Assuming that the prediction made by Boone Pickens regarding the Republicans winning the upcoming presidential election proves right, in our opinion, natural gas prices will show an upside in the coming period. We believe that gas prices will move upward due to the 50% decrease in drilling activities over the last one year, and due to the trend towards structural transformation from oil to natural gas. Going forward, we believe the U.S. can utilize its own resources to reduce its dependence on Middle Eastern oil.
Boone Pickens predicted that the Republicans will win the upcoming elections. If they do win the elections, gas prices will go up, due to the party's independent energy campaign. There will be tremendous developments in the oil and gas sector. As the table below shows, the top U.S. oil and gas companies have donated significantly to the Republican election campaign. The Republicans are expected to start more production and exploration projects, and also to generate a large number of high paying jobs from this sector. Their slogan "drill baby drill" leaves little, if any doubt about their stance on oil and gas exploration. Moreover, the third round of quantitative easing will be expected to stimulate economic growth, which it has failed to do up till now. The Federal Reserve Bank has decided to inject around $40 billion a month in the economy.
Boone Pickens' view
Boone Pickens is a well-known energy investor. He chairs the hedge fund, BP Capital Management. Around 90% of Pickens' investments, a sum of $1.3 billion, are invested in oil and gas equities. His bullish stance on Apache Corp (APA), Halliburton (HAL), Schlumberger (SLB), National Oilwell Varco (NOV), Occidental Petroleum (OXY) and Suncor Energy Inc New (SU) is based on the companies' strong fundamentals, and also on the expectation of a better industry future.
Boone Pickens has forecasted that natural gas prices will move up to $4 per MMBtu by the end of 2012, from the current price of $3.2 per MMBtu. The price has already witnessed a dip of below $2 per MMBtu, and it is now on the road to a recovery. The upward movement in gas prices is reflected in the decrease in natural gas rig counts from 912 to 448 over the last one year, as shown in the table given below. The issue of excessive supply of natural gas can be resolved by increasing the utilization of resources through different channels. The increased consumption of natural gas will boost its price. These channels will be used to produce electricity and extract crude oil from the oil sands of Canada. The United States is the world's largest natural gas producer. The Auto Industry has to be shifted to natural gas to help the country become self sufficient in its fuel needs. In fact, there are 13 million cars on natural gas in the world, out of which only 130,000 are in the United States.
Source: WTRG Economics
Boone Pickens believes that crude oil prices will fall to $105 a barrel by the end of the year. The reason for this is the sluggish Chinese economic growth and the downfall in U.S. industries. Prices have shown a downward trend due to the increase in drilling activities, as reflected in the increase in United States' oil rig count from 1,062 to 1,413, over the last one year.
One of the Boone Pickens' favorite stock Apache, has shown a significant raise in its international natural gas production by 100 million cubic feet per day over the last one year. In spite of the increased production, the company missed analyst estimates by approximately $0.5 per share, primarily because of the decrease in natural gas prices in the U.S. When natural gas prices rebound, it will boost its prospects through its transition towards horizontal drilling, increase in its rig count, and growth in Permian Basin.
United States Natural Gas (UNG), a natural gas ETF is down 37% over the last one year. UNG has probably bottomed out, and has a significant potential to show a further upside in case of rebound in natural gas prices.
In our opinion, the United States should reduce its dependence on oil imports from Middle Eastern countries. Increasing tensions between the U.S. and Iran, due to the latter's nuclear program, can potentially disrupt supply in the Middle East. The civil war in Syria and the militant attacks on the energy infrastructure of Yemen and Sudan have caused immense inconsistency in oil supply. Total oil consumption in the United States is around 20 million barrels a day, out of which 11 million is imported. The country imported 4.5 million barrels of oil from OPEC, out of which 2 million came from the Persian Gulf. We agree with Pickens that these 2 million barrels can be extracted from the North American region.
Despite spending large sums of money to protect oil reserves in the Middle East, the U.S. has been getting only 2 million barrels a day, out of the region's total exports of 17 million barrels. The main oil exports of the Middle East are to China and Europe.
The government should initiate drilling in North America and start utilizing its 750 million barrels of oil from strategic petroleum reserves.
As the demand for natural gas improves and U.S becomes a net exporter of energy, natural gas prices can see a sharp move up.
Due to a sudden rise in natural gas prices, investors have started showing interest in natural gas stocks. Investors with a high risk appetite are benefiting from this rebound in natural gas prices. Romney's independent energy campaign and expected structural change from oil to gas would enable the investors to enjoy high returns. On the other hand, if Obama wins the election, his focus on alternative energy program would create difficulties for gas companies. However, gas being more friendly than coal will fit in his agenda of environment friendly power generation.