When you follow stocks for a living, it’s incredibly easy to get caught up in short-term thinking. Hurricanes blast through the Gulf, and traders bid oil and natural gas higher on temporary supply disruption. Three weeks later, Wall Street moves on to the “next big thing," and prices slither back down. Then early blasts of snow and cold sweep the nation, and, you guessed it, energy prices spike again. But as the cold abates for a couple of weeks, prices drop again.
It’s a trader’s mentality—one that can make a lot of money for the toughest guys in the pit. But one that can leave the average Joe investor dizzy, at best.
A WORD FROM OUR SPONSOR
Can You See the Forest for the Trees?
Hurricanes, blizzards, weekly supply reports: Just about anything that passes as news is just noise and should never serve as the basis for your fundamental investing decisions. Please don’t get caught up in the little details; look at the bigger picture, instead.
I’m not telling you to ignore some of the very real seasonal patterns of investing in energy. But I want you to focus most of your thinking on the long-term view, instead. If you use the XLE—the energy select sector exchange-traded fund—as your proxy for the energy sector, you'll see it has nearly doubled over the last two years.
So it’s only natural to wonder if energy stocks have had their day—are they “running out of gas?” If that’s your question, here’s my answer: I still have 60% of my personal wealth committed to the energy sector.
This Crisis Didn’t Happen Overnight
It was decades in the making. Low energy prices in the 1980s and 1990s meant that status quo was the best business practice for explorers, drillers, refiners—virtually every sector of the energy patch.
New investment—when payback would take years—meant your stock price would take a big hit. And no self-respecting CEO would go for that. So we greatly underinvested in finding new energy sources, building infrastructure and developing alternative fuels, as well.
Furthermore, the environmental movement of recent years—coupled with not-in-my-backyard attitudes—put a steel curtain in front of any new energy project, from LNG terminals to drilling in Alaska to new nuclear plants.
So as energy demand soared, supply withered.
Americans are energy PIGS, and China and India want to be just like us.
China used to be a net exporter of oil. Now their imports are soaring out of sight. And India—whose population will equal China’s by 2030—is even more dependent on foreign oil.
See why the current energy crisis is not some short-term problem? The competition for scarce energy resources is going to get even more brutal, as billions of new consumers join the modern age. And the opportunity for investors like us will keep getting bigger, as well.
Let me tell you about one of my favorites right now.
A No-Brainer
As you might expect, Wall Street has been leery of companies doing business around the Gulf. But all business is not equal. On-shore production—shallow wells—has come back on line at a much faster clip than offshore. In fact, this company’s production now stands at 105% of pre-hurricane levels.
But the stock isn’t priced that way—yet. We know this company quite well at ChangeWave Investing. We recommended buying and selling it two years ago for 84% gains. This time around, we should do better than that. Our conservative target is $10—you can pick it up now under five bucks. But if things play out as our research suggests, we’re looking at a $15 sales price—more than a triple from here.
This independent producer is one of the leaders in using 3-D seismic technology to limit risk and boost the payoffs in drilling wells. It has a great little niche in the Louisiana lowlands—200,000 acres in one of the country’s prime areas for gas drilling.
Let’s be conservative for a moment.
At current energy prices we value this company’s proven reserves at about $9 a share. That’s without any new wells. So our $10 share price-target is easily in reach, even at current gas prices. But all the official government estimates I’ve seen call for energy prices to be 20%–30% higher overall. With natural gas at $10 we pocket nice gains. At prices 50% higher, we make a killing.
Here’s the wild card—one entirely to our advantage—with a rock-solid base in the Louisiana bayou, this company is looking to expand in a very big way.
As usual, they’re going about it intelligently. But after careful seismic research, they’re developing two new big projects: a very large east Texas gas field and a monster gas field near an existing Apache oil field in the Gulf of Mexico.
The feedback from our ChangeWave Research Alliance—men and women actually working in this industry—is very positive. We expect both these fields to come on line by the end of 2006. Positive exploration news would come much earlier, of course, and really push the stock.
Frankly, this investment is a no-brainer. Even without these new fields, I can make the case for gas reserves doubling—thanks to their $97-million drilling program, 100% targeted to natural gas. Bottom line: This stock made big money for us once. Now we’re getting in line for a second helping.
Buy it under $5; sell it at $10—or if things go according to plan, TRIPLE your money.
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