The Great 3-Way Race for Energy

With all the TV coverage of the Torino Olympics, Americans should remember that the game ain’t over till it’s over.

The same is true for oil and the energy sector.

Right now, with oil prices in retreat, Americans are breathing a sigh of relief. Gas prices have come down, the winter was warmer than expected, and inventories seem adequate. But that relief could be short-lived.

Why? A chief reason is the great 3-way race for energy now emerging among China, India and the U.S. – a competition that promises to send select energy stocks soaring … and potentially make nimble investors very wealthy.

That’s the good news. The bad news is that Uncle Sam, once a heavy favorite to win this race, is in danger of losing.

First, some basics:

Many investors seem to be blind to the fact that weather can work against you as much as for you. A warm winter depressed demand. But a hot summer could fire up demand at the 17% of U.S. power plants that use natural gas – and send prices soaring.
They’ve also forgotten that hurricane season starts in June, putting the Gulf of Mexico’s oil and gas production at risk, starting just four short months from now.
Our relations with the Muslim world seem to be getting worse by the day. A shooting war with Tehran seems like a real possibility. Meanwhile, India and China are strengthening their ties with Iran and other nations in the Middle East.

India Stepping on
The Toes of China

The Persian Gulf and Mid-East aren’t the only place India’s active. Recently, its officials announced they’re going to pour $1 billion over the next 12 months into Canada’s oil sands.

With this investment, India is stepping on the toes of China, which is already investing hundreds of millions of dollars in Alberta’s oil sands, as well as other projects in Canada including natural gas and pipelines.

And never mind how China and India are both stepping on the toes of the U.S., which has long considered Canada its best and most reliable supplier of energy. Heck, Canada supplies nearly 17% of U.S. imports, making it our single biggest international supplier.

Going for the Black
Gold in Alberta

One week ago, I told you what I think about Canada’s oil sands. The process for removing the oil from the sands – using current technology – is not very efficient. And I don’t think it’s the best use of our energy resources (like natural gas).

But just because oil sands aren’t an efficient solution to our energy problems doesn’t mean investors won’t make money. Canada’s oil sands are a vast treasure trove of black gold containing 175 billion barrels of proven reserves.

I believe the share prices of the explorers and developers are overpriced. But with both India and China throwing money at the region, the shares are still likely to go up.

And Alberta is only one arena in the race for global resources. Here’s a list of just a few of the recent contests India and China have been waging for oil and gas …

ONGC Videsh, the overseas investment arm of India’s largest oil-and-gas producer, was on the verge of competing for an 11% stake in a rich Sudanese oil field. But before the deal could be inked, the China National Petroleum Group (CNPC) swooped in with an offer that was reportedly 17% higher and snatched the oil prize for Beijing.
In August, ONGC Videsh also lost out to CNPC, which outgunned its Indian rival for PetroKazakhstan with a $4.18 billion bid.
Another Chinese oil company, China National Overseas Oil Corp (CNOOC), purchased the Apko field in Nigeria for $2.27 billion, outbidding India’s state-owned Oil & Natural Gas Corp.
In December, just when India thought it had a gas pipeline deal with Myanmar, China swooped in and offered the Southeast Asian country a better deal. India isn’t giving up on that one without a fight – another deal may be in the offing.
Last month, CNPC led a Chinese consortium that outbid the Indian company for oil assets in Ecuador in a $1.4 billion deal.

As you can see, China has won contest after contest with India. But India isn’t crying uncle. Its billion-dollar entry into Canada’s oil sands is the equivalent of laying down the gauntlet.

And despite its earlier loss in Kazakhstan, India isn’t giving up there, either. India’s state-run Oil & Natural Gas Corp. is trying to outflank China’s CNOOC with a $2 billion bid for a Kazakhstan oil producer.

Now, the U.S. Is Jumping Back into
The Race. The Resulting Bidding Wars
For Energy Will Be Truly Ferocious

In the Olympics, many athletes pursue the same prize. The same thing happens in the oil fields, only it’s a contest waged with investment dollars. The big winners are the companies and countries that are cleaning up as India and China bid up assets.

But until recently, while India and China have been racing around signing deals, the biggest U.S. oil companies have dragged their heels.

Now that’s changing: American companies are saying they’re ready to enter the game with guns blazing. It’s the simplest and easiest way to grow. They need the reserves badly. And they’re flush with huge amounts of cash.

It wasn’t just ExxonMobil raking in $10.7 billion in the fourth quarter – up 20%. The latest complete (third quarter) numbers show oil industry profits running at an annual rate of $70.8 billion – far, far higher than the average over the last five years of just $24.3 billion!

According to a December Lehman Bros. survey of 325 oil and gas companies, spending on exploration and production this year should increase by 15% to $238 billion. The study also sees double-digit spending increases in U.S. and international exploration.

That translates into a flood of American money to compete head on with the cash pouring out from Indian and Chinese coffers. Result: Drillers and explorers could see their share prices gush higher.

And never forget: Drilling and exploring is just one way to find oil. Go-for-the-jugular, feeding-frenzy mergers and acquisitions are another. This year, spending on mergers and acquisitions should hit $367 billion, according to industry estimates. What do you think that’s going to do to the stocks of select energy companies? Zoom, that’s what!

Why An Acute Energy Crisis May Be
Closer Than Any Are Ready to Believe

Two weeks ago, I told you how oil reserves are falling all over the world – in the North Sea … Indonesia … Iran … even Kuwait, which was supposedly sitting on 10% of the world’s oil reserves.

According to Petroleum Intelligence Weekly (PIW), Kuwait’s oil reserves may be only 48 billion barrels … or about half the 100 billion officially stated. To give you some perspective on the amount in dispute, the total oil reserves of the U.S. are estimated to be about 22 billion barrels.

That’s right – an amount equal to twice all the oil reserves in the U.S. may be missing.

There’s no way to know for sure if PIW is right – and you can bet Kuwait won’t come out and confirm this report. But in a global energy market as tight as this one, these occasional bombshells only put more pressure on prices.

Kuwait’s not alone. Repsol, the Spanish-Argentine oil and natural-gas giant, recently downgraded its proven reserves by 25%, or 1.25 billion barrels of oil equivalent.

And then there’s Mexico. South of the Border is an oil field called Cantarell. It is the world’s second-biggest-producing field after Saudi Arabia’s Ghawar. And it is in deep, deep trouble.

Experts say Cantarell’s output could drop sharply in the next few years, as water leaks into the oil field, making pumping much more difficult.

Right now, Cantarell produces two million barrels of oil a day, or six of every 10 barrels produced by Mexico. No one knows for sure how fast production will drop, but recent figures project that production should tumble 6% this year alone. One pessimistic scenario even shows production tumbling by 1.5 million barrels per day (bpd) to 520,000 bpd in a little over two years. That’s a compound decline rate of 44% per year.

Mexico, by the way, is the United States’ second biggest international supplier of oil – over 53.3 million barrels in November alone (the most recent reported month), and over 12.5% of our total imported supply.

Is there more production coming online? Yes. Saudi Arabia, for example, has a new project called Haradh in its Ghawar field that should produce 300,000 bpd of crude oil and 140 million cubic feet of natural gas in the second quarter.

In terms of volume, this represents 29 billion cubic meters of natural gas and roughly 70 million barrels of condensate. Will this and other projects be enough to fill the gap? Not likely … especially if the production declines in other fields are anywhere near as bad as expected.

The market hasn’t woken up to this bad news yet. When it does, we could see explosive movements in crude oil and the energy stocks leveraged to the price of crude.

Two Funds to Make the
Most of the Coming Boom

If you want to ride this wave, here are two of the mutual funds I like.

The first is US Global’s Global Resources (PSPFX). This no-load fund is up 16% so far this year, has a 1-year return of 67.39%, a 3-year-return of 59.6%, and an expense ratio of just 1.3%.

With holdings including Petrobras, Valero, Tesoro and the Canadian Oil Sands Trust, it should make the most of the next flood of money into global energy.

Right now, it’s in a bit of a setback. But since October 2004, this fund has been going up at a nice steady pace, with four setbacks along the way. Each was similar to the one we’re seeing now. And each time, the fund moved on to new highs.

The second fund I like is Fidelity Select Energy (FSENX). This no-load fund has returned 16.9% so far this year, and has a 1-year return of 69.5%, a three-year return of 38.2%. And it has a total expense ratio of only 0.9%.

Its top three holdings are Halliburton, National Oilwell and Schlumberger. So it should make the most of the boom I expect to see in oil services stocks.

The pattern of its rising value in recent years is very similar to that of Global Resources – up, up and up, with just normal corrections along the way.

And right now, it’s touching down to the bottom of its range within the context of a solid rising channel.

How to Leverage Your Investments
for Triple-Digit Returns

Everything I’ve told you about could send share prices catapulting higher. And as oil producers gobble up smaller companies to secure oil reserves, we could see these stocks move up 10%, 20% or more virtually overnight – never mind the run-up in the months and weeks before the buyout, as the smart money gets in early.

There are three ways you can take advantage of this rise.

You can buy the mutual funds, giving you a crack at some pretty nice gains.

You can select the highest performing stocks, giving you the potential for even better results.

You can go for small-cap stocks (my specialty) and go for doubles, triples and better.

Or, for the most leverage (still with strictly limited risk), also consider options. Right now, for example, Larry is recommending long-term options (LEAPS) on grossly undervalued oil stocks. If he’s wrong, you could lose the entire amount which you invest in them, which is not very much. But if he’s right, you’re looking at the possibility of up to 16-to-1 gains.

The good thing about the LEAPS is that they give you gobs of time for the investment to work out – from one to three years. So even if you get caught in a correction, it’s OK. And provided you never use your keep-safe funds, you should always be able to sleep nights knowing that you can never lose more than the small amounts you invest.

I don’t care how good these opportunities are. Your stash of cash is for things like long-term health care, your kids’ college and emergencies – not for investments that jump up and down.

Good luck and good trades,

Sean Brodrick

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

Sign Up Free