Shale Gas Going Global – An Interview with Dave Forest’

Dave Forest and I are philosophically aligned.  Dave writes “Pierce Points” everyday (and I read it every day) and he is a former Casey Energy newsletter editor. We’ve started sharing ideas and a key one for both of us is that we see huge shareholder wealth being created for oil and gas investors as the new technologies now used in North America – horizontal drilling and fracking – get exported around the world.

Of course these technologies are 40 years old, but only in the last decade have they been perfected so they can get oil and gas out of shale rock.

Being able to make an economic hydrocarbon discovery in rock as opposed to the regular loose sands is about as simple as I can make the opportunity.  It opens up the probability of billions of new barrels of oil to be discovered over the coming decade or two.  Where is the next Saudi Arabia sized shale oil deposit?  I think we could find out in the next decade.

These technologies were first perfected in the Barnett shale in Texas over a decade ago, and has now become the big growth engine of oil and gas production from Louisiana to northern British Columbia.

Literally tens of billions of dollars in stock values have been created for oil and gas investors by North American oil and gas plays like the Barnett, the Haynesville gas shale, and the Bakken and Cardium oil formations.

But the question for investors is now – what’s next for shale oil or shale gas? Where will the industry create billions in value next?  Dave is much more technical than I am – he’s a geologist, I’m a journalist – so I asked him to share with readers where he sees the next big opportunities in shale oil and gas, for investors.

“These technologies are quickly going to move around the world,” he said.  “Foreign companies are scrambling to learn the tricks and “take the show on the road”.  We’ve seen a slew of farm-in deals from companies like Total on shale gas acreage in Texas, and other foreign companies in other basins. More than production, these companies are looking to learn from their North American partners, and use this to unlock new basins abroad.”

So which shale basins do you think will get developed next?

“Well, before I answer that, it’s important to know that economic shale gas is about more than just geology. There are a lot of gas-bearing shales around the world. But making money cracking shales is a tough game. You need high-quality services at a reasonable cost. China is cheap but probably not good, and the UK is good but well costs can run 2 to 3 times the cost for a comparable well in Texas. That blows your profitability.”

OK, sssoooo….how will investors know what the next big international shale play?

“Money will be made in overseas shale gas. But it will take places with

1) a strong gas market, and decent pricing,

2) lots of services competition, and

3) basins with good history of conventional production, where geologic data is readily available.

Poland and the Czech Republic have been held up as examples of countries where all these goals might be achieved.

Perhaps more interesting is the shale gas activity that’s starting to pick up in southeast Asia, e.g. northern Thailand. One angle here may be access to affordable, high-quality services from Japan. Combined with a strong southeast Asian gas market, shale gas projects might be economic here.”

In our next story, Dave will help us understand how market economics in the gas industry in Europe is changing, and how that could affect shale gas plays there.

You can sign up for Dave’s daily letter at www.piercepoints.com. (He is a great read – more concise than me).

Hello, this is Keith Schaefer, editor and publisher of The Oil & Gas Investments Bulletin.  I started my subscription service in mid-2009 because I could see there was no place where retail investors could go to easily find which oil and gas companies were creating huge shareholder wealth by using exciting new technologies, such as horizontal drilling, fracing and 3D seismic.

Publisher

CANADIAN HOME PRICES STILL BUBBLING

The Teranet-National Bank National Composite House Price Index (a mouthful!) was released yesterday.  This relatively new house price index is similar to the U.S. Case- Shiller index.   In short, January saw another increase in house prices, rising by 0.5% MoM, taking the year-over-year to 7.5% (the highest on record, which goes back to 2000.

Not surprisingly Toronto (+0.9% MoM) and Vancouver (+0.7% MoM) led the gains while Calgary posted a 0.5% drop.  The index has gone up nine months in a row on a monthly basis but January’s 0.5% increase was the smallest — although relative to the U.S. Case-Shiller 0.3% result, it is still quite bubbly.

…..read the Whole Market Musings & Data Deciphering HERE

In This Issue:

• While you were sleeping — global equity markets are responding positively to a slate of very robust manufacturing diffusion indices for March

• Some first quarter earnings thoughts — the consensus is currently expecting 37% YoY earnings growth for Q1, with revenues up 10%

• Income is king — while equity markets have been a strong performer in the past year, risk-adjusted returns still belong to the fixed-income market

• Size matters — once the arithmetic boost from lesser inventory withdrawal is adjusted from the real GDP data, it shows that the economy only managed to rebound at a tepid 1.6% annual rate since the recession technically ended

• Lies, damned lies and statistics — the media was just fawning over the Case-Shiller home price numbers … give me a giant break

• Confidence or lack thereof

• Show me the money!

• Chicago! Chicago PMI at a three-month low of 58.8 in March

• Canadian spring — more signs of a spring thaw in Canada with January’s GDP coming in above expected, rising 0.6%

• Canadian home prices still bubbling

…..read the Whole Market Musings & Data Deciphering HERE

When it comes to equity analysts Teun Draaisma is a must-read. The European equity analyst famously called for investors to sell stocks in June 2007 when the markets were flashing a “full house sell” signal. He then flipped bullish in November of 2008 as the markets were pricing in a much more severe situation than Draaisma saw unfolding. He’s one of the few investors who actually got the downturn and the upturn correct and was able to connect the dots between cause and effect. In his latest strategy note Draaisma is saying the rally has gotten ahead of itself and that we’re due to for a correction as good news becomes bad news. In addition to being bearish about 2010 (see here), Draaisma says the better than expected growth in the near-term is putting more pressure on the Fed to raise rates and will lead to tightening measures sooner than most investors suspect:

“The rally since 5-February is nearing its end, we believe. Our thesis is that good growth will lead to tightening measures and struggling equity markets this year, just like in 1994 and 2004. The recent rally was larger than we expected, and in our eyes was due to:

2) sentiment had turned quite cautious in early February. Nevertheless, we do think the market peak associated with the start of tightening is near, and expect 2010 to show a volatile whipsaw pattern in equities. We expect good payrolls (April 2) and a Fed language change (April 30), some leading indicators are rolling over from multi-decade peaks (ECRI leading indicator for the US, OECD leading indicator for the world), and some sentiment surveys have turned more bullish.”

Draaisma believes the market will decline 11% in the next 3-6 months:

“The 3-6 month outlook: tactical caution. The last 12 months have been characterised by record stimulus and rising economic leading indicators. We think the next 6 months will be characterised by some stimulus withdrawal (as a reaction to good growth in Asia and US), and softening leading indicators. We reduced our equity exposure two months ago. We recommend selling into strength, and we think MSCI Europe will reach 1030 at some point later in 2010, down 11% from here.”

On a longer time horizon Draaisma says the markets remain entangled in a bear market and that investors should not be fooled by the cyclical bull within a secular bear:

“The multi-year outlook: the secular bear market that started in 2000 is not yet complete (pages 11-13). We believe the secular bear market is incomplete for a variety of reasons, including that banking crises and bailouts tend to precede debt crises; that the amount of debt has not been reduced yet (it only changed hands to the government); that equity valuations never reached end of bear market levels; and our historical analysis that equities tend to struggle for longer in the aftermath of secular bear markets. When the next earnings recession hits, perhaps in 2012, we expect equities to complete the bear market that started in 2000.”

Draaisma’s outlook isn’t exactly consensus, but then again, it never really has been. And that makes his research a breath of fresh air on Wall Street.

The proprietor of The Pragmatic Capitalist is the founder and CEO of an investment partnership. Prior to establishing his own business, TPC worked at Merrill Lynch Global Wealth Management. TPC is a Georgetown University alumnus, growing up in the DC area and now living in Southern California.

The saying “common sense is very uncommon” has never been more applicable than it is to modern markets. TPC attempts to approach markets with sound reasoning and as little emotion as possible. A capitalist through and through, but always pragmatic…