U.S.: Companies Sense Great Opportunities

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1 U.S.: Companies Sense Great Opportunities In Shale Oil and Gas Boom The global energy map is being redrawn, thanks to the discovery of vast reserves of shale oil and natural gas in the United States. American energy independence may actually become a reality in the years ahead. Now, it appears that the Made-in- USA brand of oil and natural gas will transform the domestic energy market. America s dependence on oil is well-known. Beginning in the late 1950s, the country s hunger for energy was fueled in part by gas-guzzling sedans, and then SUVs. Soon, the energy-sufficient nation became a net importer of oil, natural gas, and coal. Currently, the world s biggest oil consumer gobbles up no less than 19 million barrels of oil a day, which translates to about a fifth of global energy consumption. Though China has overtaken America in overall energy consumption, per capita energy usage by individuals in the U.S. is much higher than that of their Chinese counterparts. Due to its reliance on foreign oil from regions as far as the Middle East, the United States often had to play the role of the policeman to ensure its safe passage. Big oil producers such as Saudi Arabia, Iraq, and Iran tried to corner the nation with tactics such as the Arab oil embargo of 1973, which prompted then President Richard Nixon to mull the idea of America s energy independence. However, the lofty idea remained a topic of political rhetoric for decades. U.S. ENERGY MIX Petroleum 37% Coal 20% Nuclear Power 8% Natural Gas 26% Renewables 9% U.S. ENERGY CONSUMPTION BY SECTOR The idea now seems to be gathering pace, thanks to the humble shale rock that has proved to be rich in repositories of oil and natural gas. The Paris-based International Energy Agency (IEA) has projected that by 2020 the United States could become the biggest producer of oil, overtaking Saudi Arabia. The IEA joins the OPEC and the U.S. Energy Information Administration in coming out with forecasts for a sharp increase in domestic oil production in the years ahead. According to a WSJ report, U.S. oil production is estimated to reach 11.1 million barrels a Electric Power 40% Industrial 21% Transportation 28% Residential 11% Source for all data: U.S. Energy Information Administration

2 Three factors are driving the boom in shale oil and gas production technology, volatile energy prices, and rising geopolitical uncertainties. Fracturing, or fracking, involves injecting huge amounts of a high-pressure mixture of water, sand, and chemicals into the dense shale rocks to extract natural gas and oil. day by 2020, with natural gas displacing oil as the single largest fuel in the domestic market by the year Production figures also attest to the shift in energy consumption towards less-polluting fuels, with natural gas contributing to 31% of power generation during the first eight months of the year, compared to the yearago figure of 24%. Thanks to the newfound sources of energy, the U.S. is forecasted to become selfsufficient in energy by DRIVERS OF THE SHALE OIL BOOM Technology: The abundance of oil and natural gas in the domestic market is the result of two decades of painstaking research and digging, assisted by technologies such as hydraulic fracturing and horizontal drilling. Fracturing, or fracking, as the process is often called, involves injecting massive amounts of a high-pressure mixture of water, sand, and chemicals into the dense shale rocks to extract natural gas and oil. The glut in natural gas production from shale beds, which has touched 37% of the total U.S. gas production compared to a meager 2% just a decade back, has also made this process dirt-cheap. Interestingly, it was the successful extraction of natural gas that led explorers to apply the same technology to dig out tight oil, which lay several layers deeper. The process, TOP FIVE OIL EXPORTERS TO THE U.S. EXPORTS ARE RISING COMMODITY EXPORTS FROM U.S. IN OCT 2012 Crude Oil Natural gas Gasoline SAUDI ARABIA 14% MARKET DYNAMICS MEXICO 8% VENEZUELA 11% TECH. DRIVERS OF THE OIL BOOM GEOPOLITICS CANADA 29% NIGERIA 10% 67,000 barrels per day 331,000 barrels per day 462,000 barrels per day THE GREEN PUSH TECHNOLOG

3 The shale oil has helped reduce America s huge energy bill. Millions of jobs have been created. The glut in natural gas supply has led to production of cheap electricity which benefits manufacturing sectors such as steel, aluminum, and glass. The nation s economic growth should get a boost as consumers will have more disposable income in their hands to spend on goods and services. though much more expensive in the case of oil extraction, has seen U.S. oil output rising 25% since Market dynamics: Fluctuating oil prices have been the bane of the domestic economy with the oil bill alone shaving off a chunk of the country s GDP. The huge bill for imported oil also widens the U.S. current account deficit. In simple economic terms, when prices of petroleum products are high, consumers typically have to spend more of their income to meet their energy requirements such as fuel for their automobiles and electricity to keep their homes warm, leaving them little to spend on goods and services. Higher oil prices increase the input costs for producing goods and services because transportation costs go up. Rising geopolitical uncertainties: Large oil companies are finding it difficult to operate in countries such as Russia and Venezuela, which favor government-owned companies. This fact encouraged big energy firms to invest in shale deposits in the U.S. and Canada, which also helped facilitate faster development of unconventional energy sources in North America. Demand for clean fuel: Traditionally, the U.S. had been dependent on polluting coal for producing electricity. With increased focus on reducing carbon emissions, natural gas produced from shale rocks has offered a cleaner alternative to generate electricity. WORLD S ENVY, OWNER S PRIDE THE SCENES OF ACTION Shale beds are spread across states BAKKEN SHALE IN NORTH DAKOTA MARCELLUS SHALE IN NORTHERN PENN. BARNETT SHALE IN FORT WORTH, TEXAS EAGLE FORD SHALE IN SOUTHWEST TEXAS UTICA SHALE FORMATION UTICA SHALE IN IN OHIO ADVANTAGE AMERICA Several factors contributing to the shale oil growth pie The boom in shale oil and gas production in America is hardly surprising since the country has a well-developed system of pipelines and other infrastructure such as rigs ready to be used. Most of the land is private, which can be made easily available for exploration as farmers get liberal incentives. Well-developed financial markets ensure availability of capital for new exploration activities. Above all, the country has a highly competitive energy production industry which encourages small independent energy companies to experiment with new techniques. WELL-DEVELOPED SYSTEM OF PIPELINES AVAILABILITY OF PRIVATE LAND AVAILABILITY OF CAPITAL FOR EXPLORATION ENCOURAGEMENT FOR INNOVATION

4 U.S. OIL IMPORTS IN RECENT TIMES KILO BARRELS/DAY Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Source: U.S. Energy Information Administration What is remarkable about the shale oil spurt in the U.S. is that the exploration is being spearheaded by small and medium-sized companies that have shown a higher appetite for risk taking. Privatelyowned small companies account for about 50% of the shale oil output, while big oil firms make up for the rest. BENEFITS OUTWEIGH CONCERNS? Fracking has revolutionized the process of extracting oil and natural gas from shale rocks. While no one can deny the fact that the economy has benefited immensely from the shale gas boom, the pollution of air and ground water caused by the process has also been widely acknowledged. At the outset, it looks like a classic case of the industry versus environment debate. The question now is whether the benefits seem to outweigh the so-called concerns regarding the process of fracking. The objections are manifold, right from the excessive water usage involved in the fracking process to the release of methane, a greenhouse gas during the process of production. An Economist report points to the IEA estimate, which said shale-gas production emits 3.5% more methane than conventional gas extraction. Supporting the case for fracking, it is expected that the safety and pollution aspects of the issue will receive greater attention with the involvement of bigger and well-established companies in shale gas exploration and production. Moreover, contrary to the objection of greens, the success of fracking has in fact helped lower greenhouse gas emissions in the U.S. to the lowest levels since 1992 as lower gas prices have ensured that natural gas is increasingly replacing coal as the leading source of electricity. SHALE OIL BOOM BRINGS GOOD TIMES Cheap electricity, lower oil bill, millions of jobs... SHALE OIL BOOM IMPACT Cheap Electricity Regional gains Low Energy Bills Creation of Jobs Manufacturing Gains GAINS FOR REGIONS CHEAP ELECTRICITY PRODUCTIVITY BOOST DETAILS MILLIONS OF JOBS CREATED LOWER OIL BILL Cost to generate power goes down Lousiana, Texas, & North Dakota benefit Oil import costs reduced significantly More than 1.7 million jobs created so far Cheap power boosts productivity

5 SOME DOMESTIC PLAYERS COMPANY BUSINESS CONTRACT/PROJECT Chesapeake Energy Exploration and production of natural gas and oil The company owns leading positions in Eagle Ford, Utica, and other unconventional liquids plays, as well as in the Marcellus and Barnett unconventional natural gas shale plays Exxon Mobil The biggest U.S. oil producer The oil major is on track to buy Canada s Celtic Exploration to gain access to shale oil and gas properties in British Columbia and Alberta Anadarko Petroleum Independent oil exploration and production company The Eagle Ford formation in South Texas is its main exploration area. The firm acquired rights for six shale wells in Utica in October 2011 Apache Corp. Exploration and production of natural gas, crude oil, and natural gas liquids The company s main exploration areas are the Liard Basin Gas Shale in British Columbia and the Vaca Muerta (Dead Cow) Shale in Argentina Hess Corp. Energy company which operates in exploration and production as well as marketing and refining segments The company acquired Marquetta Exploration LLC for $750 million in 2012, and also signed a 50% JV with CONSOL Energy to develop its shale assets in Utica THE INDIA CONNECTION: Guar, a modest hard bean grown mostly in India, is an essential ingredient in the making of fracturing fluids, thanks to its ability to stiffen water used for drilling shale rocks. Talk about a globalized world. SOME FOREIGN PLAYERS COMPANY BUSINESS COUNTRY OF LISTING CONTRACT/PROJECT BHP Billiton Iron ore mining Australia Petronas Indian Oil Corp., Oil India Ltd. Oil explorer and producer Oil refining and marketing Malaysia India The global mining company acquired Texas independent shale company PetroHawk Energy in The Eagle Ford shale formation and frontier Permian Basin are the company s main operations This Malaysian firm acquired Progress Energy of Canada to gain access to vast reserves of shale oil and natural gas These state-run Indian firms jointly bought a 30% stake in Houston-based Carrizo Oil & Gas s Niobrara shale asset in Colorado in October 2012 Reliance Industries Ltd. Petrochemicals, oil and gas refining India India s largest listed company has stakes in three shale gas joint ventures in America Total S.A. Exploration and production of oil & gas and LNG France Sinopec Oil refiner China The French company is in a joint venture with Chesapeake Energy and EnerVest to invest in Ohio s Utica shale The Chinese oil firm has struck a deal with Devon Energy to invest in five shale fields in the U.S. Sources: Reuters, The Wall Street Journal, The Financial Times This publication is for informational purposes only. This publication is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this publication does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account. FORWARD LOOKING STATEMENTS Certain statements made in this publication may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.

6 Are You Positioned for a World of Opportunities? THE THOMAS WHITE DIFFERENCE Our strategy is to seek smoother, more consistent returns by stressing excellent local stock selection as opposed to betting on major country and sector moves. To succeed in this approach, we have built an exceptional global research team that uses our proprietary techniques to identify the most attractive stocks in each of the major regions of the world. This in effect is our trump card. Thomas S. White, Jr., Portfolio Manager Thomas White International manages in excess of $1.9 billion in assets across multiple global, international and domestic equity mandates. The diverse client base spans public, corporate, endowment, Taft-Hartley, and separately managed account platforms. Research is the heart of our company. At Thomas White, we believe that original research is the surest path to superior portfolio performance. That is why our disciplined investment process is supported solely by our in-house research. Our investment process differs from the crowd. Our labor-intensive approach to valuing common stocks combines the patient collection of data, and the execution of thorough historical studies, with the application of fundamental securities analysis. These guidelines provide an investment framework, which is used in the process of determining a company s current business worth. Valuing global stocks in nearly 50 countries, this industry-based stock selection process employs tailor-made valuation frameworks refined and tested over the 40-year history of the Thomas White organization and its predecessors. Our veteran analysts, most with PhDs, on average have more than sixteen years of experience working together as a team. Our proprietary research is generated by our professionals, both in Chicago and in our Asia office in Bangalore, India, who have spent their entire careers at Thomas White. Our investment approach seeks to benefit from buying undervalued stocks and selling them when they return to fair value. Our analysts find that investors tend to overvalue a company against its industry peers when the intermediate business environment is favorable, producing strong earnings growth and then undervalue a company when the environment depresses its business outlook. This pattern is a reflection of human behavior - it occurs in every industry and country around the world. It is this phenomenon that explains a stock s wide price swings above and below its intrinsic value as a business. For more information please contact: Gabriel J. McNerney, CFA (312) [email protected] thomaswhitefunds.com Thomas White International, Ltd. 2013