Our Energy Challenges

Future Currents: Where
the Global Energy
Sector Will Flow
Robert Rapier
The Wealth Summit
May 2014
 Biography
 Philosophy on money and energy investing
 2013/Q1 2014 in review
 Is natural gas still cheap?
 Shale oil continues to boom
 A word on coal, nuclear, and renewables
 A peek at my portfolio
Robert Rapier Bio
 MS in chemical engineering
from Texas A&M
 > 20 years in the energy
 Roles in oil and natural gas production, refining,
petrochemicals, renewable energy
 Five patents granted
 Worked in Germany, Scotland, and the Netherlands
 Based in Hawaii, but on assignment in Arizona
 Investor for >30 years
The Hats I Wear
1. Investing Daily
• Publications
• The Energy Strategist/The Energy Letter
• MLP Profits/MLP Investing Insider
• Personal Finance
2. Merica International
Chief Technology Officer and Executive Vice President
• Conduct due diligence
• Develop technologies
• Presently working with Advanced Green Innovations in Arizona
3. Freelance writer/commentator
Managing Editor, Energy Trends Insider
Guest columns in Washington Post, Forbes, Wall Street Journal, The Economist
TV appearances on 60 Minutes, The History Channel, and PBS
Author of Power Plays
• Published in 2012
• Layman’s guide to energy
• Overview of energy options
• History of US energy policy
• Due diligence primer
TES Philosophy and
Portfolio Review
My Money Philosophies
 Spend less than I earn
 Minimize personal debt
 Invest in businesses I understand
 Invest in profitable but out of favor businesses
 Understand the risk level
 Avoid investments that are overly dependent on
government subsidies and/or mandates
 Identify long-term trends and invest for the long term
 Have an exit strategy
A Few Energy Philosophies
 Energy is nearly as important to society as is food
and water
There is no economic, scalable substitute for oil
Oil prices will continue to be driven by growth in
developing countries
A long natural gas boom is underway
Coal and nuclear power face headwinds
Investing in advanced biofuel companies is a good
way to lose money
TES 2013 in Review
 Purged 27 holdover companies, including royalty trusts
and several foreign companies
 Average return of companies after selling was -5.7%
 Added 27 companies from across the energy spectrum
 Average annualized return of new buys was 28% versus 22
percent advance for the Energy Select Sector SPDR (NYSE:
 Kept 18 companies from previous regime
 Average annualized return of holdovers was 28%
 Full performance summary in December 27 TES story
“Counting Our Blessings”
Q1 2014 Report
 Energy Select Sector SPDR down 1%
 S&P 500 up 1%
 TES portfolios up 1.8%
 12 TES “Best Buys” up 7.6%
 Two in the red and six returning double digits
 Major moves in Q1 by American Railcar (NYSE: ARII),
up 52%, and First Solar (NYSE: FSLR) up 30%
Current Best Buys
* I own shares in this company
2014 Investment Landscape
The Case for Natural Gas
Global Shale Basins
Shale Gas Resources
North American Shale Basins
Gas Production Surges
Rigs Shift to More Lucrative Oil
The Long Term Natural Gas Drivers
LNG Exports
 Two dozen liquefied natural gas (LNG) export license
applications under review at DOE
 Total capacity of all licenses applications is 35.6 billion
cubic feet per day (Bcfd)
 This is equivalent to just over half the natural gas production
in the US in 2012
 Thirteen companies have applied to the Federal Energy
Regulatory Commission (FERC)
 2 West Coast, 2 East Coast, 9 Gulf Coast
 18 Bcfd total proposed capacity
 Cheniere Energy Partners LP (NYSE MKT: CQP)
scheduled to start exporting LNG in Q4 2015
EPA Phase-out of Mercury
 Mercury and Air Toxics Standards (MATS)
 Designed to limit emissions of mercury and other toxic
substances; implementation in 2015 and 2016
Source: EIA, Annual Energy Outlook 2014
EPA Curb on Carbon Emissions
 Proposed limit of 1,100 lb CO2/MWh for new power plants
 Coal-fired power without expensive carbon sequestration
unable to meet this standard
 Average emission rates in the US from coal-fired generation
are: 2,249 lbs/MWh of carbon dioxide
 Average emissions rates in the US from natural gas-fired
generation are: 1135 lbs/MWh of carbon dioxide
 EPA: “EIA projections show that natural gas is likely to be
the most widely-used fossil fuel for new construction of
electric generating capacity through 2020”
Natural Gas Vehicles
A Relevant Digression
 I am currently working to help commercialize a natural
gas conversion kit for heavy trucking and power
 Embedded at Advanced Green Innovations in
 They have developed the world's first non-invasive
diesel to natural gas engine conversion kit that
provides full diesel power and torque -www.zhro.com
The Short Term Natural Gas Drivers
Understanding Gas Inventories
 US natural gas consumption is seasonal
 During “injection season”, gas is stored under
pressure in depleted oil or gas reservoirs, in natural
aquifers, or in salt caverns
 Injection season lasts from ~April 1st to ~midNovember
 Inventories are then drawn down through the winter
 Abnormally cold or warm winters can have a lingering
on natural gas prices
Source: EIA, Annual Energy Outlook 2014
Natural Gas Inventories
Natural Gas Inventories
1995-96 Gas prices rise 168%
Natural Gas Inventories
2000-01 Gas prices rise above $10/MMBtu
Natural Gas Inventories
2002-03 Gas prices rise above $15/MMBtu
Natural Gas Inventories
2011-12 Gas prices fall below $2/MMBtu
Natural Gas Inventories
2013-14 Largest gas withdrawal on record
A Long, Cold Winter
 Natural gas inventories are 53 percent below normal
A Long, Cold Winter
 Inventories not expected to recover before 2016
Prices crashed
From my presentation last year:
“Natural gas is cheap”
Natural gas highlights
 Henry Hub spot price on May 31, 2013 was $4.02 per million Btu
 Henry Hub spot price on April 29, 2014 was $4.83 per million Btu – an
increase of just over 20 percent
 Added Cabot Oil and Gas (NYSE: COG) to the Growth Portfolio on
 Nation’s 12th largest gas producer
 Total return to date of 19.2 percent
 Added Chesapeake Energy (NYSE: CHK) to the Aggressive Portfolio
on 5/13/13
 Nation’s 2nd largest gas producer
 Total return to date of 43.5 percent
 Added Devon Energy (NYSE: DVN) to the Growth Portfolio on 9/25/13
 Nation’s 4th largest gas producer
 Total return to date of 19.1 percent
Top 20 US Gas Producers
Denotes portfolio holding
Disconnects Create Opportunity
 Cabot Oil and Gas
COG drops based on
short-term factors
I pick up shares at $35
Natural gas takeaways
 Natural gas in the early stages of a long-term growth
 Short-term investors should exercise more caution, as
gas producers have surged recently
 Downside risk short-term would be an unusually mild
summer followed by a mild winter
 100% of natural gas-weighted portfolio holdings have
been winners to date
The Shale Oil Boom Continues
Global Opportunity
Developing Regions Want Oil
Shale Oil Resources
Shale Oil Rising
Top US Oil Producers
Graphic source: The Economist
Notable Portfolio Holdings
 4 of the Top 5 US oil producers
 3 of the Top 4 Bakken oil producers
 Continental Resources (NYSE: CLR)
 Whiting Petroleum (NYSE: WLL)
 EOG Resources (NYSE: EOG) – also top producer in
Eagle Ford Formation
 Top producer in the Permian Basin
 Occidental Petroleum (NYSE: OXY)
Coal and Nuclear Power
Global Coal Consumption
Nuclear Woes
Nuclear and coal industries
will be driven by growth in
India and China, but will face
plenty of headwinds
Opportunities in Renewable Power
Rapid Growth in Wind and Solar
Exponential Growth
Growth in Context
Renewable Takeaways
 I believe solar power is destined to become our most
important source of power
Rapid capacity growth will continue in several
renewable segments
Opportunities exist, but most companies are richly
valued and rely on government support
Investors should choose entry points cautiously
Notable portfolio holding is First Solar (NASDAQ:
 After returning 88 percent in under seven months, we
advised investors to take some profits
My Portfolio
My Overall Allocation
Energy stocks – 29.0 percent
Health care mutual funds – 20.4 percent
Vanguard PRIMECAP Fund (VPMCX) – 8.2 percent
Fidelity Low-Priced Stock Fund (FLPSX) – 7.3 percent
Vanguard Morgan Growth Fund (VMRGX) – 6.5
 International mutual funds – 6.7 percent
 Technology mutual funds – 4.9 percent
1 year portfolio return through 4/24/2014 is 31.4 percent
My Energy Holdings
 ConocoPhillips (NYSE: COP) – 15 percent of
 Phillips 66 (NYSE: PSX) – 7.5 percent of portfolio
 Devon Energy (NYSE: DVN) – 3.2 percent of
 Acquired shares on 11/6/13 at an average price of
$59.69; gain to date ~ 18 percent
 Cabot Oil and Gas (NYSE: COG) – 3.3 percent of
 Acquired shares on 2/28/14 at $35; gain to date ~ 12
2013 Removals
 Petrobras (NYSE: PBR)
 Heavy-handed government intervention; sold for small
 Berry Petroleum (NYSE: BRY)
 Merger arbitrage situation; sold for small profit
 Westport Innovations (NASDAQ: WPRT)
 Lost faith in management; sold for 12 percent loss
Thank You!
RR Selected Publications
 “Biofuels” in Achieving Sustainability: Visions, Principles, and Practices.
Vol. 1. published in 2014.
Power Plays: Energy Options in the Age of Peak Oil published in 2012
“The Potential of Algae and Jatropha as Biofuels Sources” in Global
Economic and Environmental Aspects of Biofuels published in 2012
“The Global Energy Picture” for The Economics of Alternative Energy
Sources and Globalization published in 2011
“Diesel Production Processes” for Advances in Energy Research
published in 2011
“Bioenergy/Biofuels” in Sustainable Development in the Forest Products
Industry published in 2010
“Renewable Diesel” in Biofuels, Solar and Wind as Renewable Energy
Systems: Benefits and Risks published in 2008

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