A New Strategist Takes the Helm
This is my first issue of The Energy Letter, so let me begin by wishing all the best to Elliott Gue in his new venture. My goal for today’s letter is to introduce myself, detail a bit of my background and investing experience, and assure readers that the quality content they have come to expect will continue. Please also see this video, in which I lay out the basics of my background and investing philosophy.
I have worked in the energy sector for about 20 years. I began writing about energy in 2005 in a column that I called R-Squared Energy—a play on my initials, but also a reference to r-squared (R2), a statistical tool that can be used to project future outcomes. Earlier this year I published my first book, Power Plays: Energy Options in the Age of Peak Oil, which is essentially a layman’s guide to the important energy issues facing the world today.
Over the course of writing thousands of articles about the energy sector, I have made a number of specific predictions that have turned out to be very accurate. I have correctly forecast bankruptcy for a number of companies long before they ran into trouble (e.g., Pacific Ethanol (NSDQ: PEIX), Xethanol (NYSE: XNL), and Range Fuels). I predicted that the ethanol bubble would burst in 2006, when I felt ethanol stocks were grossly overvalued. In the months following that column, ethanol stocks across the board fell by 40-70%. During the 2008 oil price crash, I bought Petrobras (NYSE: PBR A) just before oil prices began to recover and watched the share price triple over the next year. Most recently, in August of this year, I correctly forecast the current gasoline crisis in California. Hedge funds, brokerages, and individuals have traded on my advice on many occasions.
My educational background consists of Bachelor of Science degrees in chemistry and mathematics, followed by a Master’s degree in chemical engineering from Texas A&M University. My research during my time at Texas A&M involved conversion of biomass into fuel, and that ultimately culminated in the creation of a renewable energy company called Terrabon.
In the years after my graduation, I worked for the petrochemical industry in three foreign countries (Germany, the UK and the Netherlands) and four US states. I spent seven years with Celanese (NYSE: CE) mastering the art of producing butanol, and then the next six years working for ConocoPhillips (NYSE: COP). During that time, I worked in the areas of synthetic fuels, oil refining, refinery economics, natural gas production and biofuel production. I was consulted extensively on ConocoPhillips’ renewable energy efforts, and at one point the company sent me to testify as an expert witness to the Montana state legislature about a proposed ethanol mandate for the state.
In my current job, I specialize in conducting technical due diligence on companies around the world. My job is to determine whether certain companies have legitimate, game-changing technology and are therefore worthy of investment, or whether they are ultimately exaggerating their technology to obtain funding. I have written extensively about the art of technical due diligence, and included a chapter on this in my book.
I now live on the Big Island of Hawaii with my wife and three children, but I grew up on a farm in Oklahoma. I’ve held a job of one sort or another almost constantly since I began a paper route at the age of 11. I saved the money I earned and began investing when I was 16 years old (almost 30 years ago). I was hooked on investing when I learned about the impact of compounding returns, began dipping my toe into money market funds at the age of 16, and at 17 was invested in a diverse portfolio of mutual funds.
I experienced the stock market crash of 1987 and was fortunate enough to have moved my investments into cash on the Thursday before Black Monday. I have lived through biotechnology and dot-com bubbles, and I have learned over time to only invest in things that I clearly understand. Perhaps like some of you, I earned a lot of money during the dot-com bubble of 1997-2000, and then lost a good bit of it because I didn’t understand the core businesses of these companies well enough to know which ones to cull from my portfolio when the market began to fall.
The dot-com experience resulted in two specific outcomes for me. First, if I don’t understand the core business of a company, I will not invest in it. Second, it made my investment style somewhat more conservative and focused on the long-term. It does no good to make a lot of money quickly only to lose it all just as quickly. That’s why highly speculative stocks are not a part of my portfolio.
There are two sectors that I believe will fare very well over the next 20 years or more, and those sectors are energy and health care. Consequently, those sectors make up the bulk of my personal portfolio, which I have grown from nothing into a respectable nest egg.
My broad views on energy are as follows. I believe that society significantly undervalues the importance of oil, and a combination of voracious demand by developing countries and the depletion of easy-to-extract oil is strongly bullish for oil over the long term. My expectation is that we will pay $200 per barrel by the end of this decade, just as my expectation in 2005 was that we would see rapid growth in the price of oil for the rest of that decade. (I wrote an article in 2007 that projected $100/bbl oil in early 2009, but it happened about a year earlier than that.)
There are many great investment opportunities in the energy sector, because the world has such a strong demand and need for oil. That’s why I think that companies such as ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and Schlumberger (NYSE: SLB) are all good long-term bets.
Natural gas is a bit more complex. Because the fracking revolution has opened up large new supplies of natural gas, the price of this commodity has been seriously depressed and some companies have struggled to turn a profit on wells drilled at those prices. Consequently, some production has been shut in. On the other hand, a lot of plays are profitable as gas prices approach $6 per million British thermal units (mmBtu).
In 2005, many believed that US natural gas prices were headed much higher—and they did for a bit—but with the current growth in production and a lack of export terminals I believe natural gas will mostly trade in a range of $3-$6/mmBtu for several years until some export capabilities are available. But there are opportunities regardless, such as master limited partnership (MLP) EQT Midstream Partners LP (NYSE: EQM).
The situations with coal and nuclear power are more complex and at a greater vulnerability to politics. My views on biofuel and renewable energy companies are mostly negative, for reasons I will cover in future issues. The essential problem with biofuels is that producers vastly underestimate the economic challenges of competing with oil. However, there are some nuggets to be found, and there will be companies from this sector that will enjoy great success in the years ahead. We’ll highlight them in future issues.
As I take the helm, my core mission as chief investment strategist is to carefully and continually scrutinize all of the stocks in the various portfolios. I actually own several of these stocks already, and I know these companies very well. I will not make rapid, wholesale changes to the portfolios, but over time they will naturally evolve.
I look forward to bringing you profitable ideas and useful analysis in this exciting sector in the weeks and months ahead.
Around the Portfolios
Conservative Portfolio holding Chevron (NYSE: CVX) warned that its third-quarter earnings would be “substantially lower” than second-quarter earnings, leading to a selloff in the stock today. However, the reasons for the earnings disappointment seem temporary, including the impact of Hurricane Isaac on facilities in Mississippi and a fire that shut down the company’s refinery in Richmond, California. Despite the short-term setback, Chevron remains an attractive long-term holding. Buy below 105.