Category
Kent Moors
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Ignore the Doom-and-Gloom Crowd When They Talk About $40 Oil
I just returned from a week down South with a few of my energy clients. It's good to get my hands dirty and remind myself firsthand what is going on at the project level of some of the country's top energy companies.
But when I returned home this weekend, I made the mistake of flicking on the television and opening the newspaper.
I can't believe that the pundits are now predicting that oil will fall to $40 a barrel. They also are projecting that the entire natural gas sector is going to collapse.Here we go again.
Yes, we are wrestling with an energy sector that remains gun shy on elements from market volatility to geopolitical tensions.
And sure, $40 a barrel is possible, but only in an improbable situation where global demand for oil completely collapses, along with the world economy.But we are in a new reality. And such doom and gloom predictions are highly oversimplified and potentially dangerous to you as an investor.
Here's why.
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Don't Ignore This Shift in the Global Oil Market
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This Key Energy Metric Could Make You A Lot of Money
Last week I discussed what EROEI is-and how to use it.
This week I'd like to talk about how this key metric affects the balance of your energy investment portfolio.
Now, this is certainly not the only element in determining preferable stock moves, but it's critical that you know the EROEI because it could make you a lot of money.
Recognizing the real elements that determine the genuine cost of energy production, EROEI is becoming an important factor in estimating profit margins.
And those margins certainly influence the performance of a stock as we've seen all across the energy value chain in recent months.
EROEI refers to the amount of energy used to produce energy.
If this ratio produces a figure of 1.0, EROEI is telling us that it takes one barrel of oil equivalent to produce one barrel as a result.
Anything under 1.0 means that more energy is consumed in the production process than is gained as an end product.
EROEI has the advantage of being a useful yardstick throughout the energy curve – from upstream production sites (wellheads, generating facilities) through midstream (gathering, transit, storage and initial processing) to downstream (refineries, terminals, wholesale and retail distribution, end use).
Some applications of EROEI are already in wide usage, although we don't tend to think about them in these terms. Energy-efficiency ratings on appliances, heating and cooling systems, windows, or building supplies are an application at the end of the energy curve.
But how can we use this to fine-tune an investment portfolio?
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What EROEI is – and How to Use It
In Friday's Oil & Energy Investor, I began a discussion about the importance of a metric known as Energy Returned on Energy Invested (EROEI).
As our research disclosed in the "Your Future: The Ultimate Pyramid Scheme" documentary, the factor is becoming a substantial element in the availability and cost of energy in general.
But oil is the most critical energy source in this discussion.
Our research has found that the situation will not be improving. We will be reaching a point when our need for exponential growth in energy, the environment, and the economy will become unsustainable. From there, we will experience a tipping point, and then a major collapse.
This will require that each of us change the way we structure our investments, secure our assets, and provide for our families.
However, in the interim, there will also be some amazing opportunities to make unparalleled profits in the energy sector.
And, in all of this, EROEI will be figuring in important ways.
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How We'll Profit in the Coming Growth Crisis
The mantra these days is that we need growth to offset a double-dip recession. After all, if the economy is growing, everything else ought to work itself out…
Right?
Well, it depends on the nature of the growth.
Everybody understands that a rapid increase of the currency in circulation is a ready path to inflation. They also get that accelerating growth concentrated in one economic sector will risk intensifying problems in other sectors that aren't participating in the advance.
Yet growth is still widely perceived as being a good in itself – a kind of general elixir for whatever ails a market.
How many times during the ongoing political campaign have we seen "growth" as the key to:
- increasing employment;
- reducing the budget deficit;
- allowing a reduction in taxes;
- permitting an increase in benefits;
- creating better business startup opportunities; or
- curing the common cold (or just about anything else that comes to mind)?
This is especially true with energy.
Pundits translate sluggish energy demand into a concern about economic decline. Expanding demand, on the other hand, is always regarded as evidence of everything that's noble and right about capitalism.
The point is made in both directions, actually.
Some consider an improvement in energy demand to be an indicator of an improving (by definition an expanding) economy. Others see signals of economic growth as a springboard for expanding fuel and power demand.
Either way, economic growth is the essential foundation upon which investment decisions are made in the energy sector. Positive or negative spin is given as part of every argument over oil, gas, nuclear, renewable and alternative sources, or biofuel advance.
Seems logical enough.
Yet consider this….
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Eurozone Debt Crisis Won't Be Fixed by "Bailout Lite"
The market red ink this morning (Monday) around the globe is the result of a usual suspect – Spain.
These days, if someone even sneezes in Madrid, Barcelona, or Córdoba (one of my favorite places, actually), investors go into intensive care all over the world.
This new Spanish influenza has been wiping out paper value from one end of Europe to the other. This morning came word that many of the regions in the country will need help. Attention is now directed from focused support for banks to wider calls for a sovereign bailout.
And that is where the whole matter can turn nasty. Word is that we should now expect some Italian cities to be requesting money in the near future. Seems California and Pennsylvania are not the only locations where cities can go bankrupt.
The accord reached at the end of June by the Council of Europe (the EU member heads of government) to bail out Spanish banks is already derisively referred to as "bailout lite." As the beer commercials attest, this is going to be "less filling."
Unfortunately, it is the heavier version that Europe now needs.
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Why Gas Prices are Heading Higher
With "Big Ben" testifying over the next two days on Capitol Hill, the indices will be bouncing around.
I always find it curious that the same Street urchins who criticize government for interfering in the "free market" are nonetheless the same ones pouting in the corner when the Fed doesn't propose a new bailout to improve their portfolio values.
When my children would pull a stunt like that, they would be sent to bed early… not given a seven-figure salary and benefits.
In any case, that's not the only pouting going on…
A few weeks ago, pundits were claiming U.S. gas prices could be moving down to as low as $3 a gallon nationwide.
Well, these same guys have been quiet lately.
That's because the price has been moving, all right, but in the opposite direction.
The RBOB near-month futures price was up again yesterday (Monday) at market's open. This is the contract traded on the NYMEX for blended gasoline. The price has increased 5.6% in the past week and 11.6% for the month. As of Monday's open, the price had recovered 13% from the recent low, just three weeks ago.
Gasoline is now tracking ahead of the rise in crude oil futures prices.
The reasons are rather straightforward.
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Four Things Suppressing Crude Oil Prices Today
The collapse of talks between Iran and the "Big 6" (the five permanent members of the UN Security Council plus Germany) should have accelerated international crude oil prices.
And yes, they are higher.
But the real spike hasn't hit. Not yet.
The rising crisis atmosphere in the region and the genuine possibility that a fourth round of talks between the two sides will not even take place should have renewed the upward movement.
That hasn't taken place yet, either.
Oil prices are caught between the normal dynamics of geopolitical concerns – which push prices north – and continuing concerns over a global economic slowdown – which results in lowering expectations.
Now, this limbo is a delicate balance; it could change in a matter of hours.
We are likely to see a short-term rise Monday evening if the Norwegian oil and gas sector strike is not averted. Labor negotiations between Norway's oil workers and employers over pay and pensions failed – yet again – yesterday. The country is now just hours away from the first complete shutdown of its oil industry in decades. (Already, the strike has cut oil output by 13%, according to Reuters.)
Then there are the figures coming out from the Energy Information Administration (EIA) on Wednesday, which will almost certainly show a drawdown on U.S. inventories. Normally, that would also push up prices.
However, absent an Iranian move against the Strait of Hormuz or a major refinery accident somewhere in the world, the rise will be less than usual.
That's because right now, four things are tempering the oil price rise:
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The Next Phase of the Eurozone Debt Crisis
Today (Monday), as we digest what happened in Europe, the obvious question arises: What comes next for the Eurozone debt crisis?
For starters, the heads of state coming out of the Council of Europe meeting last week pledged to have the new structure by July 9, even though the new stabilization mechanism will take longer to phase in.
For the first time, there will be a greater accountability (and control) over continent-wide commercial banking and access to some underwriting of debt coverage. It also means that national banking systems will need to relinquish some oversight to the European Central Bank (ECB).
For months, a number of people (myself included) have insisted that the solution to th e Eurozone debt crisis requires greater financial integration. The shortcoming seemed rather straightforward.
The EU had ushered in a more centralized monetary system (single currency and all that) but had no centralized fiscal system to parallel it. Simply put, that required adherence to currency rules without any ability to coordinate the credit and fiduciary end of the spectrum.
Well what came out of the Council in the early hours of Friday will not solve the debt problem in Spain , Italy , Portugal, or Greece. There is no magic short -term fix. But it might just provide the underpinnings for a credit system that may begin to operate.
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Chesapeake Energy (NYSE:CHK) Needs to Dump CEO Aubrey McClendon
Strategically, Chesapeake Energy Corp. (NYSE: CHK) is a great business with a long, bright future.
Chesapeake had been the largest independent natural gas producer in the U.S., with significant cross-interests in oil, a creative approach to bringing in international majors without losing control over projects, and some of the most attractive drilling acreage around.
It's positioned for a decade of growth – at least.
What's more, now that the shares have sold off, Chesapeake is incredibly attractive from an investment standpoint, too. (In fact, we're taking advantage of the company's growth potential in my Energy Advantage right now.)
So don't get me wrong when you see what I have to say today. I love the company.
But Aubrey. Oh Aubrey…
I don't normally devote an entire column to criticizing a company executive. But I have had enough of these shenanigans by the company's fast and loose CEO and co-founder Aubrey McClendon.
The latest revelations have caused yet another sell-off.
This time, there are allegedly email records of his attempts to suppress land-bidding fees with normal competitor Encana Corp. (NYSE: ECA). And this may end up in the lap of federal investigators.
While this might be concerning, I don't want anyone to overreact. I only see this as a temporary problem – and one that creates even more of a buying opportunity for potential shareholders.
Nonetheless, the time has come for more drastic action on the corporate side.
