Wednesday, March 2, 2011

“Oil and natural gas will continue to meet the majority of the world’s growing energy needs for decades to come.”

Oil and natural gas will continue to meet the majority of the world’s growing energy needs for decades to come.”[1]

Point Roberts WA- March 2, 2011–, an investor research portal specialized in sector research including energy stocks, releases the following CFA commentary from Patrick J. Murphy, featuring American Petro-Hunter, Inc. (OTC.BB: AAPH). 

Patrick J. Murphy is the owner of Murphy Analytics LLC, a provider of sponsored research coverage on smallcap stocks.

Oil and natural gas will continue to meet the majority of the world’s growing energy needs for decades to come.”[2]

Continuing the argument presented in the Company’s “Outlook for Energy – A View to 2030”[3], ExxonMobil’s assertion delivered at the recent Goldman Sachs Global Energy Conference is based on the expectation that shifts in energy usage and technology will continue to evolve gradually, over decades rather than years, as has been the case historically.  While it is undoubtedly true that ExxonMobil (NYSE:  XOM) has a vested interest in the continued dominance of oil and gas as power sources, it’s also true that this forecast is difficult to refute. 

The macro-economic trends in support of ExxonMobil’s assertion are easily identified and the far-reaching impact of the BRIC and other developing nations has been discussed ad nauseam, but it is illuminating nevertheless to attempt to think about these trends in terms of specific data points.  As one example, the U.S. Department of Energy (“DOE”) estimates[4] that there were approximately 840 motor vehicles per 1,000 U.S. citizens in 2008.   While the DOE estimate is 140 vehicles per 1,000 citizens for Brazil, the estimate for India is 13 and the estimate for China is 36 vehicles per 1,000 citizens as of 2008.    In terms of the aggregate growth in this ratio for the decade ended 2008, the DOE estimates the U.S. fleet grew by 8% compared to 31% for Brazil, 74% for India, and 300% for China - in 1998, there were approximately 9 vehicles per 1,000 Chinese citizens, and this grew to 36 vehicles by 2008. 

Vehicles per 1,000 Citizens (2008)
Approximate  # of Vehicles (2008)
Theoretical # of Vehicles Applying U.S. Ratio
United States


Utilizing the population estimates provided by the CIA Factbook, and assuming no change in the vehicle ratio from 2008 to today, it is likely there are 370 million vehicles in Brazil, India, China, and the United States, which collectively represent about 45% of the world’s 6.8 billion population.   If it seems unlikely that the developing world will ever require the same level of motor vehicle dependence that has evolved in the U.S., it is worth noting that Canada’s ratio as of 2008 was 623, with 563 for the Pacific, and 593 for Western Europe.  Outside of these regions, in generally lesser developed countries, the ratios fall significantly, likely implying substantial future demand in these areas well:  300 vehicles per 1,000 citizens for Eastern Europe, 132 for Central and South America, 103 for the Middle East, 54 for the Far East and 27 for Africa. 

While predicting additions to the global fleet cannot be accomplished with precision, the general trend is clear – there will be hundreds of millions and likely billions of motor vehicles added over the coming decades.  Even ignoring all the other ways in which we devour energy, including the increasingly prominent role of natural gas in power generation, it’s hard to imagine the demand for oil and gas decreasing for any meaningful amount of time in the foreseeable future.  It’s significantly easier to find data that support the argument that the demand for oil will continue climbing over the long-term, and that developing alternative fuels in quantities sufficient enough to meet growing demand in a manner that competes with oil economically is likely to take decades, not years.  This is the view taken not only by ExxonMobil, but also by the DOE, which forecasts that despite the rapid growth of renewable energy sources over the coming years and decades, fossil fuels will still provide 78% of U.S. energy use in 2035.[5]

There are a number of ways to invest in this long-term trend including direct investment, commodity futures, and in the stocks of oil services firms or majors such as ExxonMobil (NYSE: XOM), BP (NYSE: BP) and Chevron (NYSE:  CVX).  There is also potential opportunity with independent producers like Chesapeake (NYSE:  CHK), Devon Energy (NYSE:  DVN), and Southwestern (NYSE:  SWN). 

For those interested in the potential upside of a junior oil and gas exploration and production company, American Petro-Hunter (OTCBB:  AAPH) recently announced increased production and an expectation of net revenue proceeds in February from production at the NOJ26 well located in the Company’s Woodford Shale acreage in northern Oklahoma.  The projected initial projection rate is 40-50 barrels per day currently, with an increase to 100 barrels per day anticipated.  AAPH has reported that the southern part of the Company’s lease block has room to drill up to 5 horizontal wells, and although these wells can be expensive, as much as $1.75 million per well, the return on investment may be very rapid if production of 500 barrels or more per day is achieved.  AAPH also expects there is the potential for up to 25 less expensive vertical wells on this area of the lease block.  While continuing to exploit these opportunities throughout 2011, AAPH anticipates a frenzy of activity both in the near and longer term across the Woodford Shale. 

Both here in the U.S. and elsewhere, while there may be significant short-term price fluctuations, the likely continued increase in energy demand  seems to mandate that fossil fuels will continue to dominate global energy consumption for a long time, and the easiest case to argue is that long-term oil and gas prices must rise.  This trend presents opportunity for investment not only in major and independent producers but also among junior exploration and production companies like American Petro-Hunter, which is delivering promising early results from its Woodford Shale acreage. 

More info: American Petro-Hunter, Inc. (OTC.BB: AAPH
The Company is a goal-oriented exploration and production (E&P) Company aiming to become an intermediate level oil and gas producer within 12 months. The Company is in production at the Poston Project in Trego County Kansas with new drilling activity and production underway at the North Oklahoma Oil Project. With the achievable target of becoming a 1000 BOE producer as our goal, American Petro-Hunter is actively on the hunt for domestic petroleum assets.
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Patrick Murphy Disclaimer:

Readers are advised that the above article is solely for information purposes and should not to be construed as an offer to sell or the solicitation of an offer to buy any security. The views expressed herein are based upon the author’s analysis of the issuer's public disclosures, and assumes both their accuracy and completeness. The opinions and statements included herein are based on sources (including the companies discussed and public sources) believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. The author has not independently verified the information contained herein. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. You should review a complete information package on all companies, which should include, but not be limited to, the Company's annual report, quarterly reports, press releases and all regulatory filings. The foregoing discussion contains statements which are based on current expectations, estimates and projections, and differences from such expectations, estimates and projections can be expected.

The author, Patrick Murphy, was compensated $350 for writing this article by  Mr. Murphy does not own shares of any of the companies mentioned in this article.  Mr. Murphy expects his research firm, Murphy Analytics, to be engaged for the provision of a research report on AAPH in March 2011. 

Patrick Murphy Bio:

Patrick J. Murphy is the owner of Murphy Analytics LLC, a provider of sponsored research coverage on smallcap stocks.  Mr. Murphy has over 15 years of capital markets experience providing institutional investment and transaction analysis across a range of asset classes including microcap equities, commercial real estate debt and equity, municipal derivatives and public finance, venture capital, fixed income, CMBS and mortgage REIT's.  In addition to his work with Murphy Analytics, Mr. Murphy also serves as a consultant to a municipal derivatives advisory firm.  Mr. Murphy is an alumnus of the University of Notre Dame (1991), with an undergraduate degree in Economics, and earned a Masters Degree in Finance from St. Louis University in 1997.  Mr. Murphy is a CFA Charterholder and a member of the CFA Society of St. Louis.

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[1];  Mark W. Albers, Senior Vice President, ExxonMobil.  “Delivering on the Energy Challenge”  January 12, 2011
[2];  Mark W. Albers, Senior Vice President, ExxonMobil.  “Delivering on the Energy Challenge”  January 12, 2011

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