Musings -- May 29, 2014

Updates

June 1, 2014: in the original post I talk about the two schools of thought regarding replenishing the diminished natural gas stores -- some think it will be easy to replenish the natural gas stores this summer; others think it will be more difficult that some analysts think. I remain neutral, somewhat perplexed; there are too many variables. One variable: the president's speech on greenhouse gases tomorrow. From Platt's via Investor Village:

US natural gas demand could increase by 3 Bcf/d to 10 Bcf/d by 2020 under an expected Environmental Protection Agency plan to reduce carbon dioxide emissions from power plants, analysts said Friday.

Using its authority under the Clean Air Act, EPA is expected Monday to announce proposed rules designed to limit the amount of COs emitted by existing power plants.

Gas will be one of the winners under every assumption about new source performance standards for existing power plants, analysts said Friday. They differed only on the size and scale of how much gas would be needed, saying that will depend entirely on how strict or lax the new regulations are on coal-fired plants.

Bottom line: this speech Monday could be a hugely bullish speech for natural gas operators. Huge.  
 

Original Post

Wow, talk about a busy day in the news. Not much real news in terms of big stories, but all put together, it was quite a day, in terms of "things" I am interested in with regard to the blog: investing and the Bakken.

First, a huge "thank you" to the readers who provided additional background to some of the Vern Whitten photographs. The photographs are quite a hit, and folks love a bit of the background behind the pictures.

Second, the market was very interesting today to say the least. I will spend a few minutes on the market, but it's not for purposes of investing (though that might be hard to believe based on what I write and how I write) but in the big scheme of things, talking about the market helps me put the Bakken into perspective.

Many of the stories were sent to me by readers.

The Dow started off a bit tentative and remained so most of the day, up only ten points or so. However, it finished nicely (for bulls), up about 65 points. Surprisingly, after dropping a bit yesterday, oil finished up almost 1% today.

That, of course, had some effect on the Bakken players:

• OAS, up almost 2%, over $50/share, again
• KOG, also up over 2%, closing in on $13, again
• CLR, traded at a new 52-week high, up almost 2%
• WLL, up similarly

I no longer consider EOG a Bakken operator, it's moved a new level, but EOG also traded at a new 52-week high.

Other non-Bakken energy companies that I enjoy following:

• SD: up over 2%
• CHK: up about 2%

So, it was an interesting day.

But what really caught another reader's attention (I would have missed it), HK and CLNE had incredible days:

• HK: up over 5%
• CLNE: up almost 9%

One of the "Big Stories" I follow is the "North American Energy Revolution." In any revolution, there are winners and losers. I originally focused on the shale oil and gas story as the basis of the North American Energy Revolution, but I think I was wrong on that. It is much more than just the amount of oil and natural gas production being produced in Canada and US. That, I think, could be simply nothing more than a result of free market capitalism. There may be other reasons, but for now, let's lump all this shale oil and gas "talk" into the discussion of "free market capitalism."

But there's another story, just as important: the political story. I'm not sure whether to call it ideology,  cronyism, demagoguery, but in the big scheme of things it doesn't matter. It was the president's war on coal that has been going on for quite some time now.

It was clear some years ago that the numbers for renewable energy did not add up. Investors in renewable energy (wind, solar) would do well, but as an "industry," wind and solar would remain a niche player in the big world of energy. A reader sent me this story today from Bloomberg. The story seems to have no theme; it wanders all over the place. It starts out as a "renewable-energy-is-a-must" story but then seems to come around to reality that it's all about fossil fuel. This little bit from a very, very long article is the reality:

Even as investors have embraced fracking, more Americans tell pollsters they oppose the practice than support it, according to a September survey by the Washington-based Pew Research Center. It’s true that windmills as tall as 40-story buildings are still sprouting in the Great Plains, and more solar panels are appearing on Americans’ roofs, including at the White House. The U.S. is generating more power from these sources than ever before.

Yet the pace is slowing. Combined capacity for solar and wind power expanded 9 percent to 76,326 megawatts in 2013, down from a 30 percent increase in 2012.

And the use of fossil fuels still dwarfs that of renewables. Half of new power-plant capacity in the U.S. last year was natural gas -- 6,861 megawatts, according to the Energy Department. That’s enough to provide electricity to the state of Massachusetts. It’s also 25 percent more than the combined capacity additions for solar, wind, biomass and water power. 

A huge part of the "political" story, of course, is related to EPA regulations, as seen again, in a story sent to me by another reader:

Before President Obama took office in 2009, the amount of electricity being produced by coal-fired utilities was approximately fifty percent of the total. Today it is approximately forty percent and, when the Environmental Protection Agency regulations take effect as of June 2, more such utilities are likely to close their doors.

It didn't take a nuclear engineer, especially after the nuclear debacle in Japan, to figure out that if renewables were not the answer (renewables cannot even be the long-term solution as the activists like to argue; the numbers simply do not add up; God simply did not make enough earth for all the turbines and solar panels that would be needed) and the war on coal was a success, the only recourse was natural gas. And that takes us back to free market capitalism.

So, the North American Energy Revolution is part political, and part free market capitalism.

One of the best things for me, personally, to have come out of blogging, was to make me a better investor. I never took investing very seriously (and still don't, based on number of annual reports I read per day [zero, on average]). Don sent me this story earlier today, from the EIA: US exports of NG to Mexico are about to surge. This is from our own EIA.  I replied to Don:

I haven't read the entire story yet, just the headline and the first paragraphs, but this is a very, very good example of how the blog has made me a better investor. I was aware of this story about two years ago it seems ... it was the tea leaves, as I often say. All the energy stories that I find on my own, or that readers send me, told me that Mexico was going to be importing a lot of natural gas in the next few years; then the stories about certain utilities (such as SRE) that were positioned to take advantage of that. I never would have known about these stories had I not been blogging day in / day out -- many of the stories were unrelated to the Bakken directly, but they all helped me understand the bigger energy picture and help put the Bakken in perspective. 

I wouldn't have thought much more about the story, but then this little meteor ended up in my backyard moments later, from Seeking Alpha:

U.S. proposes major change to LNG export decision-making process

• The Obama administration announces a major overhaul of its review process for approving U.S. liquefied natural gas exports
• Under the proposal, the Department of Energy would no longer issue conditional approvals of projects; instead, the DoE would decide whether an LNG export project is in the national interest only after the FERC had issued a final environmental review.
• The change to the export process aims to help expedite reviews by focusing only on most commercially viable projects that have finished the FERC process.

Well, isn't that interesting. I don't trust anything presented as "good news" coming from this administration, but if this is accurate, some long-term investors in natural gas companies with Mexico on their radar scopes will be very, very happy. [Update, May 30, 2014: it looks like my first suspicions were correct; things may not be so rose as the Seeking Alpha snippet suggests. The WSJ has a much more in-depth article. The lede:

The Obama administration said it would perform a more rigorous upfront review of proposals to export liquefied natural gas, offering a mixed bag for the roughly two dozen projects seeking federal approval.

The U.S., which is enjoying a natural-gas boom, is expected to start exporting LNG in significant volume next year. The administration has only approved one export facility, but about 25 additional proposed projects are under review.

A few projects far along in the approval process could benefit from the proposed rules change because they could be cleared as others are delayed by the new requirements. The Energy Department said Thursday that the proposed revisions would require export-terminal proposals to first undergo a more expensive regulatory review by the Federal Energy Regulatory Commission involving an environmental impact assessment before the DOE reviews the permit application.

The DOE previously was granting conditional approval either parallel to or before completion of the environmental review, a process that allowed companies to get a project started with a smaller financial commitment.

It would not surprise me a bit if the administration said ALL projects had to have the environmental impact study completed before approval -- a "do-over" for everyone, just like the administration has required a complete "do-over" of the review of Keystone XL North.]

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Although Zacks is not a huge "believer" in SRE, their recent update is interesting with regard to SRE:

Recently, the company reported impressive first quarter earnings that were driven by favorable weather as well as by underlying growth and operational performance. The company's diversified basket of businesses insulates its operations to a significant degree from regulatory rate risks. Also, geographic diversity in its assets exempts the company from any region specific risk. Thus, Sempra Energy presents a lower risk profile relative to its peers.

Mexico’s state-owned electric utility, Comision Federal de Electricidad (:CFE) recently announced five pipeline bids. These bids comprise three in the U.S. with an estimated cost of $1.2 billion. Sempra Energy’s unit Sempra U.S. Gas & Power seems to be well positioned to grab the opportunities here. These ventures will be supported by long-term take-or-pay contracts and have targeted operation dates of Mar 2016 through Mar 2017.

Sempra Energy is also focused on its Cameron LNG Liquefaction-export Project. A Sempra Energy unit, Sempra LNG, is the prime company developing this project, which comprises three liquefaction trains with a nameplate capacity of approximately 13.5 million tons per annum of LNG. The construction is slated to start later this year and the company has several large projects in Mexico and Peru coming online in the second half of 2014.

The downside, of course: a) this is all very capital-intensive; and, b) SRE operates in the land of fruits and nuts. As Zacks notes:

SRE operates in the state of California which maintains an aggressive 20%-plus renewable portfolio standard, with the targets ramping up to 33% by 2020. This entails significant investments in renewable energy projects that would require more funds.

I'm not worried. I won't go into that now, but lessons learned from as far away as Germany and as near as Minnesota tell me "not to worry."

One last thought: with regard to refilling the depleted natural gas storage sites there are two schools of thought: a) it will be very challenging; b) it will be very easy. In none of the articles or stories I have read about this debate has a very interesting data point been mentioned. I can't remember if I've blogged about it. I'll come back to that in another post, if I remember.

But now, forward and onward, to the daily activity report.