For Energy Stocks, Look North of the 48th Parallel


Never Tell Anyone What You Do For a Living

For Energy Stocks, Look North of the 48th Parallel

Oil Sands are the Future


I'm often asked at my son's ballgames, "Hey Lou, do you have any hot investment tips?" or "Are the gas prices at the pump high enough for you?" My reply is on cue and standard: "I reserve my investment ideas for paying clients at Cabot, and I hedge higher gasoline prices by investing in sound energy companies."  After that, I find a quiet corner to watch the game.

But seriously, sound investment ideas in any sector are hard to come by, and require diligence and pain-staking research. In the energy sector, we're currently faced with a macro dilemma: In the immediate term, crude oil energy supplies are adequate due to energy demand that has been comatose since 2011. However, in the long term, demand will outstrip supply, sending crude prices off to the races.

So don't rush out to buy that Hummer just yet.

How can we be short oil in the long-term? Well, let's look at the seven major global oil producers, the western multinationals like ExxonMobil, Chevron, Total, BP, Shell, ENI and Conoco. I track their oil production by quarter. In the first quarter of 2009, they produced roughly 1.1 million barrels of oil, in the first quarter of 2012, it dropped to just under 900 million barrels--a 17% decline. On a year-over-year quarterly comparison from 2010 to 2012, the results are alarming, and oil production is declining rapidly.

Chart 1

 The quarter-over-quarter results are no better.

Chart 2

What about the rest of the world's major producing basins?

Russia has struggled to get oil production to 10 million barrels a day (b/d) since 2000, and never returned to its Cold War high of roughly 12 million b/d in 1987.

Brazil's deepwater production has struggled in the 1% to 2% growth range the last few years, and its massive pre-salt discoveries are several years and billions of dollars away from significant production that might top 1 million b/d by 2019-20.

The U.K. North Sea has been in decline since 1999, Norway has been declining since 2000, Mexico since 2004 and Venezuela since 1998. Iran is struggling to maintain production and is faced with economic sanctions. Iraq has never come close to its high of 3.5 million b/d in 1979.

What about the U.S.? The U.S. consumes roughly 19 million b/d of crude oil, or about 22% of worldwide consumption, and produces about 45% of its consumption and imports just under 48%, or about 9 million b/d.  So even if we can get unconventional shale oil production to reach 1 million b/d in production, the U.S. is still about 8 million b/d short.

So much for the bad news. Here's the good news.

If the world will be short crude oil long-term, where do we invest? We invest in companies that have abundant crude oil resources. Many of those companies are in Canada just north of the 48th parallel; most are Canadian oil sands producers. A few of our oil sands favorites are Suncor (SU), Meg Energy (MEG) and Cenovus (CVE).

Here are three reasons Canada holds long-term potential:

* Canada has roughly 170 billion barrels of economically recoverable bitumen (crude oil) and sits on about 1.7 trillion barrels of bitumen in place--resources deemed not economically recoverable; second only to Saudi Arabia.

*  Canada has low political risk.

*  There is low exploration risk; the resources are in Northwest Canada.

Next time you fill up your tank, hedge your gasoline bill by investing in energy equities.

I hope you learned two things today: first, never tell anyone what you do for a living, and second, always subscribe to Cabot's investment newsletters.

Have to go catch a ballgame. Good luck out there.

From the Oil & Gas Patch,

Lou Gagliardi

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