5 Giant Game-Changing Energy Trends

The most important aspect of predictive energy investing is keeping up with technological advancements BEFORE they go viral. These are the hints; the bread crumbs to opportunity. There was a long line of bread crumbs leading from hydraulic fracturing to the shale revolution, for those who were astute (and patient) enough to follow it. But it's not only about getting in ahead of the technology; it's about understanding the limits and striking a balance. Thus, those companies who put all their eggs in the natural gas basket and saw gas prices plummet, are in a worse investment position right now, than those who made sure their oil-gas assets were balanced out.

Then there is market sentiment-the most difficult to predict because bread crumbs are tossed about haphazardly, and it's not so much a path as a maze. Thinking ahead just a bit, investors would have been able to foresee a reduction in national gas prices thanks to the shale boom, but sometimes greed is blinding. Today, there are plenty of bread crumb trails we are following for you. They lead to massive opportunity, and it's all about getting in at the right time:

•    Subsea exploration and production (the final, final frontier, and it's a huge one)
•    Analog exploration, the supercomputing and seismic magic that gets you there faster, with less risk and a higher rate of drilling success
•    A future rise in natural gas prices courtesy of Mexico and wider US exports
•    LNG Engineering (the next trend and the first beneficiaries)
•    Enhanced Oil Recovery (EOR) and by default, Carbon Capture (as gas prices remain low for now, this is what it's all about)

ENHANCED OIL RECOVERY, OLD WELLS BECOME NEW

Don't miss out on this one because it's just really getting under way in earnest and there's still time to get in on the GROUND FLOOR here.

Up to 75% of oil is left in a well after primary and secondary production methods are exhausted (that's about 89 billion barrels of additional oil trapped in onshore reservoirs in the US alone). Primary oil recovery is when hydrocarbons naturally rise to the surface or are pumped to the surface. Secondary oil recovery is the use of water and gas injection to displace oil and drive it to the surface. Even combined, 75% of the oil remains trapped in a well. Tertiary oil recovery, which is EOR, can increase well production to 75%. Essentially, EOR changes the properties of hydrocarbons using one of three processes (and it's going to hit offshore soon, too):

•    Gas injection: natural gas, nitrogen or carbon dioxide injected into the reservoir to expand and push gases through to mix with or dissolve in the oil and increase flow. (CO2 EOR is gaining in popularity, fast; and it kills two birds with one stone, using carbon captured from industrial output and diverting it for EOR. (around 50% of US EOR is via gas injection)
•    Thermal recovery: heat is introduced to reduce the viscosity of the oil in the well, often with steam applied to thin the oil and make it flow better (50% of EOR procedures in the US are of this type-for now)
•    Chemical flooding: polymers introduced into the reservoir to increase water-flooding efficiency (used in less than 1% of all EOR procedures)
•    Water-flooding: low-salinity water flooding is also gaining in popularity and initial results say it could increase production by 20% (not as much as other methods, but cheaper)
•    Well stimulation: This is the cheapest solution only because it can be done to a single well, while the other EOR procedures must be applied to an entire reservoir at once

EOR-Related Stock Pick

When the biggest carbon capture project in the US went on line in Port Arthur, Texas, in May, to capture CO2 from industrial operations and funnel it to oil producers for EOR, the first thing that caught our eye was the estimate that the diverted CO2 from this single plant will increase production in the West Hastings oil field (south of Houston) by between 1.6 and 3.1 million barrels annually. This is just one field!

So we are treating EOR and carbon capture as a lovely duo that is going to make some companies a lot of money and immediately increase the value of their assets.

Our top pick here is Plano-based Denbury Resources (DNR), which will be the biggest beneficiary of the Port Arthur CO2 project. This CO2 will be shipped via Denbury's Green Pipeline-Texas to its West Hastings oilfield. Denbury stands to gain a lot from this because CO2 EOR is already a proven and lucrative process in Texas, and specifically where Denbury has a nice set of assets that are about to get a production boost. Plenty of investors think Denbury is forward-thinking, with smart management. The market has been kind to Denbury, which is on the upward climb and still riding high on a 2012 asset exchange deal with ExxonMobil Corp.

Denbury sold 196,000 acres in the Bakken Shale to Exxon in return for $1.3 million in cash plus operating interest in older oil fields in Texas where it can put EOR to work. The market likes Denbury, and investors have shown their confidence in its EOR ambitions-even when it means trading new for old.  

SUBSEA EXPLORATION AND PRODUCTION

Right now, we're looking at a 70%-30% spread for total global onshore and offshore oil and gas production, respectively. Of that 30% of offshore production, subsea oil and gas production represents 9%. That is about to change as E&P companies go deeper and deeper, taking advantage of new technology that can handle higher pressure and higher temperatures to ward off declining production.

Subsea production systems are wells located on the sea floor rather than the surface. Petroleum is extracted at the seafloor, and then 'tied-back' to an already existing production platform. The well is drilled by a moveable rig and the extracted oil and gas is transported by riser or undersea pipeline to a nearby production platform. The real advantage of subsea production systems is that they allow you to use one platform-strategically placed-to service many well areas.  And as the cost of offshore production rises, this could represent significant savings.

Subsea production could rival traditional offshore production in less than 15-20 years, and we're looking at expected market growth for subsea facilities of around $27 billion in 2011, to an amazing $130 billion in 2020.

Subsea capital expenditure is set to grow at 14.8% to 2017, according to Infield Systems, and driving this growth is investment in Northern Europe, West Africa, Brazil and the US Gulf of Mexico. Real growth that began this year is expected to continue unabated over the next five years.

There are vast opportunities here in a multitude of sub-sectors-from subsea technology development and manufacturing, to supply, installation, service and maintenance, and exploration and production. Analysts expect E&P companies to invest more than $19 billion in subsea production equipment in 2013 alone--and up to $33 billion by 2017.

Subsea Stock Pick

There are the obvious choices, the key manufacturers of subsea infrastructure systems, like Oceaneering International Aker Solutions, Cameron, FMC Technologies, Schlumberger and National Oilwell Varco.

Of these-and thinking a bit ahead of the game-we like Cameron International Corp. (NYSE: CAM) and Schlumberger (NYSE: SLB) best.

Most importantly, the two plan to combine their subsea businesses through the OneSubsea joint venture which will allow them to capture a significant amount of the subsea services market.

CAM has also procured a contract from Brazil's state-run Petrobras to provide subsea equipment for the development of Pre-Salt and Post-Salt areas offshore Brazil and enjoys a long-standing relationship with Petrobras. In February, CAM also signed a subsea equipment deal with an affiliate of ExxonMobil Corp.

But we're also keeping a close eye on GE Oil & Gas, which is the strongest growth segment of GE (NYSE: GE) these days and has shown a keen ambition to stay ahead of the game on the technology sides of the oil and gas business.

ANALOG EXPLORATION & SEISMIC MAGIC

Supercomputing the addition of a "new" dimension to seismic imaging is making it easier and easier to find the next sweet spot-without drilling it first.  This is analog geology, and what these supercomputing systems do is analyze vast amounts of seismic imaging data collected by geologists using sound waves. Now we have 3-dimensional imaging that tells a much more accurate story; but it doesn't stop there. There is 4-dimensional imaging as well: time. This 4th dimension unlocks a variable that allows oil and gas companies not only to determine the geological characteristics of a potential play, but also gives us a look at the how a reservoir is changing LIVE, in real time. The sound waves rumbling through a reservoir predict how its geology is changing over time. This is advancing continually; at this point enough to tell us that standing in Brazil is the same as standing in Angola (the same fossil fuels story is being told). Whoever has the best supercomputing, gets to the best spots-first.

Supercomputing Stock Pick

In this segment, we like France's Total SA, which has recently unveiled its own new supercomputing system, Pangea, which will help it find new discoveries 15 times faster than before. This is behind Total's success in Angola, where it was able to analyze its seismic data from the Kaombo project in only 9 days, while it would have taken over four months with its old system.

Pangea processes geological data to help determine with much greater accuracy where the best place is to explore and drill-fast. Pangea can process at 2.3 quadrillion operations/second. This is as powerful as the simultaneous operation of 27,000 regular computers. Total says it's among the Top 10 most powerful computing systems in the world.  

LNG EXPORTS-ENGINEERS FIRST

In June, the US government approved the Texas-based Freeport LNG Development project, and we think there could be between 5 and 7 more projects of this type approved before the end of the year. It will cost $10 billion to build the terminal, and should be operational in 4-5 years. But the golden part is that there are 19 or 20 more projects like this waiting for approval from the federal government. There's a ton of money to be made here, first and foremost for the LNG infrastructure specialists.

LNG Stock Pick

We like Chicago Bridge & Iron (CBI) here, and not just because Warren Buffet has acquired a 6.1% stake (that certainly doesn't put us off), but because for the immediate and near-term, we're focusing on the engineering companies who will be the FIRST beneficiaries as they will build the massive LNG export terminals.

CBI did the initial design of the Freeport terminal, and is in on the front-end engineering, so it stands a good chance of getting the rest of the engineering contract. What else do we like? Right now CBI has a $6.3 billion market cap, and earlier this year Buffet's Berkshire Hathaway acquired 6.5 million shares. The company is undervalued for its portfolio of projects coming online and the potential that is about to be unleashed for this top competitor for LNG infrastructure projects.

The competition is still, tough: Fluor Corp (FLR), KRB Inc, Matrix Services (MTRX), Caterpillar (CAT), and Jacob's Engineering (JEC). How does CBI stand up? Its stock has risen 57% and its revenues are up 14% year on year. What we really liked was the February acquisition of one of its rivals, Shaw Group, for $3 billion. In May, CBI's shares hit a record $64.89, dropping back to around $58 end of June. CBI is trading at a discount of 12 times forward earnings, which is much lower than the average Standard & Poor's rate of 15 times forward earnings.

NATURAL GAS PRICES-WHERE ARE THEY GOING?

We think natural gas prices are going up-not immediately, but in the medium term, due to three developments that will boost demand (so be ready and time investments wisely):
1)    Increasing Mexican demand (this is already clear) and pipelines in the works to back up this demand
2)    The ball is already rolling for approval of more large-scale LNG export projects
3)    Obama's new climate strategy is based on natural gas (at the expense of coal)

Our natural gas favorites …

First, we would just like to reiterate that we aren't keen on those companies who have put all their eggs in the natural gas basket, when they should have been balancing this out with oil. One company that has gotten into some trouble in this respect is Chesapeake. Regardless of our medium-term natural gas price predictions, we still put more stock in companies who are de-risking their assets NOW, with a nice balance between oil and gas.

So who do we like? Anadarko Petroleum (APC). APC continues to beat earnings estimates, with an impressive 12%+ year-on-year increase in sales volumes. The exploration and production company's earnings report shows sales volumes of 71 million barrels of oil for Q1 2013, or 793,000 boe/day, up from 704,000 boe/day for the same period last year.

Anadarko is riding high on its Eagle Ford liquids bonanza to the tune of about 600 million barrels of oil equivalent-65% of which is oil and natural gas liquids. It's had record sales in the Marcellus Shale, in East Texas and in its Permian Basin oil assets. Anadarko earned $1.08 per share for the second quarter 2013-an increase of 17% from last year, and 14% above expectations.  

Anadarko's market cap stands at $55 billion, and analysts are looking at up to 14% revenue growth over the next two years. But what investors should really like is the cash flow, which has grown by 60% over the last two years and ensures the company has the capital to develop some of its lucrative assets.

Not only has the company beat earnings estimates for five quarters running, but its worldwide assets (including in China), are sweet prospects-from Ghana and Mozambique to Algeria. Anadarko's asset portfolio is impressive, onshore and offshore, from its US assets in the Rocky Mountains, Appalachian Basin, Alaska and the Gulf of Mexico, to highly prospective basins in Ghana, Mozambique, Algeria, China and New Zealand.

Please look out for this coming Friday's letter where we will have more reports such as this alongside geopolitical intelligence, market forecasts and trading advice.