by Tim Melvin | April 7, 2014 12:28 pm
While oil prices have held somewhat firm this week because of geopolitical concerns in places like Russia and Libya, many of the companies that produce oil and gas are acting like no one will ever drill for the stuff again.
Oil and gas companies, especially those with substantial exposure to natural gas are priced at step discounts to their asset value as gas prices have remained relatively weak due to a weak global economy and an abundant supply of oil.
I have mentioned some of these energy stocks before, but long-term investors should adopt a private equity mindset and accumulate stocks like Swift Energy (SFY), which is trading at just 50% of book value, Penn West Petroleum (PWE), which trades at 60% of book value, and Hercules Offshore (HERO) at 90% of book value.
If you look at the 2014 projections form the Energy Information Administration, you begin to understand that the abundant supply is exactly the reason that long-term investors should buy these energy stocks at current levels.
Natural gas will replace coal by 2004 as the largest energy source in the United States. The EIA report says:
“Projected low prices for natural gas make it a very attractive fuel for new generating capacity. In some areas, natural gas-fired generation replaces generation formerly supplied by coal and nuclear plants. In 2040, natural gas accounts for 35% of total electricity generation, while coal accounts for 32%.”
We have a lot of natural gas, and fracking technologies make it easier to access more if needed. We will also develop new uses for natural gas including personal vehicles and a continued expansion of the number of companies using natural gas for their vehicle fleet.
The EIA estimates that we will become an exporter of natural gas by 2018, two years sooner than earlier predictions. That time frame could shorten even more if it becomes necessary to send supplies of gas to Europe to offset Russian energy actions in the aftermath of the Ukrainian developments.
This increase in demand is going to drive higher prices for natural gas in the future, and that movement will be fantastic for energy stocks that are trading as if natural gas was going to be free in the future. Investors who have a long time frame should see extraordinary gains from buying cheap energy stocks today that will benefit from increased natural gas usages and pricing over the next decade.
There’s a reason that the leading private equity firms are aggressively looking to buy North American shale field assets, and it has nothing to do with charity of kindness. Prices are going to move a lot higher over the average private equity holding period of 6 years, and those energy stocks are positioning themselves for profits measured in multiples, not percentages.
As oil and gas prices increase in the future, so will revenues and profits for energy stocks like SFY, PWE and HERO. That means that these energy stocks should soar to prices several multiples above current levels.
As of this writing, Tim Melvin was long SFY, PWE and HERO.
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