Welcome to the Energy and Capital Weekend Edition — our insights from the week in investing and links to our most-read Energy and Capital and sister publication articles.

Take a minute and think how far shale gas has grown in the last five years…

It wasn’t until the success of the Barnett shale that U.S. drillers took notice. Although drilling the Barnett formation picked up considerably in the late 1990s, it wasn’t until 2006 that drillers struck it big.

Two things changed the course of shale gas development in the U.S.

The first was the advancements made in horizontal drilling. The second is that changes were made to the Clean Water Act in the 2005 Energy Policy Act. This change exempted natural gas drillers from disclosing the chemicals used in hydraulic fracturing.

For now, let’s push that hot-button issue to the side. I’ll cover it at a later date, so feel free to vent your “fraccing” anger at that time.

The point is, shale gas development exploded. It’s the main reason that our domestic natural gas production shot through the roof in 2008.

The shale boom extended beyond natural gas, too. Oil plays like the Bakken formation in North Dakota became wildly successful for investors.

It’s a story my readers at the $20 Trillion Report know that all too well. In fact they just recently earned a quick 33% gain after playing an upcoming Bakken producer.

Piggybacking on the U.S. shale fortune, both China and India are also looking to tap shale resources.

Reliance Industries, India’s biggest company, has made three shale gas investments in 2010. Some of you might remember when Reliance picked up a 45% stake in Pioneer Resources’ Eagle Ford shale assets for a cool $1.13 billion…

Now, the company is making a move into the prospective Horn River Basin in British Columbia. This time, their sights are set on Quicksilver Resources. As you know, I believe the Horn River Basin to be one of the best-kept secrets in natural gas discoveries.

China is taking a cue from the same investment page.

However, their target is much closer to home. ExxonMobil is supposedly in talks to develop an unconventional gas field the Ordos basin, located in northern China.

Now I’ll admit that ExxonMobil hasn’t been on my good list; I wouldn’t normally trust ExxonMobil to have much success in China.

However, I think their chances are much better after acquiring XTO last December.

For now, I’m sticking with the proven winners in U.S. shale — and so should you.

Enjoy your weekend,

Keith Kohl

Editor, Energy and Capital

P.S. Feel free to kick back and catch up on the top stories that have recently crossed my desk.

Options Investing Made Easy: How the Experts Trade Options
Most traders avoid trading options at all cost. The reason? They simply don’t understand how to do it. And trading options can be more lucrative than stocks and bonds. Imagine pulling-in a 338% gain in under two weeks! Let options guru Ian Cooper show you how easy it really is.

Oil’s Game-Changer: Why the BP Oil Spill is more Profitable than Ever
Three months ago, the U.S. oil industry changed forever. Yet the fallout from the BP disaster isn’t over; even now the public is screaming for heads to roll. In typical government fashion, the knee-jerk reactions by vote-hungry politicians is keeping the drillers out of the water. For three of our favorite oil stocks, however, the profits have just begun.

Investing in Offshore Oil Stocks: They Panic, We Buy
Energy and Capital’s Keith Kohl reveals six offshore oil stocks that are worth a second look to investors.

Energy and Metals Outlook for 2010: How to Invest for the Rest of the Year
Energy and Capital Editor Ian Cooper assesses the success of energy trades in the first half of 2010, and offers two ways to turn a profit in the second half.

The Decline of the U.S. Dollar: And the Perfect Scenario for Rising Gold Prices
Editor Greg McCoach gives the hard facts about the future of the U.S. dollar and recommends two ways to minimize the wealth.

The End of the Bush Tax Cuts: The Hammer is About to Fall
Editor Steve Christ examines the end of the Bush tax cuts and explains why it won’t be painless.

Herpes, The Jersey Shore, and Trading Secrets 11-20: Snooki Rings the NYSE Bell
Wealth Daily Editor Christian DeHaemer connects the Jersey Shore with herpes and, as promised, brings readers #11-20 of his trading rules.

Green Options: Twice the Money in Half the Time
Green Chip Editor Nick Hodge discusses a lucrative yet often misunderstood way to invest in everything green: green options trading.

Shale Gas Explosion originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.

Over the past few months, I’ve been telling you about the world’s most undervalued oil company.

It’s up 727% since I recommended it, and is still undervalued by more than 1,000%…

And this play, dubbed Stalin’s Lost Oil, still has plenty of room to run.

But today, I’d like to tell you about a company that could be the next big energy winner.

It’s the world’s most undervalued coal producer. 

And the value numbers are staggering. 

In fact the next sentence sums it up:

This 45-year-old company has more than 100 million tonnes of high quality, thermal coal, and yet it has a market cap of only $20 million.

That’s right. The company produces more than 500,000 metric tonnes of coal per year, and currently boasts a reserve base of 100 million tonnes (or more) of high quality thermal coal — the very type of coal that China covets.

This is no flash-in-the-pan startup… This outfit employs 1,200 workers and supplies about 15 percent of Mongolia with high quality coal.

So, why is a coal company that is usually valued at $5 per tonne of reserve now trading at twenty cents per tonne?

I’ll tell you why. 

This company is cheap for a number of reasons, the first of which is, that it is in Mongolia — which, as you know, is a euphemism for the middle of nowhere. 

But as we’ve seen with the 727%-plus gains from Stalin’s Lost Oil play, the story is getting out.

Mongolia is the next major commodity hotspot.

Pre-IPO pricing

The coal company you are researching used to be owned by the government, and has a forty-five year history of production. They were privatized and listed on the Mongolian Stock Exchange in 2003 after a pro-capitalist, democratic, free market government took over.

But just a few months ago, a private New York-based hedge fund acquired 54% of the company. This company has been near the top of list in Barron’s for profitable hedge funds. It makes its living by buying undervalued companies in frontier markets and unlocking that value.

This time, the plan is to take the company public in Hong Kong…

Which means you can buy today before it IPOs on a major international exchange.

In order to list the company on a major global exchange, the company hired a Western drill company to substantiate the amount of coal and produce a Joint Ore Reserve Committee (JORC) compliant reserve statement. 

Stick with me, this is important…

JORC is sponsored by the Australian mining industry and is a widely accepted professional reporting standard in Asia. This would qualify the company for a listing in Hong Kong.

(For the record, the last Hong Kong IPO, The Agricultural Bank of China, was oversubscribed and made $21 billion.)

This is what the JORC found:

This Mongolian Coal company is now trading at a low valuation of 20 cents per tonne of coal reserves. 

Other Mongolian companies like SouthGobi and Mongolian Energy trade at an average of $5 per tonne of coal reserves. So there’s a massive upside here — just as with Stalin’s Lost Oil…

But you want to be in before the Hong Kong listing. 

The company recently traded at US$ 2.95 per share with only 7 million shares outstanding, which means if the company starts to move, it will move fast.

And there are lots of positives here. The Mongolian Currency (MNT) is appreciating against the U.S. dollar:

And the Mongolian stock exchange was the best performing market this year — up 68%.

The way to buy this stock is at pre-IPO prices and wait for the listing in Hong Kong.

But this stock is not for slackers; you might have to send a few faxes…

That said, I’ve worked with this New York hedge fund before, and my readers have made a great deal of money on company’s like Hurricane Hydrocarbons, and on an Australian uranium company that was bought out by Paladin Energy for a high triple-digit gain.

(Please note that I am in no way affiliated with this fund, nor have I received payment or benefit.)

Catalysts

The basic catalyst for this Mongolian Coal company is that word of its basic value will get out — as a result of exports to China, promotion by the hedge fund, a Hong Kong listing, and the rising awareness of Mongolian stocks in general. 

You have to understand the value here. 

The company is so inexpensive that the rail spur it owns to the Trans-Mongolian Railway is worth $40 million alone. 

Again, this company has a market cap of $20 million and is sitting on 100 million tonnes of coal. It would have to go up by 25 times to be of fair value even to its Mongolian peers!

But you can’t wait. The shares are starting to move. It was up 11% last week to 4,001. (USD1 = 1352.5 Mongolian Turgid (MNT))

That puts your per share price at $2.95.

This is one of those trades that comes along once a decade. It’s not for the herd. 

But if you have what it takes, join us and get rich.

Christian DeHaemer
Editor, Energy and Capital

Profit from Mongolian Coal Stocks originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.

The stage is set for the next vote on offshore drilling.

The U.S. House of Representatives is ready to vote today. The question at hand is reworking the current offshore drilling system.

So what’s at risk?

For starters, my concern is how involved the government will be in shaping the future of offshore drilling. They’re already talking about eliminating the cap on damage claims, which is currently $75 million.

I don’t think the offshore industry will wait around for an answer.

I briefly talked about the latest move by four offshore players, ExxonMobil, Chevron, ConocoPhillips and Royal Dutch Shell. Those four have banded together, each putting up $250 million to set up a new rapid-response system, which would be available in the event of an oil spill. Specifically, the money will be spent on various underwater equipment that will be able to capture up to 4.2 million gallons of oil in depths up to 10,000 feet.

BP’s Macondo well is half that depth.

With the BP nightmare still under the media’s spotlight, we can probably expect the election-seeking politicians to come down hard on the offshore industry. We’re talking about tighter regulations more more restrictions on deepwater drilling endeavors.

Of course, all of this will have a devastating effect on deepwater development, making it more expensive for companies to drill into the seabed.

I can’t help but ask my readers, will the offshore industry recover, eventually?

Let me know what you think.

Until next time,

Keith Kohl

The Offshore Drilling Vote originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.

Be honest. Has BP’s management makeover really changed your opinion about the company?

More importantly, have you let the media frenzy over offshore drilling sway your trading decisions?

If you answered yes to the latter question, I have some bad news for you.

As the anti-offshore sentiment reaches a feverish pitch, offshore stocks have taken a beating. In last Saturday’s “Weekend Edition,” you got a firsthand look at how difficult the market has been for these Gulf players. None were spared, as share prices were herded off a cliff.

Now, it’s time to buy into their panic. Here’s why…

Does offshore oil have a future?

Yes.

I know there are a few people out there who don’t believe in the peak oil theory; but no matter how optimistic you are about future oil production, you can’t deny the important role that offshore oil will play in meeting future demand.

Let’s get some of the facts straight:

• 25% of the world’s oil production comes from just 20 oil fields.

• Most of these massive fields were discovered prior to 1950 and have been producing since.

• Nearly all of these fields have passed their peak production.

• Another 50% of the world’s oil production comes from just 110 other fields.

• The remaining production is produced by approximately 70,000 smaller fields.

• The average oil field has a natural decline rate between 8%-9%.

The problem is that oil discoveries have been declining for more than four decades. Furthermore, companies are pushing further and drilling deeper than ever before.

The lack of major oil discoveries i not fiction, nor theory.

And we can’t forget the story of the Cantarell oil field, either…

The once-mighty Cantarell field used to be among the largest oil fields in the world. Discovered in 1976 by a fisherman, the death of Cantarell will eventually force Mexico to become a net oil importer. Pemex, Mexico’s state-run oil company, estimates its 2010 crude production currently averages 2.5 million barrels per day.

I can’t put it simpler than this: The world needs offshore oil.

That includes deepwater targets.

Offshore drillers: best friends

Like it or not, offshore drillers in the Gulf of Mexico have become best friends. The media fallout from the Deepwater Horizon disaster has officially lumped them all together for the public to condemn.

Today, the word offshore and oil have become synonymous with BP.

And being labeled with BP is inescapable — no matter what a specific company’s safety record says.

Recently, four oil companies have banded together to form a rapid-response system to deal with future deepwater oil spills.

ExxonMobil, Chevron, ConocoPhillips, and Royal Dutch Shell have announced they are committing $1 billion to the creation of this plan. Although $250 million bucks a pop sounds like a hefty price tag, keep in mind that as of this morning, BP has spent approximately $256 million in claims.

According to the four companies, the plan could be in place as soon as in six months from now. At that pace, it’ll just be in time for the latest drilling moratorium to be lifted.

Coincidence?

The value of offshore stocks

Over the last two weeks, my colleague Christian DeHaemer has laid out his “Forty Rules of Trading.” If you haven’t read it yet, I suggest doing so today. His words of wisdom could save you from making a costly mistake.

Chris’s trading rules had me daydreaming this morning. Several years ago, I was at odds with myself on whether or not to buy a particular oil stock.

He said, “Well, would you be comfortable owning this stock five years or ten years down the road?”

I was.

And when nearly every energy company took a nosedive in 2008, I asked myself that question on a daily basis. At one point, back in March 2009, the price had been severely beaten down. When several readers expressed concern as the stock plummeted to $1.12, our long-term confidence prevailed.

Rather than dump our position along with everyone else, we bought. A year later, that beaten-down oil stock opened at $17.41.

The reason I’m bringing this up is because I get that same feeling when I look at offshore stocks… If you have the same outlook for oil as we do, the decision is a no-brainer.

Of course, there are other signals.

Although no single factor will make us put our hard-earned money into a stock, one indicator for us to measure the company’s value is calculating its PEG ratio. It’s a good rule of thumb to use, and one that’s helped make my readers a nice profit. The idea here is that lower the PEG ratio, the better.

Many of the offshore players in the Gulf of Mexico are trading with very attractive PEG ratios. And as you can see, the market hasn’t been too kind to them during the last three months:

All six of these stocks have a PEG ratio below 1. I don’t believe there will be a better opportunity than right now.

The moratorium is still being touted by the media, most of whom have no idea how crucial offshore production will become.

Eventually, these deepwater drillers will get back on their feet.

Until next time,

Keith Kohl
Editor, Energy and Capital

Investing in Offshore Oil Stocks originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.

With a monumental strain on the global financial system that lead to unparalleled governmental intervention and stimulus, we found ourselves knee-deep in a chaotic, directionless market.

We were met with unbridled volatility and strain that may impact the financial markets for at least another year.

And they are likely to be met with even more chaos moving forward.

But despite all of this turmoil, we still found a way to not only beat the market — but outperform it significantly.

As the Dow gained a measly 5% between January 2010 and the beginning of July 2010, Pure Asset Trader readers racked up an average gain of 28%, which included 24 closed winners and just one loser.

That follows the 40 winners and just three losers racked up in 2009.

But we’re not here to gloat. We’re simply assessing what Pure Asset Trader has done for readers, believing it’s best to grade our recommendations, whether the results are flattering or not.

Notable first half 2010 winners include Hudson Resources (147% gain), Brigham Exploration (50%), Canada Lithium (75%), Lithium One (45%), Basic Earth Sciences (55%), and Entree Gold (30%).

But the rest of the year is likely to be even more impressive…

And today, I give you two sectors to invest in now.

Buy more natural gas stocks

We already called the $4 bottom of natural gas — watching it soar above $5 just weeks later. And we’re still buying, believing it could run to $8 before all is said and done.

You see, summer is the weakest time of the year for natural gas consumption. This sets up a trade for natural gas stocks — buy in June-August, sell in December-January, when North American heating demand should have natural gas trading at its year highs.

Last summer, natural gas stocks suffered. But like clockwork, September 2009 saw natural gas experience a large seasonal jump in prices.

In fact natural gas prices roughly doubled from $2.50 to $5 by January 2010. This occurred even though the market fundamentals for gas were poor.

This was a good 4-month trading rally. Easy money in the bank, as Wealth Daily Publisher Brian Hicks calls it.

Even President Obama is bullish on natural gas:

The time has come, once and for all, for this nation to fully embrace a clean energy future,” Obama said. “That means [making] everything from our homes and businesses to our cars and trucks more energy efficient. It means tapping into our natural gas reserves, and moving ahead with our plan to expand our nation’s fleet of nuclear power plants. And it means rolling back billions of dollars in tax breaks to oil companies so we can prioritize investments in clean energy research and development.

Sure, we’ve all heard that supply is out-pacing demand… That our ability to horizontally drill for shale gas has made the supply picture seem unlimited… And that the short-term outlook is bleak…

But that’s herd mentality thinking of fools… Buy natural gas now, and hold.

Load up on rare earth — and this coming IPO

As we’ve reported in Wealth Daily and Energy and Capital… there’s a very real, coming boom in rare earth.

China currently holds 97% of the rare earth market, and is tightening its grip again with plans to cut exports by 72%.

And as we’ve said in the past, if we don’t find more rare earth supply:

Electronics could start disappearing from shelves… Products that depend on these materials would see prices skyrocket, possibly bankrupting the very companies that depend on these sales… Green technologies would suffer… And strategic and defense weaponry (guided missiles, for example) wouldn’t be produced as quickly.

The impact on electric batteries and motors would be crippling. Toyota’s Prius depends on 2.2 lbs. of neodymium in the hybrid’s electric motor and 22-33 lbs. of lanthanum in the car’s battery pack.

And there are still plans to double production of the Prius from one million to two million units. But it’ll never happen without rare earth supply. The President can call for a million electric cars all he wants, but they all depend on available rare earth supply.

It’s the same story with wind power; turbines use massive amounts of rare earth. Right now, all of those rare earth materials are coming from just one place: China.

All of this demand will no doubt send prices for rare earth metals soaring — especially given the idea that global demand for rare earth will increase six percent a year between now and 2014 (from about 124,000 metric tons to about 180,000 metric tons).

Sure, we have possible deposits in Idaho, Wyoming, and Alaska, giving us hope that U.S. rare earth production will get us by.

And we can always get a little help from Greenland, Canada, and Australia…

But the clock is ticking. Developing new mines can take years.

And it’s not as if the crisis is a ways off… It’s already here.

It’s why you want to be in stocks like Hudson Resources (HUD.V), Lynas (LYSCF.PK), and the coming IPO from Molycorp, a company described as the only rare earth minerals producer in the Western Hemisphere.

Its Mountain Pass mine (for which it has plans to reopen and expand) is one of the world’s largest rare earth mines outside China.

Other than rare earth and natural gas, the Pure Asset Trader team is also looking to buy silver stocks in coming weeks. We’ll keep you updated with our picks and a new report coming out sometime in the next few weeks, so keep an eye on your inbox.

Meantime, make sure you’re on board for these and other near-term buying opportunities.

That is… if you’re interested in watching us close another year of sizable winners.

Stay Ahead of the Curve,

Ian L. Cooper
Energy and Capital

Energy and Metals Outlook for 2010 originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.

Is this the Unconventional Destruction of LNG?

We’re going to have to pick a side, sooner or later.

Our decision may not come in the next six to twelve months, but you’ll have to eventually choose between liquefied natural gas (LNG) and unconventional shale gas.

In North America, the decision has all but been made for us. It’s true, there was a time when the LNG was being hailed as the wave of the future. The proof is in the numbers, too. Between 2002 and 2003, U.S. Imports of LNG jumped 121% to 506 billion cubic feet. By 2007, our LNG imports had jumped another 52% to 770 billion cubic feet.

For other investors, it was a new era for natural gas.

My readers and I were a little more cautious. As early as 2007, unconventional shale plays like the Barnett shale had caught our attention.

And just as we expected, the development of shale formations across the U.S. had a devastating effect on LNG. You can see the EIA statistics for yourself. During 2008, LNG imports had dropped like a stone, down 54% to 351 billion cubic feet.

I know what you might be thinking. Everything tanked in 2008, didn’t it? After all, that’s when it hit the fan.

I’m not buying that argument.

Take a closer look at those EIA numbers on LNG imports. As you can see from the monthly statistics, LNG really started to plummet in November, 2007.

That was the turning point.

In November, the year-over-year LNG imports declined by 43%. Of course, the market meltdown and demand destruction helped keep LNG imports low.

On the flip-side, shale gas production skyrocketed to more than 2 trillion cubic feet in 2008, a 70% increase over 2007.

Now, this is a story that we know well. The unconventional shale boom since 2007 has been profitable for us.

And right now, China is undergoing the exact same thing. With a potential resource of approximately 900 trillion cubic feet, you can bet the farm that the Chinese are going to try and develop it. Remember, that’s the total resource amount. The IEA believes the country’s shale gas reserves are roughly 26 trillion cubic meters.

Is it really surprising to find China’s oil and gas companies taking stakes in North American shale plays.

For China, where coal meets 68%of their energy demand, this decision is a no-brainer.

However, LNG isn’t going down without a fight. The fact that China’s shale development is in its infancy means that LNG could prove to be the short term answer, assuming that demand continues to grow.

I’d love to hear your thoughts on the matter.

Do you think we’re going to see a similar destruction in Chinese LNG imports? Will it be as profitable?

Until next time,

Keith Kohl

Editor, Energy and Capital

Is this the Unconventional Destruction of LNG? originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.