With gold trading above USD$1,000 per ounce this morning and with more talk from the United Nations about creating a new global reserve currency, we had planned on tackling that subject this morning.
Instead, no sooner had we settled at our desk in our office overlooking Fitzroy Street in St. Kilda, than Diggers & Drillers editor Dan Denning burst through the door shouting, “tight gas!”
Naturally, your editor’s first instinct was to reach into the top drawer of our desk for the Rennie indigestion tablets we keep for such emergencies.
“No, not that. Woodside CEO Don Voelte has taken a swipe at CSG [coal seam gas] companies in an interview with the Eureka Report. You may want to take a look at that for Money Morning today,” Dan ‘tight gas’ Denning explained.
So indeed, we shall take a look.
But before I go on – and before I put you through the pain of more unfunny gas jokes – let me explain exactly what ‘tight gas’ is.
In simple terms it’s natural gas which is playing hard to get. Normal natural gas is much easier to access. Of course, it’s all relative, but the likes of Woodside just need to locate it, drill the well, and because the surrounding rock formations are porous, the gas flows easily.
Whereas tight gas, well, that’s harder to get at, and harder to extract.
Because the gas is located in less porous rock formations, conventional drilling just won’t work. It’s like trying to suck an ice block through a straw!
That means the explorers need to use different methods. And obviously this creates extra costs and increases the risk of the projects.
As Voelte says in the interview, “the coal-seam guys are having a bit of difficulty with their economics.”
He goes on, “you have the problems of gathering the gas, and starting the plant, with talk of building a surge bottle, which means an underground reservoir to store gas and act as a regulator.”
Our response? Well, he’s correct on both counts.
But that’s exactly the point.
These CSG plays are high risk. That’s why I pick them in Australian Small Cap Investigator and not in Australian Wealth Gameplan.
Clearly Don Voelte is talking up his own book. But that’s OK. It’s no coincidence Woodside doesn’t have a CSG exposure. You need to decide for yourself whether it’s because Woodside has just missed the boat or whether it’s more interested in making best use of its own resources.
To be honest we’d probably say it’s the latter. Larger companies tend not to be as innovative as smaller companies. Woodside has poured millions and billions of dollars into perfecting its own processes and business.
It’s hardly like to turn its back on those investments and try something else.
It simply doesn’t make a lot of sense for a big company to get involved in every new development. In most cases they can use their size and economies of scale to continue doing what they’ve always done.
But that’s not something unique to the resources industry. It’s the same for any industry.
You only have to look at Microsoft as an example. Apart from a few new bells and whistles, Microsoft Word is pretty much the same as it was twenty years ago.
That’s because there’s no incentive for Microsoft to make wholesale changes. One, because they’ve got a near monopoly share of the industry, and two because it would cost them many more billions of dollars to come up with a new idea that may not work.
Instead Microsoft has largely left innovation to smaller technology companies. Some of those smaller companies have failed. But many others, such as Google have thrived and are challenging the technology establishment.
That’s what I do with the small cap CSG and LNG picks. I know they’re high risk, but that’s why I’m backing them. It’s the kind of risk/reward 11,000 Australian Small Cap Investigator subscribers are looking for.
You see, forget about CSG as an energy play for a moment. Think about it as a ‘disruptive technology’ play. It’s a bunch of upstart companies that don’t have billions of dollars of cash in the bank.
But what they do have is an opportunity. They are small cap companies that have identified a niche in the market that they can exploit.
They know the big guys aren’t going to put their neck on the line developing these unconventional gas fields. The big resources companies are aiming for the ‘low hanging fruit’ first. And typically that’s ‘fruit’ already in their ‘orchard.’
Unfortunately, there aren’t many new ‘easy-pickings’ left for gas explorers. They’ve got to look harder for the natural resources.
So when technology is developed that allows explorers and producers to extract gas from coal seams and less porous rocks, small companies have an incentive to try and exploit it for their own – and shareholders – profit.
Look, I’m not saying there’s anything wrong with Woodside’s approach. Don Voelte has been in the game a long time and he knows what he’s doing. Primarily he’s protecting Woodside’s interests.
If you’re after a reasonably stable blue chip resources company with steady single digit, or low double-digit growth, then Woodside fits the bill for many investors.
But if you’re after triple-digit gains, and are prepared to accept the downside risk if it goes wrong, then one of the best places right now is in alternative ‘tight gas’ plays on the Australian market.
When CEOs of large cap companies start warning investors about the dangers of the smaller players then you know it is their bottom line they are more worried about rather than the profit line of your share trading account.
Other Stuff on the Markets
The S&P/ASX200 jumped 1.56% yesterday, while overnight on Wall Street the Dow Jones Industrial Average added 56 points. In Europe the FTSE100 gained 0.29% and the CAC40 added 0.22%.
The price of gold in Australian dollars is trading at $1,157.99, while in US Dollars it is trading at $1,000.76. And the price of silver in Aussie dollars is $19.22 and in US Dollars it is $16.61.
The Aussie dollar gained versus the US dollar and Japanese Yen, trading at USD$0.8626, and JPY79.52.
Crude oil closed overnight at USD$71.30.
For the biggest movers on the market yesterday click here…
