I’m Counting on Chaos in the Energy Sector and You Should, Too

Keith Fitz-Gerald Apr 17, 2015
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CNBC’s Kate Kelly asked me last January if I was worried about smaller players in the energy sector “just plain going out of business.”

I replied that not only was I not afraid of the weaker players being swept away, I was counting on it.

As you might imagine, that raised more than a few eyebrows, considering oil had fallen by 51% from last summer’s highs to only $52/barrel at the time, and investors couldn’t hit the sell button fast enough.

But I had studied my history carefully and knew something everybody else didn’t – the strong always survive.

That sounds cliché, but I’m bringing this up for a reason because this tiny nugget of information – this perspective, really – has helped turn ordinary people into millionaires for years. And it will again.

I want you to be among them.

Here’s what everybody else is missing.

Setting the Record Straight on the Global Energy Outlook

Many investors are traumatized by lower oil prices, and understandably so. For years they’ve been fed a constant diet related to Peak Oil, higher prices, and fear at the pumps. I can’t say I blame them. I read the headlines, too.

But here’s the thing.

The energy crisis is reaching critical mass. As hard as it is to imagine, the low prices giving everybody else fits are a magnificent opportunity.

It’s been six months since the Saudis fired the first shot in the current “oil pricing war” by unleashing 30 million barrels of oil a day on the markets. The glut caused traders worldwide to slash prices and made plenty of OPEC members unhappy.

Yet the Saudis continue to pump oil onto global markets anyway because their real target has always been the U.S. shale revolution and the threat it represents to their way of life.

You and I can debate the merits of what they’re doing all day long. I think the Saudi government made an unbelievably stupid decision and completely miscalculated the outcome. You may think it’s brilliant. I respect your view. Either way though, it’s a moot point.

What matters is that the Saudis have deliberately created a short-term pricing disruption and, in doing so, have inadvertently created the best possible investment scenario for us.

Instead of sending U.S. oil producers packing like they planned, the Saudis have actually created an environment where the best managed, best capitalized energy companies are hunkering down, flushing out the weaker players, and emerging stronger than they were before.

Take Schlumberger Limited (NYSE:SLB), for example.

When the Going Gets Tough, the Tough Get More Profitable

For months now, expectations have been that the massive oil and gas equipment maker would get trashed by virtue of lower oil prices. Instead, the opposite happened.

SLB smashed earnings expectations, turning in $1.06 per share versus the $0.91 analysts expected, despite a drop in Q1 revenue of 9% to “only” $10.2 billion. Not surprisingly, the stock jumped more than 2.3% in pre-market trading, and is still trading higher as I write.

It’s a graphic example of what I’m talking about here – the strongest will survive… and profit.

Facing lower prices, Schlumberger’s management took aggressive cost-cutting measures and actually improved profit margins during the quarter to 24.1%, versus the 22.5% expected. At the same time, the company repurchased 8.7 million shares of common stock at an average price of $82.98 per share, for a total of approximately $719 million.

My point is that here you have a perfect example of a company that is doing better in an industry for which expectations are absolutely terrible. The short-term price dislocation that everybody is so worried about is nothing more than a speed bump in the longer-term scheme of things.

More importantly, Schlumberger will not be the only company in this position. In fact, there are going to be plenty of energy companies that grow despite seemingly overwhelming headwinds plaguing the industry.

I’ve already recommended two of them, in fact: Williams Companies Inc. (NYSE:WMB) and Marlin Midstream Partners LP (NasdaqGM:FISH). They’re up 21.56% and 15.29% to date, respectively, not too shabby compared with the 0.5% return of the S&P 500 since I recommended FISH in December.

I have no doubt they’ll pull even farther ahead over time for two reasons:

  1. Not a single energy company on the planet is actually worried about being able to sell all of the oil it has.
  2. According to the International Energy Agency (IEA), surging world energy demand will trigger an estimated $48 trillion in investment by 2035. Analysts forecast that approximately 59% of this will be simply to maintain production at current levels, while the remaining 41% will be to meet rising demand.

I believe that figure is about half of what it should be, though.

When you take into account the amount of capital needed to compensate for aging infrastructure, warfare, and regional security, I think the necessary capital is going to be more like $80 trillion.

The best part of this is that most investors don’t yet realize the potential. But they will. More than 80% of all future upstream oil and gas investment will be made simply to offset declines in today’s fields.

Meanwhile new fuel and energy supply investment has more than doubled in real terms since 2000, while investments in renewable energy have quadrupled over the same time frame and are projected to double again by 2020.

Some $1.3 trillion was invested in 2013 alone. The IEA is forecasting that figure will rise to $2 trillion by 2035, while annual spending on improvements to energy efficiency will grow to $550 billion.

Factor in the instability in the Middle East – which can cramp supply and bring prices roaring back without a moment’s notice – and the case for preparing your portfolio for oil’s resurgence is stronger than ever despite the low prices giving many people pause.

In closing, I’ll be back with yet more specific recommendations to play this Trend in near future. In the meantime, I’d love to hear from you if you’re following along with FISH, WMB, or our Halliburton lowball orders.

Chances are you’ve got plenty to celebrate.

Until next time,

Keith Fitz-Gerald

37 Responses to I’m Counting on Chaos in the Energy Sector and You Should, Too

  1. Lamar Owens says:

    What are the chances that Saudi Arabia and OPEC will change the petrodollar to something other than the U.S. $?

    • Don says:

      It would appear, all other factors remaining steady, to have negative consequences as doing so would weaken the US dollar which in turn would make US refined oil export products more price competitive.

    • Gar says:

      I think China has a big say in what money we use as they have the most gold backing them right now. Obama right now is making our friendly nations our enemies right now. I have nothing bad to say about anyone just facts that I read. When you read an article you must make a copy and re-read it until you completely digest what the article really said. An article is like deciding what stock to buy. Buy the wrong stock and your broke.
      I was taught use common sense not what someone else tells you. If it feels right inside you then buy. I watch many people give their thoughts but they do different than they say. COMMON SENSE!

      • Gar says:

        In 2007 I listened to my wife and didn’t sell but a voice in my head said SELL. I lost 675,000.00 on one stock. Now I listen to that voice in my head, I guess you call it your brain.

    • yngso says:

      Clue, Iran is still selling oil, and I suspect not in USD. Others maybe need the USD too much?

  2. Andy says:

    I bought into HAL on 12/9 and am up 20% having sold my previous tranche in October. A no brainer with the recent merger announcement!

  3. Barry says:

    Hi Kieth, what a day in the markets

    I did buy Fish when u mentioned it in total wealth & up 16.7 % as per close today

    HAL I bought a few times over the years and up 27.5 % , average cost basis being $ 36.2 , even though some bought in mid 40’s , its also one of my largest positions

    Do have a smaller position in schlumberger & to bad hadnt bought more of that as bought way back at $ 63.25

    Oh yeah, besides HAl I do have a losing position of 5 % in BHI, but will be a gain if merger goes through with HAL as its structured
    other Infractruce involved with had mark West partners MWE up over 100%, but took out 2/3 when up 200 % and just letting rest ride, though would of done better if sold rest after 25 % trailing stop

    also up 50 % on SE Spectra Energy Corp

    I have been into Oil for long time

    sold many a winner luckily , sold losers as well, NO way will i tell u all i have are winners

    But do have a nice portfolio at least in my opinion

    & BTW thanks to money morning got into US silca at a good price and up, appreciate the free advice

    Barry

  4. Joe Amberson says:

    U R 100% right on. only problem enough capital.

  5. Peter Rubelman says:

    Please comment on HAL
    Thank you
    Pete R.

  6. Robert in Vancouver says:

    I totally agree with the article.

    The Saudis made a costly and stupid mistake in dropping their oil price.

    So now they are selling about the same amount of oil, but at a 60% discount. The only thing they accomplished is forcing some weaker oil companies to shut in production or sell assets at fire-sale prices.

    As the article suggests, that has created an opportunity for investors to buy strong oil companies shares at bargain prices.

  7. Tim says:

    I bought FISH and WMB when you recommended them, FISH sold off below my stop and I have not repurchased. Do you still think it’s the right thing to own at today’s prices? As for Haliburton, some time ago you suggested putting in a buy for sub $40 when it waqs mid 40. I did, bought at $38, it’s back up and I plan to hang on to it. Thanks for your insight and input.

  8. Bob Braaton says:

    I am about to start a shark feeding frenzy of which I am the meal, but hey, gotta be brave. I watch the energy industry for very different reasons, but I agree with Keith there is a retrenching going on and some companies will emerge stronger and more profitable, but there is a bigger question here.
    Oil, coal and natural gas are produced to generate the energy that drives the world economy, but the production of that energy has a consequence.
    The burning of those fossil fuels creates CO2…100,000,000 tons of it per day to be exact…indisputable fact. CO2 has the physical property of retaining heat, a fact we have known since 1856. The earth’s average temperature has risen 1.3 degrees F. since the early 20th century, also a fact. If we burn all the reserves of fossil fuels we have (and I believe Keith said all the companies who own those reserves intend to do just that) the average temperature of the earth will rise by 10 degrees or more and will cause the extinction of almost all living organisms on the planet including our own species.
    Now I assume all of you have normal lives, have children and/or grandchildren and hope to enjoy retirement into a ripe old age. If we continue to burn fossil fuels at the rate we are doing now, none of that will be possible. Your children and grandchildren’s lives will be an unending struggle for survival and the very structure of our society will not survive.
    Now, I’m sure most of you have written me off as some whacko/tree hugger, but let me point something out. All of you base your investing on sound, scientific analysis of financial facts, right? Then why are you ignoring the sound, scientific facts that represent the complete consensus of the world’s scientific community concerning climate change?
    Does the importance of making money override the moral imperative of examining the consequences of your decisions and your commitment to the lives of your loved ones?
    The tide is turning, Solar is growing exponentially, there is a strong movement pushing for divestment in fossil fuels, the pope just announced a world conference on climate change and said it is a “sin” to harm the environment. Maybe it is time examine your investment plan.
    Let the feeding frenzy begin!!!!
    Bob

    • Dennis says:

      Hey Bob, Greetings!
      I too will enjoy input on solar from Keith. Don’t have ‘the nuts’ on solar, though Solar City is attractive in my view. Again, here’s to Keith getting in on this, as I too very much value the input from that guy. Thank you, Bob for all your great commentary, response. We all depend upon input from one another, so here’s a ‘ Cheers!’ and a thank you, Bob. Hey Keith. Are in here some place? Waiting to hear from you.
      Dennis

      • Gar says:

        If you don’t plant 2 tree’s for every tree you cut then in time you will have a desert. I learned that from being stationed in Germany 1955 to 1957. My grandfather taught me the same thing as a child until he died. He was a prosperous farmer. The Germans after WW2 replaced 2 tree’s for every tree
        that was knocked down by bombs or cut by people. These foreign countries are way ahead of the USA. Greed has taken over this country. Watch out another country doesn’t end up owning this country. The foreign countries loaned the USA trillions of dollars that we can’t pay back. Just something to think about.

        • Steve says:

          Over nearly four centuries, Americans have removed an estimated 90% of the forests in the eastern half of the United States. Were we to plant two trees for every tree removed, where would we put them?
          Responsible timber companies plant trees on land they have harvested, but such artificial environments fall short of a naturally selected forest.

          • Richard says:

            So you do nothing? I did not see any recommendations as to the direction we should take. While it may be impractical to plant two trees for one tree taken you cannot argue that removing trees does no one any good except the few that profit and the ones that need the resource. We need to start taking those externalities, like the cost of deforestation to our shared environment, into the model or we truly are doomed. There is NOTHING sustainable about the way we interact with our environment as a species.

    • yngso says:

      I don’t get the math here: We’ve been burning hydrocarbons for about a century and a half, and in about a century it’s all over. How can temperature increase accellerate that much in the last 40% of the time we use hydrocarbons?
      I’m sure a lot of people would like a non-ideologic answer to that questiom…

  9. Ed says:

    Schlumberger cut costs by slashing 11000 jobs. – bad for economy – great opportunity for investors. I’m a WWII veteran so I won’t live long enough to see the day investors give a hoot about the workers that made them rich.

    • Gar says:

      The 11,000 jobs lost is a big loss in buying power and Federal, State and City Income taxes. The rich have ways to keep from paying taxes so the 98% have to keep the businesses making a profit so that we investors have something to invest into. Think about that. I studied Economics in College.

  10. Norlan Nalagon says:

    Hi, I am pleased to meet you! I would just like to tell you that I need all the help that I could get, so that I may be able to earn a genuine investing reputation.

  11. Tom Stanley says:

    I fully agree with you Keith.
    Considering the condition of the Saudi’s oil fields they are cutting off their nose despite their face. At best they could slow the shale production maybe 5 years only and ruin their fields in the process. Even if they have a card up their sleeve, being a new and highly productive field (which I doubt) as DR. Moore would have said something.
    It is entirely possible that you might be witnessing the beginning of the end of OPEC at lease with a Saudi rule.
    Myself I have bought both the sticks you list today, months ago and am increasing holding in another one; LINE- Linn energy. Items I have read have confirmed what the company said abut raising their dividends, in the off shoot they do I will be ready as LINE is a good price now, paying a monthly dividend of 0.10

    Writing this the second time as the first one disappeared, for an unknown reason.

    Keith I firmly agree with you about the Saudi’s. In my opinion they are cutting off their nose to spite their face.
    When you take in to consideration the condition of the Saudi’s fields and at best they could slow the oil production – delay it by maybe a couple of years – at best! Now if they were to be in possession of some vastly productive new field totally under every ones radar- which I seriously doubt – as Dr. Moore would have said something, somewhere.

    Myself I have a holding in both stocks recommended, for several months now in fact.

    I am trying to increase my holding in Linn Energy: LINE. Some of the stories I have been reading seem to confirm what the company said about raising their dividends’ in the near future. My goal is a long way off – a very long way!

    • Gar says:

      In WW2 ‘FDR’ the President of this country froze prices and wages until the nation economically stabilized itself. He didn’t borrow from Hitler. Anybody who could work worked. We went without. WW3 means the end of the World. Are you ready for Heaven or Hell tomorrow? That’s where we are headed for at the time being.

  12. Kevin Beck says:

    I entered into the first SLB position in December, right after it dropped to the mid-90’s, and then bought more last month as it bounced off the low 80’s. I also bought an early position in HAL after the BHI deal was announced, and entered a second order following your suggestion. Based on your big-picture projections for these companies going forward for decades, I kept the same long-term perspective with those investments. I anticipate they have long runways for their operations, and am comfortable even if there is some short-term pain, since I’m not living off their dividends. And if the share price growth happens slowly, it gives me the opportunity to add regularly to those positions on future dips, which will always happen.

  13. W. Howard Pritchartt III says:

    It is a great time to get in the oil business and make out like a bandit! What goes down must go back up!

  14. Rex Alfonso says:

    The Saudis – in a severe stretch – could put up 10m bbls/day in the early 2000s after rebuilding their production facilities and introducing new fiends from 1995. They could put up 30m bbls/day only by having 100 chartered VLCCs offloading their cargos on the same day, and then only for that day.. After that it’s back to 10m bbls/day for – maybe – 4 months, if that. The estimate of 30m bbls/day looks like. a typo, is it?

  15. William Dahl says:

    Hey everyone, it’s great to see you coming in with the tough and thoughtful questions! Keith is currently traveling, so he’ll get back to responding directly in a few days’ time — but in the meantime, he’s preparing an article to answer five of your best questions.

    Thanks as always for keeping us on our toes and being members of the Total Wealth community!

    -William Dahl, Associate Editor

  16. Paul Davey says:

    Hi Keith,
    Love your work! Just one question on lowball orders. What happens if you have a number of lowball orders in and the “reset” everyone is talking about happens? You would be stuck with shares you could then buy at probably half the price. Do you then just buy more and try to price average?
    Regards
    Paul Davey

  17. paul momoh says:

    Keith,
    Reading your work for the 1st time. In what publication did you recommend FISH and WMB and how do I get the next recommendation?
    Thanks

    • William Dahl says:

      Hi Paul,

      Welcome to the Total Wealth Community and great to have you on board! Keith’s recommendation of FISH and his recommendation of WMB are here. All of his other Total Wealth recommendations can also be found under the “Archives” tab of the home page.

      If you were emailed this article, you’re automatically subscribed and will get all of Keith’s future Total Wealth insights, too. If not, you can subscribe for future Total Wealth updates here.

      Best,

      William Dahl, Associate Editor

  18. art white says:

    WHAT DO YOU THINK ABOUT THE DRILLERS. RIG IS DOWN AN IT COME DOWN A LONG WAYS.

  19. Jane says:

    What about nuclear energy. Read Japan’s building plants again and some German’s are paying more for electricity than rent…. nu energy is clean and many think it’s the coming other clean fuel.

  20. David Derouen Sr says:

    What best energy stocks to invest in 2015!

  21. David Derouen Sr says:

    What best energy stocks paying excellent divided 2015!

  22. yngso says:

    The Saudis simply aren’t worried about the current oil price dip, because they still have enormos reserves and an equally enormous sovereign fund.
    What I see as more of a worry is that – I’ve read – that there’s only about three year’s worth left of US shale!?

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