4 Bold Energy Predictions for 2011

After reflecting on the big themes of 2010, here are a few that I came up with:

  • BP's (NYSE: BP  ) Macondo oil spill and its fallout.
  • The ongoing natural gas glut, courtesy of the Haynesville and other booming shale plays.
  • The mad dash by independent E&Ps to get oily, and the rise of the Eagle Ford, Niobrara, and other liquids-rich plays.
  • The return of the oil sands, including this giant IPO.
  • Insatiable foreign demand firing the long-term supercycle for coal.
  • Optimism giving way to frustration regarding America's nuclear renaissance.
  • A stronger-than-expected year for solar, overshadowed by concerns over weakness ahead.
  • A generally tepid turnout for other alternative energy businesses, including wind and geothermal.

Many of the above themes are interrelated. Weak natural gas prices encourage E&Ps to search for oil, and they also push down electricity prices. That hurts conventional power producers, but especially higher-cost renewable sources. As the head of Shaw Group pointed out recently, we're likely to see a lot more movement on nuclear power in places where natural gas runs $7 or $8 per million BTU, rather than the $4 or $5 that we've seen domestically for the better part of this year.

Defining events like the Macondo disaster are clearly impossible to predict, but that won't stop me from making a few wild prognostications about the year ahead.

Bold prediction No. 1: Oil goes higher until it doesn't
Oil has begun pushing against the upper end of its trading range in recent weeks, suggesting to many analysts that we're looking at a run back to triple-digit crude prices in the year ahead. Goldman Sachs analysts, for example, see $100 oil by the second half of the year, as global demand remains strong and OPEC spare capacity tightens. Once you add the magic of QE2 into the mix, that outcome seems entirely plausible.

As oil prices head skyward, investors will get increasingly confident and bid up the prices of speculative oil stocks, including those with no oil production. These same stocks will be most vulnerable to implosion when the music stops, so they're probably best avoided if you like to sleep soundly.

Bold prediction No. 2: Natural gas does not go to zero
Gas is trash today, but there are some reasons to believe we'll see some relief in the year ahead. Three-year leases originating in the land grab of 2008 will be satisfied, allowing producers to dial back on their drilling commitments in places like the Haynesville and Marcellus. Constraints in frac equipment, natural gas liquids processing, and pipeline capacity may keep a lid on activity in various plays. Hedge books will roll off, exposing producers to lower prices. The ongoing permitting purgatory will choke offshore supply growth.

I am not even going to attempt to time a rebound in natural gas prices back to the more comfy $6 level. Everyone that has done so has been wrong. I do want to increase my exposure to this sector, though. I offered up Contango Oil & Gas (AMEX: MCF  ) as an idea in late August, and may have missed the boat by not buying at the time. Southwestern Energy (NYSE: SWN  ) , on the other hand, trades lower than when I tapped it as a low-risk bet. That business still looks like a good buy.

Something I will not do is invest in an indebted company that's not built to survive persistent weakness in the gas price. My friends over at Motley Fool CAPS are very bullish on Compton Petroleum, but even after the company's recapitalization, I'm just not comfortable with the financial picture. The operating leverage of less indebted producers should produce shareholder returns that are more than satisfactory.

Bold prediction No. 3: The world continues to rely heavily on coal
This one's simple enough. China and India, while simultaneously pursuing cleaner options in earnest, need coal to power their growing economies. They're looking to Australia, Mozambique, and elsewhere to get it. International companies like Peabody Energy (NYSE: BTU  ) will continue to benefit from this trend. I would probably favor export-oriented firms, despite the fact that the U.S. isn't kicking coal anytime soon, either.

Bold prediction No. 4: Alternative energy companies with poor fundamentals will continue to flame out
This year, we've seen Evergreen Solar (Nasdaq: ESLR  ) slump toward what looks like inevitable irrelevancy. Energy Conversion Devices (Nasdaq: ENER  ) , whose thin-film laminates will face increased competition from Dow Chemical (NYSE: DOW  ) and other well-financed new entrants, probably isn't far behind. I'm all for green investment themes, but investors need to tread extremely carefully here. The sector is ripe for hype.

Well, that's as far as I'm willing to go with my predictions. If you're prepared to go further out on a limb, chime in with one of your own in the comments section.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool both owns shares of and has written puts on Contango Oil & Gas. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (55)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2010, at 4:17 PM, DHeavy wrote:

    There is nothing more in this world that I enjoy more than some good sarcasm. Great article.

    DHeavy

  • Report this Comment On December 17, 2010, at 4:34 PM, MachbusterTom wrote:

    Comptons is a VERY risky play but I think stil worth looking at for a tough investor...

  • Report this Comment On December 18, 2010, at 12:44 AM, sconcher wrote:

    There is nothing bold about your predictions.

  • Report this Comment On December 18, 2010, at 10:06 AM, dividends100 wrote:

    Are there any ETFs that may help one invest purely in Natural Gas??

  • Report this Comment On December 18, 2010, at 12:35 PM, ybckorea wrote:

    I think the assessment has more to do with a limping economy where individuals have less money or are more cautious in spending what they have. Heat is needed while solar is discretionary. Electricity requires the use of all your items while nuclear requires increased expeditures. I see tight money controlling the situation.

  • Report this Comment On December 18, 2010, at 3:49 PM, MKArch wrote:

    This one might take a little longer than a year to play out but here's my bold prediction.

    Jim Chanos is right, China's in an epic construction bubble that will burst at some point although nobody knows exactly when. When this bubble bursts it not only brings China's economy down to earth but it brings commodities including oil down with it. This may hurt the U.S. in the short term as panicked markets may slow the over all U.S. economy for a while but ultimately we don't sell much to China, they will continue to make cheap stuff for us and lower commodity prices will be a boon for our economy and most others around the world.

    I'll make another longer term bold prediction as well. For the first half of the past decade China's economy was benefiting from a massive migration of jobs from the west as west based companies got cost cutting religion in the 2000 recession. That catalyst has largely played itself out by now but is being replaced by the current construction bubble. When this bubble bursts it not only will China come back to earth but their days of 10% GDP growth are probably over and commodities including oil that are priced like China will continue high growth indefinitely will be priced for a new modest growth emerging market reality going forward.

    Realistic commodity prices will be a boon to the U.S. economy and the markets will shift focus from emerging markets to the U.S. I'm long the U.S. in my personal portfolio and my CAPS portfolio. You can't have commodity prices going vertical on the backs of consumers who make ~$3,500.00/ year. That's not a sustainable trend.

  • Report this Comment On December 19, 2010, at 11:03 PM, hutsell215 wrote:

    I would agree with the fool's stance on BP. This company has been battered and should reemerge. Read this article about the current lawsuit against BP and their future growth prospects:

    http://wp.me/pZM1b-EY

    I am buyer of BP. I equate this purchase to sports drafts when teams draft players solely on their "upside". BP could return a nice profit for those willing to invest now.

  • Report this Comment On December 20, 2010, at 11:12 AM, Wade32ru wrote:

    Sure, nat gas won't go to zero, but the real question is: how long will it stay at $4.00? Nat gas E&P companies could be dead $ until we see a pop in the underlying commodity. SW is a solid choice, though.

  • Report this Comment On December 23, 2010, at 1:59 AM, PeakOilBill wrote:

    Coal and gas aren't in short supply, yet. OIL will soon be the MAJOR problem, with China now buying more cars than the USA. With all these financial problems and low growth, if it were in surplus, it wouldn't be at $90 a barrel. The question is, how to make a killing on the coming oil price spike. We have been using more oil than we have been finding since around 1970. Venezuela is virtually closed. The only other place with large available reserves, that I am aware of, is Iraq. Unless they can rapidly increase oil exports, the price will continue to rise and might spike like in 2007. The head of Total recently said that he doubted if world oil production could EVER go above about 90 million barrels a day. If he is wrong, as head of a worldwide super major oil company, who the hell would know?

  • Report this Comment On December 27, 2010, at 3:47 PM, stanton17 wrote:

    Also consider these other "energy plays" to supplement existing -- and, perhaps, larger -- holdings:

    COAL:

    Cloud Peak Energy Inc. (CLD)

    NATURAL GAS:

    Cheniere Energy, Inc. (LNG)

    OIL:

    Crimson Exploration, Inc. (CXPO)

    Crosstex Energy, Inc. (XTXI)

    Magnum Hunter Resources (MHR)

    Vantage Drilling (VTG)

    NUCLEAR:

    Global X Uranium ETF (URA)

  • Report this Comment On December 30, 2010, at 4:11 PM, fuzzylou wrote:

    I think BP will rebound this year. And I hate to see gas prices rise, but I think they will go past what we paid in 2007!

  • Report this Comment On January 01, 2011, at 2:57 PM, akazakoff wrote:

    As a 3-5 year buyer, does buying Nuclear make sense? Does anyone know of companies that work in nuclear or are complementary?

  • Report this Comment On January 03, 2011, at 10:10 PM, tnk4800 wrote:

    Hypernion Power. John "Griz" Deal, CEO-Pres., Heads group of Los Alamos, NM engineers.

    Sealed nuclear power plant. 6 x 3 x 3 - kitchen refrigerator size modular design, like a power plant on a nuclear submarine, aircraft carrier etc.

    Can be transported by tractor trailer, mobilized for remote power or quick grid or emergency solution application, any location, Power 25,000 homes, $50 million to $70 million per plant. Power capsule sealed, encased in below ground concrete vault, that heat radiator type tubes submerged in water. no site or human contamination. "period." Module it self has 10 year life, then back to factory for re-build and /or exchange.

    February 2010 news release reported 50 signed sales orders with deposit, mostly 3rd world or remote mining locations.

    First application scheduled for mid 2012-14? Alaskan mining town, SE of Fairbanks.

    Press release in May of 2010 announced a signed agreement with Chinese manufacture to build and supply multiple # of these plants for remote Chinese and African mining sites.

    Seems like a simple no brainer solution to me.

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