Investors
who want to know how the energy sector will be doing in the coming year are, in
my opinion, asking the wrong question. There really is no such thing as
“the energy sector,” because the performance of the different
resources—from oil and gas, to uranium, to coal, to renewables—can vary
dramatically.
Case
in point: while unconventional oil exploration and production have seen a huge
upswing in recent years, thanks to the vast success of the Bakken and other
oil-rich shale formations, at the same time natural gas has taken a nosedive,
due to a supply glut that still hasn’t found its balancing point.
To
find out which investments will deliver the greatest profits for well-positioned
investors in 2014, my team and I have identified three trends that are hot… and
may become even hotter in the course of this year.
HOT: Service Companies in North
America
The
oil and gas production in the United States is mature. Rather than looking for
new basins, companies are looking to “rediscover” the past by
applying new technology to increase economic production from known oil and gas
fields.
This
new technology comes in a variety of shapes and sizes: better software, bigger
rigs, more efficient drilling processes. And it’s being applied everywhere,
onshore and offshore, conventional and unconventional alike.
Just
as an example, today we’re seeing operators drill more than 50 horizontal wells
from a single well pad, a far cry from just a decade ago.
Exploration
and production companies know that the focus moving forward is not just the
amount of oil they can pump out of the ground, but the profit they can extract
from every barrel (what we call the “netback”). This is even more
true in the mature unconventional basins such as the Bakken, Eagle Ford, and
the Marcellus shale plays, where the margins are tight and require an oil price
of more than US$70 per barrel in order to be economic.
This
means E&P companies have to use the best ways to increase production from
every well—while at the same time reducing their drilling costs. Failure to do
so would be to guarantee a firm’s demise.
The
dilemma for E&P companies is having to prioritize what their shareholders
want in the short term—growing production and dividends—over whatever may be
best for the company in the long term. At the same time, they have to fight the
natural decline of oil coming out of their wells.
All
the while, service companies continue to extract fees for their tools and
services. Drillers, pumpers, frackers, and other oilfield-service guys make
money regardless of whether E&P companies find oil or produce it at
economic rates.
We’ve
said it before: Many E&P companies are running on a treadmill, and the
incline is going higher and higher, which means higher costs to produce the
same amount of oil.
Of
course, not all service companies will rake in the dough. The ones that will do
the best are the ones that can consistently stay at the forefront of technology
and keep signing contracts with the supermajors like Exxon, Chevron, and Shell.
HOT: European Energy Renaissance
Russia’s
grip on European energy continues to tighten, and there’s a push to produce oil
and gas within their own borders all around Europe.
2014
looks to be an exciting year for companies like one of our Casey
Energy Report stocks, a TSX-V-listed oil and gas explorer
and producer with a 2-million-acre concession in Germany. We call the
deposit it’s sitting on the “Next Bakken” because we believe that its
potential to deliver exceptional output could rival that of the famed North
American formation.
This
development is still in its early stages, but investors who position themselves
now could see outsized gains for years to come. It’s not really a question of
“if” the oil is there—previous oil production in the very same
location yielded more than 90 million barrels—but of “how much” oil
can be extracted with the modern methods not available the last time companies
worked on this field.
The
company has completed its first well and will continue to drill additional
wells (both vertical and horizontal) next year. While the initial well cost
more than anticipated, it’s a good start that indicates economic oil can be
produced in Germany. We’re also confident this company’s experienced management
team is applying the lessons of its first foray to reduce drill costs on future
wells.
As
our Energy Report pick proves up any of its projects in 2014 and
early 2015, we can expect another of our holdings, which has just entered the
German oil and gas scene, to either farm into the company or even buy it
out.
We
predict that by the end of 2015, our “Next Bakken” play, and others
like it, will have attracted a lot of attention, not just from individual
speculators, but from institutional investors as well—and investors who have
gotten in early will be very happy indeed.
Another
of our portfolio holdings is just beginning to drill on its Romania projects
after a series of delays due to politics and bureaucracy. We have reason to be
optimistic because its JV partner, a Gazprom subsidiary, has drilled successful
wells on the same basin on the other side of the border in Serbia. If our pick
has anything close to that level of success, the markets will surely take
notice and its shares will go much higher.
As
the “Putinization” of the global energy markets continues and
Russia’s dominance grows, European countries become increasingly more desperate
to escape from under Putin’s heavy thumb and to start developing their own
energy resources.
The
European Energy Renaissance is real, and we continue to monitor companies that
are funded and have the permits and ability to drill game-changer wells in
Europe in 2014.
HOT: Uranium
During
a recent trip to London, I spoke with Lady Barbara Judge, chairman emeritus of
the UK Atomic Agency and an advisor to TEPCO on the Fukushima nuclear disaster
in Japan. I asked her point-blank whether Japan was willing to bring any
nuclear reactors back online in 2014.
Her
answer was an unequivocal “Yes.” The Japanese have no choice, really,
because the alternative—importing liquefied natural gas (LNG)—is far too
expensive.
Japan
is the world’s largest importer of LNG and has had to double its imports since
the Fukushima incident. For that privilege, the country pays some of the
highest rates on the planet—almost four times more than what we pay for natural
gas in North America.
South
Korea also shut down its nuclear plants post-Fukushima to do inspections and maintenance
upgrades, and it, too, has had to import a lot of LNG. Both countries are
looking to restart their nuclear reactors so they can stop paying a fortune to
foreign energy suppliers. When these countries restart their reactors, they’ll
also restart the uranium market, so we expect uranium prices to begin to shake
loose of the doldrums this year.
Another
driver will be throwing the switch at ConverDyn, the U.S. uranium facility that
is slated to start converting natural U3O8 to reactor-ready fuel in late
2014 or early 2015.
We
currently hold two solid uranium companies in the portfolio—one is a U.S.-based
small-cap producer (one of the very few in America), the other is the
lowest-risk way to play the uranium market that I know of. Both, we believe, will
take off in 2014 on the renewed interest in uranium and the associated stocks.
http://www.caseyresearch.com/articles/energy-outlook-whats-hot-in-2014
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