We haven’t covered the 12% Letter in these pages for a few months, if memory serves, so I was pleased to get several questions from readers about their latest teaser for the “secret retirement legacy” that’s apparently been offered up by George Bush (the dumber one, not the older one).
Did I just type that out loud. Geez, sorry. He can call me a dummy too, if he wants — he wouldn’t be the first.
But anyway, Dan Ferris, is teasing us about a special secret from the former President, one that will get you income from a company that he calls “King Shale.” If you don’t know any of the background of this one, Ferris took over the 12% Letter a couple years ago and generally focuses on value investments and, at least in this letter (he also edits the more “aggressive” value-focused letter Extreme Value), on solid dividend growth stocks that can compound your interest and offer an (eventually) high rate of return with relatively conservative “World Dominator” companies.
Not the kind of thing that generally lends itself to sexy teaser stories, but probably the sort of thing most of us should be doing with our money — and in the hands of the right copywriter, with a touch of secret intrigue and a hallucinatory vision of mailboxes filling up with checks, even a stolid dividend growth stock can be enticing.
So what’s he teasing here?
Well, as you can probably guess from the “King Shale” reference, he’s teasing shale gas — which isn’t anything new to the great galloping hordes of Gumshoedom or to anyone else in the United States. The Bush reference is that he simplified matters for shale drillers during his time in office, and helped the industry with some regulations near the end of his term that helped them avoid stringent oversight and pay unusually small royalties for drilling on federal land. I don’t know how much of this is true or important to the argument, but certainly you can make a convincing argument that the Cheney-led White House was as informed on the desires of energy companies as any in history.
Here’s how Ferris describes it in his teaser ad:
“The details of the deal quietly became public when Bush took over for a second term in 2005.
“In short: Bush, Cheney, and their contacts at select energy firms helped craft key legislation to exempt the fracking process from certain rules and regulations.
** They made sure these energy firms didn’t have to get certain cumbersome permits for their production facilities from federal authorities.
** They also made sure these firms didn’t have to pay the government to drill gas wells.
** Most importantly, they passed a law exempting important aspects of the shale fracking process from federal oversight.
“In other words, energy firms got a free pass to use this new technology… Without excessive government scrutiny.
“It was a ‘push to make oil-shale research and development as attractive as possible in the face of high costs and uncertain payoffs,’ the L.A. Times later reported.
“Of course, the whole deal was hardly surprising considering energy firms contributed more than $20 million to Republican political campaigns during the 2004 election cycle, according to Opensecrets.org.
“But what’s more… Just days before leaving office, Bush inked a few more deals with energy firms. This time, he set lucrative royalty rates on federally-owned shale fields.
“Essentially, Bush gave these firms the right to keep 95% of whatever money they make from federal shale.
“In other words, the government gets just 5% of production revenue. According to critics, this rate is ‘well below the federal average for oil and gas royalties.'”
So that’s the backdrop, these “secret” deals lead to more profits for shale producers. What does one do with that idea if they want to make money?
Here’s what Ferris says:
“Quite simply, I believe the best way to collect steady income checks right now is to get in on the ‘IBM’ of shale gas. This company could see its profits soar more than others as cheap natural gas replaces other energy sources over the next few decades.
“The interesting thing is: This business offers a unique income program that could pay you 10 to 20 times more income – over the long term – than traditional investments.
“Once you sign up for this program, you could forget about your investment for the next decade.”
And yes, this “IBM of Shale Gas” is also what Ferris refers to as “King Shale.” Here’s how he teases the specific investment:
“‘Today, it’s the undisputed king of undeveloped natural gas,’ says one geologist… Which is why, for the purposes of this presentation, I’m going to call this company ‘King Shale.’
“Because King Shale operates in almost all the richest shale plays in North America… almost no other independent natural gas firm can match its production in terms of volume.
“The company employs what it calls the ‘gas factory’ technique to maximize production.
“Remember the breakthrough technique called horizontal drilling that Bush gave energy firms a free pass to use? Well, King Shale has been using it to drill 8 TIMES as much gas from a single location, compared to traditional drillers.
“And because it operates across so many locations, it has developed economies of scale. In other words, King Shale can drill more locations at lower costs.”
Well, I imagine the “undisputed king of undeveloped natural gas” is a moniker that was applied to the stock by one of Ferris’ colleagues, Stansberry’s geology guy Matt Badiali, who runs a couple newsletters and has focused quite a bit over the years on companies that are “hoarding” natural resources … and the company that’s being teased here is, despite the George Bush teasing, a Canadian firm, Encana (ECA in both NY and Toronto).
And Encana is indeed a big ol’ natural gas company — though like pretty much all the natural gas companies, they are focused on upping their exposure to natural gas liquids (NGLs) and oil as well, given the weak pricing for gas. The company had been built up into a diversified oil and gas exploration and production firm as of several years ago, but split into two companies a few years back when Cenovus was spun off to be their separate oil-focused firm.
And ECA is a good yielder, like many energy stocks but unlike most natural gas producers — and a pretty conservative company as far as I can tell. They definitely have seen a very weak share price in recent years, but it’s been because they’re in a lousy business, not because they’re necessarily doing anything wrong.
Part of Ferris’ argument is that natural gas is getting so cheap that it’s going to reshape the way America does business, much like the cheap oil from Spindletop did as it weaned us off of expensive whale oil 110 years ago and paved the way for automobiles and the American Century. And contrary to the popular understanding that cheap gas is bad for gas companies, Ferris intimates that cheap gas will popularize gas, make it more critical, and lead to massive profits for the gas owners and the best gas developers. Of which Encana is probably one, and it’s the one that I’d probably be most comfortable with when compared to other nat gas majors like Chesapeake (CHK), which tend to play with fire a bit more than the relatively staid ECA.
And the special way that you can participate and get extra-big payouts over the next dozen years? I’d wager that Ferris is simply again teasing the idea of direct investment and dividend reinvestment — every now and then the 12% letter pitches the idea of Dividend ReInvestment Plans (DRIPs) as a special way to bypass Wall Street and let your money build by buying direct from the company. DRIPs that are administered through the company’s own transfer agents (meaning, you buy direct with a separate plan for each stock) are becoming a bit of an anachronism in the days of discount brokerages, free dividend reinvestment by those brokerages, and easy odd-lot trading that make most of the advantages of direct investing disappear, but there is still an argument to be made for buying direct for some folks (especially in those cases, and they’re quite rare, where you get a discount from the company for using their DRIP plan — usually a discount that materializes as reinvesting that dividend at a 5% or similar break to the current share price).
So there you have it — George Bush’s “secret legacy” was a boon to early shale drillers, and the “King Shale” company that Ferris is touting is Encana, and the secret way to boost your income from Encana is to … reinvest those dividends for a decade or more and watch them rise in value, with the compounding and the general tendency of ECA to lift its dividend over time both working in your favor (ECA’s current yield is 4%, so that’s nothing to sneeze at, either, and they haven’t cut it yet even with low gas prices).
Will that work out for you? It’s hard to say — ECA is pretty cheap even for their sector, trading at a reasonable multiple of book value and with a huge footprint that does indeed touch on most of the key shale gas areas in North America, and they are probably in better shape for low gas prices than are the riskier players in the space, and a large enough size that they do have some economies of scale (including that “natural gas factory” strategy that basically tries to bring a manufacturing focus on costs to the drilling and production process) … but you do still probably have to believe that natural gas pricing will become more solid in the years to come if you’re going to argue that ECA will be an outperformer over the next few years. They are, after all, very sensitive to nat gas prices, to the extent that they’ve already said they’ll hold back on some production in an attempt to boost pricing this year. So whaddya think? Ready to pile on for some ECA and make a contrarian bet on nat gas, or do the predictions of gas dropping under $2 and staying there have you scared off? let us know with a comment below.
P.S. If you’re looking for one of those secondary teases he made in that same letter, the “Toronto Income Secret,” that looks like it must be a rehash of a teaser he sent out last year — you can see my original article about that one here (and no, that one has almost nothing to do with natural gas … or oil, for that matter).