The 1990s were an ideal period to have timber as an investment:

• Housing was doing well, and growth was beginning to take off in major cities.
• The world was still pre-digital, and business still relied heavily on shuffling paper.
• Electronic news was still a novelty; magazines and newspapers were still going strong.

What a difference a decade makes…

• Housing is in the dumper, with no clear sign of a resurgence on the horizon.
• Business has embraced the smartphone and has gone digital, shunning paper.
• The world is increasingly getting its news in electronic form, as evidenced by the number of newspapers that are no more.

This shift away from stuff that comes from trees has resulted in an almost complete lack of demand for wood or wood pulp. As a result, prices for paper and lumber have hit multi-year lows. Lacking any catalyst for change, it’s the perfect setup for an extremely overvalued scenario in the timber industry.

Timber REITs… Look Out Below

Whereas timberland prices hovered in the $1,500 to $2,000 per acre range in the mid 1990s, a more realistic valuation today is less than half that. And therein lies the problem: Many of the timber REITs haven’t devalued their land.

If it sounds a little like the looming overvalued commercial real estate mess we’re in right now (a story we broke long before anyone else did), it’s no accident. The biggest problem? REITs are managed by human beings.

Just like they’ve been doing in the commercial real estate market, timber REIT managers have adopted a “wait it out” strategy, in the hope that timber values – and by extension the land it’s growing on – will suddenly reverse. Don’t bet on it.

Unfortunately for the REITs and their shareholders, hoping and praying for a resurgence in the housing market isn’t going to work.

It’s going to get even worse: Timber prices could drop another 50% in the next few years, as an anemic housing market – the only possible timber demand catalyst – isn’t looking at a recovery for as long as five years.

Most timber REITS, however, haven’t taken a big hit to their balance sheets. Not yet anyway. But that’s all about to change.

As a result of the aforementioned head-in-the-sand mentality, Plum Creek Timber (NYSE: PCL), Potlatch (NYSE: PCH) and Weyerhaeuser (NYSE: WY) are all on the verge of imploding. Weyerhaeuser isn’t a REIT, but it suffers from the same issues.

At a minimum, all are going to have to significantly cut their dividends, which aren’t based on anything remotely resembling ongoing operations. Nearly all of their 2009 income – and I use that term loosely – will come from land sales.

That’s a problem, too, and not just because of depressed prices for timber. Much of the hopes of the REIT management are that they will be able to sell land to real estate developers to generate cash. Huh?

You’ve got to be kidding: With the current depressed state of the housing market, developers aren’t exactly chomping at the bit to buy more land. After all, many of them are still writing down the value of land they already own.

Timber REITs Taking A Big Hit Before The Dust Settles

While it’s clear that timber REITs are going to take a big hit to their balance sheets before all the dust settles, there are others that will likely be the biggest losers of all.

You see, over the past few decades, university endowments, pension funds and Timber Investment Management Organizations (TIMOs as they’re referred to) plowed an estimated $40 billion into timberland.

TIMOs are privately run organizations that hold and manage timber on behalf of institutional investors. Here’s the big problem: The funds that the TIMOs manage have predetermined liquidation dates, and many are coming due in the next several years.

When that happens, timber industry land prices could fall even further.

One notable exception to the REITs woes is Rayonier (NYSE: RYN). It has a much more diversified stable of holdings; namely its performance fibers division, which are used by customers around the world to make certain kinds of plastics, LCD screens, pharmaceuticals, food products and more.

The bottom line is that investors who own any of the timber REITs – with the exception of Rayonier – may want to consider lightening their position or eliminating it all together. Investors could also consider establishing a short position in Plum Creek, Potlatch, or Weyerhaeuser, the three stocks most likely to fall the hardest over the next 12 to 18 months.

Good investing,

David Fessler

Source: Overvalued Timber REITs: Why Timber Investing Isn’t What It Used To Be

That’s why, in my investment letter, Outstanding Investments, I’ve constructed a kind of end-to-end offshore energy mutual fund – from prospect to pipeline. Each company has a broad skill set. None is just a one-trick pony. Some of the companies overlap in skill sets, and even compete with each other.

A few of my favorite names include Norway’s offshore powerhouse StatoilHydro (STO: NYSE), as well as subsea equipment provider FMC Technologies (FTI: NYSE). Then there’s platform and pipeline builder McDermott Intl. (MDR: NYSE), as well as offshore services provider Superior Energy Services (SPN: NYSE).

Going forward, I’m be looking to recommend other deepwater plays…at the right price, of course. I’m looking for companies that can grab hold of key parts of the growing offshore business, and produce great profits in the coming years. I think you’re going to be astonished at what unfolds.

I recently attended the annual convention of the American Association of Petroleum Geologists (AAPG). (Some guys go to classic car shows; I go to geologist conventions). I’ve been a member of AAPG for 30 years, and it’s always fascinating to spend some time there. The meeting rooms and poster sessions feature reports from the front lines of the search for petroleum, natural gas and other energy resources.

One theme emerged loud and clear from this year’s conference: Deepwater. Most of the major oil discoveries that remain to be found in the world will be offshore, in deep water.

The always-ebullient Brazilian geochemist, Marcio Mello — CEO of Brazil’s HRT Petroleum Co. — wowed the crowd with a discussion of the oil potential of the South Atlantic. “Six of the last ten giant oil discoveries in the world were offshore Brazil,” he pointed out. And then Marcio moved the discussion to the other side of the South Atlantic and gave an eye-popping description of the oil potential of the offshore regions of Namibia.

“The Namibian offshore is analogous to that of Brazil,” Marcio stated, with slides and hard data to back it up. Then he showed his proprietary research into natural offshore oil seeps off Namibia, and the geochemistry that demonstrates immense hydrocarbon potential. “But Namibia,” said Marcio, “is way underexplored. So you can put down a little money for the concessions and get very rich.”

The point for investors is how much of future world energy development will involve subsea systems.

For additional perspective, let’s examine the current structure of the American energy supply. Right now, most of the U.S. energy mix comes from burning coal, natural gas and oil. In fact, according to the U.S. Department of Energy, the U.S. gets 87% of its total energy mix from burning fossil fuels. Another 7% of U.S. energy supply comes from nuclear power. The total is 94%.

That leaves about 6% of the U.S. energy mix to come from so-called “renewable” and alternative sources. And 3% of that 6% is renewable hydropower from unique sources like the Hoover, Grand Coulee and other dams. And we’re not building any more big dams.

Thus, only about 3% of U.S. total energy comes from things that grow, blow or shine. Of that 3%, about half (1.5%) is from “biofuels,” and that’s if you count a company like Weyerhaeuser (WY: NYSE) burning sawdust to run the sawmills.

Finally, there’s a very minor part of the total U.S. energy mix — about 1.5% — that comes from windmills, solar and geothermal. For as much visibility as these things get in the media and pop culture, their energy output is tiny — slightly above statistical noise in the overall national mix.

So just follow the numbers. The “alternative” energy sources are a miniscule component of the current energy mix. That’s after a few good years of significant investment, with lots of political support and plenty of tax breaks.

It will take many years (many decades!) for these energy sources to expand and meet the energy needs of the U.S. And that’s despite whatever the politicians and policymakers wish for in their dreams.

That’s why the U.S. must continue exploring for oil and gas. I cringe when I look at the falling rig counts in the U.S. and around the world. Every well that’s NOT drilled is one less source of hydrocarbon in the years to come, as depletion causes output from current wells to decline…which brings us back to the South Atlantic, one of the world’s greatest petroleum provinces.

Some experts think that the hydrocarbon resources in the pre-salt formations off the Brazilian coast may rival those of Saudi Arabia in magnitude. We’ll see about that. But it’s beyond dispute that Brazil and its energy resources are a complete game-changer for that nation, and the rest of the energy-consuming world. It goes back to basic geology and the history of plate tectonics.

When South America started to pull away from Africa about 140 million years ago, an isolated seaway formed — a proto-Atlantic Ocean — that filled again and again with sequences of limestone, thin shales and, finally, massive salt beds. The processes of petroleum geology worked as advertised in the region. And these processes left utterly eye-popping volumes of petroleum locked in high-quality reservoirs covering vast areas.

The big downside (and it’s big and down, to be sure!) is that all that oil is under a mile or two of South Atlantic seawater, covered by three or four miles of rock and salt beds — it depends where you’re located on the continental shelf and slope.

But that’s why it takes companies with phenomenal technical and managerial skills, plus deep pockets, to play in this great game. The bottom line is that with the right companies working at it, there’s enough oil down there to produce a very big payday, not just for Brazil, but for many of the companies that contribute to the effort.

I’ll discuss at length the new developments offshore Brazil during my talk in Vancouver at the upcoming Investor Symposium, July 21-24. The title of my talk will be Is God Brazilian? So that ought to give you a clue about what I think lies under all that water column and rock down there.

Source: Deep, Wet and Brazilian