Get Natural Gas 'for Free' After Massive Selloffs:
Source: Karen Roche of
The Energy Report
Stansberry & Associates Investment Research Founder Porter
Stansberry envisions a future that is anything but rosy, but
savvy investors may find solace and security against the
crippling inflation he expects. In this exclusive interview with
The Energy Report
, the popular publisher talks about opportunities in the
beaten-down natural gas industry, where investors with good
timing have the opportunity to get natural gas "for free"
following massive selloffs. He also discusses some niche energy
plays that offer great ways to book profits in a market that has
many analysts scratching their heads.
The Energy Report:
In your "End-of-America Update" during the
Casey Research Summit
at the end of this month, you'll be talking about a crisis you
foresee that will be worse than the Great Depression. What makes
this coming crisis worse?
Let's look at some numbers. During the Great Depression, there
was a 3-4-year period of nominal Gross Domestic Product (
) decline that the government countered with a combination of
fiscal and monetary annual stimulus of roughly 8% of GDP, a
relatively mild monetary response to a very significant economic
downturn. I think the problem with the current downturn is not
its severity. It's actually not severe at all; since 2008 we've
had less than one full year of economic decline on a nominal GDP
basis. However, the stimulus has been overwhelming, closer to 20%
of GDP annually. So what I see being worse than the Great
Depression is that our monetary foundation has been completely
severed. In this case, the medicine is to be feared, not the
disease. The recession has been relatively mild, but the fiscal
and monetary stimulus to attack it has been more massive than
ever before in the history of the United States.
What would you say to those who would argue that the recession
has been mild as a result of the large stimulus?
That's nonsensical. You cannot tax yourself to prosperity. You
cannot redistribute your way to wealth. The worst aspects of the
Great Depression didn't occur due to the stock market crash in
1929. They occurred because of the confluence of the Smoot-Hawley
Tariff Act and enormous tax increases that accompanied Franklin
D. Roosevelt's election, in addition to a huge increase in
regulation and the confiscation of private property. None of
those things helped anything. The low point came at the end of
the fall of 1937, a full four years after these supposedly
stimulative measures had been put into effect.
Juxtaposing this doesn't seem to jibe with your being more
bullish on stocks than you've been since 2008, as you recently
wrote. Why would you be more bullish on stocks in the scenario
you've just laid out?
When the government prints money, sooner or later it will end up
in the stock market. You can't print yourself to wealth or
prosperity, but you sure as heck can print yourself to higher
stock prices. That's what the government has decided to do. In
particular, I think it has rigged the stock market and the
banking system to recapitalize the banks. And that represents an
opportunity for investors. When you can buy banks for very big
discounts to book value in this kind of environment, you probably
Speaking of investment opportunities, in a
you also recommended blue chips. At that time, you said they were
cheap. Can you still find blue chips in 2012 at prices that
create no-risk or low-risk situations?
You can. I would point to
Johnson & Johnson (JNJ:NYSE)
as a great example. If you had enough money, you could buy the
entire stock and finance it with its cash flows, which is the
definition of no-risk investing in equities. I'm not saying that
there's actually no risk. That's not what I mean. By no-risk
investing, I mean there's no greater risk-no additional risk-in
buying the equity than in buying the debt. Importantly, since I
originally recommended Johnson & Johnson stock, the company
has increased the dividend by 79%. That's the key. Such dividend
increases protect you from inflation.
Could you elaborate on your point about no-risk investing in the
context of stocks versus bonds?
It relates to the margin of safety. In
Security Analysis: The Classic 1934 Edition,
Benjamin Graham's great insight into investing was this concept
of a margin of safety. He indicated that one finds the most
significant margin of safety in a company that could afford to
pay for itself, obtain the whole enterprise value, buy all of its
outstanding stock and pay all of its outstanding debt. Some
large-cap blue chip stocks offer particularly good margins of
In the context of growth and investment strategies, let's turn to
natural gas. In one of your recent newsletters, you referred to
the natural gas market as perhaps the single biggest anomaly
you've seen in your entire career.
There's an enormous amount of money to be made in natural gas
over the next five or six years, and it's so simple to
understand. There are many places where natural gas can and will
supplant coal and oil. It just has to be cheap enough to make it
worth the capital investment of switching. There's no doubt in my
mind that we're at that point. I don't think natural gas has ever
been as cheap relative to oil as it is currently, with the ratio
of the price per barrel of crude oil to the price per 1,000 cubic
feet (1 mcf) of gas now above 50:1. I can't find a period in
history where the ratio was ever more than about 24:1 or 25:1-and
the 25:1 was an historical high as recently as August 2009. So,
compared to oil, natural gas has gone from being abnormally cheap
to being stupendously cheap.
Those low prices are driving a lot of natural gas companies
and a lot of exploration and production (E&P) companies out
of business. I anticipate a half dozen to a dozen natural gas and
E&P companies failing over the next 12-18-months. When their
assets are auctioned in bankruptcy, they're going to be great
buys. If you know what you're doing, you're going to be able to
buy natural gas in the ground for a very low price.
I'll give one example of a publicly traded company where you
can do this right now, which is
Chesapeake Energy Corp. (CHK:NYSE)
. It is currently trading at about $20/share, and that includes
all of Chesapeake's proven undeveloped resources (PUDs)-resources
that neither the Securities & Exchange Commission nor the
stock market acknowledges. Earlier this month, Chesapeake did a
$2.6 billion (
) deal-monetizing three oil and gas assets-and the company plans
to sell off some $10B worth of assets before year-end.
Chesapeake's market cap is about $13B, and I'll bet selling those
assets won't change its market cap at all, because the market
doesn't currently value what it is selling anyway. The market
gives it credit only for its current production. So no matter how
much natural gas these companies have in the ground, it isn't
being valued at all. It's as if the stock market believes that
natural gas will never have a value in the future.
But guess what? In 2015, three or four liquid natural gas (
) export plants will be coming online in the United States. And
overseas, gas doesn't trade for $2/mcf. In Europe, it trades for
$7-8/mcf, and for about $12/mcf in Asia. What happens to the
value of all those reserves when the prices finally get
arbitraged thanks to LNG? Once the U.S. starts exporting gas at
international rates, U.S. prices will rebound significantly. So I
see a great opportunity. If you're smart and know what you're
doing, you can buy up all these resources in the ground, either
in bankruptcy auctions or in equities of companies that aren't
forced into bankruptcy because they aren't getting any credit for
those assets. You can buy them up for literally pennies on the
dollar right now. I think those pennies are going to be worth a
lot of money in four or five years.
Natural gas will soar, one way or another. Opening up U.S.
natural gas to international demand will change the entire
marketplace dynamic. Those resources that are now considered
worthless will be worth maybe $5-6/mcf. Suppose you pick up 1
billion cubic feet of gas that you pay next-to-nothing for-maybe
a dime on the dollar, so $100 million gets you $1B worth of gas.
In three years, you'll be able to sell that gas for more than
$1B. As we speak, people out there are organizing the funds to
buy the gas to make that trade. Some of them are my subscribers
and when some of your readers see this interview, they'll pick up
on the same idea. The idea is to make a lot of money in natural
gas by buying it smart with equity, not with debt, and holding it
until the LNG markets come online.
So what does all of this mean for investing in oil?
It's the right time to be investing in natural gas because no one
else is doing it. The E&P companies are divesting natural gas
as fast as they can. I mean, Chesapeake's selling every PUD it
can and getting a lot of money for it. Unfortunately, they're
selling at the bottom, but it beats going bankrupt.
As for oil, I'm very concerned about oil prices because all
the technologies that have been used to bring us this glut of gas
also are being used to bring up a glut of oil. So much oil is
coming out of the Bakken in North Dakota that they've run out of
pipeline space to carry it to Cushing, Oklahoma. The same thing
will happen in Eagle Ford in south Texas, Marcellus in
Pennsylvania and Niobrara in Wyoming. We've tapped into a sea of
oil larger than anyone can imagine. I really do believe that oil
prices will collapse over the next few years, down to below the
marginal cost of production. According to FCC filings I've read,
the marginal cost of production with gas is around $2.60/mcf. The
price of gas today is $2.10/mcf. The marginal cost of shale oil
in liquids is probably around $50 per barrel ($50/bbl), so that
would imply maybe a price in the $40s-in today's dollars. The
nominal price in the future may be higher than that due to
inflation, but it could still be a lower real price.
If you're long on oil, you've got to have your head examined
because a tidal wave of oil is about to hit the market. People
had a hard time believing that about gas four years ago, and
they're going to have the same problem accepting it about oil
Does the negative public reaction to fracking and the potential
for regulatory bans create a potential black swan for the Bakken,
Marcellus and Eagle Ford?
Whoever bans fracking may get thrown out of office. Americans may
hate oil companies if you ask them in an opinion poll, but they
hate high gasoline prices more.
Do you think people outside the industry understand the
relationship between the risks of fracking and high oil
I do. It's funny that you used the term black swan in terms of
the risks in the oil fields. I've actually written about black
swans in the other context. A few months ago,
Anadarko Petroleum Corp. (APC:NYSE)
was drilling in the Wattenberg field in the Rockies. Although
this field-heavily explored and heavily drilled-has been in
continuous production since 1903, Anadarko discovered a new
billion-barrel resource that nobody knew about before. The more
drilling we do in these shales, the more likely the discovery of
more expansive deposits than anything anyone ever imagined.
Current estimates indicate the presence of 20B barrels of oil
each in Eagle Ford, Bakken and Marcellus shales. I believe those
estimates will grow by leaps and bounds to a point that they're
talking more like 100B barrels in those shales. No one knows
what's down there because no one has done very much drilling yet.
The more they drill, the more oil they're going to find.
So, in terms of investing, are you shorting the oil
No, but I'm being very cautious about which ones I buy. You have
to be careful. There's a big shale field out there next to
Abilene, Texas, that so far has been a secret in the industry. I
became aware of it a couple of months ago. It's called the
Three-Fingered Shale. I'm allowed to talk about it now because
Chesapeake finally disclosed its interest in the field. The other
leading company with leases in the Three-Fingered Shale is
EOG Resources Inc. (EOG:NYSE)
. We bought Chesapeake primarily because of its natural gas
reserves but also because I knew it had a leading position in
this field, which I think will end up being another 20B barrel
Investors who buy oil companies with access to these huge
reserves at the right price may do fine, but they must realize
that oil prices will be crushed and companies that paid too much
for their reserves will be hurt. Actually, I think there are
safer ways to invest in the boom, and right now I'm favoring LNG
shipping companies. That niche will experience a huge growth
trend that will last for decades. Similarly, I think it would be
wise to buy into service companies engaged in drilling and
pipelines. There are lots of ways to make money in this
However, I wouldn't count on making money buying up reservoirs
of oil on the assumption of oil prices running between $80 and
$100/bbl out into the future because those prices won't last.
Are you looking at other opportunities in energy?
No; if I can get natural gas for free I'm going to do pretty
well. The same goes for LNG tankers, because demand for them is
soaring. Leasing and rental rates are sky high and will be for
years to come.
Do you have recommendations in the tanker investment arena?
Teekay LNG Partners L.P. (TGP:NYSE)
in my newsletter in December. I haven't found the right pipeline
company to buy yet, because their prices are so high and yields
so low. As far as oil and gas companies go, in addition to
Chesapeake and EOG, we also still own
. We own those for various reasons, but as I suggested earlier,
the bottom-line is that they have very cheap resources.
Very good. Any other advice for our readers?
Buy some gold. Buy some silver. Be prepared for your real wages
to fall. And be prepared for some real fireworks out of
Washington, D.C., where they're going to do some incredibly
stupid things over the next couple of years and bring on a whole
new level of absurdity.
Strong words. Thank you for sharing your thoughts with us
After serving a stint as the first American editor of the
Fleet Street Letter, the oldest English-language financial
founded Stansberry & Associates Investment Research, a
private publishing company, 14 years ago. Stansberry &
Associates has subscribers in more than 120 countries and employs
some 60 research analysts, investment experts and assistants at
its headquarters in Baltimore, Maryland, as well as satellite
offices in Florida, Oregon and California. They've come to
Stansberry & Associates from positions as stockbrokers,
professional traders, mutual fund executives, hedge fund managers
and equity analysts at some of the most influential
money-management and financial firms in the world. Stansberry and
his team do exhaustive amounts of real world, independent
research and cover the gamut from value investing to insider
trading to short selling. His monthly
Stansberry's Investment Advisory
newsletter deals with safe value investments poised to give
subscribers years of exceptional return.
to learn more about Stansberry, his outlook and ideas.
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1) Karen Roche of
The Energy Report
conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
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3) Porter Stansberry: I personally and/or my family own shares of
the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
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