You Say Fossil Fuels, I Say Future Fuels

by: Joseph L. Shaefer

Oil, natural gas, and coal are anything but fossils. Mother Nature was kind enough to compress various forms of carbon over centuries, millennia and eons into giant batteries called “formations” for our use. Their age may make them fossil fuels, but their usability and cost make them future fuels.

One day, alternative energy sources like wind, which we’ve used for hundreds of years, and solar, which we’ve used for thousands of years, may be focused and collected and priced to be competitive with oil, gas, and coal. But for the immediate future, any “subsidies” fossil fuel extraction companies realize in the form of depletion allowances, accelerated depreciation, etc. are more than offset by the massive taxes at the federal and state level that is levied upon their finished products – unlike alternative energy sources.

I applaud private industry’s continuing research into wind, solar, geothermal, biomass, hydrogen, et al, but it doesn't seem as if the public funds from Big Government has been money thrown at alternative fuels willy nilly, with little to show for it? My guess is that the next big breakthrough in solar will come from an oil, gas or coal company looking to diversify, or from two guys in a garage somewhere. Big Government? The billions they have thrown at grants for professors to “study” this and “study” that will come to the same ending as most money disbursed by bureaucrats -- down a rathole.

That’s not to say that public/private partnerships can’t produce another Manhattan Project or TVA – just that it will cost far more than it otherwise would. Thankfully, we have cheap and abundant natural gas and cheap and abundant coal right here in America. If we need more, we can turn to our wonderful neighbor to the north which has more of both than their population can use.

And we could probably find more oil in US waters, as well. But U.S. companies are prohibited from drilling for it. For instance, US firms are proscribed from drilling within 200 miles of the Florida coast. But Cuba doesn't play by the same rules. So China's state-owned oil company, Sinopec (NYSE:SHI), has signed an oil exploration deal with Cuba and moved huge drilling platforms to within 50 miles of the Florida Keys, an area where U.S. companies aren't allowed to drill and where a single spill from Sinopec could wreak environmental devastation upon U.S. beaches.

Since Congress "protected" us from U.S. oil companies, we now risk spills from others who play by different rules and are unlikely to hew to the same safety and environmental rules we play by and we are forced to depend upon Arab oil. Smart. Real smart. That’s what happens when a paternalistic government decides to “protect” us!

So what do many geologists and ecologists recommend? Fossil fuels, cleaned both at the source and at the smokestack. Green isn't enough. Black and gooey is still necessary. We still need to extract oil and gas, and we need to use coal both to burn and for much cleaner and less-polluting coal-to-liquid technology to power our homes, our cars, and our industry.

We have more coal than any nation on earth. Why are we importing oil from the Middle East when we can as cheaply and more cleanly convert coal to liquid fuels? Or use cleaner-burning natural gas, which we have in such abundance that there is a glut right now? Exxon (NYSE:XOM) clearly doesn’t believe the glut will last. They just bet $41 million by buying XTO, a major natural gas explorer and producer, that the price of gas will be more stable going forward. Stability yields greater usage by utilities and fleet buyers.

Worldwide, there are plans to build over 1000 new coal-fired plants. One way to avoid importing oil and clean up the environment is to use Coal-to-Liquids [CTL] technology, where pollutants are removed at the source. The worldwide leader in this technology is Sasol (NYSE:SSL), the world's largest producer of synthetic fuels, both CTL and GTL (Gas-to-Liquids.) Here's the real kicker: three of the world's four biggest energy users also hold the most coal reserves! (The U.S. is #1, China is #3 and India #4.)

While we're at it, let's find smarter ways to extract the oil from the tar sands in Canada (like using the stripped-out carbon dioxide from CTL to inject underground to "bubble" oil to the surface) and the oil shale in the Rockies. Of the world's total oil shale, 89% is in Colorado, Utah, and Wyoming, USA. And most of the world’s gas shale is in – the USA. Add that to the largest concentration of coal in the world – in the USA – and then factor in the low cost of transportation, free trade agreements, and friendly relations with our largest trading partner – Canada – and you have to scratch your head and wonder: with all this going for us, how have politicians been able to screw it up so completely? And why are the hell-bent-FOR-ELECTION (answering our own question) eager to subsidize ethanol, biomass, solar, hydrogen, et al, when the USA is sitting on massive reserves of fossil/future fuels?

If you agree that this lunacy will continue but it won’t change the basic equation – “fossil/future fuels, at least for the short- and intermediate-term, will be more profitable to your portfolio than alternative fuels” – and will make us less dependent upon foreign despots or idiot politicians, as well, then here are a few oil/gas/coal patch companies I’ve discussed in greater detail in previous articles:

First would be Exxon. The company has sold off because “the street” considers their purchase of XTO “dilutive.” Well, duuuhhh, of course it’s dilutive – they paid for it with shares rather than cash. But if, as I suspect, XTO produces excellent cash flow for XOM going forward, then it won’t remain dilutive at all – it will be accretive. Did XOM overpay for XTO as some people with no skin in the game (unlike Exxon) claim? I agree with my friend’s 5-year old, who would disagree by saying, with elegance and understatement, “They stoled it.”

I imagine XOM’s well-researched and well-reasoned purchase has other great oil firms like Royal Dutch Shell (NYSE:RDS.B) and BP (NYSE:BP) looking at other natural gas producers, too. And I’ll wager they’re looking at big, well-managed firms like Encana (NYSE:ECA), Chesapeake (NYSE:CHK), Devon (NYSE:DVN) and EOG (NYSE:EOG).

If you don't mind suffering the slings and arrows of outraged greens (who think electric cars are cool and ecologically “the right choice” while clueless to the fact that 53% of US electricity is generated by coal) you could always buy some dirty old coal companies. My favorites are two “royalty” firms that do no mining but merely collect royalties from those who do: Natural Resource Partners (NYSE:NRP) and Penn Virginia Resources (NYSE:PVR).

Finally, for those who are looking for strong dividends today and slow but steady growth today and tomorrow, may I suggest natural gas (and some other) pipeline companies like Magellan Midstream (NYSE:MMP), Boardwalk (NYSE:BWP), Enbridge Energy (NYSE:EEP), Kinder Morgan (NYSE:KMR), Buckeye (NYSE:BPL), Enterprise (NYSE:EPD) and Canadian Royalty firms Enerplus Resources (NYSE:ERF) and Pengrowth (PGH.) All of these future fuel plays and all the others above are available in previous SA articles for your research and further review…

Author's Disclosure: We and/or clients for whom it is appropriate are long every one of the stocks above, though recently we have begun to take some great profits on a portion of our positions.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.