There’s a common theme to my efforts on behalf of my Outstanding Investments subscribers. Yes, I like companies that control real resources like oil, natural gas, copper, gold, silver, etc. I look for the basic resource value. But beyond these basics, I look for companies that control resources and have the technology to extract them and add value.
A company like Venoco (NYSE:VQ) is just one intriguing example. Venoco is applying rock-fracturing technology to California’s Monterey Shale. If the company accomplishes what it aims to do – increase oil recovery from shale – there’s the strong potential for Venoco to transform its shale acreage into a recoverable billion-barrel oil resource.
Or look at Talisman (NYSE:TLM). Here’s a company that’s not just leading the charge to fracture shale formations for the shale gas, but also working with South African refiner Sasol to turn “stranded,” low- value natural gas into high-value liquid fuel. In other words, Talisman is working to add value at the upstream stage and capture that value for its bottom line – and, of course, for the shareholders.
Over and over in Outstanding Investments, I have highlighted resource technology companies like Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).
These global oil field service giants provide the essential technological foundations of modern-day energy extraction. If any of these three companies simply vanished overnight, the world energy system would start to break down by the following morning. Without their technology – and their corporate ability to integrate systems of systems – the world would quickly revert to an energy state of the 1850s or so.
I should add that you can’t just pigeonhole these guys. It’s way too glib to say that Schlumberger is a great wireline company, Halliburton is a great well cementing company and Baker Hughes is a great drill bit company.
Yes, each statement is true, as far as it goes. But each company also offers a full line of energy-development technology, with the process thinking and systems management to make it happen.
Beyond just the extraction phase, you need to think in terms of upgrading the products into something else – product transformation. For example, I’ve held Weyerhaeuser (NYSE:WY) in the Outstanding Investments portfolio for a couple of years. No, it’s NOT that I’m playing on the possibility of a housing recovery, although that would doubtless be good for a “tree growing company” like Weyerhaeuser.
It’s more that I like Weyerhaeuser because it controls large swaths of biomass – that is, “trees” and all the other stuff that comes from growing and harvesting trees. I mean lumber, of course, plus bark, chips, sawdust and everything else that comes out of those vast swaths of forestland up in Washington, Oregon, etc.
So Weyerhaeuser controls biomass – but now what? Weyerhaeuser is partnered with no less than oil giant Chevron to develop – “leapfrog” is more like it – new technology to turn this biomass into something that a refinery can process. This is far beyond the primitive idea of using corn for ethanol. Really, burn your food and deplete the agricultural soil just for motor fuel? (That’s why I call it “deathanol”).
So Weyerhaeuser has the biomass – the fundamental raw material. Chevron has the refining and marketing power. Now all they need is the correct technology to turn wood chips, etc., into a feedstock for refining fuel. It’s going to happen in a big way, and likely within five years or so.
So when you’re looking around for hi-tech investments, don’t forget to look around for the world’s cutting-edge energy service companies.
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Editor’s Notes: Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.