Investment Themes To Break Russia's Natural Gas Dominance


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Oil and gas investors just received a gift.

There's a huge opportunity brewing in European oil and gas exploration, but a recent announcement from French authorities raised eyebrows and sent shares of some companies dramatically lower.

The effects are likely to be only temporary because a European country that isn't exploring for oil and gas is a country at the mercy of Russia - not exactly an enviable position. When the political air clears, investors who snap up shares of the right companies will be sitting pretty.

***Last Wednesday French authorities threw a bucket of cold water on oil and gas exploration activities in the country. At the center of the issue are the potential environmental impacts.

"We will hold a meeting as soon as possible with the holders of oil shale exploration permits," said Environment Minister Nathalie Kosciusko-Morizet in an address to parliament. " I will prevent all work if the environmental conditions aren't met."

Exploration companies with concession in France saw their stocks plummet. Toreador Resources (Nasdaq: TRGL) , a $362 million market cap company which holds exploration licenses in France's Paris Basin saw shares fall 25 percent.

I have no doubt that France is legitimately concerned about the environmental impact of drilling activities - and it should be. So too should any country, and it's important to have controls in place to prevent an onshore disaster.

But the big picture of energy supply and consumption necessarily points toward exploration activities, not only in France but in the rest of Europe.

***The natural gas market has not matured in Europe where natural gas commands a huge premium - current prices are more than double the price of natural gas in the United States. Why?

Because there's a new cold war heating up, not over nuclear weapons but rather natural gas. This time the U.S. gets to watch from across the pond

Many European countries are at the mercy of Russia, and the state controlled firm Gazprom ( IOB: OGZD) , for their gas supplies. This single company accounted for 84 percent of Russia's gas production in 2009.

Because of Gazprom's dominance in the natural gas market Europe's price is largely dependent on Russian border prices. Natural gas is not easily transported, so these countries can't simply import supplies from the U.S. to ease the pain.

Pulling 2009 European gas sales from Gazprom's 2010 Databook , and gas consumption from the EIA, it's clear why Europe needs to break its addiction to Russian natural gas.

A sequence of major oil and gas strikes in Europe could break the big stick that Russia, and Gazprom, wields over Finland, Bulgaria, Poland, and the rest of Europe.

We want to invest in the companies that will help break this stick. And that means buying oil and gas exploration companies that will help break Europe's dependence on Russia, and Gazprom.

Toreador Resources is one way to play the weakness in France. Toronto listed Vermilion Energy (VET.TO) , (VEMTF.PK) which has a market cap of $4.3 billion, is another. The latter was much less impacted by the most recent news because it also has exposure to exploration activities in Australia, the Netherlands, and Canada.

Given the bleak future for any country in Europe that completely puts the breaks on oil and gas exploration, I expect these stocks will move higher in the coming months.

***Small Cap Investor PRO lead research analyst Tyler Laundon and I just published a research report featuring a micro-cap oil and gas exploration company with exposure to huge natural gas fields in Europe - and not the ones in France. The report is only for paying subscribers, so you'll want to sign up here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: TRGL , VEMTF


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