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How to Get in on the Ground Floor of the Coming Energy Megatrend

By Frank Curzio, editor, Small Stock Specialist
Wednesday, March 2, 2011

There's a buying frenzy underway in the energy market right now... And I believe it represents one of the best opportunities you'll ever have to get rich in natural resources.
 
It all comes down to a huge problem facing ExxonMobil and its fellow Big Oil companies...
 
In the past year, famed financial analyst and trader Jim Chanos has made big news with his short position in ExxonMobil. Chanos is the billionaire founder of Kynikos Associates... He predicted the fallout in Enron and the collapse in the subprime housing market.
 
And just last month, he discussed his bearish stance on ExxonMobil: "ExxonMobil will not be able to replace its reserves."
 
That's a bold statement. After all, ExxonMobil (NYSE: XOM) is one of the most respected, most successful companies in the world... and it's excellent at finding oil. ExxonMobil was able to replace more than 100% of its reserves for 17 straight years. (At a 100% reserve replacement ratio, a company is replacing one barrel of oil for each one produced.)
 
ExxonMobil's reserve replacement ratio for 2010 was 209%. That's a huge number. But Chanos believes ExxonMobil would have fallen short of 100% without its $41 billion acquisition of unconventional natural gas giant XTO Energy.
 
That move was part of a megatrend taking place right now that few people are talking about. I believe investing in this trend today could lead to triple-digit gains over the next 12-24 months.
 
You see, ExxonMobil isn't the only one having trouble replacing reserves. Almost every large-cap integrated oil company from Royal Dutch Shell to Chevron is in the same boat. After all, it's getting more difficult to find large amounts of oil these days.
 
That's why these oil companies are spending billions of dollars on natural gas assets in some of the most prominent shale areas across the U.S. Here's a list of several billion-dollar deals that have taken place over the past 14 months:
 
  • December 2009: ExxonMobil buys XTO Energy for $41 billion. XTO owns valuable property in almost every major shale area in the U.S. The acquisition made Exxon the largest natural gas company in the world.
  • May 2010: Royal Dutch Shell buys East Resources for nearly $5 billion. East Resources is a private company with a natural gas resource base of 14 trillion cubic feet. It owns more than one million acres in shale areas – including 650,000 in the Marcellus shale.
  • November 2010: Chevron buys Atlas Energy for $4.6 billion. Atlas owns 486,000 acres in the Marcellus shale, and 623,000 acres of the Utica shale gas formation located in upstate New York. Atlas has a natural gas resource base of about 9 trillion cubic feet.
  • January 2011: CNOOC, one of China's largest oil companies, offers Chesapeake Energy $1.3 billion for a 33% stake in the company's oil-rich shale deposits in North America. Chesapeake is the second-largest natural gas producer in the U.S.
  • February 2011: PetroChina offers EnCana $5.4 billion for a stake in its shale and deep-well gas assets. PetroChina is the largest company in the world based on market cap. EnCana is one of the largest natural gas producers in the U.S.
 
To put these deals in perspective, imagine Google, Microsoft, Apple, Cisco, and IBM invested billions of dollars in companies producing a particular technology within an 18-month period. Chances are, every stock within that sector would skyrocket.
 
But that's not the case for natural gas stocks... yet.
 
There are a ton of small-cap, unconventional natural gas producers that have properties in the same shale areas where most of the acquisitions from Big Oil are taking place. Some have solid balance sheets to weather weaker natural gas prices. Also, several have exposure to oil – which is trading near $100 a barrel.
 
If these stocks decline from current levels, they could easily be bought out. If natural gas prices move higher – or we see an ease in supply – these companies could jump hundreds of percent.
 
Big Oil companies are not done buying natural gas assets. Expect to see this trend continue as long as oil prices remain high, and natural gas prices remain depressed. It's the only affordable way for these large oil companies to meet their reserve requirement goals.
 
That's great news for small-cap natural gas stocks... and investors who get in on the ground floor.
 
Good investing,
 
Frank Curzio
 




Further Reading:

Get Matt's take on another huge energy trend:
 
You Need To Start Hoarding This Commodity... Now: "It's cheap... It's clean... We have abundant supplies of the stuff. It's practically un-American not to burn the heck out of it."
 
North America's Greatest Natural Gas Hoards: "Right now, the stock market is practically giving away" this investment opportunity.
 
This Will Be the Biggest Bull Trend in Commodities for the Next Decade: Legendary oilman T. Boone Pickens is pushing hard for green energy.

Market Notes


WHY WE AVOID THIS POPULAR ETF

Today's essay by Frank Curzio is more commentary on one of our favorite contrarian buys, natural gas. But if you want to take a position in this clean fuel, for goodness sake, don't buy the popular natural gas fund, UNG.
 
Because they provide investors with a "one click" way to own baskets of stocks or commodities, investment funds like UNG have enjoyed a surge in popularity. However, some commodity funds are structured so they must continuously enter the futures market in order to maintain positions. This process often results in losses... especially with UNG.
 
Back in September, we called this fund "The World's Worst ETF." The performance chart below shows why. As you can see, natural gas (the blue line) has gained around 40% since striking a bottom in mid-2010. Hamstrung by its futures strategy, UNG (the black line) has lost investors 40% of their money during the same time! Only Wall Street could build a vehicle that generates fees while investors lose money on an asset rising in price.
 
If you want to "get long gas," stick with hoarding undeveloped or income-paying gas reserves.

Gas has climbed since mid-2010, UNG has plummeted in value

In The Daily Crux



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