In the past, the oil and gas industry has had a lot of question marks around it, which has made consumers and investors wary. Consumers resisted the increasing prices; investors have been worried about supply and demand issues.
But the industry is changing – and is even giving birth to new industries – thanks to recent technological developments. Keith Schaefer, founder of the Oil and Gas Investments Bulletin, has a lot of insight to share on the oil and gas industry. We met up with Mr. Schaefer at the Cambridge House International Montreal Investment Conference, and we spoke about shale, the changing economics of oil and gas, and some interesting developments in the industry.
We started by talking about shale and how it has caused a fundamental shift in the industry. Mr. Schaefer said, "There's a whole new set of low-hanging fruit all around the world that we're discovering. These shale deposits for both oil and gas are quite well-known – there are a lot of areas where we have been discovering oil and gas for many years. We've drilled through them looking for the oil-style conventional reservoirs. The industry now has the technology to extract profitably all the oil and gas that is locked up in the shale. There's no exploration risk. There's only a little technical risk to figuring out the right way to frack these deposits to get the oil and gas out."
In addition to the low-hanging fruit of these known deposits, Mr. Schaefer said that there are even more opportunities the industry never knew about before: "We are finding big, new deposits in areas where there has not been any traditional oil and gas production. In New Zealand, there is a monster shale target on the north island of New Zealand. This could be one of the largest oil finds of 2012 when it gets drilled. And in Australia – in the middle of nowhere – shale is just being tested for the first time this month. If that ends up being economic, that is tens of millions of acres of oil-productive shale. It will totally change the way Australia is viewed in terms of energy production."
Next, we wondered about the impact of shale on global production and consumption, compared to the existing conventional wells that most of us are familiar with. Mr. Schaefer replied: "When you compare a shale well to the monstrous [conventional] wells in the Middle East, one single shale well is just a small fraction of production. But the proliferation of shale wells has grown so fast that it has completely overwhelmed local infrastructure in some areas. Within two years, shale oil has had a material impact on oil prices. Some people are saying that we'll see lower oil prices because supply is increasing so quickly."
Availability may have been an industry question mark for consumers and investors in the past, but today's industry question marks have to do with oil prices and the economy. Mr. Schaefer provided some insight here, while revealing a perplexing conundrum he has encountered: "What I see in the oil markets right is that there is so much nervousness about the world's economy and whether the European credit crisis will send us back to the Stone Age, financially; yet, oil continues to go up in price. It got down to as low as $75/barrel but now it's back up to about $100/barrel in one of the worst crisis times. So we're in an interesting situation: If the oil is doing this well when the world's economy is on the edge of the abyss, what will it do when the economy comes back? Oil has the potential to have a huge spike. But here's the conundrum: When the world's oil prices go over $120, the world's economy screams "uncle". So we only have $20 more to go [to reach the psychological limit] but today's price (in today's depressed economy) suggests a potential price of $150 or more in a good economy… so how do we resolve that conundrum where oil is doing this well in such a poor economy?"
Then we turned our attention to China and how its oil and gas industry could change global production: "China is THE player in oil consumption," said Mr. Schaefer. "The single-most-watched number in the oil industry is the monthly oil consumption in China. They have been growing up to 16% year over year (but it's down to about 9% year over year right now). They're trying to limit the amount of increase in oil that they are using."
He continued on this theme by saying: "China is trying to become more self-sufficient in energy, and the US is also trying to become more self-sufficient in energy. (In fact, people are calling for the US to become the single largest producer of shale oil in the world). If China becomes self-sufficient in oil, we'll see the price of oil drop because supply will be up but demand will be down."
Finally, we spoke about some interesting innovations in the oil and gas industry and companies that investors may want to take a closer look at if they are thinking about adding oil and gas investments to their portfolios. He gave us three companies to pay attention to:
The first company is Poseidon Concepts (TSX: PSN). "They are a water management system that is running up to 90% margin and they save the industry a ton of money. They started off last year and now they're leasing about 9 units a week. The company is growing unbelievably quickly and is unseemly profitable," said Mr. Schaefer.
For the second company, Xtreme Coil Drilling (TSX: XCD), Mr. Schaefer explained: "They don't drill with a drill bit but with a long coil tube that comes off of a spool. They're able to send out a larger-diameter pipe down a well deeper and longer than anybody else."
And third company Mr. Schaefer described has him very excited right now because of the opportunity in this burgeoning field: "We are seeing the birth of an entire industry right now. We are seeing liquid natural gas (LNG) go global. It is now going to compete with oil around the world. The number of LNG tankers is increasing dramatically. Everybody is trying to build them as fast as they can. Right now, there are roughly 360 LNG ships in the world. Every single one is booked. LNG shipping is the best way for investors to play low gas prices. I believe the shale gas revolution will proliferate around the world. You will see gas prices in other areas in the world (where prices are more expensive) come down. That will increase the demand for shipping LNG. If investors are looking for a place to go where they're not going to have to worry about the world economy, LNG is now a theme that will last the next 5 to 7 years… and it doesn't matter what the world's economy is doing, that industry is on a major growth curve."
With those fundamentals in mind, Mr. Schaefer gave us this third company he really likes: "I'm following Golar LNG (NASDAQ: GLNG). We bought that stock at $15 last December. It's trading around $42 today. They've just increased their dividend. I see that stock being $150 two years from now."
The oil and gas industry has had a lot of question marks around supply and now around economics. But Mr. Schaefer is bullish on many aspects of the industry and, in particular, on the new opportunities presented by shale.
REFERENCES
Keith Schaefer's Oil and Gas Investments Bulletin: http://oilandgas-investments.com/
Cambridge House International's Montreal Investment Conference: http://cambridgehouse.com/conference-details/montreal-investment-conference-2011/59
Golar LNG: http://www.golarlng.com/
Poseidon Concepts: http://poseidonconcepts.com/
Xtreme Coil Drilling: http://www.xtremecoil.com/