Profit Pipeline

T. Boone Pickens, the renowned oil man and former “corporate raider,” stood in front of a crowd of institutional investors in New York City last week and declared, “I don’t believe I’ll ever see natural gas below $4.50 again.” We emphatically agree. Investing in natural gas is one of the most exciting opportunities in the entire resource sector today.

But first, a little background: As all resource investors are well aware, the earth’s “inventory” of energy products – coal, oil and natural gas – is not a renewable resource. Once burned, fossil fuel is gone forever. This simple truth is the main ally of investors looking for a bull market in natural gas.

I recently received an email from a veteran investor who wanted to correct me on what he thought was a mistake I had made in an email to subscribers of Outstanding Investments. “John,” he admonished, “you must be more careful with your facts! You say that the United States has only 20-odd billion barrels of oil in reserve. This can’t be right.”

Unfortunately, I was right. According to the American Petroleum Association, the U.S. had just 22.4 billion barrels of crude oil reserves as of December 31, 2001. Given that the U.S. consumes 7 billion barrels of oil a year, if it had to depend solely on its own reserves, the nation would consume the last of its oil in just three years!

Natural Gas Importing: Drilled Out

Little wonder that the U.S. must import 57 percent of the oil it uses. Simply stated, the US is “drilled out.” Most of the oil fields still operating onshore in the U.S. produce meager amounts of oil. For perspective, the average U.S. oil well produces about 500 barrels of oil per day, while the average Saudi Arabian well produces about 5,000 barrels per day.

The supply situation with natural gas is quite different. The U.S. produces about 90 percent of the natural gas it consumes. Canada supplies most of the balance.

America’s natural gas self-sufficiency would be comforting…if it were sustainable. The problem is, gas is becoming increasingly difficult to find in the “lower 48.” Compounding the supply problem is the fact that most new gas wells deplete very quickly.

Ironically, many electric utilities, along with numerous other commercial users, began increasing their consumption of natural gas at the very moment that domestic production peaked. The electric utilities, staring into their rear- view mirrors at chronically depressed natural gas prices, blanketed the country with brand-new gas-fired power plants. All in all, this new demand is likely to drive prices higher.

Natural gas, otherwise known as methane, is a relatively recent energy source. In the U.S. petroleum industry’s heyday, natural gas was burned off at the top of wellheads. Years later, the industry recognized that it could collect and sell gas.

Natural Gas Importing: The Cleanest Energy

Natural gas is the cleanest energy harvested from the Earth’s crust. When burned, methane releases far lower levels of “greenhouse” gases and nitrogen oxides than either oil or coal. Unlike oil, coal and nuclear energy, natural gas produces virtually no solid waste. According to the Environmental Protection Agency, the switch to gas- fired plants from coal-fired plants could reduce sulfur dioxide emissions and cut carbon dioxide by as much as two- thirds, as well as cutting nitrogen oxides by 95 percent.

As a “clean” fuel, natural gas is the fossil fuel of choice in America. Natural gas supplies 25 percent of all the energy Americans consume, second only to crude oil. And consumption is growing rapidly. Already, the majority of American households – 58 million, or 61 percent – use natural gas. According to a Washington Policy and Analysis study, residential gas consumption will grow by 30 percent over the next 20 years…assuming, that is, that the natural gas industry can find and deliver the stuff at a reasonable cost.

That’s where one of the most exciting investment opportunities of the next ten years comes into play: Canadian natural gas. According to the Oil & Gas Journal, the influx of Canadian natural gas into U.S. markets will steadily rise over the next several years.

Natural Gas Importing: WSOB

In 1986, Canada produced 2.7 trillion cubic feet (Tcf). In 2000, production soared to 6.0 Tcf, with most of the growth arising from the petroleum-rich Western Canada Sedimentary Basin (WSOB). With over 200 Tcf of gas reserves, the WSOB is the largest oil and gas basin in North America, and it is far less explored and offers far greater potential for future growth than gas production in Louisiana and Texas. Still relatively immature, the WSOB has a much lower well density than the over-drilled basins in the lower 48 states.

Canadian producers have another factor on their side: the extraction cost difference between U.S. and Canadian gas fields. In the late 1990s, Western Canada’s extraction costs amounted to less than 50 cents per Mcf, compared with Texas and Louisiana’s extraction of 75 cents per Mcf. Energy insiders tell me that this cost differential will continue to grow, a factor that will favor Canadian gas producers.

In 2000, a total of 5,500 gas wells were drilled in the WSOB. In 2001, 7,700 wells were drilled. Even with all this activity, geologists estimate that two-thirds of the WSOB’s gas reserves have yet to be unlocked. Given the turmoil in the Middle East and diminishing known reserves of oil, natural gas – Canadian natural gas – looks like its going to be a solid play for years to come.


John Myers,
For The Daily Reckoning
May 7, 2003


“The probability of an unwelcome substantial fall in inflation, though minor,” said the Fed’s announcement yesterday, “exceeds that of a pick up in inflation from its already low level.”

The Fed did not cut rates yesterday. Nor did it signal any change in policy. Nor has it proven that it can cause consumer price inflation when it feels the urge.

The Fed is still convinced that stable prices represent the biggest threat the nation’s economy faces. Heck, the things you and I buy may become even cheaper…and you can imagine what a tragedy that would be.

At least, here in Paris, that is one problem we don’t have to worry about. Yesterday alone, prices in U.S. dollar terms went up nearly 2%. Since January, the euro has gained more than 8% against the dollar. If this keeps up, we’ll all have to return to the Homeboyland before the next pay period, for we’ll soon be unable to pay our rent or our libations here in Europe.

The dollar is falling against foreign currencies and against gold…but domestic consumer price inflation is no problem. The only problem – at least from the Fed’s point of view – is that there isn’t enough of it.

And there won’t be enough of it, says the Financial Times, unless a decent recovery begins. If people don’t buy, prices don’t go up. And if prices don’t go up, people have little incentive to get rid of their money…and no illusion of prosperity.

“The inescapable truth appears to be that the labor market remains very weak and that normal seasonal hiring isn’t occurring in some industries…” writes Joshua Shapiro in MFR Commentary. “Combined with the ongoing efforts by households to increase savings and reduce non-mortgage debt, this is hardly the stuff that sustained rebounds in consumer spending are made of.”

This is probably why bonds have been doing so well, too, even as the dollar falls. Investors are not worried about inflation. They’re betting that the Fed will cut rates sooner or later…and perhaps buy enough T-bonds to keep the long rates low, too.

So, the dollar falls…while the slump continues…

And stocks?

We don’t know. They could go up and they could go down. But foreigners are buying fewer of them. The latest figures show 3 months straight of declines…with net foreign purchases of only $21.8 billion in February.

“The risk that foreigners are souring on U.S. assets is becoming a more acute concern,” opines Morgan Stanley’s Global Economic Forum. “While we do not believe that February will set the pace for the remainder of the year, we are dubious that foreigners will step up their investment to the $50 billion per month needed to finance this year’s yawning deficit. The end of the Iraq war has only increased the likelihood of a deterioration in safe- haven-related flows…”.

And here’s Eric, with more of the latest news:


Eric Fry in New York City…

– Stocks up, dollar down…the combination seems bizarre, and – like a filet of sole wrapped in cotton candy – more repulsive than enticing. But the lumpeninvestoriat seems to like its quirky financial diet.

– The Dow Jones Industrial Average rose 56 points yesterday to 8,588, while the Nasdaq added 1.3% to 1,522. But once again, the beleaguered buck fell to fresh four-year lows against the euro. The dollar tumbled 1.3% to $1.144 per euro. As put it bluntly, “The dollar is getting just creamed in here versus just about everything under the sun.” Europe’s currency-by-committee has rallied nearly 25 percent against the dollar over the past year.

– Yesterday, your Paris-based editor noted that deceased Islamic terrorists may not, in fact, be whiling away eternity in the passionate embrace of virgins. Rather, if a controversial new translation of the Koran is correct, successful suicide bombers may receive little more than a complimentary fruit basket upon arrival to the afterlife.

– According to the work of a German philologist, standard expressions in the Koran like “big-eyed virgin” may actually read “fruit as white as crystal.” Admittedly, a fruit basket is probably better than whatever hell has to offer. Even so, as eternal rewards go, a pristine apple hardly compares to a nubile virgin…If this new translation has any merit, the alleged misinformation perpetrated by the ancient Koran scribes has class-action lawsuit written all over it.

– Meanwhile, over in the temporal, soulless financial markets, no such debate rages. Neither heaven or hell – nor celestial maidens or melons – exert any influence over the goings on at Wall and Broad. In the financial markets, Darwinism holds sway – the strong survive and the feeble perish.

– “The bear market has sent one in five technology mutual funds into oblivion in the past 12 months,” USA Today reports, “a casualty rate [nearly] four times higher than other stock funds…An astonishing 21% of all tech funds have either merged or liquidated in the past 12 months, vs. 6% of diversified stock funds.”

– Were it not for the virtues of evolution, many more tech funds might have met with an untimely demise. “Among survivors,” USA Today continues, “another 23.3% changed investment style so much that they are no longer considered tech funds.”

– Some funds – may they rest in peace – entered the world so utterly ill suited to adverse conditions that they perished in their infancy. Zero Gravity Internet fund – a three-headed, albino wallaby of mutual funds – breathed its final breath before celebrating its first birthday in March 2001. The fund fell 40% during its brief life and never attracted more than $6 million in assets.

– Like the Zero Gravity Internet fund, Van Wagoner Technology fund was genetically ill-suited to bear market conditions. The fund, which has lost 90% of its value over the past three years, is not long for this world. The fund’s managers announced that they will be pulling the plug next month, thereby sparing shareholders any additional pain and suffering.

– “It’s a death spiral for some funds,” said Russel Kinnel, research director at Morningstar, to USA Today.

– “Aha!” say the bulls, “A sure-fire contrarian indicator that the woebegone technology is due for a recovery…Time to buy!” Perhaps. Or perhaps many more tech funds will yet succumb to the life-threatening wounds they suffered over the last three years. “The carnage may not be over,” USA Today winds up. “Of the 358 tech funds tracked by Lipper, only a third have more than $25 million in assets.”

– Incredibly, the tech sector is booming once again, buoying the hopes of the longsuffering lumpeninvestoriat who have been hanging on to their tech stock funds through thick and thin…and thinner. The Bloomberg Silicon Valley High Tech Index has rocketed 20% in less than 2 months, breathing fresh – albeit temporary – life into many tech stock mutual funds. We suspect that pain is not over yet.

– The tech sector may be surging on Wall Street, but it continues to struggle out in the real world. Hiring projections for IT workers during the next year are the lowest since 2000, according to the Information Technology Association of America, and more than a tenth of IT companies are planning to move jobs to countries with cheaper labor.

– Maybe tech stock investors have become a tad too optimistic…it wouldn’t be the first time.


Bill Bonner, back in Paris…

*** The illusion of growing wealth is now confined to the real estate market, where price inflation is welcomed like the dessert trolley at a weight-watchers convention. People know they shouldn’t really add to their mortgage debt, but they can’t seem to help themselves.

“Real estate prices continue their trip into the realm of the irrational,” says a letter to Barron’s from a reader who had just visited houses for sale in the Philadelphia area. “Even well-off homebuyers have been priced out of the market, and thoughtful deliberation seems to have given way to uncontrollable optimism. Participants in the real estate boom are lightheaded…As with the Nasdaq of the late 1990s, many real estate investors are convinced that markets only go up. To those apostles of the Church of Ever-Increasing Values, I say: Speak with a realtor in Tokyo, Hong Kong or Buenos Aires; or, better yet, reread your March 2000 brokerage statements.”

One of the common delusions suffered by investors is that they think they can spot “contrarian” opportunities as though they were watching for good surf. After 3 years of falling stock prices, for example, they think they are onto something. Stocks are down 40%…investors are “gloomy”…now’s the time to go against the crowd, they say, and buy! Thus, are more than 60% of fund managers interviewed by Barron’s either “bullish” or “very bullish.” Barely 10% described themselves as “bearish.” Everybody seems to want to be a contrarian, so long as they can all do so together.

But true contrarian opportunities don’t come along very often…and never attract a crowd.

*** Almost everyone thinks that real estate always goes up in value over the long haul. But it ain’t necessarily so.

Marc Faber points out that land prices in Chicago were lower in 1933 than they had been 40 years earlier – despite huge population increases.

“Unfortunately,” Faber concludes, “the history of land values in Chicago between 1830 and 1933 does not tell us whether real estate prices in the U.S. are about to decline, or whether they will continue to appreciate. It only shows vividly that real estate prices have always fluctuated widely (and will continue to do so) and that land values can decline even when the population is expanding rapidly.”

*** Every decent American must be ashamed of his leaders. They are almost all humbugs or connivers. The last American president for whom we had any real respect was Eisenhower. It must have been 50 years ago, but we still remember when we saw the former president as he was being wheeled down the hall of the Bethesda Naval Hospital. Your editor’s father, a former master-sergeant and WWII veteran, was startled to see the old general come around the corner. It had been years since either of them had worn a uniform. Still, he snapped to attention, stood as erect as a locust post, and gripped his son’s hand to avoid saluting.

Eisenhower seemed like a decent man. He played golf and left the world alone.

But our affection for George Bush is growing. We loved the photo of the Commander in Chief, on the front page of Monday’s International Herald Tribune, in that fighter- pilot get-up. It was so bold…so proud…so shameless. And so unusual. Never before have we seen an American president in a military uniform, not even those – such as Washington, Grant and Eisenhower – who earned the right to wear them. America is a country in which the military is supposed to be subordinate to civilians. Only tin-pot dictators like Saddam Hussein or Idi Amin wear uniforms.

But this is a New Era, we remind readers, a half-a-century post-Eisenhower. And we might as well enjoy it. If Rumsfeld wants to pretend he liberated Paris…and George Bush wants to bask in the light of military glory…why not?

What’s the harm?

We suggest, however, that the president get a special uniform made for himself…one worthy of his position as the top gun in the world’s top military force. Perhaps he should get Karl Lagerfeld to design it…something in purple, yes, that’s the right color…with epaulets the size of, say, Domino’s pizzas…and, oh yes, perhaps huge ostrich feathers shooting out of a burnished brass helmet. He would look absurd and ridiculous, of course…but so much the better. No one would mistake him for Eisenhower.

The Daily Reckoning