Cash In On The Shale Stimulus Plan…
One of my fondest memories last year, after visiting drill sites and frequenting oil and gas conferences, was the realization that America’s shale boom probably wouldn’t have happened if law-makers knew what was really happening.
You see, our government officials do a good job of making it seem like they have everything under control. But when it comes to actual economic growth, what they UNKNOWINGLY stumbled upon is the best thing that’s happened to America in several decades.
Today I want to share with you the latest statistics from this economic boost. It’s even better than I could have imagined…. and, as you’ll see, there are still ways to make sure you’re a part of it…
One of the quips I heard during my travel in 2011, when the shale boom was really bustling, went something like this…
“You know why the shale boom took off? Officials didn’t know about it until the revenue started flooding local municipalities and state governments….so they couldn’t tax it to death in the first place!”
When companies like Chesapeake Energy and Chevron start falling over themselves to sign lease agreements and pay royalty fees and taxes, the dollars start piling up at local permit offices and in state tax coffers.
But by that time the shale boom was already underway and it was too late for the government to screw up the growth of this budding industry (heck, if anything they tried to take credit for it!)
In most cases, governments that were receiving unforeseen income, like Pennsylvania, didn’t want to stop a good thing. So when PA did enact a tax on the shale wells, it was very industry-friendly (a modest $150k-355k tax per well, stretched out over 15 years. Compare that with an initial well price tag of $10 million and you see why I say “modest.”)
My continued experience in the past few months leads me to believe that this boom is just getting under way, too. Here’s how we can quantify it…
Sure, supply and demand are going to create fluctuations in the price for oil and natural gas – we’ve seen this over the past year with both oil and gas markets. Indeed, the same supply and demand forces will dictate the pace at which oil and natural gas wells are drilled, too. An example of this is the change over the past 18 months from “dry” gas drilling to more profitable oil and “wet” gas drilling.
But the overall rig count paints the bullish uptrend for the industry. According to Baker Hughes, the gold standard of oil and gas rig counts, this week there are 1,959 rigs spinning in the U.S. (57% of which are horizontal wells associated with shale gas/oil.)
Compare this week’s count to a recent low of 488 rigs, a little over a decade ago in 1999, and you’ll see that the total rig count has more than quadrupled!
Add it all up and there’s two immediate things you can count on: cheap natural gas (since we’re producing more now than the U.S. has ever produced before) and a more consistent price for crude oil (at a solid discount to world/Brent prices.)
For long-time DRH readers this may seem redundant. But remember, in baseball terms we’re still in the early innings here. It’s the bottom of the 2nd, the players are just getting warmed up and you and I have a dugout seat to the rest of the show.
So what should we expect to see? I’m glad you asked…
Cash In On The Shale Stimulus Plan…
For starters, this boom is much bigger than just oil and gas profit opportunities.
As I hinted above this shale boom is nothing short of an economic stimulus plan for the U.S. – consider it the “shale stimulus plan” (something Byron King covers extensively in his “must read” report.)
You see, the cascading benefits of this boom are just now starting to hit the general market.
The best way to highlight what’s happening is with a recent anecdote from the DRH mailbox, strangely it starts with a discussion on high gasoline prices…
“Gas in Washington [state] jumped 25 to 30 cents overnight, so it’s not just California” Jim from Washington writes, commenting on last week’s gas-price update.
“Prices had just gone down slowly starting in June after the refinery fire in the BP refinery in Anacortes WA was resolved,” he continues. “Refinery failures provide a great reason and political cover for price hikes. By the way have you ever seen the gas price go down 30 cents overnight when a refinery is fixed or some good news?”
To answer your question Jim, no I haven’t ever seen gas prices drop 30 cents over night. I wish.
But in lieu of giving you cheap gas at the pump – what if I told you that America’s shale boom could make it up to you in a different way?
Man, that would be the day…. when prices fall for all the right fundamental reasons.
Well don’t look now, but falling prices – due to America’s shale boom – are hitting an electricity bill near you! Take a look at this updated graphic from the U.S. EIA:
Throw a dart at any balloon on this map and you’ll see Americans are saving anywhere from 24% to 39% year over year on electricity prices.
Sure, you can rack up some of this cost savings to the low cost of natural gas, due to an overtly warm winter. But the majority of this savings is coming from the overabundance of cheap natural gas in a shale patch near you!
Just doing some back of the envelope math, let’s say the average American household spent $200 a month on their energy bill in 2011. So far this year that very same electric bill would be slashed by at least 24% — representing nearly $50 extra a month in savings. Multiply that by 118,000 households in the U.S. and you’ll start to see that this energy trend holds some weight.
But as we’ve written here before, it’s not just households that are benefiting from cheap natural gas prices. Companies that use natural gas as a feedstock are also enjoying a fruitful beginning to 2012.
Recently we’ve devoted a lot of coverage to the fertilizer sector. But the impending consequences of a severe drought aren’t the only thing supporting prices for fertilizer producers.
Nitrogen-based fertilizer production is a natural gas intensive process – and right now fertilizer producers like Terra Nitrogen (TNH: NYSE) and CF industries (CF: NYSE) have a strong wind at their back.
With cheap natural gas flowing through the pipe for the foreseeable future (at least 2 years out) now’s a great time to take a look at this thriving industry. Heck, since I first discussed both of these companies, TNH is up over 7% and CF is up over 9% in a little over a month. Not a bad start out of the gate. And I bet there will be more to come.
Another sector that you should keep an eye on is the chemical biz. Companies like Dow Chemical (DOW: NYSE) and Eastman Chemical (EMN: NYSE) are standouts here – and both could be set for more upside in the years to come.
While we watch this opportunity unfold I’ll do some more digging to see what I can stir up in this “cheap gas” sector.
With the shale stimulus plan working its magic here in the U.S., it’s only a matter of time before more opportunities sprout. When they do you’ll be the first to know, stay tuned.
Keep your boots muddy,
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