On his recent tour of U.S. shale basins, Frank Curzio, Editor of Small Stock Specialist and Phase 1 Investor, noticed two major trends: The transportation industry is eager to make the switch to cheap natural gas, and the oil and gas industry wants to further its reach by building LNG export facilities. In this interview with The Energy Report, Curzio discusses companies enabling the fuel switch, and shares some likely recipients of export terminal building contracts.
The Energy Report: Frank, you recently toured different shale plays in the U.S. Tell us about that.
Frank Curzio: My research team and I have visited every major shale area in the U.S. over the past 12 months, including the Wolfcamp and Cline Shales in the Permian Basin, the Eagle Ford, the Marcellus in Pennsylvania and recently the Bakken Shale in North Dakota. We drove over 800 miles with an energy expert who's been drilling for oil in Texas for over 30 years. We interviewed a lot of people.
I was mostly impressed with the sheer amount of oil and natural gas we're able to extract right now. It is simply amazing. Technology has become so advanced that companies rarely miss a well anymore. People who have worked for some of the largest oil service companies in the world tell me they can't remember the last time they actually missed an oil well. It's almost more of a manufacturing process today, and the challenge isn't so much finding reserves as it is determining the cheapest way to get oil and natural gas out of the ground.
More important is how small towns in Texas, like Karnes City, and Williston and Watford City in North Dakota, in the Bakken region, are booming. Simple land owners are now millionaires because of drilling on their land. Meanwhile, anyone who passes a drug test and has a clean record can make a six-figure salary working for oil services firms like Halliburton Co. (HAL:NYSE), Schlumberger Ltd. (SLB:NYSE), Baker Hughes Inc. (BHI:NYSE) and Weatherford International Ltd. (WFT:NYSE). Wages are also significantly higher in these areas for employees in retail and hospitality.
TER: Not everyone thinks that the domestic shale gas potential is as great as most people would like to believe and that these fields are depleting much faster than first expected. What do you say?
FC: Depletion is definitely a topic of discussion in the media, but I say go into the fields with an open mind and do your own research. There are shale areas in the U.S that haven't even been fully explored, such as the Utica, which is under the Marcellus; the Three Forks, which is under the Bakken; and the Cline, which is known as the lower Wolfcamp, in the Permian Basin. People who believe in depletion should look at some of the numbers reported by companies like Pioneer Natural Resources Co. (PXD:NYSE) and Continental Resources Inc. (CLR:NYSE). Some may say natural gas abundance is temporary. I don't think it's temporary.
Many other state economies, such as California, New York and even Florida, could benefit if they allowed for responsible fracking. Hopefully that will happen and we could become energy independent one day, but personally I don't think it's going to happen. There's just too much politics involved.
TER: Low gas prices have had a major impact on industry and power generation. There is talk of converting commercial trucking fleets from diesel to natural gas. How do those prospects look?
FC: Very good. There is now more than a 30% cost savings between these fuels, which could become greater in the future. Natural gas prices have come down to levels where almost every major trucking fleet is planning on switching from diesel to natural gas. In time, I expect to see the same trend in other modes of transit like ferries and locomotives. You're seeing major equipment companies moving to natural gas.
TER: How does the fuel storage capacity compare between natural gas and diesel?
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FC: That's a good question because the industry is working on making the capacity as close to diesel as they can, and they're just about there. Companies like Westport Innovations Inc. (WPT:TSX; WPRT:NASDAQ) are building new fuel tanks that can carry these trucks hundreds of miles on one fill-up. A company called Clean Energy Fuels Corp. (CLNE:NASDAQ) is building natural gas fueling stations along every major route.
I visited Westport Innovations headquarters in Vancouver with our research team. I got to meet all the executives and CEO David Demers. I rode in these natural gas vehicles, including an 18-wheel truck and also a pickup truck with conversion devices that use both natural gas and gasoline as a fuel supply backup. I didn't notice any difference in the power of the pickup. The only major difference is you can't even hear the truck move when it's running on natural gas.
Westport has also been working hard to create new products to bring to market. One of the founding fathers of the natural gas technology that goes into these engines showed us 15 or 20 different moving parts that Westport has patents on. Every single one needs to be incorporated in order to make the technology work and run on natural gas. He said it's almost impossible not to infringe on their patents unless you reverse engineer an engine. We have recommended this company in my Small Stock Specialist newsletter twice and made over 100% annualized returns on these trades. We bought it again, close to where it's trading today, at $27 a share. Right now it has so many different catalysts, with many new types of engines coming to market, whether it's for a garbage truck, Class A truck, heavy duty truck or even pickups. You're going to see good news for the next few years. This company is behind one of the greatest fundamental changes taking place in the U.S. today. I think its stock could easily double over the next three years.
TER: How could fluctuating prices for oil and natural gas, respectively, alter the outlook for natural gas as a transportation fuel?
FC: If oil were to go to, say, $50 per barrel ($50/bbl) and natural gas to over $10 per thousand cubic feet ($10/Mcf), you're going to see this diesel-to-gas switch get disrupted right away. I expect that oil will average above $85/bbl going forward, because a lot of companies are having trouble keeping their reserve replacement ratios above 100%. Even in Saudi Arabia, they're drilling offshore. I think natural gas as a transportation fuel is going to remain a trend as long as oil prices average above $85/bbl and natural gas prices stay below $6/Mcf.
TER: What are your current investment selection criteria?
FC: One of the things that I'm seeing now is the opening up of a lot of new LNG exporting facilities. We have one, which is owned by Cheniere Energy Inc. (LNG:NYSE.MKT). Now, three more permits for export terminals have been approved. I believe there are 15 or more in the pipeline. We're likely to see the government approve at least one of these every four months or so. KBR Inc. (KBR:NYSE) is one of the best names here and can build these natural gas exporting facilities all over the world that cost between $5–10 billion ($5–10B). That's a lot of money for a company like KBR, which has a market cap of less than $5B. It has a very strong balance sheet with almost $800M in net cash and it's trading at less than 10 times earnings. You're looking at a good growth play with cheap valuations. These LNG facilities aren't going to get built tomorrow, but KBR is the first in line to receive contracts.
TER: Where is it trading now and where do you expect it to go?
FC: It's been trading around $30 and I think it could easily double from here in three years or so. Another company that should benefit right away from an LNG export facility build-out is Chicago Bridge & Iron Co. N.V. (CBI:NYSE), an energy infrastructure company. It's in very good shape now, but I suggest waiting for a pullback. The stock is up 60% over the past 12 months.
Another one worth considering is McDermott International Inc. (MDR:NYSE). It missed badly over the past few quarters. If you're a technical analyst don't even look at the chart. After one of its recent quarters, one analyst said that McDermott needs a McDo-over. But I love to see stuff like that when I'm recommending stocks, where the whole world has given up on a name. I think that's what happened with McDermott.
McDermott builds the platforms for offshore oil companies. These are some of the biggest manmade structures in the world—bigger than the Empire State Building. This is a 100% pure play on this industry. Offshore drilling is going to see a massive boom. All the majors are drilling right now, spending a lot of their budgets on offshore drilling in Japan, Thailand, Brazil, China, even the U.S. The U.S. has quietly been opening up more of the deeper areas in the Gulf of Mexico and even Alaska.
The stock is trading at just 10 times earnings now because it got crushed over the last couple of quarters. But insiders are buying, which is something I like to see when a stock goes down. Goldman says the offshore drilling industry is going to grow 40% annually over the next couple of years. I like both the growth and value components in this name. I love that everybody hates the stock right now. Even if it comes out with bad news, you shouldn't really see the stock get crushed. One good quarter will push it up at least 30% in the short term. Longer term, the stock could easily double from these levels as capex toward offshore drilling continues to hit record highs.
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TER: What else do you like?
FC: I mentioned Clean Energy Fuels. This company has signed so many different deals over the last six months that the stock has run up a little bit. Then it announced a bond offering because it's looking to build even more fueling stations, not just in the U.S., but also in China. The company is not making money right now, but I think it's going to turn the corner within two years. Clean Energy is a really good, cheap, long-term play. It's more of a speculative play than the others I gave you, but this is one I like that's in buying range.
Another one we like is Chart Industries Inc. (GTLS:NGS; GTLS:BSX). It makes LNG fueling tanks. We bought this stock in the fifties and cashed out at around $100. It's a little expensive at about $120 today. It has seen massive growth in the natural gas transportation fuel industry and the exporting facility potential because this is a nuts and bolts play that supplies all these companies, and business is absolutely booming for Chart.
TER: Do you have some closing thoughts on what you think our readers should be doing now to take advantage of all these energy-related investment opportunities?
FC: Open your mind up to fracking. Forget everything you've read. The fact is, people who were once poor are now millionaires. That could be happening in so many areas of the U.S. It would create more jobs for people and, in the end, it would be a better country for our kids to grow up in. Do your own homework and research on it. Don't just listen to me. The movie "Gasland" created a lot of misconceptions, which I realized by driving thousands of miles through these areas and interviewing the locals. That's where I got my information.
TER: We appreciate the opportunity to talk with you again, Frank.
FC: Thanks for having me.
Frank Curzio is the editor of Small Stock Specialist and Phase 1 Investor. With more than 18 years of investing experience, Curzio is the latest addition to the Stansberry and Associates team. He has been a guest on Fox Business News, CNBC's "The Kudlow Report" and "The Call," and CNN Radio. His "S&A Investor Radio" program is one of the most widely followed financial broadcasts in the country.
By. Zig Lambo of Oilprice.com