Future Stars of the Energy Sector

I’ve been watching the indexes -- one day up, the next down.  It might not inspire confidence but as an energy specialist, I couldn’t be happier – energy issues have done especially well in this choppiness.  That’s not a reason to get comfortable, however – we’re still going to look for value.  And I think we’re going to find it next in natural gas.  

Some really oily plays have made us a lot of money recently:  Anadarko (APC) gave us a great settlement on Tronox, Noble (NBL) sits solidly at $75, Halcon (HK) has gotten a terrific read-through into their Tuscaloosa Shale assets with the spectacular initial results from Goodrich Petroleum (GDP) – heck, even Exxon-Mobil (XOM) is again scraping the $100 benchmark.   Yep, it looks like energy is the place to be in 2014.

But these and others, while they are still part of my portfolio, are from a trading standpoint, yesterday’s news.  The stories on all of these has been already written and accounted for, at least in my investment mind  -- with nothing left to do but stand back and trade around and out of them.  It’s the new ideas that continue to keep me engaged in a market that looks overvalued and toppy.  

And here is where the gassy names start to make some sense.  In the ‘oily’ world, there are shale growth stories that are being recognized in share prices of domestic E+P’s.  Yet in the natural gas sector, there is still a bias among analysts for unending sub-par prices and increased environmental pressures against fracking, particularly in the US Northeast.  

Both will turn out to be wrong.  Just as we needed to find and hold unrealized value in oil shale through 2013 and into 2014, now is the time to position and hold in natural gas names that have only begun to respond to higher and more sticky physical prices and an abatement of environmental pressures.  

What, you say?  You don’t believe that either is true? One thing that sequestration and even flaring of gas wells has done for US production is made it a lot less manic – stockpiles are again under the 5-year average and technology of production and wastewater and transport management has gotten safer and more efficient. The groundwater contamination boogieman has all but disappeared and entrenched Marcellus, Utica, Woodford and Bakken players have operated with virtually zero hazard in the last two years.  Recent reports linking fracking to earthquakes in Ohio will require some further drilling regulations to be put into place, but is a far less serious charge than the ones we had been hearing from Josh Fox and company.  

And natural gas prices have been eerily strong, despite the long-awaited end to a very cold and difficult winter.  This continues an upwards trend in prices from a low of under $2/mcf in early 2012.  

Finally, there is the real beginning of LNG exports, due to start from Cheniere (LNG) late this year.  While those exports will be miniscule, they will mark a sea change in the US as an export country of nat gas and ignite again the gassy names that remain undervalued.  

And what are those names?  In the LNG space, I continue to prefer Golar (GLNG) with its more mobile platform and in the producers, Southwestern (SWN), Encana (ECA) and Ultra Petroleum (UPL).

And if you don’t like any of those, go for Devon (DVN), a company that has done all it can to run away from gas production but will be lucky to find that they still have quite a lot of it in 2015 when gassy names will be the stars of the energy sector.