Investors are bombarded with bad economic information all the time. But not every expert has a negative outlook right now. Some experts in some sectors believe that there are opportunities to buy low right now because better economic times are just around the corner.
Recently, we spoke to Keith Schaefer, Editor and Publisher of Oil and Gas Investments Bulletin. Mr. Schaefer focuses on the energy sector and he believes that recent market changes may fuel an economic recovery sooner than people may realize.
Our conversation started by talking about US oil: "The focus on oil right now has really moved to the United States," Mr. Schaefer said. "We've known about the shale revolution for a long time and it's just in the last 3 months that the market has really got a handle on just how much the US is going to be able to increase oil and gas production (particularly oil) over the next 5 to 7 years. It's truly an astounding number."
Mr. Schaefer then highlighted a couple of the key stories in the US energy industry: "What you've seen happen in North Dakota with the Bakken [a rock formation and oil field in North Dakota, Montana, and the Canadian province of Saskatchewan], we're now starting to see in two formations in Texas." In the Bakken, production jumped from 50,000 barrels to 650,000 barrels a day in less than a decade, Mr. Schaefer reported. And in Texas, two areas are seeing similar growth – the Eagle Ford shale in the southeast corner of the state and the Permian Basin in the southwest corner of the state. "Both of those – particularly the Permian Basin – are already a prolific oil-producing area. But now it's going to become even more prolific because they've been able to extract oil from all the shale," said Mr. Schaefer.
Extraction of oil from shale is the big industry-changing innovation that has come about in recent years: "They've known that [the Texas shale oil fields] had oil for decades but they didn't have the technology to extract the oil. But now with multi-stage fracking, hydraulic fracking, and horizontal wells, they are able to access all of these formations now and the production boom that is happening now, and will continue to happen in Texas, is on an absolutely remarkable scale."
So, how much oil are they talking about? Mr. Schaefer didn't have the exact figures handy while we were talking but he gave us some estimates to compare: "The US hit its maximum oil production in 1970. It's been on a very steady decline ever since. It bottomed out about 2 years ago. We are now going to be back up to the all time high by 2016 or 2017. It's such a big number that it has the potential to overwhelm the refinery complex that you have on the Gulf (where there is the biggest concentration of refineries in North America)."
This is big news in the industry and it has wider implications for the economy, according to Mr. Schaefer. He sees a potential economic recovery as a result: "The amount of supply that is going to come on-stream over the next few years is stunning. I think there is the very real possibility that the US is going to see lower oil prices for the rest of the decade as we basically will be able to look after our own needs much more, and if there is a huge increase in supply then demand will start to pick up a bit. There is no way demand is going to pick up anywhere near the pace of supply over the coming 2-5 years." This will drive down prices in oil and gas. "The American public is going to enjoy lower gas prices and that should be very good for the economy. That should be huge for the economy because we now have cheaper oil and cheaper gas than anybody else in the world. So when industry looks to decide where to locate, you have a highly educated population, strong technical skills in the workforce, so it just makes sense that you're going to see a renaissance in industry. It's going to have huge ramifications in politics and economics in the United States."
Mr. Schaefer made his bullish opinion even clearer: "Anyone that is talking gloom and doom and that the US is going to collapse, I don't see it. There is so much job creation going on in the oil and gas sector. I think the future is pretty bright for Americans."
Next, we asked Mr. Schaefer is the amount of oil the US is producing will eliminate the US' reliance on foreign oil. He replied: "I don't see us being independent of Middle East oil, but we are going to have our choice of where we pick our oil from. Oil imports are heading downward on a steady basis – a few years ago it was as high as 55% and it's down now to between 38% and 42%. To say we're going to be free of imports isn't realistic."
Interestingly, the problem isn't with production, said Mr. Schaefer: "To [become independent of foreign oil], we need to build refineries. The issue isn't production; it's being able to refine it. There have been no new refineries in the US since the mid 1970's. You can't have true energy security without the right number of refineries. So far the 'NIMBY' [not-in-my-backyard] attitude means we haven't built any refineries in almost 40 years. So unless there's an attitude change somewhere, we're always going to be dependent on foreign oil."
Our conversation then turned to natural gas. Mr. Schaefer see interesting pricing activity in natural gas: "We've seen a bit of a pick-up in natural gas prices recently because the market has realized there is a much larger demand package happening from the electricity sector so there is a lot of switching from coal to gas. And certainly under the Obama administration, there is a lot of pressure to keep that there. Pure economics would say that these electricity companies would switch back to coal maybe when gas gets to $3.00. At $3.00 or $4.00 they would switch back to coal. But the politics on energy right now is to see a cleaner-burning fuel like gas gets used. So maybe until gas gets to $5.00, we're not going to see these power companies switch back to coal."
Mr. Schaefer doesn't see production declining, either: "We're certainly seeing no drop-off in production at all," he said: "Any production drop-off is incredibly minor. What that means is supply is still coming on strong but we've got an increased demand to catch up to make up for a lot of that increased supply. So I still don't see gas going a lot higher right until there is some discipline on the producer's side to shut production down. As of yet, we haven't seen that at all."
Politics is also playing a role in whether or not some states allow oil and gas exploration. Mr. Schaefer used New York State as an example: "If they just go by the science, they should approve fracking for gas. But the world doesn't run on simple science and economics; it runs on politics. Who knows how many Hollywood actors will come to New York to make sure [fracking] doesn't happen. It could happen in two or three years… or until the US economy gets so bad that they look at their neighboring state, Pennsylvania, where land owners are collecting royalty checks." He continued: "In New York State, at least one level of government has agreed that fracking does not contaminate drinking water and is not as bad as we thought it was. I believe it's only a matter of time before the truth comes out and people realize that when it's done properly, hydraulic fracking has no risk to drinking water or people's health."
We asked Mr. Schaefer where he thought the opportunities were in the energy sector and what kinds of stocks investors should take a closer look at. He had a number of suggestions but his first one might surprise readers: "I think one of the big bull markets in the energy sector is water," he said. "Shale gas wells each use 2 million to 6 million gallons of freshwater… and it's gone. Only about half of it comes back to the surface but it's very briney. You're seeing new technologies to treat, store, recycle, and dispose of that water. That's a whole new industry the oil and gas sector has never had before. And water is expensive. Sometimes it's as much as a million dollars a well. That means someone is getting paid a million dollars. There is a big bull market in water management in the energy sector and it's a good thing! Investors can look at some of the water stocks that are moving into the oil and gas sector. Investment bankers in the oil and gas sector love water – they're looking for water deals."
As for specific companies, Mr. Schaefer named a few of them but said: "It's a tough time [in the energy sector] because we don't know who will be the winners and losers. Investors shouldn't run out and buy these yet. They should throw them on their screen and start looking at them": Heckmann Corporation (NYSE: HEK) and GreenHunter Energy (AMEX: GRH) and Ridgeline Energy Services (TSX-V: RLE) are three water management companies in the oil and gas sector that investors may want to do further due diligence on.
Although the economy is down right now, and the news doesn't look very positive (at least according to some sources), Mr. Schaefer is more positive about it on the strength of the oil and gas supply.