Exxon's big bet on shale gas

America's most profitable company now produces about as much natural gas as it does oil. CEO Rex Tillerson thinks the fracking party has just begun.


See the whole story here. 


1999: $88B mega-merger with Mobil orchestrated by Lee Raymond
2009 Dec: XOM announced XTO all stock acquisition of $41B
Today Exxon, the prototypical oil giant, gets about 50% of its production from, and has 50% of its reserves in, natural gas.



This shale gas boom has turned assumptions about the future of the U.S. and global energy picture upside down. Less than a decade ago the consensus was that America was beginning to run out of economically recoverable natural gas and that the country would need to import vast quantities of it from overseas. Now we're awash in natural gas. U.S. production has increased 28% since 2005. In 2011 about a third of that production was from shale gas, up from just 11% in 2008. By 2035, according to a study by the research firm IHS Global Insight, shale gas will account for 60% of U.S. production.

It is widely thought that the U.S. now has 100 years or more of domestic gas supply at current consumption rates. Already there has been a frenzy of exploration.

Large shale deposits in South America, China, and Europe mean that it should eventually be a global trend as well. The International Energy Agency estimates that the world currently has a 250-year supply of natural gas. "In my 50 years of following the energy business, this is by far the biggest event that I've seen," says John Deutch, an MIT professor and a former CIA director who last year chaired a Department of Energy subcommittee on shale gas.

Gasland, a 2010 Oscar-nominated documentary about the dangers of shale drilling, caught the public's attention with its footage of contaminated tap water that could be lit on fire, though the veracity of some of the film's content was later challenged.

In the early 1980s a visionary, independent natural-gas driller named George Mitchell began experimenting with ways to get gas out of the Barnett Shale, which ranges all across the Dallas-Fort Worth area -- even under Exxon's headquarters in Irving, Texas. Geologists have always known that shale contains trapped gas and oil. In fact, shale is the deep layer of rock where much of the traditional natural-gas supply was "cooked." But extracting hydrocarbons from the rock was thought to be too difficult and expensive to justify.

Mitchell, however, was convinced it could work. After nearly 20 years of trial and error, Mitchell Energy developed a formula for fracking with water and sand that worked spectacularly well. The company's production of natural gas in the Barnett soon spiked. In 2002, Mitchell, then 82, sold his company to Devon Energy (DVN) for $3.2 billion.

Cash Rich Companies

Show Us the Money on Barron's 5/26/2012

Top 50 Annuities

An article on Barrons on 5/26/2012.

John Maynard Keynes: Top-down and Bottom up

A new analysis of the investment performance of John Maynard Keynes proves that the famous economist also was one of the greatest investors of the past century. By understanding what made Keynes such a star, investors can get a firmer grasp on why so many of today's money managers seem so dim.
Regardless of how you feel about his theories on the need for governmental intervention in the economy, Keynes (1883–1946) long has had a reputation as an outstanding investor. Until now, however, no one had ever gone to the trouble of reconstructing his investment track record.
David Chambers and Elroy Dimson, finance scholars at the University of Cambridge and the London Business School, respectively, have spent much of the past few years picking apart Keynes's portfolios.

They have found out that Keynes's returns were extraordinary. How he achieved them was even more remarkable. (To read the research paper, click here.)

From 1924 through 1946, while writing numerous books and overhauling the global monetary system, Keynes also found time to run the endowment fund of King's College at Cambridge.

Over that period, according to Messrs. Chambers and Dimson, Keynes outperformed the U.K. stock market by an average of eight percentage points annually, adjusted for risk.

Such great investors as Benjamin Graham, Peter Lynch, John Templeton and Warren Buffett beat the market by an annual average of three to 13 percentage points over their careers. Most of them, however, didn't have to cope with the Great Depression or World War II.

How did Keynes do it?

Flexibility, resilience and independence.

Keynes began as what we would today call a "macro" manager, relying on monetary and economic signals to rotate in and out of stocks, bonds and cash. He traded foreign currencies and commodities. As a director of the Bank of England, Keynes was privy to inside information about interest-rate changes, although there isn't evidence that he traded on it.

But Keynes wasn't a very good macro manager. He lagged behind the British stock market miserably until 1928, and he had 83% of his primary portfolio in stocks going into the fall of 1929.

"It's hard to time the markets," Mr. Chambers says. "Keynes struggled with it, and then he missed the 1929 crash—even with an unrivaled network of information sources."

So Keynes made a series of radical changes: He switched from being a "top down" asset allocator to a "bottom up" stock picker. He tilted sharply toward undervalued small and midsize companies.

Keynes also made titanic bets on industries he thought were cheap; by 1936, he had 66% of his portfolio in mining stocks and not a farthing in bank or energy shares. South African gold companies, he correctly foresaw, would benefit from falling currency values.

Keynes wasn't only a pioneer in owning stocks when most big investors favored bonds. He also relished risk, concentrating as much as half of his assets on his favorite five holdings or, as he called them, his "pets." Keynes clung to his typical stock for more than five years at a time. Only partly in jest, he had proposed making "the purchase of an investment permanent and indissoluble, like marriage." (Today, the average U.S. stock fund has only 19% in its five biggest positions and hangs on to its typical stock for just 15 months.)

The "tracking error" of Keynes's portfolio—the extent to which it behaved differently from the market as a whole—ran nearly four times higher than is typical at institutional funds today, report Messrs. Chambers and Dimson.

Keynes was no mere contrarian. He was the epitome of his own definition of a long-term investor: "eccentric, unconventional and rash in the eyes of average opinion." To emulate Keynes, "you have to be idiosyncratic," Mr. Chambers says. "That's easy to say but much harder to execute."

One of Keynes's biggest advantages, say Messrs. Chambers and Dimson, was that the board of King's College gave him uncontested authority to invest as he wished.

Today, such latitude can be found only in smaller investment boutiques—Fairholme, FPA, Longleaf and Yacktman, to give a few examples—that operate independently and don't kowtow to their clients. That latitude, of course, comes at the risk of horrific returns in the short run and the chance that the best talent might bolt.

At most larger investment firms, meanwhile, portfolio managers must invest in narrow "style boxes" and sheepishly shadow the performance of their peers. The prime directive at today's weak-kneed asset-management companies is to ensure that their portfolios never deviate much from average results. That discourages clients from fleeing and enables firms to keep earning fat fees—maximizing their own returns while minimizing those of the clients.

Even more than in Keynes's day, it is worth hiring an active money manager only if you have the confidence that he or she is a free spirit who will have a completely free hand.

Otherwise, with Keynes no longer available, you might as well buy an index fund.

— intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj

Is a Roth IRA or 529 plan better when saving for college?

Do you know that you can use Roth to support your kid's education? 

Is a Roth better than a 529 plan and when the kids go to college ?

A:With regard to which is better for college expenses, I'd have to say the nod goes to the Roth because of a special exemption that it is allowed.

Generally speaking, you can't withdraw funds from a Roth until you're 59½. Assuming a parent wouldn't be 59½ when the child starts college, there would, under normal circumstances be a penalty to any withdrawals he makes. However, the exception to this rule is for qualified educational expenses. The parent would be allowed to withdraw from a Roth prior to turning 59½ if he uses the funds for his college expenses or those of a family member.

Since contributions to both the 529 plan and the Roth are made in after-tax dollars, and since the earnings inside them accrue tax-free, there is little difference between the plans on that basis.

I would change that advice slightly if someone wanted to contribute more than they were allowed to contribute to a Roth. The 2012 Roth contribution limitation is $5,000 per year ($6,000 if you're 50 or over) with certain income limitations. If someone wants to contribute $10,000, for example, to a child's college education, I'd advise putting the maximum amount into the Roth and the difference into a 529.

Should US be the world's largest LNG supplier?

The short answer: If it wants to be. And it should—to create jobs, double exports, build global trading links and generally boost our economy.

 By JOHN R. SIEGEL in Barrons

By 2017 the U.S. could be the largest exporter of liquefied natural gas in the world, surpassing leading LNG exporters Qatar and Australia. There is one big "if," however. America can produce more gas, export a surplus, improve the trade deficit, create jobs, generate taxable profits and reduce its dependence on foreign energy if the marketplace is allowed to work and politics doesn't get in the way.

In May 2011 Cheniere Energy received an Energy Department license to export LNG from its Sabine Pass LNG import terminal in Louisiana. Cheniere subsequently reached long-term deals with the U.K.'s BG Group, Spain's Gas Natural and India's GAIL. Cheniere is targeting operation in 2016 and plans to export up to 730 billion cubic feet of LNG annually, roughly 3% of current U.S. gas production.

Sabine Pass originally was built as an import facility to alleviate projected U.S. gas shortages. Shale-gas technology changed that assumption radically. Now Sabine Pass is attractive because it already possesses much of the infrastructure for an export plant: LNG storage tanks, gas-handling facilities and docking terminals. Only a liquefaction plant is needed to convert natural gas into LNG. Overall, Cheniere can create its export terminal for half the investment required for a new one.

With world oil over $100 per barrel, equivalent to $17 per million BTUs of gas, versus domestic natural gas at $2.10 per million BTUs, the opportunity is obvious: Cheniere can deliver its gas to Asia or European customers well below current market prices.

Six developers with existing import terminals are following the Sabine Pass model. And Cheniere has another project in Corpus Christi. With the expansion of the Panama Canal, Gulf LNG projects can economically target the lucrative Asia market. By 2017, the U.S. could be exporting upwards of 13 billion cubic feet of LNG per day.

But exporters must overcome growing opposition to LNG exports by environmentalists and industrial users of natural gas. Exporters must also get multiple permits from environmentally conscious federal officials. And Rep. Ed Markey (D.-Mass.) has proposed legislation to bar federal approval of any LNG export terminals until 2025. Those who most fear global warming don't want anyone anywhere to use more fossil fuel, even "cleaner" natural gas.

It is uphill for the anti-gas crowd. High oil prices are driving a transition to natural gas, even as fuel for trucks and cars. In the U.S., the T. Boone Pickens Plan would displace gasoline and diesel fuel for compressed natural gas in large trucks. Pickens estimates savings of two million barrels per day of oil imports if the nation's fleet of 18-wheelers converts to CNG. The Pickens Plan might fail legislatively because it calls for subsidies to fuel the transition. But if CNG's nearly $2-per-gallon price advantage over gasoline continues, the concept will evolve via natural market forces, as it should.

THE ENERGY DEPARTMENT SAYS natural gas has grown its market share in the U.S. in the past three years from 28% to 30%. Globally, the trend is similar, and LNG is integral to the global supply chain.

Despite the recession, global LNG demand has been growing at a 6% to 8% annual clip for the past 10 years. When demand collapsed in 2009, prices in Asian markets fell 50% to about $5 per million BTUs. But the price drop was also driven by the rapid growth in U.S. shale gas. U.S. natural-gas supply -- flatlined for a decade at 19 trillion to 20 trillion cubic feet annually -- increased 15% in the past three years due to the shale-gas revolution. Technology advances created a supply perturbation. As U.S. gas prices plunged, LNG cargoes bound for the U.S. had no market.

Global LNG markets are growing again. By late 2010, the main Asian consumers -- Japan, Korea and Taiwan -- were seeking more LNG, while new customers such as Thailand were entering the market. The Japan tsunami put a call on LNG imports to supplant Japan's nuclear shutdowns, and with increasing demand, Asian markets rebounded to the $15-per-million-BTU range. After the tsunami, Germany plans to close its nuclear plants. Most of Germany's (and all of Europe's) new supply will be gas-fired. Given the choices, would Europe rather grow its gas supply from Russia, North Africa or the U.S.? The policy implications should be obvious, even to the U.S.

Estimates of the job benefits from U.S. LNG projects depend on a variety of assumptions. Roughly 25,000 direct construction jobs would be created if all the projects are built. Increasing the U.S. natural-gas production base by another 13 billion cubic feet might translate to 450,000 direct and indirect jobs and $16 billion in annual tax revenue for federal and state coffers.

It's easier to forecast improved trade balances. Exporting 13 BCF per day of LNG could generate about $45 billion annually. Reaching Pickens' goals could offset another $70 billion annually of oil imports.

Exporting energy, however, rubs a lot of people the wrong way. Pickens wants cheap natural gas for his 18-wheelers and opposes LNG exports. Industrial gas users argue that a vibrant LNG industry would propel domestic gas prices higher. A study by Deloitte said that exporting six 6 BCF per day of LNG would raise wellhead gas prices by 12 cents per million BTU (about 1% on a retail basis). Advocates of "energy independence" argue that exporting LNG would tie U.S. natural gas prices to global markets.

The Energy Department's Office of Fossil Energy is considering whether exporting LNG is in the public interest. In the meantime -- shades of Keystone XL -- the department has effectively put a moratorium on new LNG export licenses.

Energy's decision-making process balances the extent to which exporting LNG drives up prices with the economic benefits of increased production and energy exports. The price assessment comes at a time when U.S. gas fetches the same price in constant dollars as it did in 1975. Producers are now shutting down production and lowering exploration budgets. The shale-gas "job machine" is now in reverse.

Energy's price study, released in January, found that exporting six BCF per day would increase wellhead prices by 50 to 60 cents per million BTU by 2026. The study has a myriad of assumptions and scenarios, the most fundamental of which is future gas production. In 2007, Energy predicted the U.S. would be importing 12.3 BCF a day of LNG by 2030 due to falling gas production. But primarily because of the shale-technology phenomenon, wellhead prices have tumbled from $6.25 six years ago, even as demand increased by eight BCF per day. That demand figure is larger than the six BCF assumption of the Energy study. The Energy Department is not particularly to blame, as most forecasters got it just as wrong on gas production.

Ideally, the Energy Department should move quickly and recognize free-market principles. And the administration could send a clear policy signal that natural gas is integral to the country's energy future and that exporting LNG is good economics and consistent with its 2010 State of the Union address to double U.S. exports over five years and create two million new jobs. But Energy is moving slowly, and administration signals on natural gas are mostly lip service. The economic-benefits study should have been done by the end of March. But last week, Energy delayed its release until late summer, and said there is no timeline to review results and develop policy recommendations. Translation: after the election.

While we are fantasizing, the government could stop singling out the job-creating energy industry for higher taxes, emphasize cost/benefit analysis before adding further regulation to energy production, and get out of the business of regulating LNG exports altogether, which smacks of protectionism. To that end, should we also give veto authority to the Agriculture Department over grain exports (to lower corn prices) and the Commerce Department over auto, airplane and smartphone exports? 

JOHN R. SIEGEL is the president of J.J. Richardson, a registered investment advisor that manages a hedge fund in Bethesda, Md.

 

BKS

From Whitney Tilson:

You might not believe this in light of this morning’s news (Barnes & Noble, Inc. (NYSE:BKS) has roughly doubled, but this is what I wrote over the weekend but hadn’t yet sent:

For only the fourth time in our 13+ year investing history, we’ve gone long something we were previously short.  (Given how well it’s worked out the three previous times with Fairfax, General Growth Properties and Netflix, we should do it more often!)  In the past, there’s been some period of time between our switch, but in this case we went from short to long Barnes & Noble on the same day last week.  Such a rapid shift in opinion is unprecedented for us, but when we encounter new data/analyses that convince us that we’re wrong, we act quickly.

BKS had been a profitable short for us and we were already thinking of covering when two things caught our attention: we saw that Jana, a firm we know well and respect greatly, took a big stake, and read the write-up below on our favorite value stock idea web site, Value Investors Club.  We largely agree with the analysis in the VIC write-up: that the base business is worth almost the entire current stock price, so you get a nearly free call option on the Nook, which is doing much better than we expected.  Plus with more than 2/3 of the stock controlled by insiders and, according to Yahoo Finance, 67.2% of the float is sold short (87% if you include Jana’s new stake), even a hint of good news will likely trigger the mother of all short squeezes.

Also you can find the VIC analysis here.