Fossil Fuels - Energy and Capital

Investing in the Eagle Ford Formation

Earlier this week, I hinted about a second investment sweet spot in the U.S. oil boom that has been overlooked.

To be more accurate, however, we should say that this play is being overlooked by the wrong people.

Fact is, some of the biggest M&A deals in the United States aren't being made in North Dakota, but rather on Texas soil.

Why?

Although some states are geologically blessed with the right oil and gas resources, Texas has had all the luck since the birth of the U.S. oil industry. And ever since the gusher at Spindletop, you just can't lose in the Lone Star State.

After all, this is where the U.S. shale revolution truly began.

By 2006, the success in the Barnett Shale started to spread to other formations across the country. Some of us still remember the buildup to that story:

Here's the best part: It's all happening again in south Texas.

We'll narrow it down even further for you – it's called the Eagle Ford Shale. The formation spreads across southern Texas and is the source rock for several other oil and gas zones, such as the Austin Chalk formation (which lies directly above the Eagle Ford formation):

Like virtually every other shale play in the U.S., we've known for decades that the Eagle Ford held a significant amount of oil and gas. Back in the 1970s, however, we lacked the technology to develop it.

And if you want a glimpse at history repeating itself, here's the latest activity that's been going on:

Click to Enlarge Image

So far, more than 3,000 drilling permits have been granted and there are over 1,000 oil and gas wells on the books that are planned to be built.

Then again, perhaps the Bakken will soon be overshadowed by this play. There's actually more rigs drilling into the Eagle Ford – 255 at last count – than the entire state of North Dakota!

Now, there's a reason why I mentioned that the wrong people are missing the story here. You see, while most investors are starstruck by the multitude of Bakken stories breaking out of the mainstream media, they've most certainly overlooked this opportunity.

It's a mistake that the international community isn't making.

~~oil-sign-up~~

Picking the Right Eagle Ford Profits

Although the Bakken formation in North Dakota has been the darling of the U.S. oil industry lately, it would be a mistake to discount the potential in south Texas.

Believe me, dear reader, we're not the only ones that have taken notice of the Eagle Ford... and it seems that everyone wants a piece of the North American shale boom.

In fact, I'll show you the kind of growth that investors have been used to:

As you can see above, these three oil and gas stocks have crushed the S&P 500 over the years. And all three have been attracting international attention over the years.

We all remember CNOOC's (NYSE: CEO) $2.16 billion deal with Chesapeake (NYSE: CHK) in 2010 that gave the Chinese state-run oil company a 33% stake in Chesapeake's Eagle Ford acreage.

But it's not just the Chinese that are scrambling for shale interest, either. That same year, Reliance spent $1.15 billion to acquire a 45% interest in Pioneer Natural Resources' (NYSE: PXD) 212,000 net acres in the play.

The highlight for us came last July in the $12.1 billion BHP Billiton-Petrohawk deal. The buyout deal sent Petrohawk shares 65% higher the day it was announced. Not surprisingly, Petrohawk drilled the very first Eagle Ford wells in 2008. Of course, my many of my veteran readers were well ahead of that play, to their very profitable advantage.

Of course, the deals were back in full swing a few months later in September, when the Gas Authority of India Limited (GAIL) took a 20% interest in 20,200 net mineral acres in a joint venture (JV) deal with Carrizo worth $95 million.

Recently, the Japanese have entered the shale scramble after the country's third-largest grain-trading company paid $1.3 billion for a 35% stake in Hunt Oil's south Texas land. For the record, that comes out to $25,000 per acre, on which the companies plan to drill several hundred wells during the next decade.

What's the bottom line here?

~~oil_signup~~

~~keiths_signoff~~

Who Is Henry Hub?

We don't all immerse ourselves in energy.

If I told you XOM beat analysts' Q4 EPS estimates this week at $1.97 on revs of $121.6 billion, you might look at me cross-eyed.

You might understand a bit better if I said Exxon (NYSE: XOM) posted fourth quarter earnings this week and earned $1.97 per share on revenue of $121.6 billion, beating Wall Street expectations.

Sometimes things are unnecessarily complex. Industry jargon, false assumptions about what people already know, and a deliberate effort not to 'give too much away' often make even the simplest energy-related topics difficult for retail investors to understand.

It shouldn't be that way. And we do our best here to offer insights to the market in a way everyone can understand.

With that in mind, I've been receiving more inquiries about 'Henry Hub' than I can ignore. In fact, my Web team tells me tens of thousands of people search for information about the topic every month.

Search no more, fellow readers...

Who is Henry Hub?

Henry Hub isn't a person, but rather a thing. Specifically, it's the central location (hub) for the pricing of natural gas futures contracts in use since 1990.

A BTU is the amount of heat required to increase the temperature of a pint of water (which weighs exactly 16 ounces) by one degree Fahrenheit.

Since BTUs are measurements of energy consumption, they can be converted directly to kilowatt-hours (3412 BTUs = 1 kWh) or joules (1 BTU = 1,055.06 joules).

MBTU stands for one million BTUs, which can also be expressed as one decatherm (10 therms). MBTU is occasionally used as a standard unit of measurement for natural gas, and provides a convenient basis for comparing the energy content of various grades of natural gas and other fuels.

One cubic foot of natural gas produces approximately 1,000 BTUs, so 1,000 cu.ft. of gas are comparable to 1 MBTU.

MBTU is occasionally expressed as MMBTU, which is intended to represent a thousand thousand BTUs.

It's owned by Sabine Pipe Line LLC, a subsidiary of Chevron (NYSE: CVX).

Located near Louisiana's Gulf Coast, the hub connects to four intrastate and nine interstate pipelines owned by various public and private pipeline operators like The Williams Companies (NYSE: WMB), Enterprise Products Partners (NYSE: EPD), and others.

It has two compressor stations that can compress 520,000 decatherms per day (one therm equals 100,000 British therm units).

The entire hub can transport 1.8 billion cubic feet per day (Bcf/d).

Natural Gas Prices

In late 1989, Sabine was selected by the New York Mercantile Exchange (NYMEX) as the official delivery mechanism for the world's first natural gas futures contract.

Natural gas is priced in units of one million British thermal units (MMBtu).

A standard NYMEX natural gas contract is for 10,000 million British thermal units and uses the average of the natural gas prices from Henry Hub's 13 interconnected pipelines.

Contracts expire 3-5 days in advance of the first day of the delivery month, and can be traded up to 72 months in the future.

When you hear someone say, “Natural gas is trading for $XX,” they're referring to the Henry Hub price for the current month's contract.

Right now, natural gas is trading for $2.35 per million British thermal units. That's the Henry Hub price for March 2012 contracts.

If you hear someone talking about "spot price," that's the Henry Hub price at that moment in time — not associated with a future contract.

~~eac_nat_gas~~

Record Lows

I have an ulterior motive for this educational session...

Natural gas prices are now the lowest they've been in a decade, and it's all because of increased supply.

Newfound shale gas supplies have led a bevy of drillers large and small to push U.S. natural gas production to the highest levels ever.

The Associated Press reports: “Supplies in storage are well above average, and some experts estimate the nation has enough natural gas to meet its needs for a century.”

That's probably good news for you, because more than 50% of U.S. homes use natural gas for heat.

With the price so low, some “experts” have floated the idea that large drillers like Exxon should curb production to allow prices to rise. But its fourth quarter report, released this week, showed the company hasn't slowed down at all.

When asked why, Exxon investor relations chief David Rosenthal said, “We remain bullish on the future of natural gas as an energy source.”

So do we.

And it's why, as low natural gas prices help save money on your heating bill, we've been showing you how to add money to your bottom line by investing in the most valuable drillers and service companies bringing all this gas to market.

~~nat_gas2~~

~~nicks_signoff~~

Burying Peak Oil

“Can't say I blame them for reacting like that,” I was told over the phone late last week.

What started as a typical call with a friend turned into an hour-long conversation about Peak Oil. Both of us had just gotten word of Australia's Report 117 and the fact that the Australian government was keeping a tight lid on its contents.

“So you're saying it was okay for them to bury it like that?” I asked.

“Nowadays, I don't put anything past them... Besides, it's not like we didn't see it coming.”

Unfortunately, I knew all too well what he meant.

First, a brief rundown on Peak Oil.

Simply put, Peak Oil is the point at which oil production reaches its maximum rate. Every single oil field on the planet goes through this cycle.

Now, let's be clear here. We're not talking about how much oil is left in the world. The problem has never been that we're running out of oil...

Rather, Peak Oil refers to the rate at which we can produce it.

Think of it like this: If we could put every drop of oil in the world into one gigantic barrel, and we were given a small cup to draw the oil from the barrel, we'd be in serious trouble. The oil is sitting right in front of us, but we are unable to get it.

Back in 1956, a Shell geoscientist by the name of Dr. Marion King Hubbert delivered an ominous speech forecasting U.S. oil production would peak in the early 1970s.

Hubbert's prediction came to fruition in November 1970, when our production averaged 10.04 million barrels per day, making the Peak Oil "theory" a dire reality:

But with the peak of oil production behind us here in the United States, a more dismal peak is on the horizon — the point when the world's oil output reaches its limits, followed by a permanent decline.

That point is closer than you might expect (assuming, of course, that we haven't already reached it)...

The Silencing of Report 117

We're used to Peak Oil reports failing to grab mainstream attention. When the IEA's 2008 World Energy Outlook announced that the world's energy system is at a crossroads, it didn't turn many heads...

But at least the IEA published their report instead of burying it.

Don't feel too bad if you've never heard of Report 117 — until recently, nobody had. Turns out the report's conclusion was too much for some to handle, since the government decided not to publish it.

Here's the backstory. Five years ago, Australia's Bureau of Infrastructure, Transport and Regional Economics (BITRE) started a project to “look in a strategic way at possible alternative transport energy futures.” One of the issues on the table: the world's oil depletion.

In 2009, the report was completed. And it didn't take very long to cut to the chase:

However, deep and non-conventional oil production are growing strongly, turning a slight decline into a plateau for total crude oil (production). Given the growth in deep and non-conventional (production) balancing the shallow decline in conventional production, it is predicted that we have entered about 2006 onto a slightly upward slanting plateau in potential oil production that will last only to about 2016 – eight years from now (2008). For the next eight years it is likely that world crude oil production will plateau in the face of continuing economic growth.

After that, the modeling is forecasting what can be termed 'the 2017 drop-off'. The outlook under a base case scenario is for a long decline in oil production to begin in 2017, which will stretch to the end of the century and beyond.

The rest of the report (which you can read in its entirety here) painted a rather grim picture for the world's future oil production.

With the exception of the Canadian oil sands, the report's outlook on North American oil production wasn't too optimistic, either:

The news isn't "bad" for everyone.

After all, scarcity breeds value.

~~oil-sign-up~~

Investing in Quality and Quantity

Back to my phone call. When I told my friend that most people had never even heard of the Australian report on Peak Oil, his response was: “Sounds about right. 'Course that don't mean much to us, does it? By the time the rest of the crowd catches on, I reckon there'll be a whole bunch of us laughing our way out of the bank. And all it'll take is just two sweet spots here in the U.S.”

And while he made a good point, I have a feeling the “crowd” is catching on more quickly than my friend had hoped.

That much was evident last Wednesday while watching Continental CEO Harold Hamm talking about the Bakken with Cramer.

As Cramer said in the interview, you really can't talk about the Bakken without mentioning Continental Resources (CLR), which holds the largest acreage in the play.

While it took him until August to notice CLR, we've been well aware of how profitable this producer has been for our readers over the years:

Not too shabby for such a volatile market.

CLR is also a perfect example of the growth we're used to seeing. Here's a strong North Dakota driller pumping a little over 75,000 barrels of oil equivalent per day, which is double the amount they were producing in 2009.

As I've mentioned before, this is light, sweet crude of the highest quality (with a gravity of about 47, according to Hamm).

But why is this so important?

Remember, Eni's 2011 World Oil and Gas Review reported that medium sour crude (stemming from the Middle East, Russia, and Central Asia) made up the main source of the world's oil production, while the global supply of light and low-sulfur crude continues to decline.

Yet with all the hoopla surrounding the Bakken, I'm surprised at how little attention the smaller players have gotten over the last few years — many of which have presented investors with a huge opportunity in non-conventional production.

The Bakken isn't our last word on the U.S. oil boom...

~~oil_signup~~

~~keiths_signoff~~

The Keystone XL and the Northern Gateway

We're all aware of the Keystone Pipeline.

It's the $7 billion project that would send a much-needed 1.1 million barrels of crude oil per day from Canada's oil sands to the American Heartland.

But you're probably a bit fuzzy on what its status is.

Because of fiery political rhetoric and backroom maneuvers, it can be tough to figure out where the project stands.

I offered my no-spin take a few weeks ago, when the headline was that Obama “killed” the Pipeline, concluding:

This man has an election to win over the next ten months.

He can't kill a pipeline that would create thousands of jobs, break a supply logjam in Oklahoma, and carry between 500,000 and 1 million barrels of secure Canadian oil to the States every single day.

It will happen... eventually.

A Tale of Two Pipelines

In addition to the Keystone XL, Canada also has plans to build the $5.5 billion Northern Gateway Pipeline, which would send oil to a British Columbia port for export to Asia (China).

That pipeline has a capacity of 525,000 barrels per day.

Combined with the Keystone, the two pipelines would send 1.625 million barrels per day out of Canada.

To be clear, the Canadian government wants to build both pipelines. With reserves second only to Saudi Arabia and Venezuela, it would be an economic boon to the Great White North. And Prime Minister Stephen Harper has shown he's willing to play politics to make it happen.

After Obama's decision two weeks ago to postpone the Keystone, Harper publicly said he was “profoundly disappointed,” and spoke of the need to “diversify” Canada's oil industry.

That's code for “sell it to China.”

The thing is, Enbridge's (NYSE: ENB) Northern Gateway is facing the same environmental pressures as TransCanada's (NYSE: TRP) Keystone.

Currently, the former project's Joint Review Panel is canvassing public sentiment along the pipeline's 731-mile proposed route. Already, more than 4,000 people have signed up to testify, and I'm assuming not about how much they want a pipeline in their backyard.

What's more, together the pipelines could move 1.625 million barrels per day.

For the most recent month that data is available — October 2011 — Canada exported 47.03 million barrels, or 1.52 million barrels per day. And data from the Canadian Association of Petroleum Producers shows total production will hit 3.5 million barrels per day in 2015, 4.2 million in 2020, and 4.7 million in 2025.

So throw the politics out the window. Canada has enough to fill both pipelines.

Harper just wants to have his cake and eat it, too. And I don't blame him.

~~eac_nat_gas~~

A North American Comeback

The real story here is being buried by political spin...

It isn't about whether the United States or China gets Canadian oil. It isn't about environmentalism. It isn't about Obama.

The real story here is a veritable North American oil rush.

We're just fighting over where it will go and who will make the most money.

As I told you in my last update on this pipeline situation, oil is a global market. A fight over where a pipeline should reside doesn't change the amount of the stuff in the ground.

Sure, the political angle will play a supporting role in this year's U.S. election. And yes, the environmental crowd may get a “victory” by tying both pipelines up in court for a few years.

But at the end of the day, I believe both pipelines will be built.

The oil sands in Canada and the shale in the U.S. will both be fully developed.

To think otherwise is naïve.

And to get caught up in the trivialities of politics and environmentalism surrounding this development is to seriously take your eye off the ball.

There's a reason China invested $16 billion in Canadian energy in the past two years and $6 billion in the U.S. in just the past few weeks...

A major oil production boom is underway.

~~nat_gas2~~

~~nicks_signoff~~

Shale Implosion?

Recently, the EIA dropped another bombshell on the shale gas boom.

We've had front-row seats to the surge in natural gas production that's taken place in the United States over the last seven years.

And finding those plays has never been much trouble.

According to the EIA, almost 90% of the total technically-recoverable shale gas resources are located in just three regions: the Northeast, Gulf Coast, and Southwest.

But lately, the government has been sending mixed signals when it comes to shale gas...

One Metal, Infinite Solutions

The U.S. Army wants it to build drones...

NASA's already used it to mount telescopes...

Computer companies think it's the key to faster processing...

And it's all controlled by a tiny, 20-cent mining and manufacturing firm.

So what happened?

Remember last year when the United States Geological Survey released its report stating the Marcellus Shale formation (the largest shale gas play in the U.S.) held more than 400 trillion cubic feet of natural gas?

At the time, it was huge jump over their previous estimate of just 84 TCF.

Then, just as Obama delivered his “all-of-the-above” plan to develop domestic energy sources, the EIA suddenly had other ideas...

A few days ago, Nick Hodge explained how the United States will become an LNG exporter as early as 2016.

And we know that companies like Cheniere are already lining up long-term contracts for gas shipments reaching as far as India and China.

Yet even with the latest revision, that 2016 date will be met — and here's why...

Even the latest trimming of Marcellus reserves doesn't diminish the role that these shale gas resources will play for the next several decades; nor does it significantly change the big picture when we break down our natural gas production:

Some things aren't going to change — and that includes our growing reliance on natural gas.

As you can see above, more than half of our future natural gas production will be from shale and tight gas resources.

The Opportunity is There for the Taking

If you were looking for news to bump natural gas prices from their weakest levels since 2001, the Marcellus revision has already helped push natural gas 20% higher this week:

click image to enlarge

Investors will be hard-pressed not to be optimistic over natural gas in the long run.

The only question for investors now is when to jump in feet first.

You can find more profit ideas for today's market, below...

Enjoy your weekend,

Keith Kohl
Editor, Energy and Capital

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Natural Gas Rebound

They're playing a global game of chicken.

At stake: nearly one-fifth of the world's oil supply.

And it appears as though nobody wants to flinch first.

Sure, we've heard the bluffing before; but the latest warning from Iran that they will definitely close the Strait of Hormuz if the EU oil embargo interrupts their crude exports could prove disastrous.

Of course, Obama made his position clear during his State of the Union address on Tuesday night — and it didn't bode well for a peaceful resolution:

The regime is more isolated than ever before; its leaders are faced with crippling sanctions, and as long as they shirk their responsibilities, this press will not relent. Let there be no doubt: America is determined to prevent Iran from getting a nuclear weapon, and I will take no options off the table to achieve that goal.

So much for not flinching...

We may only give the president's hard-lined words a passing thought, especially considering our oil imports from Saudi Arabia have fallen by about 30% over the last four years — and continue to decline.

Some countries can't say the same...

Chinese Woes and Canadian Cheers

Between Saudi Arabia and Iran, almost two million barrels per day are flowing into China.

As the second-largest crude buyer in the world (yes, Uncle Sam still holds on tightly to that crown), they can't be too happy with U.S. foreign policy at the moment.

Then again, we're not expecting China to sit idle while a third world war looms. And we have a good idea where they're looking to secure that energy.

A North American Energy Comeback

Make no mistake about it: Canada and the U.S. are flush with natural gas.

Now, that's not to say consumption has tapered off. Rather, we're consuming more of the stuff than ever before:

And as Nick Hodge explained yesterday, that demand is going nowhere but up from here on out.

But even when our natural gas supply glut eases over the next few years (a situation I'll delve into deeper next week), there will still be a certain degree of shipping it across the Pacific — especially with prices this low here at home:

For investors, some charts can get even uglier:

It wouldn't surprise me if Obama had a stake in UNG. Despite all the bullish rhetoric in his speech, he got one part dead wrong.

~~eac_nat_gas~~

Obama's Slipup

Oddly enough, it wasn't just Obama's 'No Options Off the Table' approach to dealing with Iran that caught me off guard.

I practically fell out of my chair after the president said, “Our experience with shale gas shows us that the payoffs on these public investments don't always come right away.”

It was easy to see how he had missed the mark with that statement. Had he followed my Energy and Capital readers and me in 2010, he could have nearly doubled his investment on burgeoning shale plays like Range Resources (NYSE: RRC):

Believe me, that's not an anomaly for us.

The increase of M&A deals steamrolling through North America has given investors a sudden flurry of profits.

One of the best recent examples of this was last summer when BHP shelled out $12.1 billion in cash for Petrohawk Energy. That same day, shale gas investors pocketed a 61% premium on their Petrohawk shares.

In 2008, we saw the same situation unfold as ExxonMobil bought out XTO Energy, a strong natural gas player in the U.S. Exxon's entrance into the shale industry — one that came with a $41 billion price tag.

Although Obama didn't get the memo on how profitable these companies can be, we can certainly understand why he was excited, can't we?

After all, our domestic gas production is on the verge of exceeding our consumption, with billions of dollars in future LNG exports all but guaranteed.

And the EIA is optimistic that our crude output will reach 6.7 million barrels per day by 2020.

You see, there's a reason this surge in M&A deals will continue over the next few years...

Fact is, many of the large oil and gas companies are having a tough time keeping their own production afloat — and they're willing to spend billions to do it. ConocoPhillips, for example, just announced a 17% increase in year-over-year revenue, yet production declined by almost 8% in their fourth-quarter production.

As for the payoffs for public investments, Mr. Obama, the future of our U.S. oil and gas production is ripe for the picking.

~~nat_gas2~~

~~keiths_signoff~~

U.S. to Be Natural Gas Exporter

We've been meandering down a path of energy insecurity ever since the Carter-era gas lines.

As a nation, we use 19.14 million barrels of oil every day. We produce just 7.51 million barrels per day (mbd).

We are 61% energy dependent. This isn't opinion; this is a fact taken from the most recent data right on the U.S. Energy Information Administration website.

The rest comes mainly from three countries:

Canada, 2.53 million barrels per day
Mexico, 1.15 million barrels per day
Saudi Arabia, 1.08 million barrels per day

No other country gives us more than a million barrels per day.

Nigeria and Venezuela used to, but we now get 983 mbd and 912 mbd from them, respectively, as Peak Oil's grip takes hold.

The question has always been: How do we cut our 61% (11.63 million barrels per day!) dependence on foreign oil when we've never produced more than the 9.63 million barrels per day we generated at our peak in 1970?

Gas Time

That same EIA has forecast a boom in shale production will lead to a 20% increase in oil production and a 29% increase in natural gas production.

Concerning natural gas specifically, we produced 21.65 trillion cubic feet (tcf) in 2010. We're expected to produce 27.9 trillion cubic feet in 2035.

But here's the thing...

The United States only used 24.64 trillion cubic feet in 2010, which means we're about to go from a natural gas importer to a natural gas exporter.

Much of it will be natural gas liquids, or LNG.

The switch is expected to happen in 2016 with an export capacity of 1.1 billion cubic feet per day, rising to 2.2 billion cubic feet per day by 2019.

And that has a lot of companies and investors very excited right now.

As Reuters recently noted:

The search for higher-value energy resources has prompted companies such as Chesapeake and Halliburton to shift drilling from "dry gas" fields to those that are "liquids-rich," meaning they contain oil or natural gas liquids such as propane, butane or ethane, whose prices are based on those of crude oil.

Even foreign companies are rushing in...

China Petroleum & Chemical (NYSE: SNP), otherwise known as Sinopec, has paid $2.2 billion to access Devon Energy's (NYSE: DVN) fields in the Utica, Tuscaloosa, and Niobrara Shales.

France's Total (NYSE: TOT) has paid $2.3 billion to Chesapeake (NYSE: CHK) to access 25% of its 619,000 acres of Ohio's Utica shale.

~~eac_nat_gas~~

Political Support

Shale gas actually has support from both sides of the aisle.

We know where the Drill, Baby, Drill crowd stands.

But look what the Democratic White House had to say at the beginning of 2012, as part of a report called, Investing in America: Building and Economy that Lasts:

Only a few years ago, fears of a looming natural gas shortage led to significant investments in the rapid construction of liquefied natural gas (LNG) port facilities that could enable the United States to import vast quantities of natural gas. Projections from the Energy Information Administration (EIA) as recently as 2005 suggested expanding natural gas imports for decades. Without the prospect for adequate domestic supplies of natural gas at reasonable prices, companies increasingly pointed to overseas operations where they could access large quantities of low-cost natural gas.

Since the mid-2000s, however, the discovery of new natural gas reserves, such as the Marcellus Shale, and the development of hydraulic fracturing techniques to extract natural gas from these reserves has led to rapidly growing domestic production and relatively low domestic prices for households and downstream industrial users. The potential benefits to the U.S. economy are substantial.

An abundant local supply will translate into relatively low costs for the industries that use natural gas as an input. Expansion in these industries, including industrial chemicals and fertilizers, will boost investment and exports in the coming years, generating new jobs. In the longer run, the scale of America’s natural gas endowment appears to be sufficiently large that exports of natural gas to other major markets could be economically viable.

Twenty Years of Uses

The above snippet mentions a few of the potential uses for our newfound gas wealth, namely lower costs for industries like industrial chemicals and fertilizers.

But there's much more than that...

You'll also enjoy lower home energy costs.

Already this year, the price of natural gas has fallen below $2.50 per million British Thermal Units (MMBtu), a price we haven't see in more than a decade.

That will translate to your bottom line — and the bottom lines of companies that use large amounts of it.

Dow Chemical (NYSE: DOW) and Westlake Chemical (NYSE: WLK) have both announced they'll make major investments in new facilities because of low natural gas prices.

Vallourec (PK: VLOWY), a French maker of oil and gas drilling supplies, is investing $650 million in an Ohio steel mill that will produce pipes for fracturing... and create 350 jobs.

Companies like Westport (NASDAQ: WPRT) are hard at work making car engines that run on natural gas. Cummins is working with them on natural gas-powered big rigs.

Clean Energy Fuels (NASDAQ: CLNE) is building the network of fueling stations that would keep those cars and trucks topped off.

Cheniere (NYSE: LNG) has signed three 20-year contracts worth $28 billion to ship LNG to Britain, Spain, and India.

Shell (NYSE: RDS-A) has said it will build a “world-scale” natural gas processing plant in Ohio, Pennsylvania, or West Virginia.

It's all part of revived natural gas market that grew by 63% in 2011 to $31 billion — and that will grow another 19% this year to $37 billion.

Over $30 billion of that will be in the United States, where 19,000 new wells will be fracked this year, up from 16,000 last year — creating tens of thousands of jobs along the way.

~~nat_gas2~~

~~nicks_signoff~~

Montana's Second Oil Boom Begins

We can't help but feel sympathetic for Montanans.

Much like the rest of the country, Montana's oil production was in a downward spiral for as long as anyone could remember.

Between 1981 and 1999, the state's output was cut in half.

Things weren't looking good...

But at the turn of the century, good news finally struck. (Remember, we're talking years before the shale revolution began — nearly a decade before the USGS's reassessment of the Bakken formation in 2008.

The newfound success was thanks to the discovery of the Elm Coulee oil field, located in Richland County on the eastern edge of the state, in 2000.

By 2005, development was in full swing:By June of 2006, Montana reached the 100,000 bbls/d mark for the first time in history (with more than half of that amount coming from just Elm Coulee).

A year later, the field was considered the highest-producing onshore field in the lower 48 states discovered since 1950.

Unfortunately, the fairy tale didn't last. We know how Montana's oil fortune played out.

Despite the good news, state production fell by more than 30% over the last five years. And at the same time, Montanans had to sit back and watch neighboring North Dakota's fame and good fortune take off...

For the good folks of the Treasure State, the grass really was greener on the other side. And the economic impact has been nothing short of a miracle.

The reasons for Montana's envy are many:

First, there's the 3.4% unemployment rate that North Dakota enjoys (more than half of Montana's own unemployment rate)...

Then there's the nearly billions in revenue the state will make over the next few years...

And North Dakota residents are getting wealthier by the day. According to the U.S. Dept. of Commerce, personal income in the state grew by 6.9% in the first quarter of 2011 compared to the fourth quarter of 2010...

Tack on the fact that all this growth isn't slowing in the slightest...

With more than 10% of all the oil and gas rigs in the United States drilling on the western side of North Dakota, it's only a matter of months before it surpasses the production rates of Alaska and California.

~~shale_gas~~

Investors Won't Be Left Out in the Cold

We've said so before, but Montana has become the forgotten step-child of the U.S. oil boom.

Which is just one of the reasons why most investors won't see these profits coming.

All the telltale signs of an upcoming boom are there, and I believe some of the best sleeper picks for 2012 and 2013 will come from the Treasure State.

This may be the year that Montana regains some of the spotlight.

We've been following the increased activity in Montana's oil and gas industry throughout 2011, and certainly won't be surprised if the state doubles — or even triples — current production in the next three years.

As you can see below, the number of oil rigs drilling on Montana soil has surged 137% compared to last year:

Although it's nowhere near the number that North Dakota has, it's a good sign going forward.

And some of those drillers have been very successful. Several months before it was bought by Statoil for $4.4 billion, Brigham reported a new record initial production rate for its Johnson well in Richland County, Montana.

All the major Bakken players have a stake here, from Continental Resources to Whiting Petroleum.

Of course, both of those Bakken investments have panned out well for early investors:

Seeing both of those Bakken stocks nearly double since early October, most people think they've missed out.

What they don't realize, however, is that the next stage of the U.S. oil renaissance is only beginning...

~~oil_signup~~

~~keiths_signoff~~

Politics Killed the Pipeline, Not the Profits

“OPEC absolutely loves Obama right now,” I was told over the phone this morning.

The guy on the other end of the line isn't even from the United States. In fact, he was calling from two hundred miles north of the Montana-Canadian border.

Despite his lack of citizenship, I quickly found out why he has a vested interest in the mess our politicians are making here in the U.S...

When pressed for more details, he laughed right into the receiver: “Shoot, I'd even vote for him if I could! Fact is, he's going to make a lot of us up here a lot of money,” he said with confidence.

It was hard to argue with that when I knew perfectly well he was being truthful.

I've had that feeling ever since the Keystone XL project started hitting snags.

When Obama first announced he would delay the decision, it was only a matter of time before he caved to the pressure.

And to be fair, can we really expect anything less during an election year?

It turns out the uproar over the project centered around the section of the pipeline running across Nebraska and the Ogallala Aquifer:

The opposition insists an oil leak here would be devastating to the water supply. And yet, the 25,000 miles of pipeline already in place (2,000 miles of which are located in Nebraska) isn't drawing their ire.

For the record, that's 730 billion barrels of oil that cross the entire aquifer each year (again, more than 100 million of that figure travel through Nebraska's portion).

And let's forget for a minute the 20,000 (and as many as 100,000 related jobs) that come as an added bonus to the pipeline.

This isn't a sudden brand-new issue at play; oil has been piped across the aquifer for decades.

No, there's a much bigger reason Obama fumbled this decision...

Why OPEC Cast Its Vote for Obama

You see, the environmentalists weren't the only ones protesting the pipeline, clapping with joy when Obama rejected TransCanada's application on Wednesday.

He had the full support of OPEC, too.

Even Chavez was secretly wiping the sweat off his brow. After all, an additional 830,000 barrels of Canadian oil per day flowing south into Texas would mean our oil imports from Venezuela would be the first on the chopping block.

Why would that put Chavez in a bind?

We've been doing a fairly good job of limiting our exposure to Venezuelan crude over the last few years:

click to enlarge image

We know that Venezuela's oil supply isn't the most attractive around — and it doesn't hold a candle to the light, sweet stuff flowing from areas like North Dakota.

We're talking about heavy, sour production that's more expensive to refine.

~~eac_nat_gas~~

And if you want to see how crucial the quality is to refiners, call to mind the situation that unfolded last summer when Libya's oil production was shut-in.

In good form, the Saudis decided to pick up the slack until Libya's exports could get back up and running. The problem, unfortunately, was that many of the European refineries weren't able to handle the low-quality crude that makes up Saudi Arabia's spare capacity.

This is what it all comes down to: more Canadian oil means less from more volatile sources like OPEC.

Normally, we could just end things here. What was a no-brainer for Obama turned out to be a disaster.

But why would the government be worried about shunning Canadian imports? Canada really has only one true customer, right?

Well, that's not exactly true...

We've grown so accustomed to Canadian imports that we're taking them for granted.

And that that could be the worst mistake we ever make.

Politics Killed the Pipeline — Not the Profits

Look, it's no shock my hockey-loving friend was still excited after the Keystone pipeline rejection.

Companies like Enbridge already have a plan in motion. Instead of relying on the United States, they're ready to connect to a whole different oil-consuming beast.

And that project just got a little boost of support from the Canadian government.

Following Obama's indecision, Canadian Prime Minister Stephen Harper reiterated his plan to expand Canada's customer base.

Earlier today, he was quick to point out that “the 'decision' by the Obama administration underlines the importance of diversifying and expanding our markets, including the growing Asian market.”

And there you have it, folks.

Harper spelled it out, plain as day...

If the U.S. doesn't want it, China will get it.

Next week, I'll show you exactly which Canadian oil stocks will make investors a hefty profit when this Canadian-Chinese relationship blossoms.

~~keiths_signoff~~

Oil and Gas Service Stocks

Publisher's Note: Before you get to Keith's editorial for today, please take a moment to sign up for our educational presentation on silver and gold.

It will be held on January 31st and includes a 2012 gold forecast, the best ways to buy, and how to avoid taxes. It's free to all who sign up.

Good Investing,
Nick Hodge

A year from now, you won't hear me say I didn't see it coming...

That's the feeling that swept over me yesterday when I was filling up my gas tank for $3.75/gallon (I realize that's actually cheap considering what some of my West Coast readers are paying).

And I know $5 is right around the corner.

But truth be told, I don't think I'll complain when it tops $5 a gallon.

Because I've been hearing — and telling my readers — about a little theory called Peak Oil that was presented more than fifty-five years ago...

Perhaps the most common misconception about Peak Oil I come across is this idea that we're running out of oil.

That simply isn't the case here — and it's never been about how much oil is still in the ground...

Instead, it all comes down to the rate at which we can produce what's left.

And if you want a firsthand look at production rates, take a quick peek at this chart:

That's the story of U.S. oil production — at least, it was up until a few years ago.

And while we'll never return to the good old days, it isn't for lack of trying.

More Drilling, More Profits

Three days ago, when I saw that the latest number of U.S. oil and gas rigs had fallen below 2,000, I wasn't concerned in the least.

In places like North Dakota, there are still more than 200 rigs drilling away.

In Canada, there's an outright drilling surge currently taking place. They added 250 rigs just this week.

And this is all leading to a tremendous opportunity...

You see, we know what's coming in 2012. Billions of dollars from the North American oil and gas landscape will pour into investors' pockets.

For the last few weeks, I've shown you time and again that the smaller drillers are consistently outshining the lackluster performances of ExxonMobil and friends...

That much isn't going to change.

But it's not just the speculative players that will be flushing our pockets with cash in 2012. Smart investors are constantly finding new ways to play the oil and gas renaissance taking place in Canada and the United States.

I'll give you an example.

Today, Carbo Ceramics (NYSE: CRR) is still one of the best shale plays that most investors have never heard of — and the best part is they don't have to produce a drop of oil to deliver you gains.

Carbo manufactures ceramic proppants which replace the sand used in the hydraulic fracturing process. They're making artificial sand to help drillers improve productivity.

And right now is the perfect environment for companies like Carbo...

~~oil-sign-up~~

Over a million wells have been stimulated using hydraulic fracturing — including more than 90% of the wells drilled today.

Although many of us have been following the war over hydraulic fracturing that's being played out in the media, the entire issue comes with a huge catch: It doesn't matter which side you are on.

Fact is, an outright ban could potentially be crippling to us. Without it, production would plummet — and we'll be headed right back down the Peak Oil slope.

We'd also have to find someone to ship us hundreds of thousands of barrels a day.

Believe me when I say our sources are drying up faster by the day.

Aside from Canada, not many other producers would help us out — mostly because they're having struggles of their own. Mexico's oil and gas production is in just as much trouble as ours.

And let's be honest, do we really need to add more OPEC oil into the mix?

Our outlook is grim enough... It's mid-January, and oil prices are still in triple-digit territory.

~~keiths_signoff~~

Natural Gas Export Stocks

“We have so much natural gas coming up that we don't know what to do with it.”

That's what Andrew Ware, a spokesman for Cheniere Energy, told reporters last week.

But Ware's statement isn't entirely true.

Because Cheniere knows exactly what to do with it.

And as a result of this company's actions, jobs will be created and enormous amounts of money will be made by those who invest appropriately.

Dirt Cheap

Cheniere Energy (AMEX:LNG), along with about a dozen other producers, is swimming in supply. There's so much, the cost of power production has plummeted to record lows.

Hell, my energy bill last month was so low, my wife actually thought the utility company made a mistake.

There's no doubt that consumers are loving all this cheap natural gas. And we should enjoy it now, because it won't last forever.

You see, last Friday natural gas futures closed at $2.67 per million BTUs. Dirt cheap!

But it's going for as much as $12 per million BTUs in Europe and $18 in a few Asian markets.

As a result, there are now nine domestic producers lining up to get approval to export roughly 10 billion cubic feet of liquefied natural gas per day. That will certainly translate into a nice pay day for producers, but also a boost in pricing for U.S. consumers.

The latter is causing some to cry foul. And this week, the Energy Information Administration (EIA) is expected to release a report that will actually examine the price effects of potential exports.

What will that report tell us?

Who cares?

It's nothing more than a tool to placate a few boat rockers.

Would an increase in exports result in an increased price for consumers?

Probably.

And certainly the DOE will glance at this data before issuing new export permits. But the only concern the DOE really has is making sure that an increase in exports won't cause a domestic supply disruption.

And that ain't gonna happen, my friend.

~~eac_nat_gas~~

The Bottom Line on Exports

We really do have more natural gas than we know what to do with.

The fact is, natural gas is the new king. Hands down, nothing can touch it. The days of coal being the primary source of our power generation are coming to an end. Natural gas is taking on that role going forward.

Some of our natural gas bounty will also be used to power our buses and trucks. And of course, we'll export an enormous amount, too.

Because here's the bottom line on exports. . .

More natural gas exports equal jobs. It's that simple. And you'll find few in Washington – on either side of the aisle – willing to trade cheaper utility bills for job creation and GDP growth.

Don't think for a second those nine companies aren't going to get those export permits.

And when they do, the flood gates will open wide and every domestic producer that's currently operational is going to benefit handsomely. That's why we're loading up now.

Because once those export permits are released, you're going to see a nice, long steady price increase that's going to supply us with a nice, long steady flow of income. Particularly from the Three Forks formation, where for the past few weeks I've been watching a lot of big money getting very cozy with the producers.

~~nat_gas2~~

To a new way of life, and a new generation of wealth. . .

~~jeffs_signoff~~

Investors Can Find It All in the Bakken

"Sorry to tell you we don't have much time today.”

He'd agreed to give me a quick early-morning tour of the rig earlier this week.

I took one look around and immediately understood why this man didn't have much time...

With a 5,500-foot vertical well to be drilled, the last thing he wanted to be was behind schedule.

After all, it was his crew, his rig, and his time.

When news that North Dakota's oil production topped 510,000 barrels per day, this didn't come as a surprise for us. The entire state is busy drilling at a feverish pace, driving more and more investors there every day.

Thanks to the Bakken formation, just three counties produce nearly half of the state's entire oil production.

click to enlarge image

Williams County — where I found myself that day — has been pumping more than 83,000 barrels per day as of late, comprising 16% of the state's total.

True to his word, the tour was brief... but well worth the time.

As we walked through the site, the scent of petroleum was overwhelming. Of course, this wasn't this first time I'd smelled the pungent odor.

“This kind of reminds me of my trip up to see a few oil sands operations,” I told him.

His mood suddenly soured, and I was sure I'd offended him.

“Bah, I got a younger brother who went to Fort Mac for work — as if we didn't have enough here. The kid's making $125,000 a year up there,” he told me.

I didn't want to delve into the obvious rivalry that had developed between the two men, but he continued after a slight pause, “Sure, they've got a bit of oil up there, but everybody knows that now... Of course, he gets mad every time he comes back for Christmas and I remind him that the tar they're pumping out doesn't come close to our stuff.”

Quality or Quantity?

My guide had made a good point.

You see, the quality of oil is determined by its weight — also known as its API gravity — which is compared with water. Typically, if the measurement is greater than 10, it's lighter and floats on water; anything less than 10 is heavier and sinks.

Good old-fashioned WTI comes out around 39.6^o, and Brent — the current global benchmark being used — has a gravity of about 38^o.

The bitumen up north in Fort McMurray is of the extra heavy variety. Production from the oil sands has an API gravity around 8^o.

It then has to be upgraded into what's known as synthetic crude, which carries a weight of around 33^o.

Needless to say, the heavier the oil, the most expensive it is to refine.

On the other side of the spectrum, the light, sweet crude from the Bakken has a gravity of about 42^o— making it easy to see how attractive crude from the Bakken is to producers.

~~oil-sign-up~~

Something for Everyone

After a few hours, we were walking away from the rig when the guy started to shake his head.

“I've been drilling this county every day for the last few years, and I gotta tell ya, Keith... I rarely see a loser here,” he said with a grin.

He wasn't going to hear me disagree with him there, that's for sure.

I happen to know one clear-cut winner in the Bakken: everyday investors like us.

Whether it's a little more risk to pay out big, or the safe high-dividend paying companies that are the bread and butter for investors over the long run...

We can find it all in the Bakken.

And I'll show you both right now...

In March 2009, Brigham Exploration was trading below $2 when a few of my readers decided to join the Bakken fray. Not two years into their investment, Brigham was bought out by Statoil to the tune of $36.50 a share. A $1,000 investment in 2009 delivered profits of nearly $19,000.

This is an ongoing profit cycle that's been gaining steam since 2007.

Truth is, some of the best small-cap oil stocks in North America are nestled in the various counties of North Dakota.

It's where I found three little oil and gas gems just waiting to be plucked, each one holding the potential to double our money before year-end...

Or if having security is more to your liking, there's plenty of it waiting in the Bakken. (And let's be honest, a bit of security in this kind of market volatility is too good to pass up.)

Companies like Enerplus (NYSE: ERF) are not only expecting to increase production by as much as 15% over the next 24 months, but they're also paying out a hefty 8.4% yearly dividend.

I'll give you one guess as to where they hold more than 200,000 acres of undeveloped land...

Saskatchewan also happens to be the area where another high-yielding producer is securing investor profits.

When Nick Hodge mentioned the potential of PetroBakken Energy yesterday, it wasn't on a whim. At this level, PetroBakken Energy is buy pumping out 50,000 barrels per day and offering a solid annual dividend of 7.3%.

Make no mistake; the opportunity here is endless — and promising.

Especially in light of the fact that North Dakota is set to become our nation's second-largest oil producing state this year — a reality that will most likely play out in the next few months.

How profitable will 2012 be for you?

~~oil_signup~~

~~keiths_signoff~~

Our Natural Gas Investments for 2012

I can only imagine how frustrating it must be to watch helplessly as a fortune idles away before one's eyes without a glimmer of hope to take advantage of it...

That's how I feel every time I come across Alaska's oil and gas industry.

Admittedly, we've never given Alaska much hope to recover its oil production, which peaked more than two decades ago.

And if we wanted to take it a step further and pinpoint the exact moment when everything began to fall apart, it was in March 1988.

The state's oil production averaged 2.86 million barrels per day that month. And since then, it's been one long downhill slide:

Let's assume for just a moment that ANWR is suddenly opened up...

Pretend that all opposition mysteriously vanished and companies were free to develop the billions of barrels there.

The problem is years would pass before anyone saw a single drop of oil.

The EIA previously suggested it would take a minimum of a decade for companies to begin production.

Between setting up the infrastructure, getting the equipment in place, getting leases approved, drilling exploratory wells, and finally placing wells on production, it would be 2022 before they pumped any crude.

What's more, ANWR production might have added approximately 800,000 barrels per day to the mix. Of course, by that time the state's production will have plummeted to less than half of what it is today.

I can't help but feel a twinge of sympathy for Alaska...

But it isn't because developing ANWR is a fairy tale oil execs tell themselves before they go to sleep.

Nor is it due to the state's ever-declining oil production.

It isn't even because the USGS dropped a bombshell on the state when it drastically revised its estimate for the amount of conventional undiscovered oil in the state's National Petroleum Reserve (NPR).

(That USGS report slashed its estimate by a staggering 90%, from 10.6 billion barrels of oil down to just 896 million barrels.)

No, the reason I feel sorry for Alaska is because the state is sitting on a wealth of natural gas — with only a slim chance of capitalizing on it.

How much natural gas are we talking about here?

Alaska's North Slope has about 35 trillion cubic feet of proven natural gas reserves, with another potential 200 tcf that could ultimately be discovered.

It's not as if the state's marketed natural gas production is at zero; Alaska was the seventh largest-producing state back in 2007.

But there's a lot of room to grow...

Alaska's Jealousy Rages

So what's the problem?

I have a feeling you know the answer to that question.

The United States is flooded with natural gas production.

And for the fifth consecutive year, our domestic gas production increased.

Alaska's frustration over shale production must've increased tenfold over the last five years, mostly because state production simply can't stay competitive with the shale gas boom happening in the lower 48 states.

The Last Frontier's diminishing oil production means it will have to find another cash cow.

And lo and behold, here's 35 trillion cubic feet of natural gas that may never see the light of day.

~~eac_nat_gas~~

It seems the only possibility is to turn away from the United States. That's why Alaska's governor recently called a powwow with execs from the state's top three oil producers: Exxon Mobil Corporation, ConocoPhillips, and BP.

The governor had one goal in mind: to convince these bigwigs to tap into a market that would be willing to pay good money for Alaskan natural gas: Asia (LNG exports, to be specific).

Don't think it'll happen? It already has...

Two months ago, Alaska's Kenai terminal shipped one cargo of 41,441 mt of LNG to Japan.

But in order to tap into the Asian LNG market with natural gas from the North Slope, ExxonMobil and friends would have to build a pipeline running the entire length of the state.

Let me say just this once I think the supermajors might be on to something...

How I'm Trading Gas in 2012

Let's face it; most people aren't talking about natural gas right now — especially since prices fell below $3/Mcf recently. Basement-level prices and a supply glut tends to discourage investors.

But they also present a window of opportunity for you to get in on the ground floor right now.

I'll take it a step further, too, because it's not Alaska's LNG exports that I'm going to bet my money on...

In fact, there are a few natural gas players that have been developing this same strategy for years, and by the time Alaska starts building that pipeline to the North Slope, these companies will already have cornered the market across the Pacific.

Look for my full report in just a few weeks.

~~keiths_signoff~~

Youngstown Fracturing Earthquake

I was 12 years old when I experienced my first earthquake... though at the time, I didn't even know it.

I was in my bedroom while my parents were in the basement.

The house shook slightly, and my father yelled up to me, “Quit jumping around up there!”

Baffled, I attempted to explain that I was only reading and not jumping around. I was quickly disciplined for lying.

(The next morning — after we found out it was an earthquake — my father laughed and apologized for yelling at me.)

Since then, I've experienced two more earthquakes. Both happened last year, and both were intense enough to get my heart racing.

Growing up on the East Coast, I have little experience with earthquakes. And I know I'm not alone.

In fact, after a magnitude 4.0 earthquake shook the city of Youngstown, Ohio, last week — a place with no history of earthquakes at all — folks got real anxious and starting asking a lot of questions.

Was it just a random event?

Was it a prelude to the Mayan Armageddon?

Was it those fracturing wells that some have warned us about causing earthquakes?

The Devil is in the Details

It's highly unlikely that the recent earthquakes that shook Youngstown, OH, were just random events. And I'm not confident that the Mayan calendar serves as an accurate predictor of the end of the world.

No, for the good people of Youngstown, it is extremely likely that their recent earthquake experiences have something to do with fracturing.

Now before you start drafting any hatemail or criticize me for being anti-jobs, understand that I'm not saying that all our hydrofracturing operations are causing earthquakes...

There's absolutely no data to support such an argument — and quite frankly, if this were the case, we would've been aware of this problem when fracturing first started decades ago.

The fracturing connection to the Youngstown earthquakes isn't actually a result of the actual hydrofracturing, anyway; instead, it seems to be connected to the deep underground injection of wastewater that was generated during the fracturing process.

According to John Armbruster, a seismologist Ohio regulators brought in to monitor the earthquakes:

Youngstown is an area which doesn't have a history of earthquakes. This disposal well started operating in December of 2010.

Three months later, the earthquakes began and the earthquakes are trickling along. From March to November, you have nine earthquakes, all of a similar size, 2.5, 2.1, 2.7.

On Christmas Eve, there was a magnitude 2.7 earthquake. Our location of that Christmas Eve earthquake was about one kilometer from the bottom of the well and the location of the earthquake was sufficient evidence that there could be a link.

Following the well-publicized coverage of Armbruster's analysis, many residents of Youngstown started questioning whether or not it was worth it to host all these disposal wells.

Certainly lax regulation in Ohio has made it a prime location, but with all these recent earthquakes, changes could be coming.

~~eac_nat_gas~~

Even Earthquakes Can't Stop the Bull Market

I don't know if we'll necessarily see stricter regulations in Ohio. But I do know that when you consistently trigger earthquakes in regions where earthquakes are uncommon, business as usual will not be an option...

Especially in this case, where you'll find little support for oil & gas lobbyists reciting the “You can't prove it” line that's become a common refrain for decades.

When the earth rattles, people reassess the trade-off for the sake of economic recovery promises.

That being said, this is not something that will slow the domestic production of oil and gas in the United States. In fact, I would argue that it will make it safer and more efficient, which, despite what some media whores might tell you, is actually a good thing for our country.

We certainly require increased oil and gas production. Might as well do it in a way that poses less of a threat to our natural capital.

Going forward, I believe the oil & gas industry will absolutely have to address this issue. There's just no way they're getting around it.

So there are two possible approaches they're likely to take.

The first is quite simple...

You see, there are disposal wells all across the country. But only a very small percentage are being linked to earthquake triggers, because not all disposal wells contain brittle basement rock riddled with faults.

So going forward, it's possible that many of these operations will simply pony up for seismic surveys before proceeding. Rest assured, no oil & gas company actually wants to see a repeat of these earthquakes anywhere else.

Another option is for these operations to recycle the water instead of injecting it into waste wells.

I attended the subcommittee on natural gas in D.C. last year, and I found that most oil & gas companies are actively developing their own wastewater recycling processes.

There are also a number of companies that provide water recycling services for fracturing operations. But at the end of the day, I think that if the oil & gas companies decide to go this route, they'll just do it themselves, and not outsource those kinds of operations.

Point is, even earthquakes can't stop the domestic production of oil & gas. This is a done deal, and there's no turning back.

Although lately, I have noticed more "big money" interest in domestic production operations that haven't had any earthquake issues like the ones in Youngstown...

~~eac_shale_gas2~~

~~jeffs_signoff~~

Let the Chinese Invasion Continue

“Zao shang hao.”

It was too early in the morning to be riding an elevator with this guy.

We were in the heart of Calgary, heading up to the top floor of the hotel I'd called home for a few days during a scouting trip for my next oil play. I was heading back to my room to grab a few things I had left there before starting out for the day.

The moment he stepped inside the elevator, he frantically began whispering to himself...

“Zao shang hao. Zao shang hao. Zao shang hao.”

Pushing a room service cart, I had a good idea of where he was going. He was on his way to serve breakfast to several Chinese businessmen, rehearsing the entire way to their suite.

After hearing him repeat this mantra for the tenth time, I tried to boost his confidence, “I don't think you'll be forgetting that anytime soon.”

He must have realized how odd it sounded, because he smiled at me as he said, “Sorry about that. It means 'Good morning' in Chinese.”

“Are you normally in the habit of learning foreign languages at work?” I asked.

“Absolutely. My boss said I have to learn a bunch of these basic phrases. Ya know, stuff like 'Good morning,' 'Thank you,' and such.”

So what had my elevator companion thumbing a Mandarin pocket dictionary on his one free night of the week?

China's Last Resort

Although his morning language exercises may not have made much sense to most people, I knew exactly why a Calgary hotel manager was catering to the Chinese...

Their country has been pouring billions of dollars into Western Canada.

What's so special about Canada?

For starters, the Chinese realize they have an ever-increasing appetite for energy.

By 2040, China's oil demand will have caught up with Uncle Sam.

During the last decade, the number of cars in China jumped 333% to 62.9 million. By 2020, there could be as many as 220 million automobiles tearing up China's roads. (I guess nobody was listening when the Chinese government told its people they shouldn't own private cars.)

And to think that's just oil...

~~oil-sign-up~~

The country's natural gas demand is heading higher — much higher. In twenty-five years, China will be consuming as much natural gas as the entire European Union.

It's just one of the reasons the Chinese are scrambling right now to secure future energy supplies.

And believe me when I say they're spreading the wealth around. They know how unappealing it is to have to rely on a single foreign power to meet their domestic energy demand (a situation we're all too familiar with).

We can expect China to do everything in their power to avoid that kind of dependence.

Let's face it, dear reader; the absolute last place you'd want to be indebted to is Russia.

How many times has Russia used its tremendous oil and gas resources as leverage?

Anyone else remember when Russia completely cut off all gas supplies to the Ukraine back in 2005?

And the Russians are aware of China's growing thirst for energy...

Notice that every other country besides China is cutting their Russian imports of fossil fuels.

According to that chart from the IEA's World Energy Outlook 2011, China paid Russia just a little over $5.1 billion in 2010. By 2035, that amount is projected to grow 1,547% to $84 billion!

Can you think of a better reason for China to invest elsewhere?

This isn't some sudden epiphany on China's part. They've been quietly scooping up stakes in unconventional oil and gas plays across the globe.

In 2007 and 2008, the Middle Kingdom spent more than $40 billion in oil and gas acquisitions in places like Iran, Libya, and Venezuela.

Just yesterday, Nick Hodge told you about one of China's latest deals in North America.

While you might not expect to hear about another one so soon, PetroChina took full ownership of Athabasca Oil Sands Corp.'s Mackay River project on Tuesday in a deal worth nearly $700 million.

You have to admire their strategy: When in doubt, just bet on every horse in the race. North America, it appears, is their favorite stomping ground for making deals.

And China's rush to stake a claim in the shale plays across Canada and the United States are making us extremely happy...

The way we see it, you can either pick up the buying companies like PetroChina that are late to the party (at a hefty $137 per share), or you can beat them to the punch... which is precisely what we're doing.

~~eac_shale_gas2~~

Something's Brewing in BC

Back in the elevator, I couldn't help having a bit of fun. As nervous as the room service attendant was (he was now repeating 'Thank you' over and over again), I decided to offer him a tip before I departed.

“Ohayou Gozaimasu,” I told him with a straight face.

He was puzzled, and I could tell he was racking his brain to see if he had forgotten one of his phrases.

The young man wasn't yet aware that Canadian natural gas won't just be headed to China. There's another country across the Pacific willing to pay top dollar for future Canadian LNG...

“Well, once you have Chinese nailed down, you'll be moving on to Japanese.”

The look on his face was priceless.

~~keiths_signoff~~

U.S. New Top Natural Gas Destination

I recently went to tour a graphite mine about 150 miles northwest of Ottawa.

From the highway, it was another several miles down a snow-covered forestry road to get to the mine, which is in the middle of thousands of acres of Crown land.

Two moose tried to block our passage on the way in.

Massive fallen pine trees need to be cleared from the road every single day.

You'll be hearing plenty more about that mine — and about graphite — in the coming weeks and months...

But it's something else I learned on that trip that piqued my interest. And I think you'll want to know about it, too.

Remote Power

Ever wonder how you get electrical power to a graphite mine in the middle of the Ontario wilderness, miles from any power line?

I hadn't either, but it was a prime concern for this young mining company.

Every cent of cost is one less cent profit.

So all the options were weighed in thorough feasibility studies: build a substation from the highway and run a line; build diesel generators; tap into a nearby Enbridge gas pump house and build gas turbines on-site.

The winner?

Natural gas won by a wide margin.

Even with the up-front costs of tapping into the Enbridge facility, laying a new pipe, and building turbines, the current low price of natural gas — and the forecast for it to remain low — means it's a cheaper option than buying electricity or diesel to run generators.

That's incredible.

Swimming In It

New techniques and formation information have led to a global reassessment of natural gas reserves.

The advent of fracking and the discovery of shale formations mean proven reserves of natural gas could be several times more than once thought. And that's keeping prices at two-year lows — below $3.00 per BTU.

Even better, these formations are, for the most part, in countries previously considered “energy poor,” namely the United States, China, and Argentina.

This means countries once dependent on energy imports could soon become energy exporters... and this has the “energy rich” incumbents starting to worry.

The sentiment is clear in this recent quote from the head of the Venezuelan Gas Processors Association:

The global energy chessboard is changing, and markets will be realigned. Countries that have never had so much available energy will become self-sufficient, and perhaps even exporters. Fossil fuels may become cheaper, the growth of alternative energies will slow down, and new alliances, investments and trade networks will be established.

Indeed, those alliances, investments, and trade networks are being established right now.

~~oil-sign-up~~

One Day: $4.5 Billion

You may have still been hungover from New Years, but two very indicative events occurred on Tuesday:

1. For the first time ever, China's Sinopec (NYSE: SHI) bought into a U.S. shale play. It paid $2.2 billion for a 33% interest in five of Devon Energy's (NYSE: DVN) fields. Devon had been shopping the package, which includes 1.2 million acres in the Utica, Tuscaloosa, and Niobrara Shales since November.

2. France's Total (NYSE: TOT) paid $2.3 billion to Chesapeake (NYSE: CHK) and a smaller partner for a 25% stake in 619,000 acres of Ohio's Utica shale.

If you're starting to think this is part of larger, much more valuable trend, you're right.

Keith and I told you several times last year about the heavy merger and acquisition activity caused by new shale finds.

Here we see China and France chomping at the bit to the tune of $4.5 billion.

In total, 2011 saw $473 billion in energy asset transactions.

This year could be even bigger.

To that end, we've identified three stocks operating in U.S. shale formations that are most likely to be a part of this year's boom.

As the global energy chessboard changes, the world is starting to hail the new shale king.

~~eac_shale_gas2~~

~~nicks_signoff~~

Another Date Which Will Live in Infamy?

Last week, Iranian officials announced to the world they would answer any American-led economic sanctions with an embargo of their own: the shutdown of the Strait of Hormuz.

On Christmas Eve, the saber-rattling escalated another notch when the Iranian navy launched a ten-day exercise within these waters to illustrate just how quickly and easily they could shut down this heavily-trafficked passage to the Persian Gulf.

Just yesterday, Iran's Navy Commander Admiral Habibollah Sayari further reinforced the point he'd been making for the last week by claiming that this mission would be as easy as "drinking a glass of water."

The American response came swiftly and definitively, with the United States 5th Fleet stating that such actions will not be tolerated.

The reason this threat had such immediate effect on our own policymakers becomes clear with one look at a map of the region:

More than 15 million barrels of Middle Eastern oil pass through the Strait of Hormuz daily.

As a natural choke point between Iran, Iraq, Saudi Arabia, Kuwait and open water, the Gulf of Hormuz can be used to control shipments between four of the world's top 12 oil producers and their customers across the globe.

Here are some key strategic facts about this twisting stretch of sea between the Persian Gulf and the Gulf of Oman:

As of 2009, the Strait of Hormuz provided passage to 33% of the world's oil-borne oil shipments — and 17% of all oil traded worldwide;
The majority of this oil passes through the Strait on its way either to the United States or Asia, including a full half of all the oil imported by China.
In addition, the Strait provides passage to 2 million barrels of liquefied natural gas every day.
At its narrowest, the Strait of Hormuz is 21 miles wide, with navigable shipping lanes just 2 miles across.

The implications here cannot be overstated.

With close to half a trillion dollars in oil and natural gas passing through this narrow body of water annually, the world's fourth-largest oil producer has found a unique and frighteningly effective way of declawing any attempts by Western powers to project their influence on Iran's internal policy.

Many have already compared this move to the July 1941 cessation of oil exports from the U.S. to Japan, an American response to aggressive Japanese military expansions into China and French Indochina in the late 30s and early 40s. Every December 7th, Americans still remember the result of that hardball diplomacy.

But this time, it's not the Japanese Empire — but the American Empire that finds itself on the verge of losing access to its lifeline.

~~eac_report~~

It doesn't take a great amount of analytical ability to predict what is likely to happen next...

In the last 20 years, no Muslim nation has fared well when oil — and U.S. access to the commodity — was put into question.

And it appears that with this latest development — and the public naval exercises which are taking place as you read this — that pattern of forced 'regime change' might be furthered yet again.

In the coming weeks, issues such as Iran's highly controversial nuclear program will take a backseat to the very question that's been plaguing the U.S. since domestic oil production peaked back in the 1970s...

Where will we get the fuel which makes our nation run?

As inevitable as another armed conflict with a nation whose government is ideologically opposed to everything we hold dear, I would like to remind everyone that at least as far as the question of oil is concerned, maybe another war is truly unnecessary.

You see, while the world watches and waits to see if this powder-keg will finally explode...

While we sit and wonder who's going to fire the first shot, and whether that shot will be a nuclear-tipped one...

There are people hard at work to make sure that we never need to depend on things like the Strait of Hormuz, Iran, or any Middle Eastern oil-peddling nation ever again.

Not far from North Dakota's western border sits a small town by the name of Williston.

With a population of barely 15,000, this outpost of two- and three-story buildings, along with several others like it dotting the region, produce as much oil every day as the nation of Australia.

If this hunk of the American Great Plains were a nation unto itself, it would rank 29th among global oil producers.

Daily output is expected only to rise from here on out, reaching close to a million barrels per day by the close of the decade. Of course, this is a far cry from the 15.5 million barrels that pass into the Persian Gulf every day...

But what's happening in Williston is just a symptom of America's new industrial rebirth.

As the first major oil power to see its production levels wane, American oil has been fighting an uphill battle since traditional, easy-to-access oil reserves began going dry in the 70s. Many have viewed this as a sign of decline...

But while a new guard of oil suppliers emerged in the Middle East, American energy companies have spent the last 40 years figuring out new ways of getting to the less easy-to-access oil.

The quest has been long, hard, and full of pitfalls and setbacks. But the mastery of techniques like horizontal drilling and hydro-fracking are starting to pay off.

Today the biggest and most important innovations since the first oil wells popped up in the American West more than 120 years ago have firmly taken hold, reversing the general trend of American oil production decline:

The long-term fruits of this of these non-traditional methods of fossil fuel recovery are almost unimaginable.

With new techniques and discoveries opening the possibility of more oil than ever before — as much as 1.7 trillion barrels in North America — it is not just possible, but very likely that issues such as the one currently unraveling in the Middle East might very soon become a thing of the past...

Permanently.

~~keiths_signoff~~

Yes, American Oil Is Coming Back

With all the recent brouhaha about America’s oil and gas resurgence, I want to remind you that Canada is still the largest foreign supplier of energy to the United States...

More than Saudi Arabia…

More than Brazil and more than Mexico...

And that trend will continue, as part of the prolific Bakken formation resides in Canada.

As you know, I love Canadian oil and gas stocks that pay hefty dividends.

Last August, I recommended you buy my favorite oil dividend stock, Petrobakken.

Petrobakken is a Canadian Bakken producer that has consistently paid a $0.08 dividend per share, per month, for the past 27 months.

At current levels of $11.62, Petrobakken yields 8% in steady income from oil production.

A couple of months ago — when everything sold off — Petrobakken reached a low of $5.75.

Hindsight being 20/20, it was a once-in-a-lifetime buying opportunity.

Had you picked up shares of Petrobakken on October 4th (the day it hit that low), you would’ve already doubled your money through capital appreciation.

And of course, the dividend yield from that price would’ve been over 16%!

But Petrobakken is just one of many Canadian stocks that pay hefty monthly dividends.

And still, that’s only part of the story...

You see, one of the benefits of buying Canadian-based oil and gas companies is that they pay their dividends in Canadian dollars, which is natural resource-backed. (Think of a gold standard, but with oil, gas, gold, silver, timber, etc.)

Over the past several months, the Canadian dollar weakened versus the U.S. dollar, as many commodities dropped in price.

However, the Canadian dollar has been strong against the greenback since the 2008 financial crisis because its natural resources remained stable in price.

~~eac_nat_gas~~

EU concerns have led investors to get out of a whole host of currency, commodity, and equity investments... and into the perceived safety of U.S. dollars.

As a result, several of these asset classes are now at or near their recent lows.

Any future U.S. dollar weakness or oil demand strength should move oil prices back up.

This would benefit Canadian stocks involved in the production and distribution of oil and gas, with assets and dividends in Canadian dollars.

In addition to Petrobakken, some of the Canadian oil and gas stocks I like are Crescent Point Energy, Baytex Energy Cenovus EnergyEnbridge, Enerplus, Pengrowth Energy, Provident Energy, and Penn West Petroleum.

I would accumulate these companies on weakness.

Profitably yours,

~~EAC_brians_signoff~~

Publisher’s Note: An avid listener and one-time guest on his radio show, I learned Monday night that popular Baltimore radio host and political and social agitator Ron Smith passed away.

On Nov. 28, after continuing on-air for more than two months despite having been diagnosed with stage 4 pancreatic cancer that had metastasized throughout his body, Ron signed off from the 50,000-watt news talk station for the last time in his signature straightforward, no-nonsense radio style.

"I'm retiring," the former Marine said in a live broadcast. "I basically can no longer do it. I'm getting weaker every day, and it's time to pull the plug. I'm just not up to it. So, you have to face that kind of thing. Basically, the curtain is coming down right now. I'm bidding everyone a very fond farewell."

Ron, a true conservative in the libertarian sense, won my undying loyalty when he came out against the Iraq War during the run-up to the invasion.

Called the “voice of reason,” he took a beating by much of his audience for his stance — and even lost some of his loyal listeners. But he never wavered in his opinion that invading Iraq was imperialistic and would ultimately drag down the United States...

The day before his death, the last U.S. convoy quietly left Iraq.

America has lost a hero. R.I.P. Ron Smith.

The Common Sense in Energy Investing

I can't help but feel sorry for them.

Walking through an office full of traders last week, it was difficult not to.

You see, these guys have been living on coffee and cigarettes for months, their eyes glued to flashing computer screens...

It's all part of the countless buying and selling they do on a daily basis.

Before I reached the end of the hallway, I heard them whispering amongst themselves. It seemed half of their hush-hush conversations concerned Europe; the rest, Obama.

I caught sight of one poor soul holding an argument with himself. Whichever side was winning wasn't clear, but his feverish pace was taking a grim toll.

“I'm getting killed out there,” he murmured as I peeked around the corner of his unadorned cubicle.

You might be asking yourself why I am so sympathetic to the professional trader's plight.

Well, for all their maneuvers in the market, these people don't hold an ounce of sense when it comes to investing. And I know for a fact that these "professional traders" are losing even more to another group of investors...

Us.

Guaranteed Energy Growth

If I'd had the chance, I'd have given the gentleman debating with himself just one bit of advice: Energy stocks are ripe for the picking.

It's obvious how skewed the global oil industry is today. To think otherwise would be foolish.

Within a matter of five decades, we've seen National Oil Companies gain control of nearly 95% of the world's oil reserves. OPEC members alone are responsible for one-third of global supply.

What many people don't realize is how distorted things are on the other side of the equation.

The ten largest oil-consuming countries in the world today make up 60% of total demand.

Ten countries!

Just take the top five of that list, and we're talking about 40%.

That means half of the world's oil demand — now approaching 90 million barrels per day — comes from a handful of countries...

click to enlarge image

Did you happen to notice the light blue slice of the pie?

Within just 15 years, China's oil demand has more than doubled.

Several weeks ago, the IEA reported 90% of the growth in global energy demand will come from non-OECD countries.

By 2035, China will account for more than 30% of the world's energy. China's demand for oil last month was the second-highest on record.

Although it won't be enough to overtake the United States' top spot, finding that energy will be a daunting task...

Of course, the Middle Kingdom is already making preparations — which is why Chinese companies have been scouring North America for a solution, spending billions in the process. And it's no secret as to which energy sources will be dominating the scene by then.

~~eac_nat_gas~~

What's the cost behind this inevitable growth? 1.5 trillion dollars every year from now until 2035.

According to the IEA, that's how much the world will need to invest in the energy-supply infrastructure.

So you can understand why we're looking to do more than just scrape by with day-to-day trading...

Look, no matter what you do, you'll never be able to control the daily flow of news coming from Europe, or know exactly how the geopolitical game of Risk will turn out in the Middle East.

You can, however, practically guarantee your energy profits.

How?

It's a theme we've touched on all year:

You can either roll the dice with the bigger names in the field, all of which are being squeezed out of the world's oil fields by those domineering NOCs, or you can do exactly what the big players are doing — that is, you can find the sorely undervalued players that are being scooped up feverishly.

Take a look at the following chart:

Ever since my report alerted readers to the huge potential in the U.S. oil sector, plays like this one have more than doubled.

The best part?

This is only one example of how profitable these plays are right now, all during a market that's tearing professional traders (like the ones I mentioned earlier) apart on a daily basis.

That's why I've been beating this drum for years — and will continue to do so.

~~oil_signup~~

~~keiths_signoff~~

Iran Oil Opportunities

Earlier this year, I was invited to attend the climate talks in Durban, South Africa.

I had to decline the trip.

Although I've always wanted to visit South Africa and hike Table Mountain, I just couldn't justify accepting the invitation.

You see, I've never believed for a second that the world could come together and commit to a legally-binding deal to reduce carbon emissions.

Quite frankly, I think the whole idea is a bit naïve.

In fact, I predict that over the next few years, these types of climate talks will essentially fizzle. It'll eventually turn into nothing more than a dedicated group of passionate believers meeting at an off-ramp Holiday Inn conference room...

I don't say this to be crass. But the reality is there are just too many countries reliant upon carbon-intensive technologies to ever treat these climate talks as anything more than a random pest that needs to be placated once a year.

In fact, just yesterday, Canada officially withdrew from Kyoto.

Japan, China, and the tiny nation of Tuvalu — which is essentially screwed anyway, as the effects of climate change will eventually put the island under water by 2050 — all chimed in and criticized Canada for its decision.

But none of that matters.

Because no amount of international criticism is going to stop Canada from producing its tar sands...

Which, like it or not, is a massive emitter of carbon emissions.

How Do You Live With Yourself?!

As an environmentalist, I've often been criticized by other environmentalists for having a defeatist attitude when it comes to climate change.

A few years ago, a reader asked me how I could live with myself because while I spoke about the environmental and economic burdens associated with our reliance on oil, I was also more than willing to invest in the black stuff.

Well, I live quite comfortably. And one of the reasons for this is that I've made a ton of dough in the oil game.

Look, when it comes to transportation technologies, I'm no fan of the internal combustion engine.

Although its contribution to our modern world is irrefutable, it is also outdated. And relying on vehicles that run on a finite and highly-pollutive resource does us no favors.

That being said, energy policy in the United States is dictated by special interests — not our “best interests.” And unfortunately, I can't afford to buy a senator.

So while I don't think it's in our best interest to continue shelling out more than $4 billion a year in subsidies for the mature and profitable oil & gas industry, I also know that the shelf life of the internal combustion engine is nowhere near its expiration.

And because oil isn't going to get cheaper in the future, why wouldn't you go ahead and make a few bucks in the oil game?

~~oil-sign-up~~

Buy the Domestic Stuff

Yesterday afternoon, it was all over the news...

The Iranian parliament's National Security Committee announced the military was going to practice its ability to close the Gulf to shipping at the Strait of Hormuz.

Someone in our office shouted, “Rumor or Real?”

My thought: Does it matter?

Our world is so vulnerable to the slightest oil shock, it doesn't matter if it's a rumor or not. The threat alone is enough to move the price.

Those who played this news yesterday were able to jump in and out in a matter of minutes with a nice little profit.

Of course, few sit in front of a computer all day and monitor this stuff — but that doesn't mean you still can't pull in some serious oil money.

The easiest and safest way is simply to play the domestic stuff.

It's no secret that the United States is quickly regaining its status as a major oil producer...

And every time Iran gets cocky or some other Middle East nation sends news of pipeline disruptions or geopolitical threats, those domestic operations become more and more attractive.

This is something we intend to ride for many years to come, and for everything it's worth.

And while I will continue to support and profit from the development of our new modern energy economy, I will not hesitate to profit simultaneously from the old one.

~~oil_signup~~

~~jeffs_signoff~~