First Asset Investment Management’s John Stephenson discusses his outlook for the energy sector and the Keystone pipeline, along with his four top energy stock picks.
John, there have been a lot of questions in the news because of the Keystone XL Pipeline and what might be happening there. Where do you see developments there headed?
Listen: Absolutely without a doubt in my mind it’s going to get approved, but it will get approved after the election.
Look, the calculus is very simple in my mind in terms of what Obama said: I can save one job of my own or create 20,000 other direct jobs. He didn’t want to take the risk of losing part of his base, which was the environmental movement.
If you look at where the industry is, they are solidly behind it. Not just the producers in Canada, as well as the American producers who are up there producing from the oil sands, but also refiners on the Gulf Coast who are watching him saying we need crude to run through our refiners or we’re going to have to shut them down.
Mayan crude out of Mexico, Venezuelan crude—which are these heavy grades—are falling off. They need to replace this and they have to do it in the next couple of years. So Keystone will get done. It’s just too big an infrastructure project. It’s the biggest in North America right now.
Where do you see the stocks of these energy companies going?
Well, most of them—particularly the oil companies—are going to go higher. They’re going to go higher because in spite of the fact that the economy globally might be moving in fits and starts.
Record oil demand happened last August, in August 2011. That was the time when China seemed to be slowing, America wasn’t so strong, and the Europe crisis was on the front burner. The second highest oil demand ever recorded in the history of the world was last October. So it doesn’t much matter.
The demand is coming from different parts of the world than it has historically. It’s no longer North America-centric.
Let’s shift gears and talk a little bit about natural gas. Prices there have been dropping. Where do you see that going?
Nowhere. They’re going to be in the basement, and they’re going to be in the basement for years.
The reason is we have this new technological revolution, and now all these previously unforeseen areas—the shale gas we knew existed, but we didn’t know how to unlock the value there—now we can do it, because we’re drilling horizontally and we’re fracking or splitting up the reservoir to get these tight pools of gas out.
The one thing investors need to keep in mind is what is the EPA going to do? Because the EPA right now has the power to shut in and close off if they think there’s environmental issues related to the water table or whatever else—these reservoirs—and that could change the picture overnight for gas producers, from a sucker’s bet to something you might want to be all over.
What about certain industries that are related to natural gas such as transportation, pipelines...where do you see for those?
Sure. Well, we talked about Keystone. TransCanada (TRP) would be a logical stock to buy even if Keystone doesn’t get done. It’s a $45 stock. If it gets done it’s $50. It’s currently around $40.
Enbridge (ENB) is another big pipeline company. That will do because there’s a potential for taking some of that crude oil out of Canada to the west coast of Canada. They’re working on a pipeline called Gateway.
I like the oilfield services companies, particularly the international majors like Halliburton (HAL) or Schlumberger (SLB). Why? Because those are the guys who are going to get the call to develop these remote fields, whether they be in Brazil or in Saudi Arabia or off the coast of Nigeria, because they have the technological expertise.
Years and years ago—20 years ago, 30 years ago—the oil industry, being a cyclical industry, laid off all these technical experts. They got together, and they formed and created the companies like Halliburton and Schlumberger, which are going to be the next great wave of profit making for people riding the oil boom.