The World's Largest Supplier of Natural Gas - Gazprom (XOM)

Today, I've invited my esteemed colleague Tyler Laundon to speak out and share his perspective on an emerging investment opportunity in energy. Tyler is the Lead Research Analyst for Small Cap Investor Pro and follows small caps, as well as commodities, on a daily basis.

Thanks Kevin.

Tyler here. Recently the Wall Street Journal reported that Gazprom's 2010 net income surged by 24 percent in 2010.

This increase didn't come as much of a surprise to me since I've been following the 'Russian Giant' for a while. But for those of you who aren't aware of Gazprom, this headline should make you sit up and think.

That's because Gazprom is the world's largest supplier of natural gas. Not one of the largest - it is the single biggest natural gas entity on the entire planet. And in 2010 its net profit, not revenues, totaled more than $35 billionThose profits exceeded global power-house Exxon-Mobil's XOM by more than $4.5 billion.

To make this story even more interesting, Gazprom is state controlled. And to the dismay of the rest of Europe, this state controlled giant supplies around 25 percent of Europe's natural gas.

Think the rest of Europe is pleased to hear that a state controlled Russian giant is banking huge profits selling natural gas to its debt riddled countries?

I doubt it, especially when natural gas prices in Europe are double what they are here in the United States.

***In the beginning of January I put together a research report that featured emerging oil and gas companies. This report focuses on micro-cap exploration stocks that have multi-bagger potential because of the work they are doing overseas to bring new oil and gas supplies to energy thirsty countries - like many in Europe. You can read about this report here.

The catalysts for the stocks in this report, and as a general rule for most exploration companies, include rising energy costs, rampant demand, and the potential for huge oil and gas discoveries.

Many countries in Europe in particular are facing the first, experiencing the second and you can bet your last nickel, hoping for the third. An exploration company that sticks a drill into a 'gas kitchen' could bring welcome relief for consumers, and also relieve political tensions in the country that hosts the reservoir.

Not too long ago it was difficult for companies to efficiently drill gas reserves because of limitations in drilling technology. But thanks to advances in American natural gas drilling techniques, now once a potential gas resource is identified a drilling contractor can actually go after it.

These new technologies and techniques have helped to bring huge natural gas supplies online in the United States in places like the Marcellus shale of Pennsylvania and New York, the Barnett shale in Texas, and the Haynesville shale of Louisiana. The U.S. now sits on more readily available cheap natural gas supply than any other country - besides Russia.

This boom in U.S. supply, and the subsequent relief in U.S. natural gas prices, is all thanks to American natural gas drilling techniques - and now Europe has access to them.

They'll need them too. Natural gas is not easily transported, so European countries can't simply import supplies from the U.S. to ease their current pain.  

Eventually this technology should help increase supplies in Europe and allow the continent to diversify away from dependency on Gazprom. But drilling companies will need to bring commercial scale operations online in order for this to happen.

Naturally, these are the companies that we want to own stock in since they'll have the best potential to generate healthy capital gains for investors.

I crunched some numbers to see which countries investors should be looking in. Pulling 2009 European gas sales from Gazprom's 2010 Databook, and gas consumption numbers from the EIA, it's clear why Europe needs to break its addiction to Russian natural gas.

 

 

Over the past six months I've been averaging into a couple of small companies that are actively drilling in Poland. For a variety of reasons, not the least of which is a significant yet largely untapped natural gas resource, Poland is on the top of my list as a region to target natural gas related investments.

One company that I've mentioned before and that investors might find compelling is BNK Petroleum (BKX.TO). It is based in Canada, but has zeroed in on Europe for oil and gas exploration activities, including several concessions in Poland. Full disclosure: I do not currently own any shares of BNK Petroleum.

***The Wall Street Journal article I referenced earlier just scratches the surface of the natural gas story in Europe.

Another article, published on April 27th in the Warsaw Business Journal, goes a bit deeper. It states that '...a number of European countries, including Poland, may have to pay record prices for natural gas purchased from Russia."

The article goes on to point out that Gazprom has suggested that oil prices nearing $120 (per barrel) will cause the price increase - which it says could put 1,000 cubic meters of natural gas at $500. That would be a 50 percent increase over gas prices in January 2011.

I can guarantee that the powers that be in Poland are not excited about the prospect of a 50% increase in already inflated natural gas prices.

Natural gas exploration within Poland, and other European nations reliant on the Russian Giant, is the most practical solution.

Investors looking for significant investment gains that aren't already on top of this developing opportunity take note - the best energy investment you make this year might not be in the U.S. at all. But rather in largely untapped gas reserves across the Atlantic, in European countries like Poland.