Porter Stansberry: The future will be unlike the past in every way related to technology, but it will be exactly like the past as it relates to people. Technology changes a great deal, but people don't. You can count on politicians to be scumbags and most people to be lazy. But as for investing, technology gives far more people access to information. Only one person in the world knew the actual price of a high-yield bond 25 years ago—Michael Milken—and he made a fortune with that information advantage. Today, everybody has access to trading information. Everyone has access to price. In general, technology has made finance a smaller-margin business. It's led to enormous scale in our financial institutions, which is the only way they can really survive. But fear and greed are still the underlying forces that drive the markets, and investors are just as subject to irrational emotional decisions as they've ever been. I don't expect technology will ever change that.
TER: Getting specifically into energy, a few weeks ago the International Energy Agency World Energy Outlook (WEO) said the U.S. would become the world's largest oil producer, overtaking Russia and Saudi Arabia, before 2020. Then Goldman Sachs said it would happen by 2017.
PS: They stole my thunder. I've been saying 2017 for maybe a year now. If Goldman is saying 2017 and IEA is saying 2020 it will probably happen in 2016.
TER: How will the geopolitical and socioeconomic landscape change when the U.S. becomes the largest oil producer?
PS: One of the biggest drags on the U.S. dollar over the last several decades has been the trade deficit resulting from petroleum imports. That's going to largely disappear, though not completely because we'll still need some petroleum imports for certain flavors of crude. As for exports, considerable legal hurdles remain. We have archaic laws about oil because we had long believed that oil was a strategic resource and that the world was going to run out of it in the short term. Unless we change our laws to allow exports of crude oil, none of this magnificent new supply is going to aid our economy at all. In fact, we'll have a terrific glut of oil, and we're already at record levels of storage. The price hasn't collapsed yet because unrest in the Middle East is causing fear to inflate the market price, but the price will absolutely collapse if we don't allow for oil exports. The entrepreneurs who brought us this incredible new supply would, in that scenario, suffer, and many companies would go bankrupt because the oil industry is not capitalized to survive $50/barrel (bbl) oil.
But to answer your question—how the geopolitical and socioeconomic landscape will change when the U.S. becomes the largest oil producer—I'd have to know the unknowable, which is how or if oil policy will adapt. So far, it doesn't look good. So far, 12 companies have applied for licenses to export LNG, and only one license has been granted. I don't think the Obama administration is ever going to do anything to help the domestic oil industry. And I think that the result will be a price collapse and an oil glut that will harm our economy.
TER: You mentioned one company has a license. Who is that?
PS: The Department of Energy granted a conditional permit to Cheniere Energy Inc. (LNG:NYSE.MKT). It's an ironic story. For many years I was a short seller in the stock. In fact, I published an article in 2006 when the stock was trading between $30 and $40 per share. I wrote that this company's business model was beyond stupid and had ventured into insane territory. Its plan was to import LNG into the United States and the company built a $6 billion ($6B) facility, the Sabine Pass LNG Terminal, to bring in natural gas from Qatar. I said it was insane because not only was the U.S. on the verge of a huge glut of natural gas, but for decades the U.S. had either the largest or second-largest reservoir of gas anywhere in the world. So the U.S. importing natural gas is like Saudi Arabia importing sand. It doesn't make any sense.
Of course, natural gas prices collapsed and Cheniere almost went bankrupt. It saved itself by selling new equity to a very smart group in New York, Blackstone Group. With the money raised from Blackstone Group, Cheniere switched that facility from imports to exports and applied for an export license long before government officials thought any market for U.S. export gas would materialize. Cheniere got lucky.
TER: To what extent will manufacturing and petrochemical industries move to the U.S. to take advantage of cheap natural gas prices?
PS: There's roughly $40B worth of construction going on in the chemical industry. You'll see the same kind of growth in fertilizer. You're also going to see huge growth, which hasn't really started yet, in refined products. Imagine it this way: If the government won't allow exporting energy in the form of crude oil, then you can damn well bet that entrepreneurs will find a way to export that energy in some other form. Fertilizer is energy rich and easy to ship, so we'll have a huge boom in domestic fertilizer production. How about propane? There's no law against exporting propane. Targa Resources Corp. (TRGP:NYSE), a company we recommend, is expanding its Mont Belvieu import/export complex to boost propane export capacity.
The funny thing is the energy will find a way out of the country. That'll be good for our economy, but it's so inefficient. We'll have enormous investments in all these industries surrounding the energy complex that are much lower margin. It would make so much more sense to just export the oil.
TER: But wouldn't bringing in more production manufacturing have the additional advantage of creating jobs?
PS: Yes, but it's not the highest and best use of our time, our capital or our people. This is something important about economics that people do not understand at all—comparative advantage. The U.S. has enormous comparative advantage in lots of different industries. Manufacturing is not one of them. Neither are giant refineries. Yet that's what we'll be stuck with.
TER: What would change the equation?
PS: There's really no easy answer. It's mind-boggling. Imagine for a moment where Saudi Arabia would be today if it hadn't exported its oil. It could have a huge petrochemical business and be the world's leading producer of fertilizer and plastics. But guess what? The fact that Saudi Arabia put its resources to their highest and best use made it one of the richest countries in the world.
TER: So maybe we should export oil rather than gas.
PS: Absolutely. To make natural gas as our main export energy source would cost trillions to build enough of these terminals and it would take decades. Why not just hook up a pipeline of crude oil to a tanker and be done with it? Natural gas is so clearly better suited for domestic energy needs. We should export the crude and use the gas domestically, but that's not what will happen. We'll end up with higher prices on domestic crude with very little export and that'll be disastrous.
TER: You've described shale oil and natural gas in North America as one of the biggest investment opportunities. How do you reconcile that outlook with depressed prices?
PS: You can be very bullish on production without being bullish on price. In fact, I think that's the only logical position. When natural gas was at $4–5 per thousand cubic feet (Mcf), I said it would go below $3/Mcf and people thought I was out of my mind. It's not only gone below $3/Mcf, it's essentially stayed there since 2008 or 2009. As you drill more horizontal wells, as production in the Eagle Ford and the Bakken and other places soars—just look at oil storage. We've never seen this much oil in storage in the U.S. There's no doubt the price will crack eventually, and when it does it will crack hard.
I've been telling my subscribers not to buy the exploration and production (E&P) companies but to buy the companies that are able to use lower energy prices to their advantage in their own markets, such as fertilizer companies and terminal and shipping stocks, such as Targa. You can find opportunities coming about in lots of little nooks and crannies because of the excess energy supply.
TER: What are some other examples of energy-related opportunities?
PS: The big way is to play lower energy cost in the U.S., or just to find any business that uses energy and can get a retail price for the product. Think about Calpine Corp. (CPN:NYSE), an unregulated producer that converts natural gas into electricity. The price of electricity in wholesale markets is dominated by coal-generated electricity, so Calpine stock price is essentially a way to arbitrage the price of natural gas and the price of coal. If gas remains cheaper than coal, Calpine's earnings will go up—and that's what I believe.
Another good example is fertilizer. About 75% of the cost of fertilizer is made up of natural gas but the price of fertilizer is based on supply and demand. Global demand for food, of course, continues to grow quite rapidly, and due to the inflation of the dollar, farm prices continue to rise, so there's plenty of capital for buying fertilizer. This is another simple way to play and there are lots of good fertilizer stocks out there. The one we've recommended is called CF Industries Holdings Inc. (CF:NYSE).
And, then, of course, look for companies that are constructing the pipelines, making the steel for them, handling the storage, building the terminals. We've recommended lots of those companies.
TER: When you mentioned businesses that take advantage of lower energy costs, you mentioned those building terminals. Why would we want more terminals if the law won't allow exporting oil?
PS: Terminals aren't necessarily just for export, but also storage and distribution. We need huge new storage facilities, huge new pipelines and huge new terminals all across the country mostly to move gas but also NGLs and crude oil. Right now we're using railroad cars to move crude out of the Bakken in North Dakota, which is very inefficient.
TER: Whereas producers need higher prices to sustain the production costs.
PS: Mostly, yes. Operating costs are actually very low once the wells are in place. To drill a well in the Eagle Ford, for example, costs about $7M, but you can make that back from production in 90 days. The problem these companies face is the cost of buying additional acreage. As soon as people know oil's around, real estate prices go bananas and companies have to borrow tons of capital to buy the leases and drill before the leases expire. This puts tremendous capital pressure on their balance sheets.
The number-one thing to be careful of right now in this space is the oil companies that have been rewarded for building huge real estate portfolios but have done so with tons of borrowed money. That puts these companies in a precarious financial position if the price of oil falls. It's not because they can't produce oil for $35/bbl. They can. However, they wouldn't be able to pay off the debt on their balance sheets.
TER: Considering the glut of natural gas, do you foresee changes in the way U.S. consumers use energy?
PS: We've already seen a huge shift in what I'll call the robust transportation sector, the big trucks and the buses, moving into natural gas. That's absolutely going to continue and it's going to grow. However, to build these things in a way that's safe requires a big, heavy vehicle, so I don't think you'll see that at the retail level.
Porter Stansberry is intense when it comes to investing and recreation. His Atlas 400 Club brings together intelligent, successful people from all over the world for adventures that last a lifetime. See a video from his travels, including a recent trip that included racing Porsches in Germany.
Most people in the U.S. don't understand the role that energy plays in our economy. They don't understand that the boom from 1900 to 1925 was fueled mostly by the oil found at Spindletop in Texas. They don't understand that all the success we had in World War II and the boom that led to the1950s and 1960s came from east Texas. Literally the energy that drove all of that productive capacity came out of the ground with the east Texas discovery of 1930. The size of the discoveries found recently dwarf that. East Texas ended up being a 4B bbl field of oil. Every one of these new major shale plays contains 20B bbl of recoverable oil—all five times bigger than east Texas and more than 20 of them are currently being drilled. We're sitting on the biggest economic and financial boom in the history of our country and we're strangling it.
TER: If indeed we're sitting on all this gas, why doesn't the price of gasoline at the pumps go down? And if natural gas can create electricity, why aren't we seeing more electric cars?
PS: Because electric cars don't work. How many dead Fiskers do you need to see before you realize they're not reliable? The hybrids are fine because they're still using gasoline to drive them. If it makes it good for you to turn gasoline into electricity before it spins your wheels, it's fine with me. But it's completely unnecessary. In regard to electric power, we don't have the battery technology yet to make this work. It's not even close. That would be great but it's naive to think we can plug all of our cars into the power grid. Can you imagine if everyone could overnight just plug all their cars into the power grid?
By the way, all those power plants would be coal or natural gas, so you'd still be consuming hydrocarbons. So electric cars are just fantasy devices. They don't make sense technologically, economically or ecologically.
And as for prices at the pump, a very important thing that people don't get at all is that gasoline isn't oil. It's a derivative of oil. The lower price of oil will increase the crack spread, which will make refiners more profitable. But gasoline comes from refineries, and no new refineries have been built in the United States since 1974. If you want cheaper gasoline, guess what you have to build.
TER: Refineries—but earlier you said that's not a good use of capital.
PS: It is not a good use of capital for export but it's incredibly important for the domestic market. And guess who sponsors the green politicians who don't want any refineries built? The refining companies. They don't want any more competition. People think the Keystone XL Pipeline didn't get built from Canada to the U.S. because the Obama administration's full of these ecologist folks. No. The pipeline didn't get built because the E&P companies in America don't want to compete with Canadian crude.
TER: Any other insights you'd like to give to readers of The Energy Report?
PS: Yes. If they want to know what's ahead for the oil markets, study the natural gas markets from 2008 through 2010, because the same technologies are being used in the same fields and the result will be exactly the same. There's going to be a glut of domestic oil, and the oil companies that have leveraged their balance sheets to buy lots of acreage will have a very hard time.
TER: Assuming of course that we don't change some laws to allow exports.
PS: In that case, everything would change overnight. First of all, the global price of oil would equalize between West Texas Intermediate and Brent, at somewhere around $100/bbl. The profits these U.S. companies would make would be fantastic for our economy and it would be great for the shareholders. Unfortunately, the odds say that American politicians won't make any kind of wise economic choice. That only happens by accident.
TER: Let's keep our fingers crossed for a serendipitous accident, then. Thanks, Porter.
Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry's Investment Advisory, deals with safe-value investments poised to give subscribers years of exceptional returns. Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world independent research. They've visited more than 200 companies in order to find the best low-risk investments. Prior to launching Stansberry & Associates Research, Stansberry was the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter. Read more Stansberry oil insights and Porter's Atlas 400 Club.
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DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Porter Stansberry: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
