Norm Lamarche is bullish on everything to do with natural gas.
That is – everything except the producers of it.
“The real opportunity here is clearly for the consumers of natural gas in North America,” says Investment Executive’s 2009 Fund Manager of the Year, and a principal at Front Street Capital in Toronto.
“At $3.50/mcf on NYMEX and $3.00 spot price in Canada, natural gas in North America is trading for one third or one quarter of what the Asians or Europeans are paying for natural gas.”
“America’s industrial sector — their fertilizer segment, their power segment, and for the transportation sector — now has a tremendous competitive advantage worldwide.”
Dow Chemicals says they save $2 billion a year on cheap US shale gas, Lamarche adds. “They and other industial users of gas are investing (in America).”
“That gives America a competitive advantage. Cheap energy may just save the United States!”
And of course, all this cheap energy comes from the Shale Revolution — now that the oilpatch can get oil and gas out of rock (read: shale). At investment conferences around the continent I preach on the profound impact this will have on the wallets of investors, as junior E&P companies will be making dozens or hundreds of new shale discoveries all over the world in the next 20 years.
But in my interview with him last week, Lamarche says the impact of this technology breakthrough goes well past what I’ve been saying.
“There is a renaissance going on in energy markets worldwide, particularly in North America. The change in some respects, could be as powerful to the North American economy, as the Internet had on how business is done—not only economically, but also could be geopolitically far-reaching as well.”
“We see greater energy supply out of North America. This will have a positive impact on North America but be negative for energy prices. America will become much more energy self sufficient over time.”
“As these new energy reserves — both oil and gas — are developed, it will drive infrastructure spending, drive industrial capital spending and manufacturing for domestic and export markets, drive the power markets.”
“Direct jobs–and many more indirect– will come from all of this. Domestic consumption and capital spending would grow, fiscal balances could improve, trade balances improve, as energy prices come lower. The geopolitical balance of power may also start shifting towards North America’s way.”
“I’m a fan of America — I may be the only one, everybody is so negative there.”
Lamarche says all these benefits of cheap natural gas won’t come without massive investments in infrastructure. A lot of wells will need to get drilled, and fracked, which is why he likes the energy services sector.
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“Infrastructure will need to be built to support it. That group has to remain, in a growing demand environment, super busy. Energy infrastructure is also a theme as pipelines, gathering lines, liquids fracing units facilities must be built out to handle the growing gas and its liquids production.”
“Natural gas for export is also a new reality and unthinkable just five years ago, as America was very busy building LNG (liquefied natural gas) import receiving terminals. Today, the industry is looking at ways to convert them into export terminals.”
“The resources are there, and the energy industry keeps finding more of it. And the evolving technology keeps driving costs lower. The drillers and the frackers are the companies who are driving the prices lower, and they will be in demand for a long time.”
He points to the giant Marcellus shale in the northeastern US as a perfect example of his thinking.
“There is essentially no energy infrastructure in this new energy basin. This will require billions of dollars of spending.”
“The potential for energy infrastructure spending in America is incredible.”
But, he says, the producers of natural gas are the victim of their own success. The huge new supply glut has everybody showing big reserves, but low profits—and he expects that to continue.
“Most natural gas companies are coming through our offices today boasting about multiple TCFs (trillion cubic feet) of reserves on their lands.”
“TCF s are like nickels in our pockets today. Everybody has them, and that’s the current problem for the commodity. The game has changed for that commodity. If you’re going to be in the game, you have to be bigger and efficient. It’s all about driving the costs down to compete as the price will likely stay low for a long period to come.”
“As far as the producers are concerned, we continue to prefer the oil-based ones.”
Lamarche says the price of oil has been holding up very well, largely because of the greater worldwide demand and supply picture. On the oiler side, Lamarche continues to prefer the smaller to intermediate producers, as they continue to drive rapid growth.
Will this technological change influence oil prices longer term?
“Possibly,” he says, “As America’s growing domestic production weans them off of import markets.”
“The real question will be whether the growth in the emerging world will offset that decline over time. The middle eastern (and to some extent, north Africa) production is also a wild card. The current and likely future instabilities in MENA (Middle East North Africa) may very well lead to lower investments and ultimately lower production from that part of the world.”
Lamarche concludes by saying the Shale Revolution is one energy policy that will definitely work for America.
“This energy revolution is happening because of old fashioned reasons, that is, because it makes sense on its own! Not because the Obama administration is subsidizing it.”