Citywire for Financial Professionals

View the article online at http://citywire.co.uk/money/article/a602645

Diary of a Dumb Investor: I'm going to make a fracking killing

I've hit onto a cunning investment idea, but it'll make me a total hypocrite. I'm grateful for my anonymity.

 
Diary of a Dumb Investor: I'm going to make a fracking killing

So a bloke in the Jolly Gardeners tells me that America is undergoing an energy revolution – ‘fracking and horizontal drilling’.

Sips his Guinness. Sucks a pork scratching.

‘This means that companies making nitrogen-based fertilisers are quids in…’

‘Whoooaaa, what?’ I interject. Fracking, I’ve read about – beyond that I’m clueless.

Well, some Googling later and I can tell you that nitrogen processing uses lots of natural gas, which has been getting much cheaper as a result of fracking leading to a supply glut. Lower natural gas costs for fertiliser-making companies = ker-ching!

This is good to me. A financial dud I may be, but I’m comfortable in the world of science. Finally, I might be investing in something I can understand (though admittedly, my scientific background is limited to the rather niche study of fungus).

Shrewder investors than me are of course already onto this. Cormac Weldon, a fund manager for Threadneedle, is investing in companies that make nitrogen-based fertilisers. One of them is a US company called Lyondellbasell.

But it remains early days. Fracking is still shiny-new.

So now I’ve freed up some cash, I might have a crack. Or a frack. Maybe stick a cool thou on it.

Of course I’m compromising my environmental credentials here. When I started investing I despised folks who could talk about oil, tobacco and arms companies only in the cold diction of financial abstraction.

But, hiding safely behind my anonymity, I’ll readily admit that profits have begun to come first. Shame on me.

20 comments so far. Why not have your say?

chazza

Jul 09, 2012 at 12:40

If you invest only for profit, you may indeed make a profit. But if you don't, you won't have anything but an expensive lesson from which you probably won't learn as you hare off after another profit. But if you invest ethically, in things and people you believe are in business to make the world a better place, even if you don't make a profit, you'll have the satisfaction of knowing that you are on the side of the angels. Ethics first, and hopefully profits will follow...

report this

Daye Tucker

Jul 09, 2012 at 12:42

Yes artificially produced nitrogen produces short term crop growth, but it is short term and it's a costly input. Be aware that there are other more environmentally friendly and financially viable ways of producing crop growth whilst ensuring soil fertility which artificial fertiliser does not. Nitrogen fixing crops in rotation or in conjunction, provide those multiple benefits.

report this

Alan Morrice

Jul 09, 2012 at 14:18

Mr Dumbo,

You're investing to make money. Go for it.

Pay no attention to the genteel middle-class hang-ups of the 'ethical' or enviromentally-friendly' investment lobbies.

report this

Sungai Petani

Jul 09, 2012 at 14:36

Nothing unethical here.

If the price of fertilizers is reduced more poor farmers in the developing world can use them, more crops are produced at lower cost and hence less starvation. You don't even need a degree in economics to work that out.

report this

Daye Tucker

Jul 09, 2012 at 15:03

No Sungai, but a degree in agriculture would help you understand that rotational use of green manures is part of a sustainable virtual circle in crop production. Nitrogen produced from gas from fracking is dependent on a finite resource, and market forces beyond that of scarcity. Many poor farmers in India at least are already aware of this distinction.

report this

P LM

Jul 09, 2012 at 15:20

Cheaper energy is only one small & less important part of the ecconomic game of snakes & ladders. Real progress will be hobbled for years to come by the Western financial debt fiasco. This will enable the financially astute few to get richer at the expense of the many;- DI among them. Try harder. When raw material gas prices fall.biproduct prices fall, but production costs dont, & profits head south.

Many thanks.

PLM

report this

Sungai Petani

Jul 09, 2012 at 16:11

Daye:

If your children were on the verge of starvation I am sure you would be very happy to increase your productivity as a small subsistence farmer by the use of nitrogen based fertilizer.

report this

Daye Tucker

Jul 09, 2012 at 16:38

Education is the key to solving the problems of subsistence farmers not the global commodity ball and chain that would fix them forever into unsustainable dependency. Artificial nitrogen fertiliser provides short term growth similar to the loan culture affecting the global economy. Nutrients are more important for sustaining life than all the extra volume produced by adding artificial nitrogen. A companion legume will provide natural nitrogen through fixation as well as adding organic matter so essential for a healthy soil.

report this

Alan Morrice

Jul 09, 2012 at 16:53

In order to better reflect the interests of certain contributors to this blog I move that this site changes its name from 'Citywire Money' to 'Citywire Touchy-Feely Enviromentalism'.

report this

Stephen Griffiths

Jul 09, 2012 at 17:18

Everyone is concentrating on the ethics of fertilisers and not the fracking itself. This just isn't an energy revolution. Vast amounts of water are required and polluted by this process. The process also has huge energy costs. The carbon footprint is estimated to be 20% higher than for coal extraction.

I don't think it's financially viable and I don't think it's environmentally viable. I personally think the whole fracking thing is just a giant pump and dump scam by the initial wave of investors who put money in it. If it was so profitable they wouldn't be trying so bloody hard to persuade more investors to get into it. I smell a rat when suddenly all the usual suspects in terms of online investment newsletters suddenly start talking about this at once as if it came out of nowhere. It's got scam written all over it. Bear in mind it was Halliburton who first came up with this wheeze. If it is so safe why did it require Bush and his cronies to pass the Energy Policy act exempting fracking from the Safe Drinking Water Act, the Clean Air Act, and the Clean Water Act?

I fear DI you may become part of the top rung of an inverted pyramid selling scheme that pays for all the smaller rungs below it...by losing your money. Like that last wave of people in 2001 that thought...'Hey I just heard a guy in the pub saying people are making fortunes by investing in Dotcom companies...maybe I should get me some of that'.

report this

cc

Jul 09, 2012 at 17:25

I agree with Sungai - if your children are starving then a quick fix of nitrogen fertiliser is what you will go for. Use of rotation, companion plantings and organic fertilisers are all very well for the wealthy, but jam today is what the poor need. If their children die their own future dies with them.

report this

Jonathan

Jul 09, 2012 at 18:23

Dumb Investor

My advice is don't buy just because you can make a Sun headline out of your purchase.

report this

Sungai Petani

Jul 09, 2012 at 19:39

Whilst I have done no research into the financial return (or not) from the potential of fracking it is quite clear that it could be of major benefit to the UK economy. It could reduce the costs of our energy providing a huge relief to householders who have seen their energy costs rocket recently partly due to the nonsense of building wind turbines all over our green and pleasant land. It would also greatly help us to be energy independent without the need for importing so much gas from Russia.

In the US since the use of the fracking technique has become widespread the price of natural gas has dropped substantially.

Why do so many people so have their heads in the sand when it comes to exciting new developments?

report this

Daye Tucker

Jul 09, 2012 at 20:15

Fracking is about producing yet another finite commodity which will be more subject to global market price manipulation. Consumers and farmers are more aware now so may choose to back a more sustainable option. That's all I'm saying. My supposition has nothing to do with ethics or organic farming. There may not be the rush to invest you might suppose.

report this

Alan Morrice

Jul 09, 2012 at 21:52

This is Britain. We don't like to suceed. Heathrow has two runways. It is at present politically impossible to build a new runway near London. Amsterdam Schipol alone has five runways.

It is almost impossible to build new railways in the UK. There is a monstrous shortage of housing in the South East but for political reasons it's almost impossible to build new housing.

We don't do 'sensible' or economic growth in the UK.

Unlike the rest of the world we don't do fracking. We do windmills instead. Guardian readers applaud. The rest of the world laughs.

Germany for all its supposed enviromentalism still produces much of its power from burning lignite - brown coal - just about the filthiest fuel possible. They have no plans to try to save the planet by setting themselves the world's strictest carbon-reduction standards. They prefer to do 'rich Germany', exporting expensive cars with large engines to the entire world. If the Germans (or French) had our shale gas reserves they'd be drilling and fracking as if there were no tomorrow.

report this

Alan Morrice

Jul 09, 2012 at 22:02

Dumbo,

Regarding making money by investing in nitrogen fertiliser pproducers. If fracking produces a glut of cheap gas all fertiliser manufacturers will benefit. The price of nitrogen fertiliser will fall. If you know how to pick the winners and losers out of the the many competing manufactures you can read the future better than I can.

I suspect the main beneficiaries could be the large new state-owned chemical companies in the Arab Gulf states. You can't buy their shares.

report this

adrian van vliet

Jul 15, 2012 at 09:52

Fracking is another drilling method by drilling down vertically and then horizontally to get to the natural gas in spaces between horizontal rock layers.

There is a catch, however. The chemicals used in this process may/will contaminate lower level ground water.

There is no free ride in any technical development and there are a lot of people, also in the US, who oppose this method. It may be cheap to produce the natural gas but it may prove to be very expensive later when your ground water is contaminated.

report this

snoekie

Jul 15, 2012 at 15:46

With fracking there come problems, gassy water that will ignite if near a naked flame, and the incidence of earth tremors in the area where the fracking is occurring is higher, and that stands to reason, when you remove the basic support structure of the land above by breaking previously solid rock down (albeit that it was 'honeycombed').

Now if you are looking for the long term (but I doubt that this is your intent, because of the need for column inches) look to the companies looking for and supplying gas from drilling (not fracking), eg Shell, BP, BG.

Is it that your problem and that of your predecessor is you are like a butterfly, rarely in one place long enough to pick up the dividends the investments should pay, on the original investment circa £4-500 pa?

You and Mk I have made more disposals in the last year or so than I have done over the last 5 years, and apart from one, all forced on me, by take overs.

report this

Daye Tucker

Jul 15, 2012 at 16:17

Like methane reserves held in previous coal workings? A company called DART is busily exploring an area local to me.

report this

adrian van vliet

Jul 15, 2012 at 18:12

I don't think so Daye. In fracking drilling looks for gas in generally otherwise unexplored rock formation. But no harm finding out what chemicals are used in the process?

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Tesco chairman to leave as black hole deepens

by Gavin Lumsden on Oct 23, 2014 at 13:00

Sorry, this link is not
quite ready yet