Subscribe for 12 months with recurring billing - $199

Buy 12 months of subscription time - $199

 

Search Uranium Stocks
Uranium Price
Our RSS Feed

Uranium Updates

Enter your email address:

Follow Us on Twitter
Thursday
Sep162010

Eric Nuttall: Look for Underlying Oil/Gas Catalysts

Source: Brian Sylvester of The Energy Report 9/16/10
http://www.theenergyreport.com/cs/user/print/na/7382

Eric Nuttall.JPG

Eric Nuttall, portfolio manager of Sprott Asset Management's Energy Fund, believes there are opportunities in both oil and gas, regardless of commodity prices. "I'm entirely agnostic when it comes to the commodity price. It all comes down to the valuation," Eric explains. He seeks companies with existing production priced at a reasonable multiple and, as he puts it, gets all the exploration upside for "free." Eric talks about some companies that fit that bill in this exclusive interview with The Energy Report.

The Energy Report: Eric, please give us an overview of what's been happening in the oil and gas sector since we last talked with you in May.

Eric Nuttall: Last time we spoke, I was pretty cautious on the space both because of the macroeconomic data points that we were getting and a pretty negative outlook on both natural gas and oil pricing. That's remained relatively constant. It's an extremely difficult environment to navigate when you're looking for strong performance.

Generally, I still think there's quite a bit of headwind for oil and natural gas stocks. Most of the data points that we see seem to suggest that there's a deterioration in the overall economic well-being in the United States and globally. That has a profound impact on the demand for crude oil. We've seen oil prices soften from the mid-$80s down into the mid-$70s. I think for the next year to two we're looking at a pretty tight range, with a floor of about $70 and a ceiling about $85, because of weak global demand, multi-decade high inventory levels in the U.S. and OPEC sitting on roughly 5.6 million barrels a day (bpd) of spare capacity.

Roughly speaking, you would need about a 12% expansion in global GDP to bring that 5.6 million barrels a day number down to a more reasonable 2.5 to 3 million barrels. It's my guess that that would take another two years or so. Until then, I think there's a plentiful amount of oil. Any time oil approaches the mid-$80s, OPEC will just turn on the taps and bring on more oil to an already oversupplied market.

It's really a call on global GDP expansion. That's what you need. It's more a demand question than it is a supply question.

The outlook for non-OPEC supply growth beyond the next year is pretty cloudy. A lot of non-OPEC projects have been brought on this year; we're looking at about a 700,000-bpd increase in 2010 from non-OPEC sources, which is pretty strong, certainly stronger than people would've anticipated a year or two ago. However, we still continue to believe that we're going to be hard pressed to increase global production beyond 87 to 90 million bpd.

TER: In terms of natural gas, there's some opposition to exploration fracking in some states, especially in New York and Pennsylvania, where there are some large shale plays. Can you comment on those concerns and how they could affect the gas price?

EN: I think it's really important and it's impacting some producers in some of the northeastern states, such as New York, where there's a fracking moratorium, and in Pennsylvania, where there are growing concerns. But we need to separate fact from fiction. Politicians are not involved in the industry, so they're obviously somewhat amenable to suggestions from the lobby groups countering the oil and gas business.

I'm not an engineer, but about 98% of fracking fluid is water and sand. Beyond that, there are some chemicals in diluted quantities.

Secondly, the distance of separation between the zones being fracked and an aquifer often surpasses 5,000 ft. Sometimes the distances are as high as 8,000 ft. It's somewhat beyond me to imagine that a vertical frack plane can permeate that much rock when no producer has permeated more than 200 ft., let alone 2,000 ft.

It's my initial impression that there's a lot of overhype and a lot of ignorance. That just means the public needs to be educated about fracking. I know the industry's working hard at that, but it's going to take time. For politicians, it's much easier for them to have a moratorium or to slow down development until they have 100% of all facts.

TER: Perhaps, but perception is often reality. Could those fears impact the gas price?

EN: Potentially, but I really don't think they will. We've mostly seen concerns in the northeastern U.S., where it would impact development of the Marcellus Shale. We're seeing that now in New York, where the Marcellus is totally on hold. However, in other states, such as Louisiana, which has a slightly more mature oil and gas business, I don't think you're seeing nearly as much environmental opposition.

And it's not just pollution in groundwater. There are concerns about emissions from the drilling rigs and that type of thing. Personally, I think it's overblown. Is it going to impact the overall short-term supply? I don't think it will. We're certainly not seeing that. The most recent data I have is for the first week of September, and natural gas production's up about 4 billion cubic feet (BCF) a day in an already oversupplied market.

TER: What are your gas projections then over the short term?

EN: I'm more bearish on natural gas at least from a historical pricing perspective. I think there's been a total paradigm shift, which still isn't being appreciated by the market in terms of the changing economics and the price needed to bring on reasonable amounts of supply. Historically, we would've thought that a $7.00, $8.00 price was required for a reasonable rate of return. Take Encana Corporation (TSX:ECA; NYSE:ECA), a company that is the number-one independent natural gas producer in America. They're responsible for 4% to 5% of total production. They suggest that they need a price of $3.85 on their total portfolio to earn a 10% or 12% rate of return. Many other companies have suggested similar numbers. There are two reasons. One has been the evolution of technology: the ability to drill horizontally and then be able to place multiple stages of fractures into the formation to stimulate much more meaningful amounts of gas. The second reason is an overall change in fiscal regimes in some states and in some provinces in Canada. There have been pretty large incentives to do in situ drilling.

The overall required price threshold has dropped to a ceiling of $5 and then a lower band of about $4 in short-term pricing. NYMEX pricing is at about $3.56. Canadian gas is in the low $3s. I don't think that's sustainable. But until we see more discipline from producers in terms of reducing the rig count, I don't see any upward pressure on the price of gas—certainly not above $5, which I think over the next two years is probably a very reasonable ceiling.

TER: In your last interview with The Energy Report, in reference to Tethys Petroleum Ltd. (TSX:TPL) you said: "The market is highly anticipating a follow-up well from their original well. Management thinks they could be sitting on a very material oil discovery in the hundreds of millions of barrels" in Kazakhstan. What's the update on Tethys?

EN: We're still waiting for a material update. There was a press release out about a week ago where they announced a delineation well that encountered hydrocarbon showings in the primary reservoir. But I'd be more comfortable once we get a flow rate. It seems like their drilling program is progressing quite nicely. I think over the coming weeks and the coming months as they get a test rate on this one well and are able to drill a sidetrack and several subject wells, we'll have a better feel for the total size of the accumulation. But it certainly seems to be one of a very decent size.

TER: In terms of percentage what's your position in Tethys?

EN: For our Energy Fund it'd be about 2%.

TER: Tethys' largest project is in Kazakhstan, but they are undertaking exploration in some other countries surrounding Kazakhstan. Could those be catalysts for growth?

EN: In my view, the real upside is Kazakhstan. Everything else is somewhat noise.

TER: Another company you talked about in that interview was Corridor Resources Inc. (TSX:CDH). Corridor recently posted a $2.2 million loss in the second quarter. Its operations are based in the province of New Brunswick where banning fracking has become a provincial election issue. Is this a buying opportunity or should investors just say goodbye?

EN: Corridor's last quarter results are pretty immaterial. The real catalyst that we're waiting on are drilling results from Apache Corporation (NYSE:APA) on their Frederick Brook Shale gas program later this quarter. It was announced last week that Apache had finished drilling the first horizontal well. We're just awaiting fracture stimulation later this fall with very, very important results to be published in early 2011. That's really what's going to move the needle on the story. If Apache is successful in achieving economic flow rates, it could be sitting on 50 trillion cubic feet (Tcf) net of resource potential, which is just unbelievable. That kind of compares to the major natural gas producers on the continent. Their current operation is really irrelevant when compared to the upside from their shale gas program. I would still define it as somewhat of an exploration story because the current production doesn't backstop the current share price. However, if they're successful, you could see this stock increase several times over.

TER: They also recently received approval to do some exploration in the Gulf of Saint Lawrence on the Old Harry prospect. Could that be a catalyst for further growth?

EN: They got approval to do some sub-sea observations, but I didn't see approval on drilling. They've been waiting for several years. I don't think drilling would occur for another year and a half to two years, but that would be a very, very significant catalyst. They think it could be a tremendously large oil or natural gas accumulation.

TER: What about the CEO who is retiring this fall? What sort of impact might that have?

EN: Norm Miller is retiring. Norm has been with the company since its inception. I think he's done a good job of putting together a really attractive land base. The company is looking for a successor who can carry the torch so to speak. I don't see it as a negative by any stretch.

TER: So if investors have a position in Corridor, they should probably stick with it?

EN: I would. I would view it as a medium- to a higher-risk story, typically the type of investment that I'm looking for. I'm looking for the ability to purchase a company on existing production at a reasonable multiple and get all the exploration for free. In Corridor's case you're not quite getting that because you probably have core net asset value (NAV) of about $2.00 to $2.50 based on their current operations. But this could be easily a double-digit share price, if they're successful.

TER: In our last interview you also liked Rock Energy Inc. (TSX:RE), a heavy oil producer in Alberta. The company at that time was testing gas targets. How are those tests going and what are Rock's prospects?

EN: In October, Rock will be studying their first Montney delineation well. In Alberta, it was an extraordinarily wet spring and summer, not just for Rock but for almost every company. A lot of the exploration activity in Alberta was postponed or delayed. Rock, along with everybody else, is just getting back at it. We should have results by late fall.

Rock's trading at around 4.5 times next year's cash flow using $75 oil. If they're successful at delineating this Montney resource, it has the ability to triple their reserves. Again it's the type of story where you're not paying for the upside because it's already trading at a pretty reasonable cash flow metric.

TER: Are there any other catalysts that could propel that stock?

EN: They're testing some different technologies to increase the recovery rates on their existing heavy oil acreage in Lloydminster. But the real company maker would be if they're successful proving up their Montney acreage.

TER: In June they added Ken Severs to the board. What did you think of that appointment?

EN: That was fine. It's really a competent management team with strong technical expertise with a good resource base. We're hoping they can finally get at testing the gas upside.

TER: What are some other companies you're bullish on?

EN: Before I give individual recommendations, I need to state that I'm pretty cautious on the overall environment both in the general market and especially for the oil and gas sector. In the short term, I think you will see continuing weakness in North American gas pricing and in oil. While we may see a rebound into the low $80s in oil, I think it's range bound. It's very, very important to focus on companies that have a balance sheet that will allow them to weather low commodity prices, be it gas or oil. You want to avoid companies that were overly aggressive and leveraged up the balance sheet.

I continue to like Bankers Petroleum Ltd. (TSX:BNK) very, very much. They recently did a large financing that shored up the balance sheet. They can now weather a lower natural gas price and, because they are something of a heavy oil producer, they are somewhat vulnerable to heavy oil differentials. Their oil is discounted off of Brent, but it's trading at essentially a discount to the NAV of its proven and probable reserves using $80.00 oil.

Bankers is delineating a resource onshore in Albania. Yet at the same time, they have enormous potential to grow their reserves by four to five times if they're successful delineating the resource using horizontal wells. Your downside is limited because it's not trading at an egregious multiple. Yet at the same time, it has enormous upside through the delineation of the reserves. That's one name.

Another small name that would be somewhat high risk is Renegade Petroleum Ltd. (TSX.V:RPL). It's about a $175 million light oil company. Ninety-seven percent of its current production is geared towards light oil, the economics of which are roughly three times better than natural gas. It's stewarded by a young, driven management team that I like. They've got a good land base in southeastern Saskatchewan. What's interesting is that a lot of the light oil plays in Saskatchewan are being held by a few of the large companies. But because of Renegade's size, they're able to pursue much smaller deals that simply wouldn't be material to a large company like a Crescent Point Energy Corp. (TSX:CPG) or a PetroBakken Energy Ltd. (TSX:PBN). Renegade has been very successful at accumulating acreage.

Now that the weather has dried things up, they're going to be initiating a very, very active drilling program. We're looking for Renegade to potentially double production in 2011. I think it could be trading at under four times enterprise value cash flow using $75.00 oil. So it's trading at a cheap multiple and yet it has tremendous upside.

TER: In terms of an investment thesis, are you looking for companies with an oil and gas mix or leaning more toward the oily names?

EN: I'm entirely agnostic when it comes to the commodity price. It all comes down to the valuation. What's important, especially for natural gas companies right now, is that they absolutely have to be low-cost operators. They also need some critical mass because there's been an evolution in the nature of the wells that we're drilling. Typically, a horizontal multi-stage frack well is going to cost around $3.5 to $4.5 million. If you're a little company, you can only afford to drill a few wells a year. If that's the case, you better hope that they all hit. I'm trying to target companies that if they're going to be "gassy" are producing around 10,000 barrel of oil equivalents (BOE) a day, because they'd better be able to generate enough cash flow to fund an adequate drill program. But when it comes down to whether I favor oil or gas, it's pretty irrelevant. It comes down to each individual opportunity.

TER: Do you have some parting thoughts on the sector that you'd like to leave us with?

EN: There are times to be offensive and times to be defensive. Now, given the level of uncertainty when it comes to both the economy and the underlying commodities, I think it's time to be somewhat defensive. My fund is currently carrying a healthy cash weighting of about 17% and then a short weighting of about 5%. I'm seeing opportunities in shorting. But at the same time it's important to distinguish that you don't have to be a bull on the underlying commodities to be bullish on individual investment opportunities. We still see quite a few opportunities in that small- to mid-cap space where the companies aren't totally relying on the commodity price increasing to get the share price moving. You need to focus on stocks with underlying catalysts, either the ability to grow production or delineate some type of resource that will get the stock to appreciate.

Eric Nuttall is a portfolio manager with Sprott Asset Management (SAM). He joined the firm in February 2003 as a research associate and was subsequently promoted to research analyst in 2005, associate portfolio manager in 2008, and then to portfolio manager in January 2010. Eric is co-manager of the Sprott Energy Fund along with Eric Sprott, and also co-manages the Sprott 2010 Flow-Through Limited Partnership with Allan Jacobs. In addition to his responsibilities for those two funds, Eric supports the rest of the Sprott portfolio management team with identifying top performing oil and gas investment opportunities. Further, Eric contributes towards internal macro energy forecasts, and his insight into emerging unconventional plays has been covered in several financial publications such as The Wall Street Journal, Asia and Barron's. Eric graduated with high honors from Carleton University with an Honors Bachelor of International Business.
Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) 1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Tethys and Rock Energy.
3) Eric Nuttall: I personally and/or my family own shares of the following companies mentioned in this interview: Rock Energy, Bankers Petroleum, PetroBakken Energy. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com





On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time, however, with uranium showing signs of life just maybe we are closer than we think.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days, with more positions opened yesterday. Drop by and take a look.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.





Tuesday
Sep142010

Scott Koyich: Oil & Gas Upside Potential

Source: Karen Roche and Gordon Holmes of The Energy Report  9/14/10
http://www.theenergyreport.com/cs/user/print/na/7360

To take advantage of the upside potential when oil and gas cycles take a turn for the better, without exposing yourself to the brunt of the downside risk, make your best picks based on asset and management strength. Then wade—not dive—in. Scott Koyich, founder of Calgary-based DSK Consulting Ltd. and Brisco Capital Partners, shares his top picks for deploying his "wading into the investment" strategy in this Energy Report exclusive.

The Energy Report: What's your macro overview on the energy sector and which companies do you like in that sector?

Scott Koyich: On a macro basis, we are in a very tough time in the world today. It's now more important than ever to protect capital and to focus your investment choices. In the energy sector, oil has corrected dramatically in the past weeks. That's due to both nervousness around storage numbers and global consumer and industrial demand. This has left a worldwide bearish feeling surrounding the commodity. It's my opinion the OPEC countries need to balance their budgets on an $85/barrel oil price and I think we will see it hover around there going forward.

Natural gas prices have been in the dog house for quite some time in North America due to lack of industrial demand and the perceived abundance of supply from the unconventional discoveries in the U.S. and growing supplies of liquefied natural gas (LNG) worldwide.

The cycles normalize, eventually, and will turn in a positive direction; therefore, if you pick companies with strong management, balance sheets, asset bases and discount-to-enterprise value, your portfolio should do well on the turnaround.

TER: For example?

SK: An example on the international forefront is TransGlobe Energy Corporation (TSX:TGL; NASDAQ:TGA). This company's been around for quite some time and has built its production base to approximately 10,000 barrels of oil per day (bopd)—and that's 100% oil. TransGlobe, at its current reserve base, now sits on the radar of potential acquirers wishing to diversify out of their U.S. dollar reserve base by purchasing oil assets. China, India, Korea and sovereign wealth funds are examples of such acquirers. We know this because of recent purchases in TransGlobe's peer group in North and West Africa. TransGlobe could potentially double its reserve base in the next 24–30 months and become an even more favorable acquisition target.

An example on the natural gas side is domestic producer, Vero Energy Inc. (TSX:VRO). Even in a depressed natural gas environment, Vero has earnings-positive numbers and continues to show 100% drilling success. Its full cycle costs still show good numbers in this $4–$5 Natural Gas Exchange (AECO) pricing environment. The key for Vero is the high heating-content gas it's discovering and the 20–45 barrels of liquids production for every million cubic feet they produce. Vero had a NAV of CAD$9.67 last year and is currently trading at around $6. This is another example of buying value. The company will bring its gas-to-oil mix down from the current level of 79%–21% to 72%–28% by year-end. Vero is positioned strongly to take advantage of the next positive cycle and, if the market doesn't recognize this gem, its peer group will.

TER: You mentioned that the commodity cycle needs to turn around. Would an investor in Vero or TransGlobe expect to see a flat stock price until that turnaround?

SK: That's a good question. I tell investors on a day-to-day basis to play only the money they can afford to lose and make sure they wade into a position—rather than jump in with both feet. For instance, you have an idea about the size of position you wanted to take in Vero Energy, say 10,000 shares. On a down day, bid a position for 5,000; if you get filled right away, watch the stock to see how it plays out (this could take days to execute). If the stock goes down or up over time, average down or up to a full position. Personally, I am very comfortable with Doug Bartole's management team at Vero, the balance sheet, oil and gas properties and the future of natural gas; so, if Vero goes down after my initial wade-in position, I am comfortable with averaging down.

TER: If it's trading below enterprise value now, do you expect it to reach enterprise value before the sector turns around, or is that too optimistic?

SK: If any stock has a chance it is Vero. The company is covered by approximately 12 investment banks, BMO Nesbitt, RBC, First Energy and GMP to name a few. You want to be invested in well-covered equities because they will be the first to go back toward stronger multiple levels. Institutional sales desks and analysts, conditionally, will start calling their clients once they become comfortable with the macro environment, and then suggest their clients build positions in junior natural gas stocks for leverage. The more coverage you have, logic dictates, the better chance the undervalued equity will have to move back to its former glory. The stock has moved through $9 several times and had a high of $11.20 (2008)—if anything, it is a great trade on natural gas. As soon as the macro environment turns, you want to make sure you're vested in stories like Vero; unfortunately, timing is the most difficult part.

If we have a cold winter and decent drawdowns on storage, the natural gas market will pick up this winter. This will start investment banks marketing Vero. Normally, the well-covered, undervalued equities move first.

TER: Both Vero and TransGlobe have made nice run-ups and have been somewhat locked in a trading band. From a technical standpoint, I read this as very positive.

SK: TransGlobe sat in a holding pattern between approximately CAD$2.50 and CAD$3.50 for what seemed forever. Management realized how undervalued the stock was and commenced on a yearlong road show across the globe. It wasn't until an analyst tour to Egypt earlier this year that the world then read about the true blue-sky potential of TransGlobe Energy. The analysts needed to understand the reserve potential of the West Gharib Concession. By vertically fracing 30–40 bopd wells and turning them into 300–600 bopd wells, as well as showing the number of future locations, it wasn't hard for them to see its true potential. The stock went north of $8 and has stabilized in the mid $7s. TransGlobe was the first in Egypt to execute on a multi-frac horizontal well. Investors are anxious to see if the horizontal (multi-frac) is the key to unlocking further potential, or if the company continues along the vertical frac path they're currently on. A science project, if you will.

This is no different than the ongoing science project in the North American sedimentary basin—on fields, such as the Bakken or Cardium. You have to determine the most cost-effective way to establish reserves and optimum production with the various drilling techniques. TransGlobe is trading at current levels and will likely continue to until the world sees what reserve potential is unlocked. And, as potentially positive news unfolds, we may see TransGlobe move to the next price level. Vero is doing the same thing with its 103 net sections in the Cardium. By drilling horizontal multi-frac wells and increasing its oil weighting, TransGlobe will show the investment community they are not just another gas stock.

TER: Any other thoughts on the energy area?

SK: We continue to like the international stories; they have done well for us in the past. From 2002–2007, we represented a TSX-listed oil and gas company with properties in Egypt called Centurion Energy. Centurion was bought by Dubai-listed Dana Gas (ADX:DANA) in February 2002 for $1.2 billion, or $12/share. Fast forward to today, this management team is attempting a repeat with Sea Dragon Energy Inc. (TSX.V:SDX). You never want to bet against CEO Said Arrata; his connections with the Egyptian government are second to none and this CAD$0.25 junior may become a great leverage play going forward. The big difference between Sea Dragon and Centurion is the number of shares outstanding. Sea Dragon has nearly 4 times the number of shares outstanding than Centurion did.

TER: Do you see that as a problem?

SK: Not necessarily; but, in an uncertain capital market like this, you have to be careful. It's very difficult to manage a large float in a value-based market. Institutions tend to look at market cap and evaluation carefully. On the other side, Said and his team have done a great job getting to 1,400 bopd already and back filling the valuation.

TER: Any other companies that come to mind?

SK: Brownstone Ventures Inc. (TSX.V:BWN) is a labor of love for celebrated investment personality, Sheldon Inwentash of Pinetree Capital Ltd. (TSX:PNP). Sheldon, who is well known in the resource world, has done a spectacular job of picking natural resource equities. Through Brownstone, Sheldon has amassed an amazing inventory of non-operated oil and gas interests in countries all over the world. Brownstone sits as one of Pinetree's largest holdings, and Sheldon is chairman of the board.

Currently, Brownstone has cased a well onshore Colombia north of 15,000 feet with joint venture partners Quetzal Energy Ltd. (TSX.V:QEI) and Condor Resources Inc. (TSX.V:CN). Anyone following the excitement in Colombia knows this country has become an investment class of its own. With the likes of Gran Tierra Energy Inc. (NYSE:GTE; TSX:GTE) and Petrolifera Petroleum Ltd. (TSX:PDP) leading the charge, the investment community should become very interested in the drilling results to come from Brownstone by mid-October. This could be the first of Brownstone's many production successes to come. I love these stories—trading below last-issue price of $0.55 with a strong balance sheet and great management and board of directors—all the ingredients for potential share appreciation.

TER: You say you expect to see results coming from Brownstone soon?

SK: Yes, we should see results in the end of September to mid-October timeframe. We have our fingers crossed, but initial indications from the Brownstone team are very positive. With any positive press results, Chairman Sheldon's finger at the pulse of Bay Street and Brisco Capital taking management on the road this fall, this could create a perfect storm for Brownstone.

TER: Any other energy companies you want to tell us about?

SK: One of the common themes of our investment mandates is leverage. We at Brisco Capital love stories that have a chance at multiples on share appreciation. One of your articles mentioned a client of ours—BioExx Specialty Proteins Ltd. (TSX.V:BXI). This story has had an incredible run, as potentially the first company in history, to commercialize canola proteins. We started with this company at CAD$0.25 cents and it currently sits at CAD$2.20,

We want to bring an energy supplier to your readers' attention. Cortex Business Solutions Inc. (TSX.V:CBX). Cortex is a service company that streamlines procurement processes and supply chain management. At this point, Cortex has focused on the O&G sector due to its location in Calgary, Canada—the home of approximately 100 Canadian energy company head offices. The beta client for Cortex has been Husky Energy Inc. (TSX:HSE). In any one given month, Husky used to receive approximately 350,000 pieces of mail in the form of purchase orders, goods and services receipts and invoices. Once the data-entry process, reconciliation, payment approval and check run were completed, the suppliers were lucky to receive payment in roughly 60–120 days. Cortex has automated the process for Husky and approximately 3,000 (growing monthly) of its top invoicing suppliers. Now, Husky is capturing early pay discounts from its supply chain and has trimmed its administrative department dramatically.

The supply chain—Precision Drilling Corp. (TSX:PD), Schlumberger Ltd. (NYSE:SLB), etc.—has been happy to comply, as they're paid on contract terms (net 30 days) and have even moved to weekly pay schedules. In Q1 of this year, Cortex signed up Bonavista Energy Trust Ltd. (TSX:BNP.UN), Murphy Oil Corp.'s (NYSE:MUR) Canadian division and Apache Corporation—Canada (NYSE:APA). Cortex gets paid by the suppliers on integration and monthly access fees and per transaction. The more suppliers that join the network, the more transactions between the hubs and suppliers—and amongst the suppliers themselves. This story could become viral going forward. Apache North America has gone live this month in Canada and will go live in the U.S. by year-end.

TER: Very interesting.

SK: Another compelling thing about Cortex is that the crossover rate between energy companies and their supplier base is anywhere from 45%–65%; therefore, it's very easy to hook up crossover suppliers when a new hub signs on. Also, Apache's recent purchase of BP Plc's (NYSE:BP; LSE:BP) North American asset base for approximately $9 billion was the equivalent of Cortex signing two more hubs to the network. This spring, well-known resource investor Sprott Asset Management participated for roughly $5M of a $7M bought-deal financing at CAD$0.50/share (no warrant). In fact, Sprott Portfolio Manager Jamie Horvat named Cortex one of his top picks due to its viral, transactional revenue nature. Most likely you will see Cortex move organically into the mining and construction sectors next.

TER: Interestingly enough, that was the top pick of Taylor McDonald, whose Energy Report interview just ran on August 25. He talked about Cortex as a niche player, a "tech special situation" that solves problems that resource companies are experiencing.

SK: Taylor MacDonald, through his fund at Pathfinder Ventures, has been a great supporter of the story for some time now. The key to success for these technology stories is finding the reoccurring revenue models that are viral in nature. Cortex has provided guidance to the Street that it could be cash flow positive, on a transactional-revenue basis, by Q211 (ending January 31, 2011), which means all other revenue streams flow right to the bottom line. Analysts love these stories due to their predictable revenue streams and guidance—the kind they would have loved to write about in 1999, prior to the technology crash.

TER: Very good.

SK: That's a leverage pick—the kind you want, with big leverage to it. So, you want to have stories in your portfolio that have the chance of making 5, 10 or 15 times your money over a number of years, right?

TER: Any other last thoughts you'd like to share?

SK: On the leverage side, Pacific Wildcat Resources Corp. (TSX.V:PAW). I mentioned this one in my interview with The Gold Report. This client was referred to us through PAW Board Member Terry Lyons, who also sits on the board of directors at Canaccord Financial Inc. (TSX:CF). We like this deal, not just because it's trading at approximately CAD$0.20. but also due to its management expertise and properties. The CEO, located in Perth, Australia, has assembled two great plays located near infrastructure. The first property is quick to cash flow in Mozambique. They are forecasting this project will be up and producing tantalum by February 2011. Management has stated this property will earn $2M–$3M a year at full ramp-up. They also have a rare earth-niobium project in Kenya. You couldn't ask for better infrastructure near your properties or stronger management. We haven't taken this company on the road yet because it's in the middle of a $0.22 non-brokered financing. Watch for this hidden jewel—another example of potential leverage in 2010–2011.

TER: Terrific. Thanks, Scott.

Scott Koyich is a Calgary-based entrepreneur with over 10 years of experience in the investor relations industry. He is the president and CEO of DSK Consulting Ltd. and chairman of Brisco Capital Partners, both of which provide high-level advisory and strategic communications advice, investor relations and communication services. They are private firms representing various publicly traded companies that are listed on the Toronto Stock Exchange and the TSX Venture Exchange—including a number in the resources sector, such as Antares Minerals, Bellatrix Exploration, BioExx Extraction Technologies, Bridge Resources, Canadian Energy Exploration, Dynasty Metals & Mining, Galway Resources, Sea Dragon Energy, Sunward Resources, Tonbridge Power, TransGlobe Energy, Vero Energy and Ucore Rare Metals. Scott also has a passion for life that often crosses over into other business environments; he is a partner in two of Western Canada’s top restaurants, Il Sogno (Calgary, AB) and Cabana Grille (Kelowna, B.C.) and also co-producer of Hollywood and Vines, starring his business partners and Canadian celebrities, Terry David Mulligan and Jason Priestley.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Karen Roche and Gordon Holmes of The Energy Report conducted this interview. Karen personally and/or her family own shares of the following companies mentioned in this interview: None. Gordon Holmes: From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Energy Report: TransGlobe Energy Corp.
3) Scott Koyich, DSK Consulting Ltd. (DSK): DSK is an investor relations firm. DSK provides, for remuneration, corporate communications and investor relations services to client companies represented in this interview. The information contained in this interview is based on existing disclosure documents or other publicly available information. Neither DSK nor the above-mentioned client(s) are offering securities, advising or soliciting the purchase or sale of securities. Information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. This material is not an offer to sell or a solicitation of an offer to buy any securities, nor is it an endorsement of the companies by DSK. DSK is not responsible for any claims made by the companies. Investors should independently investigate and fully understand all risks before investing. Statements included may contain forward-looking statements within the meaning of the Private Securities Litigation Reform ACT of 1995. Such statements may involve a number of risks and uncertainties. Further information on potential factors that may affect each company's financial results can be found in their specific financial reports, which are filed with the Securities and Exchange Commission (SEC) and/or the British Columbia Securities Commission (BCSC).
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

Email: jmallin@streetwisereports.com



On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time, however, with uranium showing signs of life just maybe we are closer than we think.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days, with more positions opened yesterday. Drop by and take a look.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.



Tuesday
Sep142010

Laramide Resources Limited Up 19.17% Today

Laramide Chart 14 September 2010.JPG


We kick off with a quick look at the chart which shows todays sudden leap in the stock price which will please some the long suffering investors in Laramide Resources Limited (LAM) including ourselves. The technical indicators have jumped into the overbought zone with the RSI standing at 75.64, the MACD and the STO are also up but not as extended as the RSI.

Todays news regarding the exercise of Laramides option to acquire the La Sal property in San Juan County, Utah, will require the sum of US$500,000 to be paid to the Homestake Mining Company of California and has generated a massive increase in the volume of shares traded along with a stock price increase of 19.17%.

A follow up payment will be required of $250,000 upon successfully permitting the La Sal property, and a final payment of another $500,000, upon the La Sal property moving into commercial production.

The La Sal property had been encumbered since 2005 preventing Laramide from developing the asset even though the project had been previously permitted with a 1,200 metre access drive constructed and with access to a commercial mill.

The historical resource consisted of 440,000 tons grading 0.31% U3O8, for 2.7 million contained pounds U3O8. The resource was estimated using a minimum undiluted thickness of six feet at a cut-off grade of 0.16% U3O8.

So, this all bodes well for Laramide whose stock price has now doubled over the last couple of months. There is still a long way to go but at least this is a step in the right direction.


Laramide has acquired known uranium assets with drilled out resources. Currently Laramide has approximately 62 million pounds of U3O8 (uranium oxide) located in NI 43-101 compliant resources in Australia and the U.S.

The Company’s main focus is the advancement of its flagship asset, the Westmoreland Uranium Project in Queensland, Australia. In 2009, Mining Associates of Australia completed a technical report that showed Westmoreland has an indicated resource of 36.0 M lbs @ 0.089% U3O8 and an inferred resource of 15.9 M lbs @ 0.083% U3O8 which ranks it as one of the ten largest uranium deposits in Australia and only one of a handful not under the control of a major mining company.

Uranium Chart 14 September 2010.JPG


The spot market price for uranium is currently $48.00/lb so its fingers crossed that the price can register $50/lb in the not too distant future.


Laramide Resources Limited trades on the Toronto Stock Exchange under the symbol of LAM and has a market Capitalization of $96.59 million, a 52 week trading range of $0.71to $1.98.

On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time, however, with uranium showing signs of life just maybe we are closer than we think.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

LAM logo 14 Sep 2010.JPG

Friday
Sep102010

China and India: Still Hungry for Coal

Coal.JPG


By Marin Katusa, Chief Energy Strategist, Casey Research


One can only hope that the “Don’t shoot the messenger” adage is still popular in the international community.

UK-based consultants M&C Energy Group have become the latest to join the chorus of voices asking the international community to increase the pressure on China and India to switch to cleaner energy sources.

As far as energy analyst David Hunter is concerned, it is the Western businesses that are carrying the financial burden of reducing carbon emissions. China and India, on the other hand, are benefitting from much cheaper energy, and their companies don’t have to bear the costs of reversing the effects of global warming.

Mr Hunter, however, should steel himself for disappointing news. Industry experts are expecting anything but a cut in coal demand for the foreseeable future.

By their analysis, global coal demand – already at a record high – will remain strong even as the recession cuts down on oil and gas use. And the numbers are certainly matching up to these expectations.

India’s coal demand is expected to reach 653 million tonnes this fiscal year, with only 572 million tonnes expected to be produced in the country. The China National Coal Association expects demand to grow by 4-6% in 2010 and the coal consumption to expand to roughly 3.4 billion tonnes.

And with power-starved economies to feed and millions of people to lift out of poverty, neither country is going to take kindly to any interference with its energy agenda.

There are two different types of coal – in fact two different types of demand – when it comes to the coal market. Though they can’t be considered to be totally separate, the criticism levied against these two Asian tigers becomes somewhat blunted when we take this angle.

The first is for thermal coal, the cheapest and most popular way for emerging economies to produce electricity. Almost 75% of China’s electricity comes from coal-fired plants, but this picture is rapidly changing.

Irritated by the “world’s biggest energy consumer” sticker, Beijing is investing heavily – US$736 billion – into clean energy investment plans. The aim: increase the non-fossil fuel supply component to 15% of the total primary energy demand by 2020. So really, Mr Hunter’s desire for a less coal-intensive China might just come true. As for India, it never likes to be too far behind its Asian rival.

The second demand is for metallurgical, or coking, coal. This is what China and India really need – good-quality metallurgical coal, something that North America has in plenty. And this demand is not going away anytime soon.

For a strong economy, one needs strong infrastructure. For strong infrastructure, one needs steel. Steel is the backbone of an economy, and it is metallurgical coal that is used to produce the heat in 90% of the world’s steel production process. And for as long as the economy continues to blaze, it is metallurgical coal imports that will be stoking the furnace.

The heyday of the coal market is far from over. We’ve called coal the invisible bull market before; today it’s very much at the forefront of the market, and it isn’t going away. Coal suppliers know as well which side their bread is buttered. While traditional markets in Europe continue to struggle with their debt crises, China and India will be only too happy to race on ahead and pick up the slack.
----

No one knows energy better than Marin Katusa, Casey’s chief energy strategist and senior editor of Casey’s Energy Report. One of his previous coal picks jumped by 80%, handing subscribers handsome profits. Who will be the coal winner in 2011? Find out with a risk-free, 3-month trial with 100% money-back guarantee.





Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days, with more positions opened yesterday. Drop by and take a look.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.



Monday
Sep062010

Extract Resources is trading at a discount and has major upside potential.

EXT Chart 07 sep 2010.JPG





The following article was very kindly sent to us from one of our readers in Namibia, so its thanks to Grant for giving us his views on Extract Resources. His article is posted below in its entirety and has not been edited in any way.






    Extract Resources is trading at a discount and has major upside potential.




As the world looks to Uranium as the next phase in the move towards a cleaner energy source, investors need to be seeking out the best mining shares internationally.

Demand for Uranium is set to grow at an ever increasing pace in the next 20 years as countries such as China, India, Korea and Russia beef up the number of nuclear reactors to ensure power supply in their countries, which is cleaner than coal-fired power stations.

Based on current estimates there will be sufficient supply to satisfy world demand if all start up mines come on line and there are no major supply problems. If any major supplier such a Kazakhstan, Canada or Australia experiences political or production setbacks this would have a significant effect on the supply and consequently the price of Uranium.

Any spike in the Uranium price would have a marked effect on the profitability of the remaining producing mines and consequently the price of their shares.

One of the most significant uranium deposit discoveries in the world in the last 10 years has been discovered in Namibia in the form of Extract Resources Limited, which is listed primarily on the Australian Stock Exchange and dual listing on TSX & NSX. The primary focus of Extract is the company’s principle Uranium asset in Namibia which is 100% owned Husab Uranium project.

The share rose from below AUD1 in 2008 to AUD11.4 in late 2009 based on speculation. The share has over a period of the last year retracted some of the gains and has this week traded at the year’s low of AUD6. This should represent an opportunity for investors as the basic fundamentals have at least remained the same with some marked improvements in some factors.

The share is bathed in positive sentiment and facts surrounding the discovery of the resource are all positive.

A significant portion of the resource base has moved from inferred to indicated thus creating a much greater certainty and confidence in the existence of the resource base. Indicated resources has grown 10 fold since the last resource announcement. This moves the discovery into the top 6 global uranium deposits by contained metal. (See Extract website for details)

A better defined resource statement has ensured and underpins the finalisation of the definitive feasibility study which is planned for release in the last quarter of 2010. This will move Extract from a successful explorer to a major uranium producer. Unconfirmed reports indicate that production costs could be well USD30/pound based on current testing at a pilot level. With current long term supply contracts at between USD75 and USD80 per pound this implies significant profitability for the mine and significant upside for the share. With production targets of 15 million pounds per annum at full production, at a profitability of >USD50/pound the sums are compelling.

Large international investors hold a major portion of the share capital thus ensuring sufficient project capital and working capital ensuring viability of the mine from a financial perspective. One of the shareholders recently stated that raising of finance to bring the mine to production will not represent a challenge.

A recent change in shareholding to the extent of 10.3% has strategically moved to a Japanese based Company called ITOCHU Corporation & a wholly owned subsidiary Nippon Uranium. It is speculated that this is the forerunner to the finalisation of a long term off take agreement. This move will ensure sales for the future output of the mine thus removing a significant uncertainty in the DFS , thus ensuring the viability of the mine. (We have been unable to obtain comment from Extract on this detail and remains speculation)

The mine (Future mine expected to start up in 2012) is situated in Namibia which is a well known investor friendly country on the southern tip of Africa which boasts :

Namibia already world number 4 in Uranium production and rising.

Major mining companies such as Rio Tinto, Paladin Energy, Areva and Forsys Metals already well entrenched in Namibian Uranium Mining sector

Political stability since independence in 1990 with stable economic policies

World class telecommunication sector with annual investment in infrastructure, thus improving annually on reliability and speed.

Well developed transport, roads and rail network.

Well organised and developed port for importation of inputs and export of final product, within 30km of the mine.

Significant development plans agreed to ensure supply of water to the uranium sector through desalination plant. (Areva has already commissioned a desalination plant in Namibia with great success)

Sufficient power to ensure reliability in production.

Mining Ministry who are in touch with the investment community and have shown willingness to create a catalyst to growth the uranium sector in Namibia.

Friendly tax environment

Repatriation of profits , dividends and capital is guaranteed by the Government

It is clear from this summary that Extract have discovered a sufficiently large resource which will ensure the development a sizeable mine by 2012/13. Indicative values placed on the mine based on the indicated and inferred reserves of 367.3 Mlb U3O8 are conservatively valuing the mine at AUD2.65n. Based on current market capitalisation of AUD1.56bn it is apparent that the share is undervalued by a fair margin and could trade as high as AUD10.4/ share once the mining licence allocation and DFS are complete.

Extract Logo

So there you have it.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time. All the best, Bob.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days, with more positions opened yesterday. Drop by and take a look.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

Thursday
Sep022010

Quinn Kiley: MLPs Going Institutional

Source: Brian Sylvester of The Energy Report  09/02/2010
http://www.theenergyreport.com/pub/na/7267

Quinn Kiley.JPG

Fiduciary Asset Management Senior Portfolio Manager Quinn Kiley is a big believer in the MLP space and sees opportunities in closed-end funds and among individual MLPs. In this exclusive and candid interview with The Energy Report, Quinn discusses the state of the MLP asset class and suggests some names with catalysts for growth.

The Energy Report: Today we're talking with Quinn Kiley, senior portfolio manager of Fiduciary Asset Management's Master Limited Partnerships (MLPs) products. Tell us about FAMCO and what you do there.

Quinn Kiley: Our business is built around providing custom solutions to individuals and institutional investors. Unlike a lot of the other MLP investors, MLPs are only one of the things we do. We also have a significant fixed-income business and a significant large-cap core equity business. The vast majority of our business is on the institutional side.

As you know, MLPs have, historically, been the purview of taxable retail investors. Our history in that space developed along those lines, too. We manage separate accounts for high net-worth individuals. We also offer that strategy through several broker/dealers, whereby their clients have access to our strategies and we manage the accounts for them. We do the same thing for some institutions and closed-end funds—we run the portfolios for those funds.

TER: With T-bills fetching record low yields and MLPs averaging almost 7%, is it easier to sell investors on MLPs now or do you still need to educate them about being in MLPs?

QK: It's now easier to have a conversation about MLPs because they are much more in the front of people's minds. However, the understanding about what an MLP is, how it fits in a portfolio and why it makes sense for a range of investors is still a topic that we have to cover in most of our meetings. MLPs are a growing asset class that is becoming more prominent, as entities like The Energy Report are discussing the topic in depth. The conversations are still ranging from introductory to deeply analytical, depending on the sophistication and knowledge of the investor you're talking with.

TER: Are you seeing a change in the type of investor being drawn to MLPs?

QK: For 15 years, the firm has been managing MLP portfolios for taxable high net-worth investors and, more recently, for institutions. Over the last five or six years, we've really seen an evolution in the MLP space with the advent of the closed-end funds that were launched in 2004 and 2005. Those funds initially brought institutions into the asset class. Interest in MLPs has continued to grow, and we've seen significant funds raised this year in closed-end funds. We've seen several other MLP vehicles, as well. Periodically, we've seen hedge fund interest. We've seen name-brand mutual fund interest, and that is growing, but it's been a small piece of the overall pie.

Retail investors still make up about 70% of the space; but, with the attractive yields of MLPs relative to everything else, we're seeing a lot more institutional interest. We're moving in that direction. It's part of the evolution of every asset class.

TER: What are some other noteworthy trends over those 15 years?

QK: The MLP asset class today is not what it was 10–15 years ago. Back in the late 1990s, there was only a handful of MLPs to choose from. They were all generally very conservative energy infrastructure MLPs handling oil-refined products, natural gas, natural gas liquids (NGLs) and propane. And there was a broader group of MLPs that was phasing out of the MLP structure as they reacted to regulatory changes.

In the last decade, we've seen MLPs really deliver total returns based on fundamental growth by acquisitions or by constructing new assets. But we've also seen an expansion of the risk spectrum inside the MLP space as new subsectors have been added. For example the oil- and gas-producing MLPs, which have significant commodity price risk. The asset class has grown not just in number, but also in terms of potential risk and opportunities. Today more than ever, an investor needs some sort of professional advice when investing in the space.

TER: We've talked about where MLPs have been and where they are now. Where is asset class headed?

QK: I think we're at the beginning of the institutionalization of the MLP asset class. MLPs are a smaller asset class, about a $190 billion market capitalization. The liquidity is improving; the reporting has been improving for years. Governance has been improving, too. But more importantly, we're getting to the point where there is enough scale for an institutional investor to invest. That was not true even five years ago.

If you look at the way Real Estate Investment Trusts (REITs) evolved, they provided a tax advantage structure that made it logical to capitalize real estate in that form. I think that's true of MLPs today. But, today, you're seeing new assets being formed in the MLP structure. You're seeing MLPs being the buyer of choice in certain parts of the energy world. You're seeing MLPs being the builder of choice for most of the pipelines in the U.S. Combine this stable cash flow growth with high yield and lower correlation and you have an asset class institutional investors should find attractive.

As MLPs grow and take advantage of those opportunities, the liquidity will increase. And the opportunities for investors will increase. I think we're at the early stages of the maturing of this asset class.

TER: You mean they're acting like more typical equities.

QK: Clearly. They have some fundamental characteristics that make them look a lot different from the broader market; but, in times of stress (like we saw in the fourth quarter of 2008), MLPs correlated very highly with the broader equity markets. Over the long term, because of the tax structure and the stable underlying cash flow of the majority of MLPs, they tend to break away from the herd and demonstrate lower correlation over longer periods of time. I don't think that's going to change. But they are a traded equity, and they're susceptible to the things all traded equities are susceptible to.

TER: MLPs have typically been regarded as low-beta investments or investments that are not subject to massive price swings. However, in July and August, we saw price swings of greater than 1% on 9 days, and 2 days exceeding 2%. And the Alerian MLP Index (NYSE:AMZ) fell by 5% over 4 days' trading in early August. What's happening?

QK: If you look at MLPs at the end of last quarter, I think the projected beta vs. the S&P and the measured data were both about 0.75, so they are generally lower beta than the S&P 500 for some of the reasons I already mentioned. I think it would be misleading to suggest that something evolutionary is happening. The reality is that you don't have nearly 20% annualized returns over a 15-year period if you don't have significant price moves. Though substantially driven by yields and growth in those yields, those gains are also largely driven by price moves. Although the MLP market of yesteryear was, perhaps, more stable and more yield-driven, we have had significant volatility in the last decade over shorter periods.

If you look back over the last 15 years of MLPs, there have been five cycles of bull and bear markets. In many cases, the bear market starts with too much new equity being sold into the market. In the fourth quarter of 2005 you saw an excess of IPOs. In 2007 and 2008, you had levered hedge funds indiscriminately selling. At the beginning of August this year, over a very tight time span, the asset class saw an IPO and a significant number of secondary offerings come to the market. The market didn't have time to digest them, and you saw supply overwhelm natural demand for a short period of time. But, generally speaking, I think the volatility mirroring that of equities is not new to the MLP asset class and is probably what we should expect going forward.

TER: I think it's interesting that, as MLPs are run more like typical companies, their performance in the market is starting to mirror that. Last week, the Fiduciary & Claymore MLP Opportunity Fund (NYSE:FMO), a closed-end fund, conducted a public offering of 4.25 million shares. These closed-end funds are quietly known as "roach motels" because you can check your capital in but you can't easily check it out. Tell us about the upside of being in these funds.

QK: We sub-advise for two MLP-focused closed-end funds, FMO and the MLP Strategic Equity Fund Inc. (NYSE:MTP). Both of those funds are broader MLP-focused closed-end fund products. Calling these funds "roach motels" is a misnomer and, frankly, an injustice to those investors who have taken advantage of the MLP asset class through these vehicles. This isn't someone who, typically, is allocating $5M to the MLP space. It's someone who's buying as little as 1 share and as many as 100,000. They want to do it without incurring additional accounting and tax paperwork. They're trading complexity for the simplicity of buying MLPs through a closed-end fund. There's a fee associated with that structure, but it meets investors' needs.

MLPs span a wide spectrum of capitalization from $20 billion market caps down to $100 million. They can trade from many millions of dollars in units a day to very few thousand dollars. A closed-end fund is, generally, more liquid than many MLPs and less liquid than others. The reality is an investor's ability to get cash out of a closed-end fund is no different than buying any share of any stock whether it is AT&T Inc. (NYSE:T), Kinder Morgan Energy Partners, L.P. (NYSE:KMP) or Exterran Holdings Inc. (NYSE:EXH), a smaller MLP. Liquidity should be a consideration for all investors, whatever they're buying.

TER: So what are some closed-end fund advantages?

QK: If you think about the closed-end fund universe, there are maybe nine dedicated closed-end MLP funds that are nearly 100% invested in a portfolio of MLPs. I would say there are four advantages of being in closed-end funds:
Access to liquidity in the broader market on a scale that institutional size creates. Whether that's buying blocks of units as they trade on the open market or getting allocations following IPO offerings, it's access that an individual investor would not have.
Closed-end funds are all professionally managed by some of the leading investors in the MLP space. That allocates some of your risk in terms of stock selection toward professional management.
You own a single security that is a closed-end fund share but you're getting exposure to 20–50 MLPs. To do that as an individual would get you 20–50 K1s and multiple state tax filing issues (closed-end fund unit holders receive one 1099 for each fund in which they hold units). That's a headache that a lot of investors don't want, especially in tax-exempt settings.
Many of these closed-end funds have historically bought restricted shares or units of MLPs that are issued at a discount-to-market price. And because the pools of capital are dedicated to the MLP space, they can take a less liquid security and be good holders of it over a longer period of time. For example, if you were a typical retail investor, you wouldn't be able to participate in a private placement buying Plains All American Pipeline, L.P. (NYSE:PAA) at a 3% discount to the market price.
TER: Over the last 10 years, what's been the average YOY return on your MLP investment strategy?

QK: Since its inception, the Alerian Index has returned approximately 16% annually. Over that same timeframe, our MLP composite has annualized returns of 18% gross of fees. I think it's important to put what happened over that time period and what's going to happen over the next 10–15 years in perspective. We, as a firm, don't believe MLPs will earn 20% a year into infinity. Our view is that we've had a significant spree of necessary infrastructure investment in this country, and MLPs have benefited very much from that. But over those 10–15 years, we've effectively been in a long-term falling interest rate environment. As a yielding security, MLPs benefited from that. Going forward, we expect interest rates are going to turn around and start rising; it's probably going to be next year or later depending on what the economy does. That is going to have an impact on all yielding securities. Our view is that MLP returns will have a yield of around 7%, plus long-term distribution growth of 4%–6%. That means a low double-digit return, which we think is attractive in any market but not as attractive as MLP returns over the last 10 years.

TER: What are some of your favorite MLP names poised for growth?

QK: As I mentioned, there's a broader suite of MLPs available for investment. I thought it would be interesting to talk about three very different MLPs.

Regency Energy Partners, L.P. (NASDAQ:RGNC) is probably more widely held and followed than the others. Regency has gone through several transformations; it was originally launched with a general partner (GP) that was owned by a private equity firm. Most of the transformations have centered on where the GP was going to take Regency. Historically, it was a gathering and processing MLP with higher-than-average commodity price exposure, located in northern Louisiana and in the mid-continent region. Control of that entity later transferred to General Electric Company (NYSE:GE), which had a significant suite of investments in the infrastructure world. General Electric's ability to finance large-scale projects and its ownership of significant pipelines led people to believe Regency would become a pipeline MLP.

Consensus on the Street was that that's where it was going and it should be valued that way. We thought valuation had gotten ahead of itself. The correction we saw in 2008 kind of righted that ship and was overly punitive to the name. Meanwhile, they were building out their pipelines and marching toward an impressive suite of Haynesville Shale assets—one of the more exciting shale plays. Then GE sold its interest in the GP to Energy Transfer Partners, L.P. (NYSE:ETP), a well-respected, high growth-oriented MLP that is diversified on the gas and propane side. But ETP used a gas pipeline it owned as currency to fund the transaction. Now, Regency is a diversified natural gas MLP that has pipeline and gathering and processing exposure and some compression. Regency has a footprint that sits right over top of the Haynesville Shale. Its story illustrates how MLPs have evolved from smaller private equity or corporate-sponsored entities into larger-scale, growth-oriented entities.

TER: And the next one?

QK: Looking at the coal subsector, a name we have always been a big supporter of is Alliance Resource Partners, L.P. (NASDAQ:ARLP). There are four coal MLPs right now—two run the operations and two are royalty plays. They own the coal themselves, but they don't do the mining. Alliance does the mining. They either own the reserves or lease them. They control the operations and they, effectively, control their destiny. Because it happens to be in the hands of a very strong management team, Alliance has delivered very well on the value proposition it offers. It's been able to buy and operate successful mining operations, create new mines on previously undisturbed reserves and grow its distribution over the long term. The company's done it with a very conservative coverage ratio, which is just the difference of cash available for distribution over the amount of cash actually distributed from the partnership. The higher that coverage ratio, the more conservative the approach. With direct commodity price exposure, a coal miner or an oil and gas producer should probably have a higher coverage ratio relative to a pipeline that may have very little commodity price exposure. We think Alliance does a very good job of managing that.

More importantly, unlike every other MLP, Alliance reserves enough cash to actually fund its growth. Historically, the vast majority of its growth has been funded by the cash it reserved, as well as on the credit side of their balance sheet. Alliance is not a serial issuer of equity. As you know, sometimes issuing too much equity can be bad for the performance of the underlying MLP; so Alliance has done a couple of things that make a lot of sense to us. It's profitably managed its business, delivered growth—and done it with a very strong balance sheet and conservative approach to its distributions, which we like. It also gives them dry powder for future opportunities and future distribution increases. With several of its mines having come online last year and through to 2011, we expect them to be in a position to continue to deliver growth. The one caveat to all this is that coal is in the crosshairs of the policymakers and environmentalists. We've seen some negative impact through that in the Appalachian area where Alliance has some operations; but they tend to be more focused on the Illinois basin, which has been a little more coal friendly.

TER: You said three, what was the other one?

QK: The third one is Inergy, L.P. (NYSE:NRGY)—an MLP that, historically, was a retail propane provider. They've evolved into a diversified company that has propane as a core business, as well as some pipelines and natural gas storage. Interestingly, they've done it in an area of the country that has a lot of demand for natural gas—the Pennsylvania/New York region. But, maybe more importantly, they are in the Marcellus Shale, which is another large shale play that's very exciting for energy investors. Inergy happens to be sitting right in the middle of it and has access to the New York and New England markets.

We think that they've done a good job of evolving their model over time. One of the reasons I think it's interesting to talk about them is they're a well-run company that's delivered a lot of growth. But they're going through a restructuring whereby NRGY is acquiring the GP, Inergy Holdings, L.P. (NYSE:NRGP), and they are doing it because they believe it's a cost-to-capital advantage over the long term. It's a wait-and-see on Inergy. They have attractive core businesses with good assets and a good footprint, but their structuring issues have created some uncertainty.

TER: It's noteworthy that the bigger company acquired its GP. That seems to be something of a trend in the space.

QK: Well, it has been happening over the last two years at an increasing rate. Often, the rationale is—because of the amount of cash flow that must flow to the GP, it's incrementally more difficult to raise the distribution to the limited partner (LP), which is where the majority of the assets sit. LPs tend to say: "Let's eliminate it!" But they usually do it by buying GPs at a very high multiple. The result is that the near-term recapitalization has near-term negative implications. But the transaction is done with the longer-term view that, as growth resumes, they'll be able to pass more of the cash flow growth to the LP investor. We've seen this happen several times. I think we honestly have to take a step back and say: I understand why this makes sense, but over the long run have we really seen an incremental increase in distributions to the LPs? Time will tell. But with the uncertainty in tax policy going on in Congress, there's a lot of incentive for people to do this now—as opposed to waiting for a new tax regime in which they don't know how they'll be treated. I think there's a tax part of this that's really driving a lot of these transactions.

TER: What are some MLP names that may not have the brand equity of some of the bigger names but have significant growth catalysts?

QK: As far as existing MLPs that have done a good job of delivering growth and have some opportunities, I think you have to look into the gathering and processing space. That group has had phenomenal performance over the last year and a half but was just absolutely crushed in the selloff of 2008. These names have yet to fully recover—names like MarkWest Energy Partners, L.P. (NYSE.A:MWE), which is about a $2.5 billion market cap. They have opportunities inside the Marcellus Shale. You look at Targa Resources Partners, L.P. (NYSE:NGLS), with a little less than a $2 billion market cap, it is really well positioned in the natural gas liquids market and the logistics business. We think they have near-term opportunities, as well.

Quinn T. Kiley is the senior portfolio manager of FAMCO's Master Limited Partnerships product and is responsible for portfolio management of the firm's various energy infrastructure assets. Mr. Kiley serves a portfolio manager for the Fiduciary/Claymore MLP Opportunity Fund and the MLP and Strategic Equity Fund, Inc. Prior to joining FAMCO in 2005, Mr. Kiley served as VP of Corporate and Investment Banking at Bank of America Securities in New York. He was responsible for executing strategic advisory and financing transactions for clients in the energy and power sectors. Mr. Kiley holds a BS with Honors in Geology from Washington and Lee University, an MS in Geology from the University of Montana, a Juris Doctorate from Indiana University School of Law and an MBA from the Kelley School of Business at Indiana University. Mr. Kiley has been admitted to the New York State Bar.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Energy Transfer Partners.
3) Quinn Kiley: I personally and/or my family own shares of the following companies mentioned in this interview: Fiduciary/Claymore MLP Opportunity Fund, General Electric, Plains All American and Exterran. I personally and/or my family am paid by the following companies mentioned in this interview: Fiduciary Asset Management.

Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com



Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.

We also thought that you might like to know that on Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.




Wednesday
Sep012010

Oil’s Out - Find Out What’s In

Baseline Emissions casey 02 sep 2010.JPG


By Marin Katusa, Chief Energy Strategist, Casey’s Energy Opportunities

The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution.

June saw the 2010 launch of IEA’s biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world’s energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.

As far as the IEA is concerned, this is probably a very important moment to start looking at alternative energy sources. If we, as a collective group of consumers, continue on the business-as-usual path, the scenario for 2050 is looking grim.

This baseline scenario sees carbon emissions rising by 130%, with power generation accounting for 44% of total global emissions in 2050. Oil demand will be up by 70% – that’s five times the oil production in Saudi Arabia today. I’ll leave you to imagine what this means from an energy security perspective.

The other scenario offered by the publication, known as BLUE Map, is the “target” scenario. It assumes that all carbon emissions will be reduced by 50% by 2050 and suggests the least costly way to get there. This 50% reduction, the IEA insists, is the absolute minimum, should we want to keep climate change within the more acceptable 2-3 degree change.

The main focus of this scenario is, of course, weaning the world off fossil fuels. Carbon intensity of energy use would have fallen by 64% by 2050. Demand for coal would drop by 36%, gas by 12%, and oil demand by 4%. Renewable energy would be providing a hefty 40% of primary energy supply and 48% of the electricity generated. As for cars, 80% will be electric, hybrid, or hydrogen-fueled.

And while the world is expected to reduce emissions by 50% by 2050 in the BLUE scenario, it is the OECD that will bear the real burden. Non-OECD countries can get away with just a 50% reduction; OECD countries are looking at cutting 70-80% of their 2007 emissions. This would mean that the electricity sector for these 32 countries would have be “almost completely decarbonized” by 2050.
 



A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario

So what needs to be done to make this work? Well, gird your loins – the “top priority” will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.

But there’s also some exciting news. The revolution is already under way.

On a global scale, total investment into technology and its deployment between now and 2050 would be about US$45 trillion – 1.1% of average annual global GDP over the period. The good news is, that investment has already begun all around the world.

Even as China grudgingly accepts the mantle of the biggest energy consumer, investment dollars are being poured into renewable energy research. China has already surpassed the United States as the largest producer of clean energy, whether it be hydro, wind, solar, or nuclear.

Germany, Europe’s powerhouse, is lining up renewable energy to compete with nuclear. Currently getting 10% of its energy from renewable energy, Germany’s renewable numbers for 2020 are projected at 38.6% electricity, 15.5% heating and cooling, and 13.2% of the transport sector.

And in the United States, the Obama Administration has been pushing for, and encouraging, clean energy research and development since it came into power. On display are a variety of subsidies and loans guaranteed to tempt even the most conservative producer.
Whether it’s the 30% cash up-front that the government is willing to give renewable energy projects or the vast amounts of cash injections into various energy technologies programs, renewable energy is set to take off in America.

For those investment portfolios that have taken a hit from the BP and Enbridge oil disasters, the IEA report is only going to spur up greater interest in the renewables game. Knowing which companies are enjoying political favor from Washington to Berlin and are at the receiving end of substantial grants is a sure-fire way to repair the damage.
---

Find out which renewable energy company – poised to take a moon shot – is Marin’s personal favorite right now. Read more here.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.

We also thought that you might like to know that on Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.




Tuesday
Aug312010

Peasgood Preaches Patience on Geothermals

Before we dive into todays post we thought that you might like to know that on Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time. All the best, Bob.


Source: Brian Sylvester of The Energy Report 8/31/10
http://www.theenergyreport.com/cs/user/print/na/7241

Wellington West Analyst Sean Peasgood covers the geothermal, plasma gasification and "Smart Grid" subsectors of the alternative energy (AE) market. He believes there's room to make some dough in each of them but believes investors may need to be patient as these growing markets gain traction. "As these (geothermal) projects come online and are proven out, the reward to investors is going to be large," Sean says. He even reveals some names to help you earn your reward in this exclusive interview with The Energy Report.

The Energy Report: Sean, can you tell us a little about yourself and your coverage area at Wellington West?

Sean Peasgood: I've been covering the technology and clean-technology sectors with Wellington West now for about 10 months. Before this, I was with a bank-owned dealer for about four years covering the technology sectors as an associate analyst. I now cover the alternative energy space, focusing on geothermal, plasma gasification and the Smart Grid markets.

TER: Could you give us an overview of those alternative energy subsectors and their respective outlooks?

SP: Let's start with geothermal. While the stocks in this sector have been relatively weak over the last few quarters, we have a positive long-term view on the space. It takes significant capital and time for these projects to come online. I believe that early stage investors will benefit as projects generate significant free cash flow in the future. Eventually, they will look more like utilities and less like exploration companies. Investors who get in today will benefit from capital gains in the short term as projects come online and then from dividend-yielding equities in the future.

Given the baseload nature of geothermal, we believe utilities are more interested in signing attractive power purchase agreements (PPAs) than relying on more intermittent sources of renewable power, such as wind and solar.

We also cover the Smart Grid market, which is essentially the deployment of Internet protocol (IP)-based communication networks across the existing power grid. The goal is to increase efficiency, enhance control and provide visibility across the grid for utilities. The lack of infrastructure and maintenance upgrades over the last several decades, along with increasing demand for power, have reduced the reliability and quality of power not only in the U.S. but around the world. This problem is only being exacerbated as the world looks to add renewable energy sources to the grid. While some of these upgrades have already begun, we believe this deployment will take place over the next 5–10 years. This should translate into strong revenue and earnings growth for a variety of IP communications-infrastructure companies both wireless and wired.

Finally, as I stated, we cover the plasma-gasification market, which is an emerging alternative technology being used in waste-to-energy projects, as well as producing cellulosic ethanol. Plasma gasification reduces emissions and produces a synthetic gas that can be used to generate power. In cellulosic ethanol production, this synthetic gas is fermented and converted to ethanol. There are a number of projects getting underway in North America, and we're seeing interest for this technology in India and China, as well.

TER: Given the speculative nature of these alternative energy plays, what type of investor should be looking at this sector?

SP: I think investors should look to balance their traditional energy exposure by adding newer alternative energy companies to their portfolios. In many cases, these new technologies are just emerging; so, while they have more risk than more traditional energy plays, when they begin to gain traction, investors could be handsomely rewarded. That said, there are ways investors can reduce this risk exposure. For example, investing in early stage geothermal companies is, obviously, more risky than investing in some of the larger players that have a portfolio of projects and stronger balance sheets. We believe risk-averse investors should look to the larger players in the market to gain exposure to these growing markets.

Investors in the geothermal market need to have a multiyear time horizon, as development can take several years. As these companies bring projects online, I expect the share prices to continue to increase as a reflection of lower exploration and development risk. Then, as they start generating stable free cash flow, they will trade more like utilities and, eventually, provide dividends.

TER: What's the timeframe on that?

SP: Generally, projects take about three to four years to develop. Depending on who you're looking at in the space, most companies that we cover—I'm talking about Magma Energy Corp. (TSX:MXY) and Ram Power Corp. (TSX:RPG)—have a portfolio of projects that will come online over the next few years, leading to a steady increase in megawatts (MW) online. Ram, in particular, has a 32 MW project in Nicaragua that will come online in the second quarter of 2011, which will immediately provide them with an increase in their top and bottom lines. Two quarters later, they're going to bring an additional 32 MWs online, meaning the company will be generating 72 MWs in total by the end of 2011.

Companies have been developing things in sequence. So you're going to see multiple projects coming online every year, which will be positive for the stocks and help fund future growth.

TER: In looking at your research, some of the price targets in your recent reports are a bit more aggressive; but some targets you set earlier this year were rather conservative. For example, in a report on RuggedCom Inc. (TSX:RCM) dated May 28, 2010, your target price was a mere 21% above the existing price. Using that as an example, are your conservative targets more indicative of your approach or sector weakness?

SP: Generally, I try to weigh the growth opportunities with the risk factors and be as fair as possible. As far as RuggedCom is concerned, I've become more aggressive on it lately given the recent slide in the stock, the company's leading market position and the significant growth opportunity in the market. They are actually benefiting from not only Smart Grid opportunities but also from other industrial ethernet markets like transportation and infrastructure.

For the geothermal space, while we are bullish long term, investors need to understand the risks involved in these projects. There's financing risk, which has recently been improving, and political risk, as government grants can enhance the value of projects and some of the projects are in foreign jurisdictions. As projects advance and get de-risked, then I will become less conservative. But I think at this point, it's fair to provide investors with the full set of risks and that's reflected in my forecasts and price targets.

TER: You've mentioned Smart Grid a few times. Everyone has heard of the grid, but what's a Smart Grid? And why should investors look specifically at this alternative energy subsector?

SP: Essentially, the Smart Grid is the deployment of a communications backbone over the existing power grid—all the way from power generation out through transmission and distribution, and then into the home. Most of the infrastructure out there really hasn't changed in 100 years. What we have now is significantly higher demand for electricity across a decaying grid infrastructure that is becoming less reliable and efficient. The idea of the Smart Grid is to deploy a communications backbone, so utilities have full visibility across that grid.

Over the last few years, there's been a real focus on putting smart meters in homes. Smart meters provide the user with visibility and the ability to switch their habits to use more power at off-peak times and also provide the utility with information about electricity demand patterns. For example, with a smart meter, the utility can charge a little bit more for running your dishwasher during peak times and try to encourage you to run that dishwasher at night. That's the first phase.

But we believe the next phase is the more important part of the Smart Grid, where communication infrastructure is being placed in substations across the grid, so utilities have even greater visibility and control. Right now, if power goes down, the utility has no visibility and must wait until customers contact them to let them know. The Smart Grid provides the opportunity to put a communications network in place, so utilities know if they've just lost a whole block and immediately take action. This should reduce power outages, which negatively impact GDP and are becoming more frequent.

This is where RuggedCom has been focused for about seven years—putting routers and switches and IP-communications equipment into substations. Currently, in most substations, there is no infrastructure to alert utilities, which can result in a fault in the substation. But with this equipment, all of those things can be monitored in real time; and the equipment will make the appropriate adjustments with very little need for human intervention. This full communications backbone is the real solution to providing utilities with the visibility to meet growing demand, increase efficiency and reduce greenhouse gas emissions.

RuggedCom has a strong management team, backed by a number of individuals from General Electric Company (NYSE:GE). I really like this stock (we have a Strong Buy rating on it and $20.50 price target), and I think it's a good way for Canadians to play the Smart Grid. Currently, there aren't many public companies in Canada that are exposed to this space like RuggedCom. The major risk for investors is the potential for lumpy quarters, which can lead to volatility in the share price. To gain a better understanding of the business, investors should look at results on a trailing four-quarter basis, which illustrates the consistency in revenue and earnings growth over the last several years.

TER: What countries are deploying this technology at a rapid rate?

SP: There's been a lot of attention on smart meters in North America and Europe. Substation automation is happening globally; however, the upgrade process has been one or two substations at a time, rather than the mass smart-meter deployments we have seen to date. When utilities upgrade a substation, they'll upgrade all the communications equipment inside at the same time. Given utilities' risk aversion and new technology, the sales cycle for these products can be 12–18 months. To put this in context, last year the market for substation automation-communications infrastructure was roughly $150 million. If you just look at all of the substations in the world and assume that 20% of those have been upgraded, which is probably a conservative view, to upgrade the rest of the substations would be about a $4 billion opportunity.

TER: That's not an overly huge market though.

SP: That's just the substations—just one piece of the overall Smart Grid opportunity. It shows you where the market could go. I mean it's very, very small right now as utilities are really only upgrading a few substations at a time. Could it multiply significantly over time? We believe it will, but it's really going to be about how quickly these utilities adopt this technology across their footprint.

TER: You mentioned Asia earlier. In other sectors like mining, China has changed the way businesses operate. Last year, according to an alternative energy report that came out earlier this week, $34 billion was spent on solar and wind projects in China. What sort of impact is China having on the AE sector?

SP: As one of the world's fastest-growing economies, China is going to be an important part of this market for many years to come. Right now, about 90% of China's energy is from nonrenewable sources. The Chinese government wants to get that to 18% by 2020. Electricity demand there is growing significantly, so you know this is going to require significant investment. We're already starting to see that in wind and solar. We believe all of the markets we have spoken about so far should benefit from that region.

TER: What are some companies other than RuggedCom that have significant exposure to China?

SP: One would be Alter NRG Corp. (TSX:NRG; OTCQX:ANRGF), which is in the plasma-gasification market. The company just signed an agreement with Wuhan Kaidi Holding Investment Co. to develop a number of waste energy plants in China. They're going to start with a small demo plant, which is expected to be online in mid-2011. Then they're going to look to develop up to 50 additional plants in the future. Alter NRG is also in discussions with other parties in the region that want to take advantage of the waste-energy market. Currently, most waste sites are still using landfills and incinerators. These Chinese engineering companies are looking to use plasma-gasification technology to eliminate waste and generate electricity.

TER: How does that work?

SP: Plasma gasification is a thermal/chemical process that converts low-value, carbon-based feedstock into a synthetic gas (syngas), which in turn, can be used as a fuel or combusted to generate steam or electricity. Alter's plasma-gasification technology has been recognized for being very flexible, enabling it to handle a variety of feedstocks. This is important as some competitors' gasifiers require the feedstock to be treated or prepared prior to gasification, which can increase project costs.

TER: That technology sounds interesting. Did they develop it?

SP: They bought Westinghouse Plasma Corp. (NYSE:WEST) gasification technology in 2007 for US$29 million. Alter is working with a number of large players to bring projects online over the next several years. For example, Coskata Inc. is developing a large cellulosic ethanol facility that is trialing Alter's technology in their pilot facility. Alter is also working with NRG Energy, Inc. (NYSE:NRG) to retrofit coal-fired plants to use gasification and reduce emissions. While all these projects are still in the early stages, they offer large opportunities. Any one of those, if they come in, would take this company from $1M–$3M/quarter to between $30M and $90M for just one of these projects. I think it's just a matter of time before the company gets one of these large projects across the finish line, which would help prove to investors the large market opportunity for this technology.

TER: What's your target price for Alter?

SP: Given the projects are still largely in the trial phase, we have a Speculative Buy rating on the stock and a price target price of $2.50.

TER: Another statistic in that same report was that investments in geothermal power fell from $2.2 billion in 2008 to $1.5B in 2009. What accounts for that drop, and how should investors interpret that 31% decrease?

SP: I will start by saying we continue to see strong demand and development both here in North America, and all around the world in the geothermal market. There's a lot of development going on in Africa, Indonesia, the Philippines and Australia, to name a few. We continue to see new projects being explored with companies and governments promoting the development of geothermal projects.

I think the drop in 2009 was largely due to the tightening of the credit markets following the credit crisis. These projects need significant amounts of debt financing to get across the finish line. Before the credit market seized up, geothermal companies needed to have 50%–60% of the resource proven out before getting construction financing. This increased to 100% in the height of the crisis. Good news for investors and the market, in general, is that we are beginning to see the credit markets loosen up. On Ram Power's recent conference call, management indicated that one developer in California was able to get debt financing after only having 60% of the resource proven out and the terms on the paper were more attractive by 200 basis points. It's nice to see that those markets are starting to open up, because geothermal is so capital intensive that this was a barrier to development. As long as the credit markets continue to behave, then I would expect those investment numbers to reverse.

TER: What companies are you following in geothermal?

SP: We cover four companies in the space. The two large ones that we cover, Ram Power and Magma, probably get a little more attention given the larger project portfolios and strong balance sheets. The Ram Power management team has significant experience in the space and has a number of people working for them who were formerly with Ormat Technologies Inc. (NYSE:ORA). The Ram team has numerous projects that they're developing right now, which, as I said, are slated to come online in 2011. They also have a number of properties in the U.S. that they're developing and recently announced that they were going to acquire Sierra Geothermal Power Corp. (TSX.V:SRA) to add to those properties, some of which are adjacent to their Clayton Valley project.

TER: What's the status of that takeover?

SP: Management indicated that they expect the transaction to be completed in the third quarter. They also said they would come back to the market with specific details as to how capital expenditure requirements may change, and how quickly some of those projects at Sierra may advance. It's a nice acquisition for both companies because Sierra was having trouble raising the funds needed to continue development, and Ram has a much stronger balance sheet and the ability to access capital markets to develop those projects. I think the combination of the two is going to be positive.

TER: What are Ram's catalysts for growth?

SP: I think the catalyst is that Ram has done exactly what they said they were going to do. Their projects are all advancing on time and on budget. The share price has been weak recently, but really the whole sector has shown some weakness.

My view is that, as we get closer to the Nicaraguan project coming online in 2011, investors will be able to better understand the cash flow from these projects. While it's capital intensive upfront, investors who get in early are going to benefit as these projects come online. But, from an investor's perspective, getting in front of that, and then having the second project come online later that year, are two big catalysts for the company.

TER: But these geothermal projects in development are in Nicaragua. Do you consider Nicaragua a safe jurisdiction?

SP: Well, obviously, there's some political risk; but, from what I understand, the government is very supportive of the development and the country needs access to reliable power. Ram has a PPA in place and management has been operating in the region for some time. I don't see this as a major risk, but investors should always stay tuned into political issues where these geothermal projects are located (as things can change over time).

TER: What's your target on Ram?

SP: We rate Ram Power a Buy with a $4.50 price target.

TER: What are some other geothermal companies you're following?

SP: I also cover Magma Energy, which is similar to Ram in that it has a strong management team, healthy balance sheet and is also helping to consolidate the industry. Right now, the focus at Magma is what's going on in Iceland. They had a 46% stake in HS Orka—an Icelandic company that generates about 175 MWs annually. They recently made a bid to increase their stake to 98%. However, over the last few months the Icelandic government, spurred on by some high-profile people in Iceland, has become more concerned with foreign investment. They are now reviewing that acquisition by Magma. There has been some uncertainty in the stock over the last month or so given these developments. The company has stated it's going to move forward with that acquisition and recently announced they had closed an additional tranche, taking them to 84%. We continue to believe this transaction will be successful; however, investors do need to weigh this political risk.

TER: You mentioned Magma's management. That company is headed by Ross Beaty, who made a name for himself in mining and, more specifically, as chairman of Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS). Could you comment on Magma's management?

SP: Obviously, Ross is very well respected and has done a great job of creating value for investors in the mining space. I think investors expect that to continue in the geothermal space. Coming from the mining industry, the company is familiar with exploration activity, working in different regions of the world and working with different governments. I think those are all synergies as far as moving from mining into geothermal.

Ross has done well to attract talent from across the industry and now has a strong management team behind him, as well. And that's another aspect of this Iceland acquisition—he is adding significant human capital that he'll be able to leverage across other projects they are developing. The stock has been weak, but I think it offers investors an opportunity to get into a company with proven management, a very attractive basket of assets and a strong balance sheet that should allow them to develop those assets. If this Iceland ordeal can blow over, we believe the stock should recover nicely. We rate Magma a Buy and have a $2.40 price target.

TER: Do you have some final thoughts on the sector?

SP: Investors in the geothermal space are going to have to be patient while projects come online. That said, the rewards for early stage investors are likely to be higher than for those who wait until the companies are spitting out strong cash flow. At this point, a new set of income-seeking investors will likely look to take advantage of utility-like stocks that will generate stable free cash flow and are likely to produce dividends.

The other question is: Will large utilities step in and potentially buy these companies in order to meet their renewable targets? We believe that utilities are unlikely to take on exploration risk today; however, as projects come online, we believe these companies could be strong acquisition targets.

Sean Peasgood is an equity analyst at Wellington West Capital Markets, covering the clean-technology sector. Before joining Wellington West, Peasgood worked in the equity research department of a bank-owned dealer covering the technology space as an associate analyst for four years. Sean has a HS.Bc. from McMaster University and an MBA from Saint Mary's.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Ram Power.
3) Sean Peasgood: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies mentioned in this interview: None.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.




Thursday
Aug262010

Vikas Ranjan: Look for Sustainable Models in Cleantech



Source: Brian Sylvester of The Energy Report  8/26/10
http://www.theenergyreport.com/cs/user/print/na/7209

"Ubika" is an ancient Sanskrit word meaning growth. Ubika Research Cofounder and Managing Director Vikas Ranjan knows investors covet growth, so Ubika covers companies in sectors with tremendous growth potential. In this exclusive interview with The Energy Report, Vikas offers some strategies on how to play the cleantech sector and discusses in detail several clean-technology companies ready to flourish.

The Energy Report: Today, The Energy Report talks cleantech with Vikas Ranjan of Toronto-based Ubika Research. What does it mean to be a cleantech company?

Vikas Ranjan: Cleantech is the development of the whole range of technology that will enable humankind to basically conduct life in ways that are more eco-friendly and sustainable. It's a fairly broad term. For example, alternative-energy generation companies (i.e., wind, solar and geothermal companies) all fall into the cleantech category.

TER: Are you noticing any trends in that market segment?

VR: Yes, absolutely. A couple of years ago when you talked about cleantech, the discussion mostly centered on alternative energy with a focus on wind, solar and, to a certain extent, geothermal companies. But in the last three years or so, there's been an acknowledgment that cleantech is much more than renewable power generation. This move toward a broader classification is a really big change.

Another big change would be the growth of a whole set of companies that focus on very basic problems, for example, methods of providing clean drinking water to the vast majority of the global population, and more efficient technologies for waste management, especially in developing countries.

We are seeing a growing acceptance of clean technologies in these areas, and you can see increased participation among the governments, especially in the developed world. Governments are actively supporting this sector through various programs and some subsidies.

TER: The sector includes quite a few companies now. Is there an index that measures the performance of the cleantech sector?

VR: That's a good question. Determining what is considered a cleantech company is difficult, and I believe that makes it harder to construct an index. However, the Toronto Stock Exchange (TSX) recently launched a cleantech index. The TSX claims there are about 125 clean technology–focused companies listed on the Toronto Stock Exchange and the TSX Venture Exchange, and it selected 21 of those companies for its index.

Another broader cleantech index is the Cleantech Index (NYSE.A:CTIUS), which was launched by the Cleantech Group and the AMEX. It has 77 companies. Deustche Bank and NASDAQ OMX also recently launched an index that consists of 119 companies from around the globe.

We believe many more indexes will be launched as this sector gains attention from a range of investors.

TER: There's risk associated with investing in all companies, but when it comes to cleantech, the risk is significantly higher because these companies often do not have proven business models. Why should investors risk it?

VR: This is an excellent question and a question every investor should ask. To start, I would suggest investors think of the cleantech sector from purely an investment standpoint, excluding the ethical side, which certainly has a positive bearing from an investment point of view. From purely an investment perspective, an investor should think of cleantech as an emerging area that will inevitably go through many changes.

If you want a decent return on your portfolio, one of the things that you should do is look for emerging growth industries. There is no question that cleantech is an emerging growth industry. If you believe that premise, then it makes sense to have some exposure to cleantech. The extent of exposure will depend on each individual investor's personal situation and investment preference.

TER: Looking historically at other sectors, can you compare where the cleantech sector is at?

VR: You will remember the dot.com industry, which saw rapid growth and attracted many early-stage companies in the 1990s, but also witnessed a rapid transformation that left only a few companies with sustainable business models as winners.

We believe that cleantech will go through a similar process, and over time you will see only a select few come out on top. If we have to pick winners, we will bet on those areas that are focused on solving problems that affect the masses, not only in wealthy countries, but also in emerging and developing countries.

A quick example is the battery industry, which is a cleantech sector that attracts lots of investment. There are lots of companies producing batteries for electric cars, which is supposedly a huge growth area for cleantech companies. If you look closely, however, I would say that the jury is still out about the size of the end market. Electric cars are priced pretty high. Even the GM Volt, which will be available in 2011, will have an MRSP of $41,000, high by pricing standards for a compact car. All of these vehicles are supported by heavy government subsidies and incentives. If that market doesn't take off, what do you think will happen to the cleantech companies focused on manufacturing these electric batteries? It won't be good.

That is something investors should keep in mind. What seems "hot" today may or may not be very much in focus a couple of years down the road; whereas, if you look at areas that are focused on solving issues like water contamination or excess waste, they have more sustainability. Even companies focused on Smart Grid technology, which allows new sources of renewable energy to be supplied to mainstream power systems that distribute electricity, are good prospects. Companies with effective and commercially viable technologies in these areas will have a sustainable and large market to cater to. Those are, in our opinion, areas that will probably do well and will be sustainable in the long term.

TER: What percentage of an investor's portfolio should be in cleantech?

VR: Considering all the novelty related to the sector and a lot of unknowns, I would not recommend that investors should put more than 10%–15% of their stock portfolio in cleantech companies. But that may change over time as the sector matures. The extent of exposure also depends on each investor's personal situation and investment preferences.

TER: You mentioned battery power and power storage. What are some companies that you cover that are making progress in that sector?

VR: There are various companies in that sector, but one in particular is Exide Technologies (NASDAQ:XIDE). This is a well-established company; it makes lead acid batteries and other energy storage solutions. It had $2.6 billion in revenue last year, but the market cap is below $400 million. It is considered a worldwide leader in lead acid battery technology, so it has the technology and solid engineering resources. The company had, I think, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of close to $200 million in its last fiscal year, ending March 2010, but the market cap is pretty low.

TER: Why is that?

VR: Actually, the company had a reduction in revenue margins and profits between 2009 and 2010. That probably resulted in investor disappointment, and that must have pressured the stock. We believe the company is undergoing an organizational restructuring, which will hopefully improve cash flow, head count and working capital. If you think that the reorganizing and restructuring efforts will pay off, then it could be a good value play at these levels.

TER: One of the more established sectors in cleantech is power generation. What companies are you following in that subsector?

VR: Yeah, that is probably the most well-known cleantech sector. And it kind of broadly encompasses various areas including wind, solar, ocean wave, geothermal and what not. One of the companies that we profiled recently and like is Boralex Inc. (TSX:BLX). Its core business is the development of power stations that run on renewable energy.

What we like about this company is the asset portfolio, which is very well diversified. It has footprints in three countries—the U.S., Canada and France. It is an experienced operator with expertise in wind power and other sources of renewable energy. It owns and operates 28 power stations with a combined installed capacity of more than 400 MW of power in Canada, the U.S. and France. And it recently acquired a 23% interest in a fund called the Boralex Power Income Fund (TSX:BPT.UN). It has 10 power stations under that fund with a capacity of almost 200MW in Québec and the United States.

TER: Why did Boralex buy a stake in the Boralex Power Income Fund?

VR: The fund takes an interest in renewable energy power stations. By getting a stake, Boralex now has exposure to a better diversified portfolio, which also allows the company to become the manager of 10 power stations that are owned by this fund. This is an attempt, I believe, to diversify and get assets that have longer-term contracts. That reduces the riskiness associated with their existing assets.

TER: It sounds like it might be a somewhat less risky venture than perhaps some other companies that you cover in this sector.

VR: Yes, I would say so. As I said, it is a well-established company with experience in power generation, and it continues to diversify its asset portfolio. This is a growing company but still trades at a reasonable six times cash-flow multiple. It has a very strong balance sheet and has been able to finance its projects without significantly diluting equity, which is positive for current and future shareholders. This is a good company to look at in the power generation area.

TER: What are some other power generators that you're covering?

VR: Another interesting company we like is Ocean Power Technologies Inc. (NASDAQ:OPTT). It has a proprietary technology platform that basically harnesses ocean wave resources to generate reliable, clean electricity.

TER: How does that work?

VR: Well, they have these power buoys platform systems, which are dropped into the ocean and anchored to the seabed. The rising and falling of the waves offshore causes these buoys to move freely up and down. The resulting mechanical stroking, in technical terms, is converted into power to drive an electric generator. The generated power is transmitted offshore via underwater power cables. It's a unique approach.

Harnessing ocean waves to produce electricity has some advantages over other energy sources such as wind and solar. First of all, ocean waves are abundant and near major urban centers. And this energy source could produce large amounts of power with a lot of predictability. And obviously, it opens up a scalable source of electricity generation. If a company like OPTT can commercialize it successfully, then it could be a real winner.

TER: That sounds somewhat like a big IF. What are their hurdles at this point?

VR: I would say the hurdle is mainly related to commercialization and successfully finding the right partners. We believe the company has made some good progress. The technology is now commercial and gaining acceptance. It has formed some good partnerships and has received interest from various governments. It even recently announced some contracts. It will take some time, obviously, to make inroads, but the company has strong cash on the balance sheet to further develop this technology and invest in sales and marketing. Actually, I was surprised to learn that the company has roughly $66 million in cash on the balance sheet. The cash per share is roughly $6.50, which is more than the share price of the company. It could be an interesting value play.

TER: Indeed. Are there any other power producers that you like?

VR: Another one that we're looking at closely is called Wind Works Power Corp. (OTC:WWPW). This is a play in the wind sector, and a company that I would say is relatively unknown. It is a good example of a company that has strong investment potential. The company develops wind parks for operation or for sale to wind energy producers. The business model is to assemble a land package, secure regulatory approval, do all the work related to building infrastructure and finally enter into power purchase agreements with local utilities.

TER: Are you saying they make pre-made wind farms?

VR: Absolutely. What we like about this company is the leadership. This is a new company with old leaders, in the sense that they have significant development experience and have a proven track record with a strong wind energy background.

Now, Wind Works has a strong pipeline of wind energy projects. The pipeline is 610 megawatts (MW) strong across Europe and North America. Of this total, Wind Works will own roughly 350 MW of power. The company is only listed overseas right now, and not even on the biggest stock exchange, but I believe this will change as the company formalizes these projects. Once that happens, then I think there could be a lot of potential for investors. It recently secured contracts from the province of Ontario through the Ontario Power Authority's Feed-in Tariff Program in the very first round of project evaluation. That shows that the strength of the team and its technical experience is well recognized.

TER: What other steps are they taking to de-risk their company to encourage investment?

VR: Wind Works had to raise capital and diversify its asset portfolio, which they are doing. They're actively looking to build on their current asset portfolio, and they recently acquired a 100% interest in a fully permitted wind project in Germany. That means they will be able to generate cash flow from some of these fully operational projects and use that cash flow to feed into newer projects they acquire.

As the company gains an investor profile and becomes more established, it will have access to cheaper capital, which is a key concern for the market in terms of Wind Works' ability to execute on these projects.

TER: What are some other companies you're following, Vikas?

VR: As I mentioned earlier, the areas that we like and that we think are going to be big winners are related to water treatment and waste management.

In that respect, there are some companies that we really like. One is H2O Innovation, Inc. (TSX.V:HEO), a major player in the water treatment industry in Canada. It designs, develops and produces environmentally friendly water treatment systems, especially for wastewater and industry-processed water.

It's a very promising industry, believe me. It has huge growth potential; water is a scarce resource. If you ask me, in 20 years, chances are that there will be wars fought over water—not oil. Drinking water is going to be a scarce resource, so reusing water is critical. Water treatment technologies offered by H2O Innovation have a very promising future, as more countries develop and try to conserve water.

This is one of the fastest growing small-cap companies in Canada. It had a compounded annual growth of more than 100% in each of the last three years. It has an established client base with more than 415 installations in Canada, the U.S. and all across the world. This is a good example of a company that could do very well in the future.

Other cleantech companies we like focus on improving current fossil fuel-based technologies. A good example would be Westport Innovations Inc. (TSX:WPT). This is a company that we profiled some time back, and I think Westport has more than doubled since we profiled it. This company is developing fueling technology to reduce emissions by adapting diesel engines to use compressed natural gas (CNG) or liquefied natural gas. This is a great example of a company that is addressing a real problem, which is carbon emissions, by offering solutions based on cleaner sources of energy. The energy is still fossil based, but natural gas burns much cleaner than oil or diesel—not to mention it's much cheaper.

This is a great company: rapidly rising revenue—revenue increased by 24% in the third quarter—and lots of traction in China and India through very strategic partnerships. We like this company; this is a good one.

TER: What is the catalyst for growth with Westport?

VR: The catalyst for growth is that by using Westport's technology, you can adapt current engines and convert them into something that can use natural gas, CNG for example, instead of diesel. That opens up tremendous potential markets as fleet owners can adapt their vehicles to use CNG. In our opinion, that is a great, great benefit for Westport.

In the same space, there is a company called Hy-Drive Technologies Ltd. (TSX.V:HGS; OTCPK:HYDVF), but that's a much smaller company. Hy-Drive has developed a proprietary, patented hydrogen-generating system that increases fuel economy in commercial truck engines. Its proprietary hydrogen system also reduces diesel emissions used by these commercial vehicles.

TER: Do you perhaps have one more company you would like to talk about?

VR: I would like to talk about two. Is that alright?

TER: Sure.

VR: One is Synodon Inc. (TSX.V:SYD), a company that has a proprietary, airborne remote-sensing technology to detect leakage from oil and gas pipelines. It recently got a patent in both Europe and the U.S.

This technology is excellent; it is actually something that was part of the Canadian Space Agency. More than $53 million was spent on R&D, and the market is huge. The total market demand for Synodon's services is more than $1.6 billion.

The airborne surveys have a huge advantage over the currently deployed manual inspection method, as you could imagine.

The natural gas industry currently experiences 2 million leaks a year, causing loss of nearly 2% of its product and adding to greenhouse gas emissions. Regulatory authorities impose fines for leaks up to $1 million per incident, and government mandates require frequent inspection and reporting. Synodon services bring customer benefits such as increased revenue due to increased throughput, risk mitigation of both safety problems and regulatory fines and operational efficiencies.

TER: But I can't imagine this is the first company to have developed this.

VR: No, probably it's not, but it has a different take on this platform. Like I said, the current market is covered 80% by handheld, on-surface devices. The solution offered by Synodon is airborne and significantly increases the aerial coverage and productivity, and that leads to lower costs for the customer. That is a big advantage, and I think that they can replace a good chunk of the existing market, which consists of land-based, manual inspection type devices.

TER: You said there were two.

VR: And the other one I like is AgriMarine Inc. (TSX.V:FSH), which has developed a closed-containment system for fish farming. This is another example of how cleantech is not just about renewable energy.

This is a company that has developed a system, which is now commercial, to rear fish such as salmon and trout inside a solid wall containment unit. The system is very environmentally friendly, and mitigates direct environmental impact of aquaculture such as waste buildup and fish escapes.

TER: Fish escape?

VR: Yes, most of the fish and seafood we eat nowadays comes from farms and not from the ocean. Most traditional aquaculture is currently done using net cage technology, which is not very friendly to fish or to the environment. It has lots of issues such as waste buildup, and a lot of the time fish escape from the net cages leading to a lot of water contamination, that kind of thing. AgriMarine basically builds proprietary fish tanks; these can be as big as 5,000 cubic meters for raising salmon, trout and other fish.

The market opportunities for this technology are enormous. We don't believe that there is any other company that has successfully commercialized this closed-containment technology. AgriMarine has, and now they're producing in B.C., as well as in China, which is their main focus. The first commercial cash crop is coming in this fall. It's a tremendous opportunity for this company, and for expanding this technology through various forms such as joint ventures.

TER: So, there's some cash flow coming and some prospects for growth.

VR: The company raised more than $5 million about two months ago, so they have some capital to expand these fish farms that they are building using this technology.

TER: Are they metal cages?

VR: Earlier they were using concrete to build these fish tanks. Now these tanks are built using incredibly strong shipbuilding material, consisting of a fiberglass-reinforced plastic sheath surrounding closed-cell high-density foam. One of the advantages of this technology is that it is proprietary.

TER: It's basically a better mousetrap, but it's a fish trap.

VR: Exactly, that's a good way of saying it.

TER: What about AgriMarine's prospects for growth?

VR: I think the growth will finally come to this company a bit later than we had anticipated. But, finally, it is doing the right things and getting to the right place.

TER: Do you have some parting thoughts on cleantech?

VR: Typically people think of cleantech as renewable energy plays, but we believe it is a much broader term. Investors should look for those sectors that address issues faced by mass markets, and select companies in those areas that have sustainable, long-term business models. If investors follow this approach, we believe investors could do well in this sector.

Vikas Ranjan is a management and investment professional with over 15 years' experience in diverse areas of investment management, finance, customer analytics and investment research. Vikas is a principal of Ubika Research, a specialized research and analytics company with a wide range of small-cap clients and operations in Toronto and Vancouver. Vikas' previous experience includes various management positions in companies such as TAL Global Asset Management and Bank of Montréal. Vikas has a strong knowledge of financial markets and has researched and analyzed companies in diverse industry sectors and markets. He holds a BA in Economics (Hons.), Masters in Management Studies from the University of Mumbai, India and an MBA in Finance from McGill University. Prior to cofounding Ubika, Vikas cofounded P2P Systems Inc., a company acquired by Toronto-based technology company Microforum Inc.

Ubika Research specializes in small-cap companies where market capitalization amounts to less than $500 million and offers market insights to end investors and market participants.

Ubika Research provides access to all research reports and investment ideas through www.smallcappower.com. Users can sign up to receive free daily emails on small-cap stock picks, research and investment ideas.

SmallCapPower.com (SCP) is a leading resource for small-cap investing. As an interactive website with rich investment content and dynamic functionality, SCP brings investors and financial industry professionals together to discover and communicate with small-cap companies.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: None.
3) Vikas Ranjan: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview. None.
4) Ubika Research has received fees from AgriMarine Inc. in the past to provide research coverage.
5) Synodon Inc. is a client of Small Cap Power, a division of Ubika Corp. Synodon is a featured company at www.smallcappower.com, and Ubika can receive fees and stock options for providing exposure services to Synodon.

Except for the historical information presented herein, matters discussed in this interview/document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Nothing in this interview and report constitutes an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the purchase or sale of shares in any company mentioned in this interview and report.

Ubika Research and www.smallcappower.com are both divisions of Ubika Corporation. They are not registered with any financial or securities regulatory authority and do not provide or claim to provide investment advice or recommendations to readers of this report. For making specific investment decisions, readers should seek their own advice. For full disclosure, please visit: www.smallcappower.com/disclosure.aspx.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com






Stay on your toes volatility will be the order of the day and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.



Wednesday
Aug252010

Khan Resources Incorporated: Battles On!

Khan Res Chart 25 August 2010.JPG

As charts go, they don't come much more volatile then this one of Khan Resources. The legal battle with the Russians is set to continue with many twists and turns yet to come.

Russia is moving forward with plans to expand the role of nuclear energy. But is it resorting to strong-arm tactics to secure uranium properties in neighbouring countries?

This is a short clip from BNN who spoke to Jim Doak, chairman, Khan Resources, which is suing the Russian company ARMZ for unduly influencing Mongolia into eliminating Khan's mining and exploration licenses in the country, please click here to see it. How this situation will unravel remains to be seen but we do appreciate the efforts of Mr Doak in that he is standing up to a much bigger adversary.



Scanning the air waves a little further we came across this article on Market Watch that may be of interest to you, please click here to read the article in full.



The claim has been brought by Khan and certain of its subsidiaries, and seeks damages from ARMZ and its affiliate in the total amount of CDN$300,000,000, including equitable compensation resulting from their breach of fiduciary duties as one of Khan's joint venture partners and a shareholder of Central Asian Uranium Company, LLC ("CAUC"), general damages resulting from their unlawful interference with the plaintiffs' economic relations, general damages resulting from their deliberately causing damage to Khan's and its subsidiaries' rights, business reputation and property and aggravated, exemplary and punitive damages.

The statement of claim alleges, among other things, that the harmful conduct of ARMZ and it affiliates, namely in seeking to establish a joint venture with the Government of Mongolia over the Dornod uranium region without regard to Khan's rights and interests, impugning the legitimacy of Khan's interests in Mongolia, interfering with its economic relations with MonAtom LLC (Khan's other joint venture partner in CAUC and the Mongolian state-owned entity with which Khan sought to pursue a strategic transaction), and interfering with the competing and superior take-over bid by CNNC Overseas Uranium Holding Ltd., all with the goal of eliminating Khan's interests in Mongolia, has caused Khan, its subsidiaries and its shareholders substantial damage.

Well there we have it, for disclosure purposes we still own shares in Khan Resources and will continue to do so until this court case resolves itself.


Stay on your toes volatility will be the order of the day and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.