Some Thoughts about Oil, Natural Gas and Alternate Energy

Is the Place to be Energy? Or energy Service Companies?

Fracking
One of my favorite magazines is Forbes, and one of my favorite columnists is Ken Fisher. In the July 19, 2010 issue, Ken makes some comments about the changing nature of gas and oil exploration. To summarize his comments (forgive me if I misquote), the world of energy exploration and production is changing radically by something called ‘fracking’. This involves relatively newer techniques using an older technology whereby fluid at very high pressure is injected into a well, usually a natural gas well, thereby dramatically increasing output.

Ken’s thought is that this advancement of technology will keep natural gas prices cheap for a very long time. He thinks $2 per thousand cubic feet is a logical result which is about 40% of today’s price.

Ken recommends that you buy the service companies providing these technologies to the energy industry and recommends several names.

The Price of Natural Gas
He could be right. Major gas fields that were formerly unproductive are now providing massive amounts of gas. New fields that were previously ignored are now bonanzas. The price of gas has fallen dramatically and now rests around $5, and stubbornly refuses to move upward.

Some very famous people have said that the price increase is coming and will be dramatic. They cite all kinds of reasons including economic recovery increasing demand. They cite rapid decline rates for the new technology. They cite historical records. They cite a dramatic shift in North America from scarce oil to plentiful natural gas. Famous speakers appear on ‘Larry King Live’ to promote the use of natural gas. Etc.

What to Invest In? Resources.
We certainly agree that resources are the place to invest, and we also agree that service companies are good bets. But look at all of the companies servicing the industry. Several drillers have given up the business because oil and gas explorers couldn’t raise the financing necessary for new wells. The stock price of numerous service companies are within the range that they were in before the great fall in October 2008, especially the juniors and smaller companies where the Cymorfund specializes..

The alternate way to look at this, is that these companies will not likely jump in price. If they sustain profits over a long period, or appear to be earning super profits, then the price of their stock will increase, and sometimes nicely.

The problem is that no-one guesses correctly all the time as to what stocks to buy. If you are satisfied with a modest return on the winners, how will you offset the losses on the losers?

Alternate Energy – Windmills
Ken also makes the point that environmentalists are against using fossil fuels as they all contribute to global warming. The major contributors to greenhouse gases are coal-fired energy plants. Switching to natural gas provides a significant reduction in emissions, although costs are higher. All of this is undeniable.

Yet as time passes, wind powered energy is proving to be illusive cost wise, NIMBY complaints are being heard frequently, naturalists complain about noise damaging the environment and the effects on birds, and taxpayers are starting to resent the obscene amount of subsidies necessary . So wind does not seem the answer.

Solar Cells
It seems hardly a day goes by without some announcement of a major advance in this technology, yet costs remain stubbornly high, great amounts of real estate are needed for the installations, and without massive subsidies, they just aren’t economic, nor does that day seem to be approaching.

The total contribution of all alternate energy sources to energy needs of industry and consumers remains at less than 1%. Reality is starting to set in. Alternate fuels cost too much, have too many drawbacks, and we simply need the next great discovery to make any impact whatsoever.

Buy Junior Resource Stocks
The fact remains that the greatest ‘bang for the buck’ is with the shares of companies that have the potential to develop the next great oil field, or natural gas field, and it doesn’t matter that these fields are in North America. It does matter that management is very good, that the political environment is stable and welcoming, and that it is a place that welcomes this type of investment and exploration.

A basket of junior energy stocks developing natural gas wells, oil deposits, and uranium fields is a good place to invest.

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

2 comments

  2. Yes, I completely agree with Cliff’s comments. Well written article and it does make sense.

    I’ll start browsing more of the articles after this – and recommend the site to some friends.

    Reply

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