|
Stansberry & Associates
Investment Research Founder Porter Stansberry
envisions a future that is anything but rosy, but savvy investors may find
solace and security against the crippling inflation he expects. In this
exclusive interview with The Energy Report,
the popular publisher talks about opportunities in the beaten-down natural
gas industry, where investors with good timing have the opportunity to get
natural gas "for free" following massive selloffs. He also
discusses some niche energy plays that offer great ways to book profits in a
market that has many analysts scratching their heads.
The Energy Report: In your
"End-of-America Update" during the Casey
Research Summit at the end of this month, you'll be talking about a
crisis you foresee that will be worse than the Great Depression. What makes
this coming crisis worse?
Porter Stansberry: Let's look at some
numbers. During the Great Depression, there was a 3–4-year period of
nominal Gross Domestic Product (GDP) decline that the government countered
with a combination of fiscal and monetary annual stimulus of roughly 8% of
GDP, a relatively mild monetary response to a very significant economic
downturn. I think the problem with the current downturn is not its severity.
It's actually not severe at all; since 2008 we've had less than one full year
of economic decline on a nominal GDP basis. However, the stimulus has been
overwhelming, closer to 20% of GDP annually. So what I see being worse than
the Great Depression is that our monetary foundation has been completely
severed. In this case, the medicine is to be feared, not the disease. The
recession has been relatively mild, but the fiscal and monetary stimulus to
attack it has been more massive than ever before in the history of the United
States.
TER: What would you say to those who would argue that the recession
has been mild as a result of the large stimulus?
PS: That's nonsensical. You cannot tax yourself to prosperity. You
cannot redistribute your way to wealth. The worst aspects of the Great
Depression didn't occur due to the stock market crash in 1929. They occurred
because of the confluence of the Smoot-Hawley Tariff Act and enormous tax
increases that accompanied Franklin D. Roosevelt's election, in addition to a
huge increase in regulation and the confiscation of private property. None of
those things helped anything. The low point came at the end of the fall of 1937, a full four years after these supposedly stimulative measures had been put into effect.
TER: Juxtaposing this doesn't seem to jibe with your being more
bullish on stocks than you've been since 2008, as you recently wrote. Why
would you be more bullish on stocks in the scenario you've just laid out?
PS: When the government prints money, sooner or later it will end up
in the stock market. You can't print yourself to wealth or prosperity, but
you sure as heck can print yourself to higher stock prices. That's what the
government has decided to do. In particular, I think it has rigged the stock
market and the banking system to recapitalize the banks. And that represents
an opportunity for investors. When you can buy banks for very big discounts
to book value in this kind of environment, you probably should.
TER: Speaking of investment opportunities, in a 2010 interview you
also recommended blue chips. At that time, you said they were cheap. Can you
still find blue chips in 2012 at prices that create no-risk or low-risk
situations?
PS: You can. I would point to Johnson & Johnson (JNJ:NYSE) as a great example. If you had
enough money, you could buy the entire stock and finance it with its cash
flows, which is the definition of no-risk investing in equities. I'm not
saying that there's actually no risk. That's not what I mean. By no-risk
investing, I mean there's no greater risk—no additional risk—in
buying the equity than in buying the debt. Importantly, since I originally
recommended Johnson & Johnson stock, the company has increased the
dividend by 79%. That's the key. Such dividend increases protect you from
inflation.
TER: Could you elaborate on your point about no-risk investing in the
context of stocks versus bonds?
PS: It relates to the margin of safety. In Security Analysis: The
Classic 1934 Edition, Benjamin Graham's great insight into investing was
this concept of a margin of safety. He indicated that one finds the most
significant margin of safety in a company that could afford to pay for
itself, obtain the whole enterprise value, buy all of its outstanding stock
and pay all of its outstanding debt. Some large-cap blue chip stocks offer
particularly good margins of safety.
TER: In the context of growth and investment strategies, let's turn to
natural gas. In one of your recent newsletters, you referred to the natural
gas market as perhaps the single biggest anomaly you've seen in your entire
career.
PS: There's an enormous amount of money to be made in natural gas over
the next five or six years, and it's so simple to understand. There are many
places where natural gas can and will supplant coal and oil. It just has to
be cheap enough to make it worth the capital investment of switching. There's
no doubt in my mind that we're at that point. I don't think natural gas has
ever been as cheap relative to oil as it is currently, with the ratio of the
price per barrel of crude oil to the price per 1,000 cubic feet (1 mcf) of gas now above 50:1. I can't find a period in
history where the ratio was ever more than about 24:1 or 25:1—and the
25:1 was an historical high as recently as August 2009. So, compared to oil,
natural gas has gone from being abnormally cheap to being stupendously cheap.
Those low prices are driving a lot of natural gas companies and a lot of
exploration and production (E&P) companies out of business. I anticipate
a half dozen to a dozen natural gas and E&P companies failing over the
next 12–18-months. When their assets are auctioned in bankruptcy,
they're going to be great buys. If you know what you're doing, you're going
to be able to buy natural gas in the ground for a very low price.
I'll give one example of a publicly traded company where you can do this
right now, which is Chesapeake Energy Corp. (CHK:NYSE). It is currently trading at about
$20/share, and that includes all of Chesapeake's proven undeveloped resources
(PUDs)—resources that neither the Securities & Exchange Commission
nor the stock market acknowledges. Earlier this month, Chesapeake did a $2.6
billion (B) deal—monetizing three oil and gas assets—and the
company plans to sell off some $10B worth of assets before year-end.
Chesapeake's market cap is about $13B, and I'll bet selling those assets
won't change its market cap at all, because the market doesn't currently
value what it is selling anyway. The market gives it credit only for its
current production. So no matter how much natural gas these companies have in
the ground, it isn't being valued at all. It's as if the stock market
believes that natural gas will never have a value in the future.
But guess what? In 2015, three or four liquid natural gas (LNG) export plants
will be coming online in the United States. And overseas, gas doesn't trade
for $2/mcf. In Europe, it trades for $7–8/mcf, and for about $12/mcf in
Asia. What happens to the value of all those reserves when the prices finally
get arbitraged thanks to LNG? Once the U.S. starts exporting gas at
international rates, U.S. prices will rebound significantly. So I see a great
opportunity. If you're smart and know what you're doing, you can buy up all
these resources in the ground, either in bankruptcy auctions or in equities
of companies that aren't forced into bankruptcy because they aren't getting
any credit for those assets. You can buy them up for literally pennies on the
dollar right now. I think those pennies are going to be worth a lot of money
in four or five years.
Natural gas will soar, one way or another. Opening up U.S. natural gas to
international demand will change the entire marketplace dynamic. Those
resources that are now considered worthless will be worth maybe $5–6/mcf. Suppose you pick up 1 billion cubic feet of gas that
you pay next-to-nothing for—maybe a dime on the dollar, so $100 million
gets you $1B worth of gas. In three years, you'll be able to sell that gas
for more than $1B. As we speak, people out there are organizing the funds to
buy the gas to make that trade. Some of them are my subscribers and when some
of your readers see this interview, they'll pick up on the same idea. The
idea is to make a lot of money in natural gas by buying it smart with equity,
not with debt, and holding it until the LNG markets come online.
TER: So what does all of this mean for investing in oil?
PS: It's the right time to be investing in natural gas because no one
else is doing it. The E&P companies are divesting natural gas as fast as
they can. I mean, Chesapeake's selling every PUD it can and getting a lot of
money for it. Unfortunately, they're selling at the bottom, but it beats
going bankrupt.
As for oil, I'm very concerned about oil prices because all the technologies
that have been used to bring us this glut of gas also are being used to bring
up a glut of oil. So much oil is coming out of the Bakken
in North Dakota that they've run out of pipeline space to carry it to
Cushing, Oklahoma. The same thing will happen in Eagle Ford in south Texas,
Marcellus in Pennsylvania and Niobrara in Wyoming. We've tapped into a sea of
oil larger than anyone can imagine. I really do believe that oil prices will
collapse over the next few years, down to below the marginal cost of
production. According to FCC filings I've read, the marginal cost of
production with gas is around $2.60/mcf. The price
of gas today is $2.10/mcf. The marginal cost of
shale oil in liquids is probably around $50 per barrel ($50/bbl), so that would imply maybe a price in the
$40s—in today's dollars. The nominal price in the future may be higher
than that due to inflation, but it could still be a lower real price.
If you're long on oil, you've got to have your head examined because a tidal
wave of oil is about to hit the market. People had a hard time believing that
about gas four years ago, and they're going to have the same problem
accepting it about oil today.
TER: Does the negative public reaction to fracking
and the potential for regulatory bans create a potential black swan for the Bakken, Marcellus and Eagle Ford?
PS: Whoever bans fracking may get thrown out
of office. Americans may hate oil companies if you ask them in an opinion
poll, but they hate high gasoline prices more.
TER: Do you think people outside the industry understand the
relationship between the risks of fracking and high
oil prices?
PS: I do. It's funny that you used the term black swan in terms of the
risks in the oil fields. I've actually written about black swans in the other
context. A few months ago, Anadarko Petroleum Corp. (APC:NYSE) was drilling in the Wattenberg
field in the Rockies. Although this field—heavily explored and heavily
drilled—has been in continuous production since 1903, Anadarko
discovered a new billion-barrel resource that nobody knew about before. The
more drilling we do in these shales, the more
likely the discovery of more expansive deposits than anything anyone ever
imagined.
Current estimates indicate the presence of 20B barrels of oil each in Eagle
Ford, Bakken and Marcellus shales.
I believe those estimates will grow by leaps and bounds to a point that
they're talking more like 100B barrels in those shales.
No one knows what's down there because no one has done very much drilling
yet. The more they drill, the more oil they're going
to find.
TER: So, in terms of investing, are you shorting the oil companies?
PS: No, but I'm being very cautious about which ones I buy. You have
to be careful. There's a big shale field out there next to Abilene, Texas,
that so far has been a secret in the industry. I became aware of it a couple
of months ago. It's called the Three-Fingered Shale. I'm allowed to talk
about it now because Chesapeake finally disclosed its interest in the field.
The other leading company with leases in the Three-Fingered Shale is EOG Resources Inc. (EOG:NYSE). We bought Chesapeake primarily
because of its natural gas reserves but also because I knew it had a leading
position in this field, which I think will end up being another 20B barrel
resource.
Investors who buy oil companies with access to these huge reserves at the
right price may do fine, but they must realize that oil prices will be
crushed and companies that paid too much for their reserves will be hurt.
Actually, I think there are safer ways to invest in the boom, and right now
I'm favoring LNG shipping companies. That niche will experience a huge growth
trend that will last for decades. Similarly, I think it would be wise to buy
into service companies engaged in drilling and pipelines. There are lots of
ways to make money in this situation.
However, I wouldn't count on making money buying up reservoirs of oil on the
assumption of oil prices running between $80 and $100/bbl
out into the future because those prices won't last.
TER: Are you looking at other opportunities in energy?
PS: No; if I can get natural gas for free I'm going to do pretty well.
The same goes for LNG tankers, because demand for them is soaring. Leasing
and rental rates are sky high and will be for years to come.
TER: Do you have recommendations in the tanker investment arena?
PS: I recommended Teekay LNG Partners L.P. (TGP:NYSE) in my newsletter in December. I
haven't found the right pipeline company to buy yet, because their prices are
so high and yields so low. As far as oil and gas companies go, in addition to
Chesapeake and EOG, we also still own ConocoPhillips (COP:NYSE). We own those for various
reasons, but as I suggested earlier, the bottom-line is that they have very
cheap resources.
TER: Very good. Any other advice for our readers?
PS: Buy some gold. Buy some silver. Be prepared for your real wages to
fall. And be prepared for some real fireworks out of Washington, D.C., where
they're going to do some incredibly stupid things over the next couple of
years and bring on a whole new level of absurdity.
TER: Strong words. Thank you for sharing your thoughts with us today.
PS: My pleasure.
After serving a stint as the first American editor of the Fleet Street
Letter, the oldest English-language financial newsletter, Porter Stansberry founded Stansberry & Associates Investment Research, a
private publishing company, 14 years ago. Stansberry
& Associates has subscribers in more than 120 countries and employs some
60 research analysts, investment experts and assistants at its headquarters
in Baltimore, Maryland, as well as satellite offices in Florida, Oregon and
California. They've come to Stansberry &
Associates from positions as stockbrokers, professional traders, mutual fund
executives, hedge fund managers and equity analysts at some of the most
influential money-management and financial firms in the world. Stansberry and his team do exhaustive amounts of real
world, independent research and cover the gamut from value investing to
insider trading to short selling. His monthly Stansberry's
Investment Advisory newsletter deals with safe value investments poised to
give subscribers years of exceptional return. Click here to
learn more about Stansberry, his outlook and ideas.
Want to read more exclusive Energy Report interviews like this? Sign up for
our free e-newsletter, and you'll learn when new articles have been
published. To see a list of recent interviews with industry analysts and
commentators, visit our Exclusive
Interviews page.
DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview. She
personally and/or her family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Energy Report: None. Streetwise Reports does not accept stock in exchange
for services.
3) Porter Stansberry: I personally and/or my family
own shares of the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following
companies mentioned in this interview: None. I was not paid by Streetwise
Reports for participating in this story.
The Energy
Report
|
|