion in natural gas products globally over the next few years.

One of the reasons Shell pursued this current deal was to get Repsol's stakes in a major LNG project in Trinidad and Tobago, in addition to a small project off coastal Peru. Shell previously had no presence in these emerging regions.

Operating in these regions gives Shell the ability to provide gas to Latin America, and use its Nigerian gas operations to service Asia. That'll save the company shipping costs and boost profit margins.

"This is a perfect complement to what we have. We get a West Atlantic position and an East Pacific position. These were blind spots," Maarten Wetselaar, Shell's executive vice president told The New York Times. 

The deal comes with a fleet of specialized LNG carrier ships and will add 30% to Shell's LNG supplies, according to The New York Times.

Macquarie Securities estimated Shell will now have 6.6 million tons of LNG to trade, or about 20% of its total volume.

Why Natural Gas Companies are Chasing LNG

Trend Watch

Watch What Carl Icahn Does to These Energy Stocks

Energy stocks have been largely left behind in the recent stock market rally – except for those with interest from activist investors like Carl Icahn.  

You see, concerns about global demand as well as political pressure to focus on alternative energy have weighed on energy stocks. So have the low price and oversupply conditions in the natural gas markets.

Many of these energy stocks trade at what seem to be very low prices compared with the assets owned by the corporations and their future prospects.

This has attracted the attention of many activist investors looking to force the share price to unlock the real value of the underlying corporation.

One of the best-known activist investors, Carl Icahn, has accumulated several positions in leading energy companies in the past year because of low prices and under-valuations.

Take, for example, what Icahn's done with CVR Energy Inc. (NYSE: CVI).

Icahn owns 83% of CVR, a refiner that has seen its stock price soar recently as refining margins have improved. The company also has a fertilizer business that is a major beneficiary of lower natural gas prices.

The stock has better than doubled in the past year so it would be foolish for investors to chase the shares now.

But CVR does serve as an example of the sizable returns Icahn is looking to achieve in his foray into additional energy investments, like the following two stocks he's been accumulating.

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Oil & Gas

How to Profit as the Global Energy Crisis Accelerates

For months, the signs of an impending global energy shakeup have been building.

This is not to say that we have an impending long-term shortage (it is not, in other words, a Peak Oil prophecy coming true) or that the lights are about to go out around the globe.

However, it does appear we are moving into another round of concerns for energy balance and production moving forward.

A combination of reasons exists for the accelerating crises.

Most of them are either the result of expanding energy requirements (a rise in aggregate demand) or the increase in baseline production and generation costs.

The first is playing out in regions typically unknown for their energy intensity. This is more the case outside the OECD countries (the most developed industrially). We should expect such a result, given the movement of new energy demand into these regions.

While the media attention centers on the U.S. and European markets, the other nations have driven global demand for some time. That means any spike in prices worldwide will have an impact on what it costs to obtain energy just about everywhere else.

As an investor, you should not focus on where the energy is produced. Remember, this is a globally integrated market, and prices will reflect that fact.

Still, it's the second trend that is causing the most significant problems moving forward.

And investors will have plenty of opportunities to profit as this problem accelerates.

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Washington

Why You Should Hate Ethanol (Even Though the EPA Doesn't)

Proving once again that the government refuses to learn from its mistakes, the Environmental Protection Agency yesterday (Thursday) again increased its ethanol mandate.

The EPA raised the Renewable Fuels Standard (RFS) mandate to 16.55 billion gallons for 2013, up from 15.2 billion gallons last year, while ignoring signs that the policy is doing more harm than good.

The list of problems starts with what the use of ethanol-gasoline blends might be doing to our cars.

Earlier this week, the Coordinating Research Council, a group backed by several major automakers, released a study showing that E15, which blends 15% ethanol with gasoline instead of the previous level of 10%, can damage autos.

The tests showed E15 could cause faulty fuel-gauge readings and check-engine alerts. In some cases, E15 could cause swelling and failure of auto components that "could result in breakdowns," according to Robert Greco, a director with the American Petroleum Institute.

The American Automobile Association (AAA) last fall voiced similar concerns and asked the EPA to withdraw E15. AAA said that since only 5% of the cars on U.S. roads are approved for E15, the possibility for accidental use in vehicles is too high.

"AAA automotive engineering experts have reviewed the available research and believe that sustained use of E15 in both newer and older vehicles could result in significant problems such as accelerated engine wear and failure, and fuel-system damage," the organization said in a press release on its Website.

These new concerns come on top of historic complaints that ethanol blends reduce a vehicle's miles per gallon by about 27%, meaning more trips to the gas station and more money out of drivers' pockets.

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Trend Watch

Buy Signal: Top Hedge Funds Are Moving Into Energy

There is an easy way to find out where the market thinks a particular sector is heading: Check out the movement of futures contracts held by top hedge fund managers.

These days the signal is clear and pointing in one direction. It's in energy.

Reports have recently surfaced that hedge funds are moving into commodities in general, and energy commodities in particular. What's more these moves are more bullish than at any time since midsummer.

The reason is the same one that we have been discussing for several months. Demand is coming back more quickly than anticipated.

Energy spikes usually start that way. Indicators of market resurgence seem to rush onto the scene, catch analysts by surprise, and the acceleration begins.

But this time, those who survey the market should have seen it coming. After all, the indicators and benchmarks have been there. I have been laying them out here in Money Morning for weeks.

Two elements have emerged over the past several days that finally require the pundits to catch up with us.

First, it is becoming impossible to ignore what is happening in the U.S. and China. Both markets are moving up, with that direction intensifying of late.

In the U.S., forward economic indicators are developing into a bull market signal. This has augmented the run we have experienced of late, largely due to the combination of an oversold condition, no bad news (Congress and the White House may at last be learning how to play nice in the sandbox), and money moving back in.

But it's the second factor that everybody will be talking about this week.

Trend Watch

Cheap Natural Gas Prices Give Hope to this U.S. Industry

While natural gas prices are up 50% from their 2011 lows below $2 per 1,000 cubic feet (million BTUs), they're still cheap at just over $3.

Lower-priced natural gas has helped a number of industries, like chemicals and utilities, cut costs, as Money Morning Global Energy Strategist Dr. Kent Moors pointed out in his 2013 natural gas price outlook.

Now there's another U.S. industry that hopes cheap natural gas can revive its flagging performance.

I'm talking about steel.

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Energy Investing

Three Reasons Why the Energy "Experts" are Wrong

Last week, another batch of oversimplifications attempted to explain a significant decline in energy stocks.

Excuses ranged from declining demand to shale oil and gas gluts. Others pointed toward a general market Armageddon.

But you and I know better than to believe this hype.

Last week the S&P closed at a five-year high, NYMEX West Texas Intermediate (WTI) crude oil futures closed higher than in any session since September 18, while the spread between WTI and London's Brent benchmark rate is the narrowest it has been since September 14.

We recognize that the harbingers of doom are right only if markets and economies completely collapse. Once again, we know that is not going to happen.

None of this means we are simply off to the races. But they do indicate how the half-baked approaches used by some "experts" are not reflecting reality.

Their arguments are wrong for three very basic reasons. And once you learn them, you stand to profit from the biggest energy trend in decades.

Energy Investing

Four Timely Moves For The Next Three Crises

As I wrote last Thursday, the aftermath of the fiscal cliff deal requires some restructuring of energy sector holdings.

We are currently in a brief period between crises. Nothing was resolved in the eleventh (and a half) hour compromise.

The truth is there are still three huge fights on the horizon – revisiting the sequestration (automatic spending cuts) portion of the fiscal cliff, spending versus taxation in the budget, and raising the debt ceiling.

All will hit by early March.

So the reprieve gained on New Year's Eve will be brief.

The spike after the accord was huge. Unfortunately, as we witnessed late last week, the market rally has no legs. VIX (volatility) has been abnormally low, but that will be drifting up, to accelerate as we get closer to the next round of legislative paralysis.

We cannot predict how protracted this next round will be, but early indications are hardly encouraging.

That's why investors need to be more defensive and identify energy components that are more likely to withstand the gridlock and even profit from it.

Overall, you should divide the energy sector into four segments:

  • Producers;
  • Midstreams;
  • Processors/Distributors; and,
  • Alternatives.

Most members in each of these groups are likely to be vulnerable as we move closer to the end of February. But not all of them.

Here's what you need to know…

Top News

Toshiba Talks Highlight Nuclear Power Slow Down

Toshiba CEO Norio Sasaki told Dow Jones in an interview today (Thursday) the company is negotiating with three potential buyers, including Chicago Bridge & Iron Company NV (NYSE: CBI), to purchase a 16% stake in the Westinghouse Electric nuclear power unit.

Toshiba said earlier this year it would consider offers as long as it retained majority control over Westinghouse.

Toshiba paid $4.16 billion in 2006 for a 77% stake in Westinghouse. In 2007, Toshiba sold a 10% stake in Westinghouse to Kazatomprom of Kazakhstan, leaving the company with 67% of Westinghouse.

But Toshiba's stake will jump to 87% in January when a sale from The Shaw Group Inc. (NYSE: SHAW) becomes final. Shaw in September 2011 exercised an option to sell its stock after it agreed to be taken over by rival Chicago Bridge & Iron.

An 87% stake would give Toshiba too much exposure to a nuclear industry rattled by the March 2011 accident at Japan's Fukushima nuclear power plant.

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