This is a miserable time to be a natural contrarian if you’re a resource investor. Forecasting agency BIS Shrapnel reckons that the resource and mining boom has years to go. In a report released yesterday, the firm reported that, “With an enormous amount of work in the pipeline, and more projects still to commence, investment is forecast to rise another 11 percent over the next two years and peak in 2007-08.”
Resource companies, pinched by labour and capacity constraints, are subcontracting much of their expansion plans to specialist firms. These firms are in the sweet spot of the commodity super cycle at just this minute. But that doesn’t mean the resource producers and larger firms will stop doing well.
Take Woodside Petroleum (ASX: WPL). Yesterday the company announced that liquefied natural gas (LNG) from its North West Shelf venture will be sold to Japan’s Tokyo Gas. It is not the first, nor the last, of these kinds of deals between Woodside and Japanese or Korean electric utilities. Asia’s electricity generation is heavily reliant on cleaner-burning natural gas and nuclear (as opposed to coal). And these days, Australia is a much more trustworthy and reliable strategic partner than say, Russia.
The nationalization of Russia’s energy resources continued yesterday. This simply drives gas-hungry Asian utilities into the warm, hairy arms of Australian LNG producers like Woodside. But if it is fundamentally good news for Woodside, it is less good for multinational oil and gas companies like Royal Dutch Shell (LON: RDSA) that hoped to operate in Russia’s natural-gas rich Sakhalin Island.
The Sakhalin-2 project on the remote island north of Japan was, until yesterday, Russia’s only major oil and project owned exclusively by foreigners. In Vladimir Putin’s Russia, and in today’s world where energy assets are strategically invaluable, foreign development of Russian gas is neither desirable, nor, as it turns out, necessary. Russia simply unfurled a heap of red tape Shell’s way to gum up the works. Bureaucratic red tape (designed as environmental safeguards) have finally succeeded in forcing shell to conceded control of the product to Gazprom, which is largely owned by and mainly answers to, the Kremlin.
A few years ago in The Bull Hunter, we called Sakhalin Island East Asia’s “big prize…18 trillion cubic fit of natural gas reserves,” that make the island, “the energy mother lode of the region-a find rivaling Alaska’s North Slope-and the kind of resource, if properly handled, that could power the region’s energy needs for decades.”
From an investment perspective, we turned our attention to the gas and energy industries in general and went on to recommend Korea Electric Power (NYSE: KEP), which at the time of publication in June 2005 was trading for US$14.90. Yesterday, KEP traded at US$22.42, for a pre-tax, pre-currency adjusted gross gain of about 50 percent. At a price to earnings ratio of less than ten, and still off its 52- week high of US$24.97, we look admiringly at the stock again today.
But two years on into the Asia-driven energy and resource boom, we’d look for oil, gas, and energy producers further “upstream,” i.e. closer to the gas in the ground. All the success of strategic forecasting makes us nervous. But one of the most difficult emotional lessons as an investor is to let your winners ride. Buy value. And then let the market tell you when to sell.