Peak Oil & Gas, Energy Cornucopia, and Reality The Rude Awakening
Bangkok, Thailand
Friday, December, 15, 2006 ------------------------- - Following oil and gas to the bottom of the tank,
- The Agora Financial Reserve - closing soon,
- Real Thai fish sticks, the mortal enemy of the "untourist" and plenty more…
------------------------- Having traded in his London galoshes for Thai sandals, Joel Bowman reports from Bangkok… "Don't brush your teeth with the water in Bangkok…" "Don't eat the fish on a stick in Chinatown…" "Don't take deep breaths while riding in the back of a tuk-tuk around town…" "Don't take a guesthouse on Khao San…"
These insightful traveling hints, along with some other, decidedly unpublishable warnings about androgynous street wanderers, flooded your junior editor's inbox last week. Motivated by the flailing value of the Greenback, and the rapidly diminishing supply of them in our travel account, we left behind the expensive accommodation of London in pursuit of the warmer weather and cheaper accommodations of Bangkok, Thailand. Twelve hours and six time zones later and we found ourselves, slightly disheveled, standing outside the airport of this sweltering city. Having done little research into the best places to stay and how to get there, we listened as cab driver after cab driver approached us, each offering a cheaper price to a more desirable destination. "Is there a bus headed downtown?" we inquired in slow, deliberate English. "No. No bus…only taxi-cab." Came the answer. "700 Baht for you, my friend. I give you good price." After a little investigation we found a bus downtown for 150 Baht (about US$4.50). We should have known what was in store when we noticed the amount of backpacks in the luggage compartment on the bus. We were en route to the "untourist's" nightmare of Bangkok - Khao San Road. Throngs of belching, slovenly European, American and Australian tourists wander drunkenly along this street at all hours of the day, haggling with the locals for a few cents off their fake Rolexes and Gucci sunglasses. These hooligans march the tourist-beaten pathways singing football songs with the sole purpose, it would seem, of being as obnoxious as humanly possible. Patchouli-reeking pseudo-hippies earn their third-world stripes by drinking Chang beer by the jug and offending the local street vendors with their foul mouths. If you are unlucky enough to find yourself mired in this putrid hole of impolite buffoons, we would suggest taking the nearest tuk-tuk out of there. If there is no tuk-tuk within sight…start walking. Disgusted with our countrymen and fellow travelers, that's exactly what we did… 
After an hour or so of wandering through backstreets, stopping occasionally to enjoy some fresh fruit from a kindly tended street stall, we found ourselves in our favorite place…lost. Without map or compass, we engaged the locals in a form of Thai-English that had us both laughing and amused. The Thai people are among the kindest people we have met so far on our travels. Eager to help and wearing smiles the size of the watermelon slices, they sell they are polite and welcoming. Having not seen a fellow backpacker for a decent amount of time we were dubious when a sun-beaten Danish man approached us, asking where we were headed. "Nowhere in particular," we tentatively replied, "just enjoying the day." "Sick of Kao San already?" he inquired with a knowing grin. Dennis, we would soon learn, is also an untourist. Spending six months of the year in Goa, India, and the rest in Nepal, Dendis has been to Thailand many times and knows the backstreets well. Speaking fluent Thai, Dennis introduced us to some of the locals and pointed us in the direction of some healthy Thai food. 
He also advised us where we could get a clean room at an honest rate. Your grateful junior editor is now paying just over 100 baht, or US$3, per night for a single room with a shower and air conditioner about an hour's stride east of Bangkok's Chinatown. With only a few days here we'll likely spend them traipsing the untrodden backstreets until we leave for Malaysia. While we continue to get lost and avoid our despicable countrymen, we invite you to read on as Dan Amoss follows up on yesterday's peak oil discussion… --- The Halfway Mark --- Rude Reader ~ Your opportunity to take advantage of a discounted price for our premium lifetime package - the Agora Financial Reserve - is almost over. This month only we have opened the doors for membership to our this elite service. The finest research from all of our trading services and research letters is available to you here, but only until the end of the month…Then the doors close again. Act quickly to ensure you don't miss out and join us for the profit season ahead in 2007. Click here for all the information you need to get started. The Agora Financial Reserve ---------------------------- Peak Oil & Gas, Energy Cornucopia, and Reality
By Dan Amoss Dave Hughes is a "concerned geologist." He is concerned that natural gas production in North America may already be topping out. Hughes is a senior official with the Geological Survey of Canada. But during his fascinating presentation at last month's ASPO-USA Conference (Association for the Study of Peak Oil), he informed the audience that he would "speaking as a concerned geoscientist that happens to have spent more than 30 years studying energy in Canada and the world, as opposed to an official statement on behalf of the Canadian government." "The U.S. lower 48 had its most recent peak in natural gas production in mid-2001," Hughes noted. "This is clearly evident in EIA production data…The U.S. should count on reduced exports from Canada. They will not remain flat, and they certainly won't be increased." 
It appears that the blue chart, or drilling activity, must keep growing to offset the very rapid production decline rates. The natural gas production profile in Canada is also disconcerting. Many are under the impression that Canada has limitless natural gas resources and will bail out the forecast U.S. shortage. Though Canada has an agreement under NAFTA to sell a fixed proportion of its gas to the U.S., this will not take priority over its own sovereign interest. The U.S. should not count on further growth in Canadian gas imports. 
WCSB (Western Canadian Sedimentary Basin in Alberta) drilling rates will grow somewhat from the record levels of 2004. Initial productivity of new wells will decline slightly from current levels. WCSB initial productivity has declined from an average 600 mcf/day in 1998 to 280 mcf/day in 2004. The overall decline rate of the WCSB has increased from 13% in 1992 to 20% in 2004 -- this means 3.3 bcf/day of production must be replaced each year to keep production flat -- production appears to have peaked in 2002 and been roughly flat since then. NEB (October 2005) expects production to increase by 2% through 2007, mainly because of coalbed methane. The bottom line in all of this analysis is that the natural gas supply scenario looking out over the next few years is likely to be worse than CERA forecasts, and CERA is known for often being too optimistic. Profile of Chesapeake (CHK) -- a High-Growth E&P Company For guidance on the most likely trend of future natural gas prices, I find it useful to pay attention to the growth strategy of the world's best-managed oil and gas exploration and production (E&P) companies. A Nov. 6 article in The Wall Street Journal discussed the rapid evolution of Chesapeake. How was Chesapeake able to expand natural gas production so rapidly in the U.S., where total production has been stagnant for years? Chesapeake has been a very aggressive acquirer of both drilling leases and smaller E&P companies, and has chosen the right areas in which to invest capital. Half of the company's growth over the past five years has been organic, or "through the drill bit," with the other half coming from acquisitions. Chesapeake now accounts for about 3% of total U.S. natural gas production, with this share likely to grow by double digits over the next several years: 
Notice that in 2001, Chesapeake's base gas production was contracting at an 18% annual rate, but has been improved to 9%. The blue area of this chart is what the revenue trend of a North American gas-focused E&P company would look like if it decided to enter "harvest mode" and not reinvest its profits into drilling and acquisitions. CEO McClendon has spearheaded the company's effort to shift its portfolio of reserves toward unconventional gas basins. But this aggressiveness is tempered with savvy use of natural gas futures contracts. Chesapeake's balance sheet is basically a concentrated "long" position in natural gas, so by periodically selling short natural gas futures, the company can lock in current spot prices for gas that may not be produced until a year or so into the future. The WSJ article explains, with my comments interspersed (emphasis added): "Recently, Chesapeake locked in agreements amid relatively high prices. Through the first nine months of 2006, Chesapeake sold $2.53 billion of gas and also made $833 million from gas hedging operations, according to company financial reports. Until recently, it had contracts covering 80% of next year's planned gas production, far more than any comparably sized energy company. "When prices dipped last month, Chesapeake took advantage. It unwound commitments to sell its own gas in the future by snapping up other expected gas production at relatively low prices. Chesapeake will pocket the difference. The move lowered Chesapeake's coverage to 59% but in the process generated a $540 million profit. Now that prices have risen again, Chesapeake could buy a new set of hedges to cover its own production, but says it hasn't yet made a decision.
"Since bottoming out in early 1999, Chesapeake has used its hedge strategy to become one of the largest U.S. natural gas producers." "Chesapeake has more rigs drilling new wells than any other company in North America. It has made more than 50 deals in the past four years, spending more than $10 billion to gobble up smaller gas producers. Last month, Chesapeake agreed to acquire closely held Dale Resources for about $200 million, its ninth deal of the year."
Chesapeake had a near-death experience in 1999 after becoming too aggressive investing for a high-price gas environment that had not yet arrived. As gas prices rebounded sharply over the next few years, the stock recovered and the company implemented its "land grab" strategy very early on. Now Chesapeake has about a 10-year drilling inventory on acreage that as it is drilled over time has the potential to triple the company's current proved reserves. No other large independent E&P company will come close to the kind of organic growth that Chesapeake will deliver over the next 10 years. In a stagnant North American natural gas supply environment, this will lead the stock market to assign CHK stock an industry-leading earnings multiple. However, there is one scenario that could keep a lid on the returns Chesapeake provides to its shareholders. Right now, finding and development costs are only in the range of $2-3 per thousand cubic feet in most unconventional gas basins. Many will look at this figure and conclude that the free market will direct a surge of capital investment into new gas production, considering that the profits and incentives are so high with spot gas prices in the $6-8 range. But we must remember that finding and development costs are dynamic, and certainly trend higher over time as the more expensive, hard-to-find oil and gas becomes a larger share of total production. The single greatest variable in finding and development costs is the average "dayrate" charged by available rigs. Right now, the rig fleet is working at close to full capacity, so drillers have considerable power to negotiate higher prices and earn higher profits. Day-rates have already surged dramatically, yet there is potential for them to increase even further and remain in the current range longer than the market currently anticipates. But here's the kicker for Chesapeake: The company built up a wholly owned drilling and oil field services subsidiary near the bottom of the investment cycle. McClendon and his team have a very impressive track record of timely decisions, and they spent the past year reshuffling and expanding the size and capabilities of their land rig fleet. After being tossed about by the whims of the spot natural gas market of the late 1990s, the company has emerged stronger than ever and now practically controls its own destiny in a market in which the long-term fundamentals have shifted decidedly in its favor. In Chesapeake, therefore, you have a company that is rapidly boosting its production and reserves of a rapidly depleting energy source. This is a very attractive investment profile. Maybe that's why CEO Aubrey McClendon, himself, holds such a large number of Chesapeake shares. If you want to heed the insights of a "concerned geologist" by investing alongside an opportunistic CEO, buy Chesapeake. Joel's Note: Dan's full report from the conference, including the companies that are poised to profit, is availably exclusively to subscribers of his newsletter, Strategic Investment. You can access all this right here. America's own Axis of Evil --- Special Energy Report --- From the newsletter Ranked No.1 by Hulbert Financial Digest: UNCOVERED: 11 of America's New Energy Saviors Buy into these new non-oil outperformers Right Now, and you could see triple-digit returns - in as little as 6 months! | 
