It’s not hard to pin down the biggest energy story of the past year.
U.S. shale—and the massive surge in oil and gas production it has created.
2013 will be remembered as the year when America once again began tops in petroleum. With surging output from unconventional wells making it clear the U.S. will become the largest producer of liquids in the world for the foreseeable future.
But despite all the excitement, shale stocks have stalled. Many firms that were seeing double or triple-digit percentage gains the last few years ended up treading water through the past 12 months.
Just look at the chart below of go-to Marcellus shale producer Range Resources (NYSE: RRC). The producer started 2013 with strong gains. But then fizzled—remaining largely range-bound since March.
This cooling of shale producers was to be expected. After all, most firms are today trading well above the value of their in-ground oil and gas reserves. Range Resources today is valued at nearly five times proved reserves.
That’s a very hefty premium to pay for such a stock. Implying that the company needs to grow its assets by 400% just to catch up to its current share price. Any hiccups, and there’s a very real risk the valuation could come crashing down.
Stats like these show why investors are perhaps starting to look away from the shale space—for greener pastures.
But what other corners of the energy world have this kind of potential?
In fact, there are several places where under-valued stocks and excellent fundamentals are shaping up to create big opportunities for investors during the year ahead. Better yet, many of these sub-sectors are today receiving little investor attention. Bringing possibilities for big gains when the masses come chasing unexpected good news.
Below are the best three opportunities for 2014—the places with the strongest fundamental undercurrents, and the highest potential for big stock gains.
Uranium—and The People Who Mine It
Uranium has the best fundamentals of any commodity today—hands down.
The metal continues to run a 10,000 tonne per year production deficit. With mines struggling to keep up with demand from the nuclear sector.
That problem is only becoming more acute with prices having dived the past year. Spot uranium prices are currently running close to $35 per pound. When the cost of production in most of the world’s mining centers are considerably higher.
That issue is now coming to a head. With the world’s largest uranium-producing nation, Kazakhstan, recently announcing it will suspend all new mining projects. The reason? A lack of profitability.
Uranium supply is thus low and falling. Begging the question—why are prices for the metal still depressed?
The reason likely has to do with sentiment. Attitudes toward uranium and nuclear energy have turned notably sour since the Fukushima disaster in Japan. Coinciding exactly with a 50% decline in spot uranium prices.
But 2014 is likely to bring some major surprises on that front. With Japan bringing its reactor fleet back on line. Recent reports suggest the nation’s utilities have been continuing to stockpile uranium feed—a strategy that would only make sense if a nuclear restart is in the cards.
When the switch does get flipped, investors are going to realize quickly that nuclear is back for good. A development that’s certain to lift uranium prices, as well as stock valuations for uranium “ETF” companies that hold physical metal, as well as producing companies.
The Pacific Coal Powder Keg
Thermal coal prices aren’t quite as depressed as uranium prices. But the upside for coal is equally great.
Exploding coal demand in India is the most under-appreciated story in the natural resources space today. Statistics have all but confirmed that fiscal year 2014 (which runs to March 2014) will be India’s biggest growth year for thermal coal imports.
If patterns so far this year hold up, thermal coal shipments into India will grow by 40 to 50 million tonnes year-on-year. Equating to a 50% jump in just 12 months.
That growth is tightening supply-demand in the Pacific very quickly. So far Indonesia has been able to ramp up output in line with India’s growing import needs. But the poor quality of Indonesian coal may be a limiting factor on supply here.
At the same time, production from other major Pacific suppliers is stagnating. Output from Australia will grow by less than 10% this year. South African production hasn't grown at all over the past 12 months.
Surging demand and limited supply has put a floor under coal prices the last few months. With Australian prices having stabilized in the range of $80 per tonne.
With Indian demand growth showing no signs of stopping, the next move will be up for prices. Way up. Which will be very good for the beaten-up share prices of coal producers in this sphere.
The World’s Cheapest Oil
With all eyes focused on U.S. shale, very little investor attention has been given lately to the international oil and gas space. Meaning that valuations for international E&Ps have contracted relative to their onshore peers.
That sell-off in international stocks has deepened after lackluster news from formerly hot spots like offshore Brazil. Where stiff fiscal terms have led big developers to shun recent licensing rounds.
But recent events suggest that the tide is turning.
Big money in the energy space has been moving into some unlikely parts of the oil and gas world of late.
Like the Gulf of Thailand. Where the government of Abu Dhabi last month ponied up $2.3 billion to buy offshore oil producer Coastal Energy (TSX: CEN).
One of the big reasons for the buy is Coastal’s success in applying unconventional drilling to enhance oil production in the offshore. A trend we’re going to be hearing much more about during 2014.
That sort of new thinking is what’s prompted one of the biggest names in energy private equity to invest $3.75 billion in the offshore U.S. Gulf of Mexico. In October, Riverstone Holdings purchased Gulf assets from Apache (NYSE: APA)—a puzzling move for many, given that the GOM is seen as a played out, old producing area.
But unconventional drilling is bringing new life to old pools like this. Energy insiders know all about the big returns such techniques are generating here—and the coming year will be when the wider investing public realizes it too.