New Frontier Wealth Redistribution: Part I
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Posted 23 June 2012 - 01:59 PM
All investors are in a tight spot, demoralized by a command and control economy run by sycophants and crooks. I get the sense that about all of us feel like deer in the headlights. I know I do, when I see markets reacting to bailouts and looting. Friday the markets took off late in the day because the ESM paid a billion euros to Greece so that they could pay interest to the ECB for heaven sake, sickening.We have a choice between being the victims of the government’s failed economic policies or we can take action and play the trends that are reshaping the future global economy. The first step is to realize that the way wealth will be created, redistributed and retained in the coming years will be vastly different from the games going on in the recent past.To that end, I think there is going to be a massive wealth transference from an energy development surge and re-industrialization. For the US this will NOT be the tired consumer based eCONomy, but something much different. Even if the US was still wealthy, and not maladjusted and artificial, the consumer would be problematic just on demographics.One has to also be careful within the broad energy sector because there is also some creative destruction going on. In fact creative economic destruction is very much what this is about, as is the Tainter complexity theory I discussed. This would include non-fossil fuel sectors as well, see new industrial revolution.This will a new frontier and will look like the California gold rush. There the fortunes were made by providing the “picks and shovels”. Therefore the big picture play is to be short the consumer based eCONomy, and primarily long generic term “picks and shovels”. There is something sutile here, as I am not necessary talking about huge global footprint machinery companies centered around China. This will be in many respects a North American story. And as long as their stocks are cheap enough we can be long producers.As I have done my research of late on the issue of oil liquids, or tight oil exploration, I am amazed at one thing, producers are having plenty of success, nor is there evidence they are backing down. I now think shale liquids oil production going forward is going to exceed all expectations.I also think that natural gas prices are going to stay very cheap, because it is a by-product of the liquid oil production. As long as oil is the dominant target, the natural gas will be produced at high levels as excess. Right now nat gas production is running up 4% YoY. That is why natural gas production continues to grow, even though dry drilling has collapsed over the last four months. That is evident in the rig count, where oil targeted drilling has surged nearly 42% YoY despite lower oil prices. Over all total rig count in the US is up 4.5% despite a complete bust in natural gas. The rigs have merely been shifted to more oily targets.As I alluded to in my post “Oil Differentials” the key issue today is landlocked oil or non-fungiable oil more than anything else. This may continue to create confusion about WTI crude prices, where oil is backed up. There are several traps and bad misconceptions at work in the markets. This has been acerbated because the Wall Street gambling community thinks in terms of risk on-risk off, ETFs, and indexes. They can’t differentiate between companies, within sectors, and who is doing what.There is going to be the potential for re-industrialization around these oil and gas production regions. For example Potlash reopened an ammonia plant in Louisiana. Natural gas is 85% of the cost or producing ammonia.For instance there has been a new set of oil service companies launched around shale and Gulf of Mexico development. These companies are perfectly positioned for it. I mentioned one, Tetra Tech earlier and there are more. Meanwhile after these stocks have already been seriously marked down in price, anal-ysts have been downgrading the sector because they predict an overall rout in working rigs. I call bullshit: there is little evidence that working rigs are going to fall off much. In fact just going through ticker news in the last month:-Firmly footed in the Permian Basin where Devon expects 30% oil growth in 2012 with net production around 56 MBOED (76% liquids), the company plans to drill approximately 300 additional wells this year.-Statoil announced that it would increase its investments in North America. The company will spend $17 billion in order to ramp up its North American production from 150,000 barrels per day to 500,000 barrels per day by 2020.-Marathon expects that its U.S. onshore production will reach just over 125 mboe per day by the fourth quarter of 2012, up from 100 mboe per day in the first quarter of 2012 and about 90 mboe per day in the fourth quarter of 2011. Marathon’s expected capital allocation over the next four years indicates that it is staking much of its future growth on the Bakken and on Eagle Ford, with Eagle Ford capturing 43% of Marathon’s growth allocation.Apache (APA -0.4%) says it was high bidder on 90 shelf and deepwater blocks in Gulf of Mexico offshore lease sale, with high bids totaling $96M. Of the 56 companies submitting bids for Gulf acreage, APA says it ranked first overall for its 61 high bids on the shelf, while Apache Deepwater, the company’s deepwater arm, was ranked no. 4 with 29 high bids.- Osaka Gas (OSGSF.PK), Japan’s second biggest supplier of city gas, will pay $249M for a 35% stake in a Texas shale project run by Cabot Oil & Gas (COG +1%), estimated to be worth 250K metric tons/year of liquefied natural gas equivalent when output stabilizes. Drilling is set to start in July.- Chesapeake (CHK +0.2%) stands by its plan to expand its oil production, saying it will spend 90% of its planned $7B capital budget for 2013 on drilling in oil fields, including ~40% earmarked for the liquids-rich Eagle Ford shale formation.-and on and on.On the question of buying falling knives, I have a few rule of thumbs. Usually I like to see basing patterns, and at least neutral overall technical patterns. You can gauge those here. Of course I like to use divergences (support and overhead) levels even though those tend to be unmercifully gamed in this market. Usually these are low volume “shadow traders” that I just ignore, which is why I don’t use stops.
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