Some good natural gas analysis:
The following is an update on: (1) how natural gas and crude oil demand
are creating investment opportunities, (2) why stocks with high
institutional ownership tend to be more volatile; (3) behavioral finance
studies that suggest that many investors are too risk adverse; (4) LSGI
investment articles published on Marketocracy.com; (5) a discussion of
new Model Portfolio selections Texoil Inc. (TXLI), Quicksilver Resources
(KWK), and Applied Science & Technology (ASTX); and (6) an update on
existing Model Portfolio companies.
The Lone Star Growth Investor was mentioned in the September 11th issue
of the Dick Davis Digest - a newsletter that has summarized "the best
ideas from Wall Street" for over 19 years - and our investment columns
have also been carried on Marketocracy.com.
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IS THE ENERGY SECTOR HEADED FOR BOOM TIMES?
Boosted mainly by demand from new electrical generation facilities, most
natural gas wells in North America have produced "flat out" for the last
two years according to Richard Spears of Tulsa's Spears & Associates.
Spears & Associates is one of the nation's oldest market research firms
in the energy sector. And Spears notes that natural gas prices are
setting records on the spot market, with crude oil prices nearing $30 a
barrel.
* Reserves Have Not Replaced Production
Due to weak U.S. natural gas prices natural gas exploration and
production activity has been depressed the last few years. Natural gas
reserves that were produced have not been replaced according to Spears,
and drilling activities were curtailed as companies attempted to reduce
costs and preserve cash flows.
In normal times when reserves are depressed drilling activity quickly
provides additional volumes that can be marketed to meet demand.
Surprisingly, Spears has some concerns whether increased drilling and
exploration activity can increase natural gas reserves in the onshore
areas in the U.S. Due to the mature nature of the onshore areas he
thinks that such activity may only reduce the ongoing decline of
domestic natural gas reserves.
Spears cites a recent study by Texas A&M University (May, 2000) that
indicates that natural gas production capability in the North American
continent may have peaked last year. "When a well regarded petroleum
engineering school publishes such a study, you tend to take notice"
according to Spears.
* High Technology Sector Energy Intensive
Some analysts are surprised how energy intensive the high-technology
sector is proving to be. Electricity usage from the expansion of
Internet and telecommunications networks is growing at twice the rate
planners were expecting just a couple of years ago. And energy
consumption in Silicon Valley - the heart of the new economy - is rising
three times as fast as in the rest of California.
Peter Huber and Mark Mills, co-authors of the Digital Power Report,
recently noted that ''the digital economy is completely dependent on the
big central power plant.'' Firms such as Sun Microsystems Inc. and
Oracle Corp. use as much energy as a small steel mill.
And virtually all the incremental power demand is being fulfilled by
turbines that burn natural gas - an industry trend that has been going
on for 10 years now. The use of natural gas is fed by the environmental
benefits of the relatively clean-burning fossil fuel, and technological
innovations that provided enormous gains in generation efficiency. And
numerous natural gas fueled generating plants are being planned or are
under construction.
* Gas Storage At Record Low Fill Levels
Natural gas storage facilities have been of great assistance in
developing distant gas markets by allowing the producer to move the gas
closer to the end-use market in slow demand periods. This has reduced
the maximum design capacity of the pipeline equipment needed to meet
peak market demand.
But many such storage facilities are at record low fill levels for this
time of year according to Spears. The American Gas Association pegs
current inventories at 2.1 trillion cubic feet (tcf), down 15% from a
year ago. Recently, storage tanks have been getting weekly
''injections'' of only 42 billion to 52 billion cubic feet (bcf). At
that rate, stocks may inch no higher than 2.7 tcf before winter. That's
below the 3.0 tcf cushion normally salted away to get through even a
mild winter.
Cambridge Energy Research Associates (CERA) estimates that storage
inventories in the United States crossed into record low territory as of
the end of August, falling below the previous 1996 record low. CERA
thinks that "more records will likely be broken in the coming months,
and by widening margins" as injections into such reservoirs lag.
Volumes of gas that historically would be going to storage appears to be
now going to new electrical generating facilities according to Spears.
He concurs with other experts that fill rates will most likely leave
storage levels below historical norms this winter.
* Energy Prices Should Remain Strong, Companies Should Be Profitable
Spears expects both crude oil and natural gas prices to remain above
historical levels - and thinks that natural gas and crude oil producers
may be "more profitable and have more cash flow than maybe ever, in all
of history." He notes that "better run companies can throw a lot of
money to the bottom line" in this environment.
Even if this winter is unusually mild, natural-gas availability could
get worse next year. The Energy Department's Energy Information
Administration (EIA) estimates natural gas demand will grow 4.3% this
year, while production will increase by a mere 1%. Next year demand will
increase by 3.2%, and supplies will again increase by 1%.
"The last time we saw economic signals in the energy industry like we
see today" was 20 years ago according to Spears - after the Arab oil
boycott - and those signals pointed to a boom in the energy industry
that lasted a number of years. "This is going to be one of those times
that even the poorest run companies are going to be able to make a
pretty good profit" in the energy sector.
* More Drilling Activity Forecast
Spears thinks that the strong prices will provide an economic incentive
to many producers, and thinks we should see around 25% more drilling
rigs next year - mostly looking for natural gas - even though most
drillers are constrained by manpower and equipment. He expects the
current economic environment in the energy sector to last for at least
several years. Our interview with Richard Spears can be replayed at:
theaudioinvestor.com |
