For short-term traders, understanding cyclical markets is the key to profits. And with the hottest summer months ahead, natural gas could get a price boost when air conditioners start to hum, says Roger Wiegand, publisher of the Trader Tracks investment newsletter. In this interview with The Energy Report, Wiegand shares some promising names for investors who are ready to read the technical charts—and mark their calendars.
The Energy Report: How are the supply/demand fundamentals playing out for North American energy resources?
Roger Wiegand: Fortunately, supply is strong. The U.S. has substantial reserves of natural gas and oil. Shale gas in West Texas is a big, wide new program. The Bakken region in the Dakotas and Eastern Montana sports 7,000 producing wells. Because domestic oil and gas production in the U.S. is increasing, we are buying less petroleum from the Middle East, much to the chagrin of the dominant forces there.
The big oil producers in the Middle East want to hold the Brent price, which is worldwide oil, at around $100 per barrel ($100/bbl). In the U.S., the floor price for West Texas Intermediate (WTI) is $85/bbl. Oil production is up 10%, which normally would push the price down. But the increase in supply is offset by inflation within the energy sector. Oil could go as high as $110–115/bbl before the end of the year.
The price of oil is tied to security-based fears. Things are ugly in Syria and Turkey right now. The oil price in the U.S. could increase in response to fear of war or increasing turmoil in the Middle East. When things really get scary, as they did in Afghanistan and Iraq, there is often a $10/bbl premium in the oil price, which is a lot.
TER: Is the oversupply of gas in the U.S. an opportunity for export?
RW: Exporting liquid natural gas (LNG) with ships is very expensive. But shipyards in South Korea and Europe are actively building LNG-carrying vessels. The primary buyer of LNG is Japan. Japan overreacted when it shut down its 25 nuclear power plants after the tsunami. The price of electricity went through the roof. When I was there last year, the temperature in office buildings was kept at a toasty 80 degrees. Japan needs to turn to LNG across all of its energy fronts. Some of its nuclear power was turned back on, and it has old plants that run on coal. Electricity generation from coal is leveling off, though.
For a while, China was starting up a new coal-fired power plant every week. That is a stunning fact, but it reflects just how much power the Chinese economy requires. A lot of these plants operate with no environmental protection restrictions. Consequently, the air and water are terribly polluted in industrial and urban areas of China. But the government is doing the best it can to stimulate the provision of electricity from a range of resources: wind, solar, coal, nuclear and natural gas.
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TER: Let's focus on opportunities in the junior oil and gas sector. What promising names do you have for us today?
RW: New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX) is a good company. Its price recently backed off because after three major drilling expeditions performed well, the company's share price went up tremendously and investors took profits. But the company is well funded and it controls important reserves. We advise holding on to New Zealand Energy, because the price is likely to go back up.
We recently found a solid petroleum service company in the Calgary region of Canada, Enterprise Group Inc. (E:TSX.V). It is a pipeline and construction company that provides equipment and services to regional oil and gas drillers. It was formed from a combination of three smaller companies and management has plans to expand. Keep in mind that Enterprise Group is not exploring, which can be risky. Enterprise is a pick and shovel operation and its business is very steady. If one element of its trade slows down, the other two revenue sources can pick up the slack. It had tremendous new net profits on the last report. The managers are very sharp guys. I spent an hour with them and I was very impressed. We recommended Enterprise Group at CA$0.60. The floor is CA$0.20. The intermediate price is about CA$0.45, but the current price is way above that based upon good performance.
TER: Do you think holding onto a company is a good way to hedge against cyclical downturns in the energy markets?
RW: A diversified company that performs really well is worth hanging onto it as a long-term investment. However, we are not long-term investment recommenders. I encourage people to trade if they have gained or lost a sizable amount in a stock. Of course, some folks just do not want to trade. They want to hold onto a stock for 10 or 20 years. But those who want to trade need to understand how the cycles work in the shorter term. For example, commodities generally go higher into the fall before selling off. A trader who watches the charts will take profits before the fall selling event.
I still read the old Jesse Livermore books—his investment psychology is excellent. His attitude is that a trader should not be in the market all the time. He can pick his spots and go for the best, either long or short. Personally, I have not had a lot of luck trading short, so I do not do it, and I stopped recommending it. We have had good luck with call options in the right time of year, however. But a word of caution: If you do not have the technical expertise to deal with puts and calls, do not try to do it at home.
TER: Is it wise for junior investors to put together a large portfolio under the assumption that some percentage of them will pay off over time?
RW: I advise being selective: pick a handful of good stocks with the right fundamentals and technicals. Buy and sell them in sync with the seasonal cycles for each industry.
TER: What other oil and gas service industries are out there?
RW: In a word: railroads. The Keystone pipeline has been delayed, but there is still a pressing need to transport oil and gas from the Bakken region to petroleum refineries at the Gulf of Mexico. A lot of that oil is being moved by rail. It costs more money to transport by rail, but overall it is economic right now. A big refiner in Texas, Valero Energy Corp. (VLO:NYSE), recently announced its intention to own a fleet of 12,000 rail cars by 2015. And in 2009, Warren Buffett bought the Burlington Northern Santa Fe railroad, which transports oil by tank car. Buffet does not want to see the Keystone Pipeline built because that would ruin his tank car business.
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With so much oil and gas drilling in Canada and in the U.S., the service sector is where we are seeing major growth. The drillers need exploration backup, pipes, general servicing and hauling—all the things that allow the drillers to drill. Even some of the largest firms like Exxon Mobil Corp. (XOM:NYSE) buy specialized services, as it is cheaper to outsource than to create internal capabilities to do these types of jobs.
TER: What do you think about the future of coal in North America?
RW: We have liked coal for a long time. Environmentalists have tried to prevent construction of new coal-fired power plants in the U.S., and generally they've been successful. But we think that energy sources for the U.S. should include every type of energy. Coal still supplies 40–45% of all power produced in the U.S. Some plants are better than others. Clean coal can be done, although it costs a lot. Some utilities find it more economic to convert coal-fired plants to operate using natural gas.
TER: What's the future of nuclear energy in the U.S.?
RW: There is a future for nuclear in North America, but it is darn slow. It takes 12–15 years to even get a permit to start up. Fifteen years is a long wait. Some of the old reactors are ready to be shut down because it costs too much to repair and update them.
TER: Please sum up the state of the energy market for short-term investors.
RW: The energy cycle doldrums do not last very long. For example, natural gas usage goes up dramatically in July and August on air conditioning demand. And many of the coal-fired power plants in the U.S. that were converted to natural gas cannot be reconverted, because it costs too much money. So the utilities are increasingly dependent on burning natural gas, which was trading way under $2 per thousand cubic feet ($2/Mcf), and now it's up to $4/Mcf. It is headed toward $5/Mcf this year. Now is a good time to trade in that seasonally popular commodity.
TER: It was good talking to you, Roger.
RW: Thanks, Peter.
Roger Wiegand produces Trader Tracks to provide investors with short-term buy and sell recommendations and give them insights into political and economic factors that drive markets. After 25 years in real estate, Roger has devoted intensive research time to the precious metals, currency, energy and financial markets for more than 18 years. He creates a weekly column for Jay Taylor's Gold, Energy & Tech Stocks newsletter.
By. Peter Byrne of the Energy Report