--Australia?s gas market has decoupled from the gloom in the share market. Maybe that?s because of all the merger and acquisition activity. Another deal hit the newswires yesterday. Energy major Santos has made a move for Eastern Star Gas (ESG).
--Santos is expecting a tripling of Australian gas demand by 2020. This projection is a result of Australia?s economic growth and the ?decarbonisation? of the economy. But yesterday?s deal was mostly about securing enough gas to supply another train for Santos? LNG project in Gladstone.
--Mind you, the main asset Santos gets from Eastern Star Gas is in the Gunnedah Basin of New South Wales, yet another basin to keep track of in Australia?s fast-changing energy landscape. ESG planned on building a LNG facility in New South Wales. This deal?plus some public opposition to coal-seam gas (CSG) in NSW?kills the plant idea.
--The Santos deal, along with the BHP bid for US-based Petrohawk we mentioned in yesterday?s DR, shows you the exit strategy for smaller exploration companies in the CSG and shale gas business. They don?t necessarily have to become producers for shareholders to make money. They just have to identify a resource and prove it up enough for a major to swoop in and buy the asset.
--The other story here is the friction the CSG industry is running into in NSW and Queensland. That friction is growing. And we think that makes Cooper Basin oil and gas?conventional and unconventional?a lot more appealing. This is the case we?ve made in Revolution in the Desert.
--Now, it might seem like a conflict to talk about the destruction of the world?s financial system on one hand and an energy boom on the other. Aren?t they mutually exclusive? Well, no. Let us explain why.
--It?s true. The destruction of bank capital that would come from government defaults and the destruction of wealth from widespread inflation (money printing) aren?t just bad for the financial system. They?re bad for the economy. That?s the result of Western economies being ?financialised? through the accumulation of vast, unpayable debts. --But the economy is more than just the government. And once relieved from the dead hand of debt, the economy will show a lot of resiliency. People adapt because they have to. The alternative is to curl up in a ball and wait for the Mayan reaper to come get you.
--When all the credits are written down and all the debt defaulted on and after the Greater Depression, the world will still need some form of energy. It will have a new kind of money, at least partially backed by gold and silver. And it will have a new kind of energy mix in which natural gas has grown in importance as oil loses its dominance.
--The major oil companies are already on a global hunt for those longer-term energy assets, the ones that will fuel the world for the next 50 years. The dangerous game you play as an investor is buying shares in those companies while the financial system lurches and careens toward deleveraging.
--There is no guarantee that precious metals stocks and energy companies with proven reserves will be immune or even perform relatively better than other shares if the stock market goes down with the financial system. In fact, if 2008 was any indicator, a leveraged resource market will suffer even more than a diversified market in a great credit contraction.
--But the alternative is to do nothing. Doing nothing isn?t really doing nothing, though. It?s doing something. Or the same thing. And that probably isn?t a good idea, given how fast things are moving now.
--Our strategy is about the same as it was five years ago: own real money (silver and gold bullion). Try and find shares that are leveraged to rising precious metals prices. Don?t get over-exposed to one asset class. Don?t depend too much on the financial system.
--And when you?re in the market, try to find businesses and sectors that aren?t over-leveraged, can survive a dry spell, and own quality assets. Try to buy those businesses when they are cheap. This is what all our editors are up to, in one way or another, every day. It?s easy to describe, but harder to do. More on how to do this ethically tomorrow...
