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Tuesday
Nov302010

Adrian Day: Long on Gas, Longer on Oil

At first glance this looks like an oily article but it does get to uranium and uranium stocks a little further into the article which may be of interest to you.

Oil Demand about to take off 1 dec 2010.JPG


Source: Karen Roche and Brian Sylvester of The Energy Report  11/30/2010
http://www.theenergyreport.com/cs/user/print/na/7985

Even if the pace of China's growth slows dramatically, count on the commodities boom to continue, says Adrian Day Asset Management Chairman and CEO Adrian Day. That bodes well for oil, as China's huge population will at least double per-capita consumption of oil over the next decade—maybe even drive it up fivefold. In this Energy Report exclusive, Adrian discusses Indian and Chinese demand and why he isn't worried long term about natural gas.

The Energy Report: Adrian, you recently published Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks, your first book in 28 years. Why write a book now?

Adrian Day: I think the topic is remarkably crucial and important. Everybody understands the main drivers behind the increase in resources prices but most people, including those in the business, aren't yet fully grasping the scale of the resource shortage that I see coming. They know China's demand is going up. They know it's more difficult to get permitting and more difficult to find new deposits. But I don't think they really appreciate the extent of the problem.

TER: What is the most important thing for people to know?

AD: One of the keys is to really understand what kind of investor you are because what you buy and how you trade depends on that a lot.
Can you tolerate risk? Or, will you panic if stocks decline 50%? Rick Rule, one of my friends in the business, keeps telling us that volatility is a fact of life. How you use volatility determines whether you're successful. Make volatility your friend.
How much time are you willing to devote?
And frankly, how much money do you have to invest? If you don't have a lot of money, perhaps you want to be invested in one or two mutual funds. The more money you have, the more you can invest in different sectors and different areas.
So, the first thing is that people have to know themselves.

TER: You talk about this enormous resource shortfall. Surely, the U.S. doesn't appear to be on the brink of any boom. Why is it so big, especially considering that there was no shortage 5 or 10 years ago, when our economy was booming? Even China isn't growing at the rate it was.

AD: It doesn't matter whether the U.S. is booming or not. It doesn't matter whether Europe is booming or not. China has been driving the resource market and will continue to drive it for the next decade. That's what really matters; that's why I say it doesn't really matter if China's economic growth slows from 9.5%–5%. The demand for resources will still be very dramatic, and much higher than it is now. Just think about it. Everybody in China wants the same things we do. They want houses with electricity and running water and indoor plumbing. That takes steel and copper. If they move from a rural area into the city, at some point, they want a car. That takes aluminum and platinum, rubber for the tires and, of course, oil to run it. Obviously, cars are much more resource-intensive than bicycles and China is changing from bicycles to cars.

When countries industrialize, they tend to go through a characteristic pattern. Typically, the demand for commodities—resources—starts to grow as the GDP increases. It starts from a very low base and slowly over a period of 10–15 years, or even longer, begins to gather momentum to double that level. When the GDP reaches a certain level, the industrializing economies hit that takeoff point. Then the demand for resources starts to accelerate. It took longer for Germany and America 100 years ago, but it was over 10 years for both Korea and Japan that demand accelerated until the economy industrialized and matured, and then the demand reached a plateau. The demand doesn't decline; it reaches a plateau. The critical thing is that demand for resources increases and accelerates at that takeoff but it increases on a per-capita basis. Just to give two examples if I may.



Look at Japan and Korea at different stages—Japan starting in the '60s, Korea starting in the '80s. Per-capita consumption of oil as they started to industrialize went from a very low base of less than one barrel per person per year to two barrels, then up by another half-barrel per person per year. At that takeoff point, over a decade it shot up to 15 barrels per person. The typical oil consumption of all industrialized countries around the world varies from about 14–15 barrels per person. The U.S., of course, is an outlier as it is in many things but if you look at Denmark or Japan, Germany, Britain or Canada, if you look at a sparsely populated or a densely populated country, a green or not-so-green country, it's about 15 barrels of oil per person per year. That's what it takes to run a modern industrial society.

TER: And where is China's demand for oil now?

AD: From less than half a barrel per person 15 years ago, China now is at about 2.7 barrels per person. Already this year, it has surpassed the U.S. as the #1 consumer of oil in the world. But now, it's at that takeoff point. Suppose for a moment that China doesn't go to 15 barrels per person. Suppose it only goes to a third of the world average, which is a pretty conservative assumption. Suppose it takes longer than 10 years. That's still more than doubling China's oil consumption on a per-capita basis.

China represents 20% of the world's population. So, unless its industrialization reverses—not slows down but reverses—the demand for resources is about to accelerate.

TER: So slow acceleration brings an evolving country to a tipping point, after which the demand grows exponentially.

AD: Absolutely. And we could look at copper. . .at all of the resources. The pattern of consumption would be similar. It has much more significance than what happened in Korea or even Japan, because it's China—due to the population.

TER: How do the other BRIC countries figure into your equation?

AD: India is a long way behind. India today is about where China was 10 years ago. As China's economy reaches a mature stage—mature in terms of the consumption of commodities, which probably will be 10–15 years from now—India will be just about at that takeoff point.

TER: So, we have two tidal waves coming?

AD: Absolutely. India right behind China, and then Brazil and another country with a large population, right behind India.

TER: Why aren't the general investment markets seeing this?

AD: I think that in very long-term, dramatic trends, people always tend to be playing catch-up. You see it with individual companies with big discoveries that continue to grow. The stock price goes up, but it's still good value because investors also generally have difficulty with a big trend getting ahead of them. Their understanding of it is always lagging.

TER: What makes your book different?

AD: It's very accessible. My book is very much a primer, if you like, not aimed at experts in the field but rather for educated investors who don't really know much about resources. I think it is particularly helpful perhaps for newer investors, or investors who are new to resources, because I try to write without jargon. I try to make it understandable to ordinary, intelligent people who know a little about investing but don't necessarily know anything about resources. I don't cover every single resource out there but I cover the main resource areas in separate, short chapters. In the energy area, we cover oil and gas, of course, plus uranium, coal and geothermal primarily.

TER: You've talked a lot about quantitative easing (QE) in the U.S. in conversations, lectures and interviews. How does that factor into the trend toward higher commodities prices?

AD: There are always two major areas to consider any time you look at commodities—the supply/demand factors and the overall economic environment. Other things being equal, a declining dollar means higher commodity prices. More money being put into the system and low interest rates also mean higher prices for commodities. Well, guess what? We've got a falling dollar, more money being put into the system and low interest rates. So, we have the perfect economic environment on top of the perfect supply/demand situation.

TER: An accelerant on the flames.

AD: I have no doubt that, at some point in the next few years, we're going to see an upward, albeit temporary, correction in the dollar. I have no doubt that we're going to see a slowdown in China. When China's GDP growth drops from 9.5%–5%, 4% or 3%, everybody will think the world's ending—but that's still pretty good, positive growth. But it wouldn't surprise me if we had setbacks. Let's not forget that during the U.S. industrialization from 1870 to the start of World War I, the U.S. had a depression, a recession, strikers getting shot in the streets—all sorts of problems. Think of England's industrialization after the Napoleonic War, from 1815–1840, when Britain transformed from an agrarian to an industrial economy. Again, recession, deflation. . .all sorts of problems going on intermittently. I have no doubt that will happen in China, too; but if you take the big-picture view and don't let these setbacks scare you, you'll look back to see that they only last a short time.

TER: Right.

AD: Resources are more cyclical than most things and there are basic economic reasons for that. If you look back in history, the longest sustained periods of rising prices for commodities across the board always can be identified by a new source of demand—not a shortage. So, if you look at resources from 1870–1914, you see a long, upward move in resources. The same goes for the period from 1815–1840.

Investors must understand major market drivers and why the industrialization of China, and the growing middle class that goes with it, are so important. People in cities use more resources than people in the countryside. Middle-class people buy things that use more resources than poorer people, etc.

If we come into a slowdown, look at whether those major drivers have reversed and are no longer valid. Is this the end or just a temporary slowdown? If you agree that this is a long-term super cycle, don't let the corrections scare you.

TER: What basic strategies do you tell people to employ?

AD: The main strategic advice I give to people is to be really careful not to sell out too soon. I believe this is a multiyear bull market in resources. We'll see resources prices go much higher. I don't want to sound as if I'm waving my arms because I don't normally talk that way. Still, over 5, 10, 15 years, I think prices will go higher than we can imagine right now. Part of that will be in deflated dollars, of course; but if you buy quality companies with sound balance sheets that own resources in the ground in good jurisdictions, avoid the temptation to sell when the stock moves a little bit. You may not have the opportunity to buy back.

TER: When you say a bull market in resources, how do you define resources?

AD: I must admit I switch around a bit between the words "resources" and "commodities," but in this context I'm talking about everything from precious metals to base metals to energy—oil, gas, uranium, geothermal—as well as agriculture. I think agricultural assets will be among the best-performing assets over the next decade.

TER: What is your macro perspective on the growing demand, specifically for energy resources?

AD: Energy is a key ingredient as a country industrializes and its economy grows, and as it moves from a rural to an urban society. It needs energy for power and transportation, so the demand for energy will go up as much as the demand for any other commodity. China gets much more of its power from coal than do other countries and plans to get more from uranium than other countries.

TER: Wind or solar?

AD: Surprisingly to some, China also gets a higher percentage of its power from renewable sources than most of the green countries around the world—everything from wind to solar to biomass. And it's going to need every energy source it can get. Just to give you one way of looking at the potential—in China, one third of the people rely on traditional biomass fuels for cooking.

TER: What sort of investment opportunities in coal can you tell us about?

AD: The problem is that the "purer" coal companies, such as Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B), are not exceptionally cheap right now. Probably one of the best ways for the ordinary investor to get exposure would be through one of the large diversified resource companies like BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF), clearly not exclusively coal but a very large coal producer. It's very close to the main market in China and is expanding its coal.

TER: China and Mongolia have massive coal resources. Do they really need to expand nuclear?

AD: Absolutely. They've gone from being a net exporter of coal to a net importer. Most of their coal mines tend to be rather old, extremely dangerous. So, China's own deposits of coal are in no way a solution to China's power needs.

TER: How rapidly will China expand its nuclear energy resources?

AD: It has more than 40 power plants on the drawing board currently or in various stages of production as part of a process that will be staggered over the next seven or eight years. Some are being built already, some are in development and some are still on the drawing board. This compares with 13 currently in operation and a further 23 under construction, but as many as 120 have been proposed beyond those. This phenomenal growth will mean huge demand for uranium.

TER: China has uranium mines. Will it have to import uranium, too?

AD: Oh, absolutely. There simply isn't enough uranium that we know about in China to feed its own demand. It just signed a 20-year contract to buy uranium from Cameco Corp. (NYSE:CCJ; TSX:CCO), and it's making these deals around the world.

With nuclear energy, one component that's a little different from other sources is the plant itself. The largest part of cost from discovery through to output is the capex for building the plant. Relative to other power sources, operating costs tend to be low once you build a nuclear plant. The cost of uranium as a percentage of overall cost of that power for 20 years is extremely low; but, by the same token, a nuclear power plant cannot switch to coal or gas. So, once you've put all those billions of dollars into building a plant, it's critical to get the uranium—at almost any price. I won't say it doesn't matter how much, but it is certainly not a project killer if uranium runs up to $300/lb. The uranium price is far less important than the dependability of supplies.

TER: So, why hasn't the price of uranium gone up?

AD: Well, China's big demand increase for its nuclear plants won't really start until 2015, 2016. India and other countries haven't really started yet. At the same time, we have excess supply now. Kazakhstan, which is acting as a swing producer, has a lot of excess capacity; so it can increase its production relatively easily as the price moves up and pull back if the price goes down. That's the main reason uranium is fairly low. That said, because markets tend to look ahead and discount, I don't think we're going to have to wait until 2015 to see shortages start. In the second half of this decade, we'll see a real supply/demand imbalance. At that point, prices will go up.

TER: Is there enough uranium exploration underway to address that shortage to some extent?

AD: There's a reasonable amount of exploration. Uranium has certain attributes—both real and imagined—that differ markedly from, say, gold or copper. Few people want a uranium mine next door, so it takes a lot longer to get exploration permits. Several current deposits in the U.S. could be mined but they're still in the permitting stage.

Another issue is that exploring for an economic uranium deposit is technically more difficult. With a big open-pit copper operation, you can miss the core of the deposit by half a mile but still mine the deposit. With many uranium deposits, it's a bit like looking for a needle in a haystack—they tend to be extremely rich but very small.

TER: What are some uranium companies you like?

AD: On the exploration side, I like to minimize risk and prefer the simplest, most direct investment with the least downside. But rather than look for a pure-uranium exploration play that may or may not find an economic deposit, and may or may not get the permits even if it finds one, I prefer more broadly diversified explorers that have exposure to uranium. Altius Minerals Corporation (TSX.V:ALS) has two uranium exploration joint ventures (JVs) with other companies. So, if the uranium price goes up sufficiently you'll get the exposure.

TER: What else is Altius invested in?

AD: Gold, iron ore, nickel and uranium are the four main products. It has the large royalty in Voisey's Bay, a gold mine in production in another JV and also phosphates. Everything it does is JV, so it's low risk.

TER: Any other uranium explorers you want to talk about?

AD: I don't do much with the explorers. I look more at producers and other companies in the uranium business. In uranium, Canada's Uranium Participation Corp. (TSX:U) is a good way of buying. It's a closed-end fund, so it trades at a premium and sometimes a discount. You should avoid buying when the premium is too high. But that holds uranium, so it's a direct play on the uranium price. You don't have the exploration risk, but you don't have the upside either.

TER: How about among the uranium companies themselves?

AD: AREVA (PAR:CEI) is an explorer and producer that's JV'd with Cameco on many of its projects and is part owner of Cigar Lake. It also has other exploration projects. More importantly, in JV with other companies, it builds power plants and also is involved in depleted uranium disposal—really a one-stop shop for uranium.

TER: It's virtually integrated.

AD: That's right. The problem with AREVA is that it's owned mostly and controlled totally by the French government, so you can't be sure what's going to happen from day to day. But CEO Anne Lauvergeon is first-class, well respected around the world. It's a great company. I like AREVA.

TER: Any others?

AD: Among the smaller producers, I think Paladin Energy Ltd. (TSX:PDN; ASX:PDN) in Australia is a good company with a lot of upside potential.

TER: What intrigues you about the renewable sector?

AD: With growing consumption for energy, we're going to need to get it from every source we possibly can. I'm not a big greenie, but I don't like pollution anymore than anybody else. The more green sources we can get the better. Some of these are also renewable, which is the best of all. Solar is not renewable in the sense that you get rid of the solar panels when they run out after 10 years or so.

TER: But geothermal. . .

AD: The best of all worlds because geothermal has a very small environmental footprint. When the plant is running it doesn't disturb much of the environment. It's essentially permanent, totally renewable with no toxic byproducts. It's a small sector, though, and obviously you don't produce geothermal energy in California and ship it off to China. So, the China story doesn't come into play with geothermal except to the development of its own geothermal resources; and China's demand for energy generally will affect the economics of power everywhere.

TER: Do you follow any geothermal companies?

AD: The largest pure play is Ormat Technologies Inc. (NYSE:ORA), which isn't particularly inexpensive right now. Chevron Corporation (NYSE:CVX) is the largest U.S. geothermal company but, obviously, you don't buy Chevron just for geothermal exposure. Some juniors in the middle include Ram Power Corp. (TSX:RPG) and Magma Energy Corp. (TSX:MXY), both of which are well diversified country wise. Ram has a good balance sheet; Magma has significant capital needs in coming months. But both have access to capital, which is critical.

A lot of very small companies are capital-constrained. You don't get government grants until you've spent the money, so they're in a Catch-22. If they could only get the money to explore, they could get the government grant to pay it back; but they're too small to get access to capital. Thus, many of them have been taken over on disadvantageous terms, which I think soured people a little on the entire sector. The whole geothermal area is starting to bounce back, but it had declined dramatically over the last 18 months.

TER: So, it's a buying opportunity.

AD: I think so. They've come off the bottoms quite significantly, but I still think this is a very good time to buy them. Magma's at about $1.47—up from about $1, down from about $2.

TER: Has Magma worked out its differences with singer Bjork, who was among the Icelandic celebrities opposing its purchase of HS Orka?

AD: Very interesting story. Magma now owns essentially all of HS Orka, which is the largest geothermal source in Iceland. Ross Beaty, Magma's CEO, did offer to sell Bjork either one-fourth or one-third of the power plant if she wanted to pay him at cost, no profit. She said, no. He didn't understand; she didn't want to own it—she just didn't want him to own it. So has it been solved? Yes, the near-term situation has been solved. A government panel was set up to investigate and ruled that everything was in accordance with Iceland's rules.

TER: You said this is a near-term solution?

AD: Yes. No question, there is a fundamental issue in Iceland about foreign financiers coming into the country. It had a bad experience in the credit crisis in 2008, which left underlying sentiment against foreign financiers. There's also an underlying sentiment against foreigners taking over its key assets, energy being one. They don't have a lot in Iceland. Geothermal is just one of the things they do have.

Ross has said publicly and he keeps repeating it—he wants an Icelandic partner. And he's not only willing to sell a minority, 25%, 33%, but at his cost. He said he doesn't want to take a loss but doesn't want any profit, either. So far, no one's stepped up.

TER: An Icelandic partner makes sense.

AD: Yes, in part to defuse the political situation there. In any country, it's always good to have a local partner; and frankly, to free up some money and put it to work in Magma's Chilean and U.S. properties.

TER: Does Magma have power agreements in place for those U.S. projects yet?

AD: Not yet. Ram is a little more advanced in its U.S. projects. It has a better balance sheet and it has the power agreements, though it, too, will have to juggle to ensure it has the necessary capital for its development and exploration projects at the right time over the next few years.

TER: Plus an existing power plant in Nicaragua, that's doing something like 10 megawatts. Ram is also developing larger operations there, isn't it? How is that progressing?

AD: Things are developing well, pretty much on schedule. There are always delays in this business, but no extraordinary delay. Ram has a very broad portfolio and acquired Sierra Geothermal Power Corp. this summer, which gives it more early stage property to develop.

TER: Are there any other opportunities for geothermal investment?

AD: For those who are more aggressive and can tolerate the volatility and higher risk, some of the smaller U.S. companies are good buys. US Geothermal Inc. (NYSE.A:HTM) and Nevada Geothermal Power (TSX.V:NGP), for example, are probably the largest of the small ones. But remember, the smaller companies are also potentially nearer-term takeover targets; and when a company is taken over because it can't raise money, the sale doesn't necessarily command a good premium.

TER: Can you give us your high-level viewpoint on oil and some investment opportunities in that space?

AD: My high-level viewpoint on oil is not all that different from what I see for copper, zinc and everything else—a huge demand increase from China. It will need oil to fuel its cars, and it also uses oil in power generation, just not as great a percentage as other countries. Now, there is no meaningful substitute for oil, and certainly not for China. Yet, this huge demand increase for oil is building but we're not finding sufficient new sources of oil to replace what we use, let alone to meet greater demand.

We discovered the most oil way back in the mid-1960s when we discovered oil in the North Sea and Alaska at the same time. Those were huge fields. Looking back, this was closer to World War I than it is to today. From then to today, it's been a fairly steady decline with a few peaks and valleys. But on rolling three- or five-year basis, we are finding less new oil every year.

In the early 1980s, oil demand surpassed oil production. And annual oil consumption has exceeded that of discovery every year since, by an increasing amount. All of these big fields, including offshore Brazil, are wonderful. And many oil fields last a long time, so I won't say we're running out of oil anytime soon. But we can see an impending problem coming, because we've stopped discovering as much as we did previously and we're using more than we produce. Clearly, we're reaching the point where oil demand will greatly exceed production and the oil price has to go up.

TER: Does that mean the investment opportunity in oil is more due to the prospect of higher prices than new discoveries?

AD: Yes, I think so. The exploration and production (E&P) companies are always exploring and finding new sources, but many of those simply aren't significant in a long-term global view.

TER: If the oil price is going to go up, why not just go with big, heavily oil-focused players like BP Plc (NYSE:BP; LSE:BP), rather than look at options like the Canadian tar sands?

AD: Good question. It varies but the big global companies tend to be vertically integrated, exploring, refining and selling, and a higher oil price doesn't necessarily benefit them across all operations. Some are actually oil-price neutral. The large integrated oil companies also have an enormous replacement issue. Independents like Apache Corporation (NYSE:APA), EOG Resources (NYSE:EOG) and Devon Energy (NYSE:DVN) have nowhere near the serious replacement issue as Exxon Mobil Corp. (NYSE:XOM). For the global majors, most oil-reserve improvements come from either acquiring other companies or revising existing reserves—not new discoveries.

That can go on for only so long. I don't invest much in the big integrated companies other than short-term moves when they get oversold. If I were to pick any company, it would probably be BP because a much larger percentage of its revenue comes from E&P than refining. But even BP has a huge replacement problem.

So then, the next thing to look at would be the large impendent E&P companies. There are some very good companies in that space. Devon is one of the best—great balance sheet, less than 20% debt to capital, growing production. It recently sold all its offshore assets, including those in the Gulf of Mexico, shortly before the Deepwater Horizon disaster. It also sold a lot of other offshore assets around the world to focus on North American onshore. Devon is one I like.

We also own Chesapeake Energy Corp. (NYSE:CHK) and Encana Corporation (TSX:ECA; NYSE:ECA), which also has some oil sands, and those are very long-lived assets. They are high-cost assets, too; so as the oil price moves up, you have much greater leverage with oil sands than with traditional oil producers. The U.S. will likely continue to have much greater access, so it won't have the supply problem buying oil from Canada that it might have with Saudi Arabia, Venezuela or a host of other countries.

TER: Do you have some specific oil sands companies that you like?

AD: Canadian Oil Sands Trust (TSX:COS.UN), which is a unit trust, is one of my favorites. I also like Cenovus Energy Inc. (TSX:CVE; NYSE:CVE), which was created when Encana separated its gas assets (in Encana, now a pure gas play) and its tar sands assets (in Cenovus). Suncor Energy Inc. (TSX.V:SU; NYSE:SU) is a good company, too, but I think it's a little expensive right now.

TER: But Canadian Oil Sands looks good now?

AD: The other ones I would wait for, but at roughly $26, Canadian Oil Sands is a great long-term buy, and it's cheap relative to the rest of the sector. When we think of oil trusts, we think of something like the ARC Energy Trust (TSX:AET.UN) or something that pays a high and dependable yield. That never was the COS story, though it sports a very nice yield—over 7% currently. Still, uncertainties over the end of favorable tax treatment for unit trusts—despite that it's not an issue with Canadian Oil Sands—affects all the trusts.

TER: Would you be interested in an ETF for exposure to higher oil prices?

AD: No. GLD, the gold ETF, is a great way to play gold and Uranium Participation Corp. is a great way to directly play uranium, though the latter is a closed-end fund—not an ETF. The problem with commodity ETFs is that, by and large, they invest in futures contracts, not the commodities themselves. With some commodities, oil particularly, you have very high contangos—the difference between forward and spot prices. So, they're continually rolling over contracts at higher prices. Oil is a classic example; while the oil price is up this year, the oil ETF has actually lost money—over 11%. They're always buying high and selling low, which is not exactly the road to successful investing.

TER: Are you long on gas?

AD: We are definitely long on gas, but even longer on oil. We'll have to wait a bit for gas. Because of the new shale that's come on, we've gone from what everybody saw as a permanent gas shortage to a permanent gas glut. Many gas producers have since started shifting over to more oil; for example, EOG was exclusively gas and liquefied natural gas (LNG). Last year, it made a decision to go 50/50 oil and gas. A lot of these companies are backing off development in some of their gas fields due to the low price and the glut.

Ironically, I think a new source of gas like shale—which means a dependability of supplies—also means people will be more willing to put the capital into gas-fueled fleets of buses and so on because they know we can get the gas.

TER: Do they expect the glut to go on forever?

AD: While there's no doubt that the shales have been remarkably and unexpectedly successful, there's still an open question as to how long many of them will last. The decline rates—going from the first to subsequent years of production—have been very, very fast. . .much faster than with conventional oil. We don't really know yet how long the tail will be. There's a lot of debate in the industry about that.

TER: How would an investor play the natural gas sector?

AD: Encana is good. Some of the trusts are good, such as ARC, which are both oil and gas. For the more aggressive investor, some of the smaller Canadian oil companies that are a bit capital-constrained are good plays.

TER: Any other companies you'd like to talk about?

AD: One of my favorites in the general resource area would be Sprott Resource Corp. (TSX:SCP). If you buy Sprott, which is quite a liquid company, you're getting it at a discount to net asset value (NAV). NAV is about $5.20; the stock's been trading at about $4.35. You're also getting great management—Kevin Bambrough and company—and a great balance sheet.

Sprott has direct and indirect investments in different resource areas, buying whole companies, sponsoring companies or growing them. The four main areas it's in now are: 1) gold, primarily gold bullion; 2) oil and gas; 3) agriculture; and 4) fertilizer. When the companies reach a certain level, ideally it will spin off a certain amount of the shareholding in a public company. Sprott is extremely disciplined and has done this a few times already—with Orion Oil & Gas Corp. (TSX:OIP), for example, which started trading on the Toronto Stock Exchange almost a year ago.

Sprott also has JVs, including one in phosphates with Altius, and owns shares in Lara Exploration Ltd. (TSX.V:LRA). The agriculture play is very interesting—One Earth Farms Corp.—a JV with First Nations, which owns more than a million acres of farmland. It's going to be a big business, one of the largest commercial farms in North America. It's really quite staggering. It's still a private company, but it's selling some shares in a secondary offering, raising $40M–$80M. If it brings in the maximum, it will take Sprott's stake down to 24%. In a year or two, it'll IPO. That's what it's trying to do—take a direct investment, build up the company and IPO it.

TER: Any other comments to wrap this up?

AD: We need energy for a modern industrial society and we need lots of energy for an agrarian economy to industrialize. We need all these sources—oil and gas, coal, uranium and geothermal. We're probably going to need a few solar panels and windmills, as well.

Adrian Day, a British-born writer and money manager who graduated with honors from the London School of Economics, has made a name for himself searching out unusual investment opportunities around the world. As president and CEO of Adrian Day Asset Management, he generously shares his thoughts, opinions, insights and analyses via Barron's, Forbes, Bloomberg Markets, Kitco, Casey, The Stock Advisors, Dick Davis Digest, MSN Money, Financial Times, The Daily Reckoning, The Herald Tribune, The New York Times and, of course, The Gold Report—among others. A frequent speaker at international seminars and a regular guest on CNBC and The Wall Street Journal Radio Network, he has been interviewed by Money, Straits Times, Good Morning America and others. He also writes the quarterly Portfolio Review newsletter for clients, serves as editor of Adrian Day's Global Analyst and has authored three books on global investing: International Investment Opportunities: How and Where to Invest Overseas Successfully, Investing Without Borders and the just-published Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks, which is now available in hardcover and e-book format.

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1) Karen Roche and Brian Sylvester of The Energy Report conducted this interview. They personally and/or their families 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: Lara Exploration, Nevada Geothermal and Ram Power.
3) Adrian Day: I personally and/or my family own shares of the following companies mentioned in this interview: Altius, Magma, Sprott, Devon and Encana. In client accounts that I manage in addition to these stocks, we also own Chesapeake, Arc Energy, Canadian Oil Sands, EOG, BHP, Cameco, Ram Power, Uranium Participation Corp., SPDR Gold Trust and Areva. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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Meanwhile back at the ranch during our knockabout sessions we have toyed with the idea of running an Accumulator whereby we make a trade and then use the total proceeds for the next trade and so on. So the stake and any profits are rolled into the next move, if you would like to comment on this idea, then please click here.

Over in the options trading pit the team have updated the progress chart to include closed trades, now 53 winners and out of 55 trades, having been stopped out of a trade with a profit of 41.84% made in just 8 days. We currently have a number of open positions which we are pleased to say are all in positive territory.

sk chart 19 Nov 2010.JPG



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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
Nov292010

Uranium Resources Incorporated Up 8.81% Today

URRE Chart 30 Nov 2010.JPG


As the chart shows Uranium Resources Incorporated (URRE) has increased seven fold since August. The yawning gap between the stock price and the 200mda which is way out of kilter gives us cause for concern. However, if uranium prices keep making progress then investors will be enticed to take a position in this sector. The market capitalisation of URRE is around $320 million with 92 million shares outstanding, so it doesnt take much to push the price either way. The RSI is standing at 81.57 and rubbing up against the ceiling in terms of being overbought, along with the MACD and the STO, however, uranium prices are slowly but steadily heading north as the chart below indicates. It looks like a csae of the fundamentals ruling the day over the technical analysis, at least for now.

Uranium Chart 30 Nov 2010.JPG

Uranium Resources, Inc. explores for, develops and mines uranium. Since its incorporation in 1977, URI has produced over 7 million pounds of uranium by in-situ recovery (ISR) methods in the state of Texas, where the Company has ISR mining projects that are currently being restored at its Kingsville Dome, Rosita and Vasquez projects.

URI's intrinsic value lies in the 183,000 acres and 101.4 million pounds of in-place mineralized uranium holdings in New Mexico. The Company acquired these properties over the past 20 years along with an extensive information database. URI's strategy is to capitalize on the prospects for long-term strong global demand for uranium by fully exploiting its resource base in Texas and New Mexico, acquiring new assets and through joint ventures or partnerships.


In conclusion we are of the opinion that now is a good time to pick up a few of your favourite uranium stocks, go gently and adopt a 'layering in' approach to your acquisitions programme. Also be prepared for a lot of volatility in future, try and stick with the big picture and ignore the white noise.







We have toyed with the idea of running an Accumulator whereby we make a trade and then use the total proceeds for the next trade and so on. So the stake and any profits are rolled into the next move, if you would like to comment on this idea, then please click here.

Over in the options trading pit the team have are updating the progress chart to include closed trades, now 53 winners and out of 55 trades, having been stopped out of a trade with a profit of 41.84% made in just 8 days.

sk chart 19 Nov 2010.JPG



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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
Nov252010

Denison Mines Corporation up 17.13% Yesterday

DNN Chart 26 Nov 2010.JPG




Just a quick note for the supporters of Denison Mines Corporation (DNN) which has popped up yesterday on a heavy volume, DNN has pushed higher with a gain of 17.13% or $0.43, to close at $2.94, possibly due to the rumour that uranium has hit $60/lb. The technical indicators are positive and have room to move higher so hopefully we just might see a little more progress over the coming days.

We purchased Denison Mines back in January 2009 for $1.66 so we now have a paper profit of about 75%, so at least its a step in the right direction. We may pick up a few more on dips in the future, but we have yet to make that decision. We will of course keep you posted if we do decide to commence buying in earnest.

Denison Mines Corporation trades on the AMEX under the symbol of DNN and on the Toronto Stock Exchange as DML. (In Toronto today DML gained another 8% or so)

Market capitalization is $998.78 million, average volume ranging from 2 -6 million shares traded, 52 week high $3.09, 52 week low $1.08, closed yesterday at $2.94.


Other uranium stocks doing well yesterday are as follows:

MGA Up 11.76%
CCJ Up 5.60%
UEX Up 6.10%
UUU Up 8,65%
URE Up 2.50%

If you have your eye on a few uranium stocks now might be a good time to start a 'layering in' approach to acquiring them gently over time.

Meanwhile back at the ranch during our knockabout sessions we have toyed with the idea of running an Accumulator whereby we make a trade and then use the total proceeds for the next trade and so on. So the stake and any profits are rolled into the next move, if you would like to comment on this idea, then please click here.

Over in the options trading pit the team have are updating the progress chart to include closed trades, now 53 winners and out of 55 trades, having been stopped out of a trade with a profit of 41.84% made in just 8 days.


SK Chart 25 Nov 2010.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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.

Uranium Spot Price Chart 26 Nov 2010.JPG
Wednesday
Nov242010

Crosshair Exploration and Mining Corporation Quadrupled since July 2010

CXX Chart 25 Nov 2010.JPG



We kick off with a quick look at todays chart for Crosshair Exploration and Mining Corporation (CXX) which is another uranium stock that has done well recently and has quadrupled since July, gaining 25% today on heavy volume when 2.4 million shares changed hands. The RSI is standing at 80.72, which puts us well into the overbought zone so there might be a breather on the cards. The MACD and the STO are also up there bouncing on the ceiling which may entice chartist to take profits, however, this sector is on the move and could attract more investment over the short term.

Having purchased this uranium stock at $0.25 on 6th January 2009 with the view to participating in its recovery we are pleased to see it close at $0.45 today, to show a paper profit of around 80%.



On the news front Crosshair has closed a brokered private placement with BayFront Capital Partners Ltd. (the "Agent") to accredited investors of subscription receipts of Crosshair ("Subscription Receipts") for gross proceeds of $7 million. Upon satisfaction of the escrow release conditions set out below, the Subscription Receipts will be automatically converted (for no additional consideration) into units of Crosshair (the "Units") at an effective price of $0.70 per Unit, with each whole Unit being comprised of one post-consolidation common share of Crosshair ("Common Share") and one Common Share purchase warrant of Crosshair (a "Warrant").Each Warrant will be exercisable for one Common Share at an exercise price of $1.00 per Common Share until November 23, 2012.

To read this news release in full please click here.

Crosshair currently trades on the Toronto Stock Exchange as CXX and the NYSE Amex as CXZ.

Crosshair’s market capitalisation is $59.16 million with 131.48 million shares outstanding, the 52-week high is $0.47 and the 52-week low is $0.10 and is trading at $0.45 as we write.


During our knockabout sessions we have toyed with the idea of running an Accumulator whereby we make a trade and then use the total proceeds for the next trade and so on. So the stake and any profits are rolled into the next move, if you would like to comment on this idea, then please click here.

Over in the options trading pit the team have are updating the progress chart to include closed trades, now 52 winners and out of 54 trades, having been stopped out of a trade with a profit of 41.84% made in just 9 days.

sk chart 19 Nov 2010.JPG



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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
Nov232010

Mawson Resources Limited: Up 100% in a week

MAW Chart 24 Nov 2010.JPG


As various uranium stocks begin to 'pop' Mawson Resources Limited (MAW) joined in the move as its stock price increased 100% in a week. Taking a quick look at the chart we can see that a sudden increase in the volume accompanied the stock price hitting the roof, doubling in a week. The technical indicators suggest that this stock is extremely overbought so go gently if and when you do decide to acquire it. For disclosure purposes we do not own it, however, on a day like this we wish we did own it.

The Company is exploring at Rompas in Finland, a new discovery with BONANZA GOLD where samples up to 12,800 g/t (373 oz/ton) gold and 43.6% uranium have been identified. In addition, the Company is exploring for gold and copper in the highly prospective Cordillera of Peru, with a focus on a new high grade gold discovery at Alto Quemado.

Mawson is a leading Scandinavian uranium exploration company, with advanced projects in Sweden and Finland. As the European Union moves to reduce its reliance on carbon-based energy sources and continues to debate energy security, Mawson is well positioned to provide Europe with the option to fuel its future. Areva NC of France holds 11% of the Company and provides Mawson with an active technical partner.

With a strong cash position and a multi-jurisdiction European and South American portfolio, Mawson is ideally positioned to enhance its status as a leader in the uranium and gold industries.


In its latest news release the company announced the first channel sample results from the Company's 100% owned Rompas gold-uranium project in northern Finland.

Highlights from 39 surface channel samples include 0.3m @ 1,866 g/t Au and 8.0 % U, and 0.26m @ 1,510 g/t Au and 3.95 % U (Table 1, Figures 1 and 2). The diamond saw-cut channel samples are considered the first representative samples collected at Rompas.

Included in this batch were 10 mineralized grab samples that averaged 672 g/t Au and 2.06 % U and ranged from 0.2 g/t to 3,230 g/t Au and 14.6 ppm to >15% U. Grab samples are selective by nature and are unlikely to represent average grades on the property.

All samples reported come from Rompas South. The channels were taken over a strike distance of 75 metres and grab samples over an area of 65m by 125m (Figure 1). To date, hundreds of gold and uranium showings have been discovered at Rompas over a surface area exceeding 6.5km in strike and 200m average width. A total of 984 rock chip samples (including 111 highly radioactive samples) remain to be reported by the laboratory from the field program conducted this summer at Rompas.

These are excellent results so far and as a two pronged attack on both gold and uranium this stock is shaping up very well indeed.

Its also a favourite of Micky Fulp who discussed it on BNN earlier today, he also give Strathmore Minerals (STM) a mention too, which was up 6.6% today.




Mawson Resources Limited can be found on the Toronto Stock Exchange under the symbol of MAW, Frankfurt as MRY, and on pink sheets as MESNF


The company has a market capitalization of $97.07 million, shares outstanding: 49,747,253, Cash position is around C$14 million.



Over in the options trading pit the team have updated the progress chart to include closed trades, now 51 winners and out of 53 trades.

sk chart 19 Nov 2010.JPG



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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.

BNN Uranium spot price 24 Nov 2010.JPG
Friday
Nov192010

Neal Dingmann: The Play’s the Thing

Source: Brian Sylvester of The Energy Report 11/18/10
http://www.theenergyreport.com/pub/na/7908

Neal Dingmann.JPG

He may not be a theater critic, but SunTrust Robinson-Humphrey Analyst Neal Dingmann is amply qualified to critique the best plays in the energy sector—onshore and offshore, natural gas and oil and even his list of the top-five shale plays. His exclusive interview with The Energy Report also touches on recent and potential mergers and the power of politics.

The Energy Report: Neal, last week Chevron Corporation (NYSE:CVX) offered US$3.2 billion in cash and shares for Atlas Energy, Inc. (NASDAQ:ATLS) and agreed to assume Atlas' debt. Thus, for about US$4.2 billion Chevron gets a significant foothold in the Marcellus Shale, where most of Atlas' trillion cubic feet (tcf) of natural gas reserves are located. What messages does that deal send?

Neal Dingmann: I think there are probably two messages. First, it's pretty clear that a deal like this shows that the majors, in this case Chevron, have a long-term positive view on natural gas. Obviously, there's a lot of near-term cautiousness to outright bearishness on natural gas in the market right now. However, I don't know if you want to call it an extreme bullish view; but, clearly, Chevron is at least somewhat bullish to pay this kind of number for these assets. Secondly, I think it says that Chevron believes in the newer type of technology that will bring gas out of these shale plays. They're telling us that gas prices should be sufficient as long as the technology will work to deliver that gas.

TER: Isn't it also about companies taking the view that mergers are a better way to develop these assets than financing by diluting equity or taking out loans? For example, we've seen Exxon Mobil Corp. (NYSE:XOM) take out XTO Energy Inc. This is a similar but much smaller-scale merger.

ND: This is Chevron, along with the other large companies, telling us that in order for it to keep its recent growth profiles, it's running out of other options. Would the company rather go with some sort of domestic oil play if it could? I think absolutely. Offshore drilling is very difficult; international is becoming even more difficult. So, choices are becoming fewer and farther between.

You also have to look at the seller side of the equation. Two to three years ago, conventional wells were relatively cheap. The plays in these unconventional shale wells are still very expensive. You need good-sized capital or a bankroll to develop them. It might make sense to have economy of scale here.

TER: Did the Chevron merger catch you off guard?

ND: Not really. I think last year's Exxon/XTO deal is the one I think caught everybody off guard because gas prices were still heading down. The Chevron merger was, I believe, 10 times the size. But ever since the Exxon/XTO merger happened, I would say probably nothing is going to catch us completely off guard.

TER: In the June interview you did with Bloomberg, you said that onshore producers would outperform offshore producers for months after BP's Macondo accident. Time has passed. Is there still a performance gap?

ND: There hasn't been as much of a performance gap as expected. In the case of Energy XXI (NASDAQ:EXXI) and some other offshore stocks, the market initially hit the stocks rather hard. However, up to the moratorium being lifted, you saw a nice rebound. Then, when there was talk about issuing permits and some offshore companies actually received permits, you saw an even larger rebound.

What still makes me a bit cautious is that we haven't yet heard much from the government about the final rules and regulations about infrastructure, procurement or even about the well-liability cap. So, I'm still relatively cautious on the offshore group versus the onshore.

TER: What estimates are the regulators talking about for the liability cap?

ND: I've heard everything from a billion on up to several billion to unlimited liability. The problem with those types of numbers is that they would essentially put some of the smaller independents out of business. As someone at one small, independent public company said, 'With that kind of liability you would have to self-insure.' You're essentially putting your company at risk for each well you drill. You just couldn't afford to do that. Well-cap liability is going to be a big issue when Congress returns.

TER: Could we see some mergers on that side?

ND: I think most definitely. Having a Republican House, you might think things won't get worse. If I had to bet, I wouldn't think the well-cap liability would get too onerous. But if it did, I think it could force some acquisitions.

TER: Sticking with offshore producers, are there some you think are poised to rebound in 2011?

ND: There are a couple. Obviously, Energy XXI comes to a lot of people's minds. What makes that one interesting is its nice oil base production of around 28,000 barrels per day (bpd). It also has a pretty nice working interest—call it between 15% to 20% interest—of some McMoRan Exploration Co. (NYSE:MMR) wells, the Davy Jones and Blackbeard prospects. They are shallow water but very deep gas wells that have big potential. In addition to those big prospects, Energy XXI has some great baseline support and the kind of diversification one looks for.

Another one that's been on a run and looks interesting is W&T Offshore Inc. (NYSE:WTI). It just bought a big deepwater piece from Royal Dutch Shell Plc (NYSE:RDS.A). I believe it was for about US$450 million. Founder and CEO Tracy Krohn generally seems to develop newly acquired properties very well. The first year or so after he acquires a property, we've, historically, seen a pretty good ramp-up. This could be the case with these new properties.

TER: Looking through some of your recent research, you have quite a number of companies with buy ratings. Since the research was published, some have exceeded your targets. Let's go through some of those companies, starting with TransAtlantic Petroleum Ltd. (TSX:TNP, NYSE:TAT). It's trading at about US$3.45. You had a target of $5. What supports that?

ND: This is a company with extremely good management. It's managed by Malone Mitchell, who previously operated Riata Energy. He has several million acres in Turkey, but the real key is that he runs all his own service equipment. The company is now producing about 2,500 bpd. Next year, the potential is there to exit more than 15,000 bpd and two years later, to exit more than 25,000 bpd. TransAtlantic could see production ramp-up tenfold within a couple of years for two reasons: 1) He has the acreage to support it; and 2) He's got all the oil field services to make sure that is done correctly—that the wells are drilled properly. I like that combination.

TER: At a slightly higher price, Venoco, Inc. (NYSE:VQ) is trading at $17. Your prior price target was US$25. Why the revision?

ND: Venoco's pretty interesting. In a sense, you are really betting on its core gas position in the Sacramento Basin. It provides nice baseline cash flow because it's gas and is well hedged for the next couple of years. One would say, 'well that's not very exciting.' But the really attractive upside is Venoco's Monterey Shale play. Venoco has a couple of thousand acres there, and it's just Venoco and Occidental Petroleum Corp. (NYSE:OXY) in this play.

This Monterey Shale is a very interesting oil play on the coast of California. Estimates say there could be more than 100 million barrels in place, though the estimates could be extremely high. This play is almost like an offshore. You have a lot of upside, but you've got a lot of risk because we just don't know about the timing. The company's only going to drill four or five horizontal Monterey Shale wells this year and probably 15–20 next year; so, you're not going to see a ton of results. But as those results unfold, I think you're going to have a lot of people very excited.

TER: Northern Oil & Gas Inc. (NYSE:NOG) has already exceeded your prior target of US$20. Is there room for more, or do you have a hold on it now?

ND: I need to revisit this one, following its last conference call. In the past, I was hesitant to put a buy rating on it and I've become very positive about a non-operated strategy. But Northern has done a very good job. It kept costs down to a fraction of what the operators pay, and it has great relationships out in the Bakken. Then to cap all that off, last quarter the company's guidance was that it would ramp-up somewhere around 30%–35% on a sequential, quarterly growth basis. It actually increased by about 40%. I'm not necessarily going to automatically bump it up, but I can tell you it's sure hard to bet against these guys given their reports the last few quarters.

TER: So, you're not willing to speculate on what your revised target might be?

ND: No. I haven't had a chance to catch up with management. The part that makes me a little bit nervous is that winter is coming. Up in the Bakken, you have a little bit of an activity slowdown in the winter. But I'm still telling clients to look at the stock, and if they are going to buy to buy it on a full 2011 calendar year. Everything that I'm seeing still checks out quite positively.

TER: When you value these companies, you do a multiple of cash flow, correct?

ND: Generally, yes. For companies that are on a go-forward basis, I'll run a cash flow. With newer or brand-new companies that have little to no cash flow or don't have enough of a cash-flow history, I'll try to come up with a net asset value. I might not know how much cash flow it's going to kick off or what it might have to do behind the scenes in terms of seismic or exploration—things that are not going to boost cash flow overnight. But clearly a company's assets—that being its acreage, reserves and equipment it holds—any of that must have a value. So, a lot of times I'll look at assets.

TER: But how do you determine that multiple?

ND: I like to use a relative basis. Does Company A deserve a 20% or 30% premium to Company B if it operates in various regions? I'll break companies out by whether they are offshore or onshore. If they're onshore, where are they? Are they in Marcellus or Eagle Ford? What groups are trading at that level today? I also look from a historical basis. I think the answer is in the combination of the relative and historical. You might have a stock that deserves a premium to its peers because it's growing production 40% a year, while its peers are at 10%. But comparing it on a historical basis helps make sure it's not too far out of line regarding what's it's historically traded at.

TER: Would you be willing to rank the shale plays right now? Maybe the top-five shale plays in terms of their premiums.

ND: Clearly, you can't get any better than the Bakken. The returns are there. Everything is there. That's going to be your number-one choice. I think that with the natural gas liquids (NGLs) it has, the Eagle Ford has to be, not a close number two, but still strong nonetheless. The number three and four positions are going to be interesting because they're a little bit newer, still unfolding. I would say it would be either the Marcellus or the Niobrara. Niobrara is likely going to be much oilier and have much more liquids. But in terms of pure acreage, the pure size of the Marcellus makes it one you can't get away from. The Marcellus may be a little different because there could be dry gas. So, those two plays would be three and four.

At number five, I would put the Haynesville Shale. Haynesville is still a very good play. I would call it sort of a lower economic play because we know it's mostly going to be dry gas. The difference with the Bakken, Eagle Ford and Niobrara is that they are going to be oil or liquid, both of which clearly demand a very nice premium right now.

TER: I also want to ask you about Clayton Williams Energy Inc. (NASDAQ:CWEI). This company has the biggest market cap by far. It's trading at around US$73.07 and you had a target of US$85 on it. What's your read there?

ND: To me, Clayton is a very simple company; it's just blocking and tackling. Historically, Clayton was in the penalty box because it had a number of dry holes. That's changed in the last couple of years. It's been doing what I call 'just singles and doubles'—mostly just premium drilling and Austin Chalk drilling. These types of things have no exploration risk, in my mind.

If you look at where the stock is trading right now and go back to my old adage about a pure multiple, the stock would actually be closer to a US$80 target. The discount is there because Clayton Williams and his family own more than 60% of the shares and the stock is pretty illiquid. Without the illiquidity, I would clearly say the stock is worth more than US$85.

TER: What other companies are you following?

ND: One that I think is noteworthy is Gran Tierra Energy Inc. (NYSE:GTE; TSX:GTE). It has done a tremendous job of growing the company with virtually no debt. Right now, the company has well over US$3 million in cash and no debt. That's remarkable for a company of that size. But what's interesting is the company's core asset base, called Costayaco. Costayaco is generating +15,000 bpd. On top of that, the company's talked about two or three potential new discoveries. One is called the Moqueta, which is a new play wherein it's drilling the fourth well. Gran Tierra's also got the Taruka-1. The point is that besides the cash, lack of debt and stable base assets, Gran Tierra has some very exciting exploratory projects, which really give the stock some upside.

TER: Do you have some parting thoughts on what's going on in the oil and gas sector?

ND: Obviously, the premium of oil versus gas sticks out. The dichotomy is there when you look at oil versus gas stocks. You have oil at US$82 and gas is at US$4; that is a 42:1 multiple. That has to balance out a little. I don't mean to insinuate that we need to go back to a 6:1 multiple, but maybe we can go back to at least 15:1. Until that happens, the big premium is going to be on oil and the liquids. Albeit, you might have some periodic valuations when you have deals like the Chevron deal. Overall, as we see the next few months play out, the oil and the natural gas liquids companies will clearly get the premium value.

TER: Thank you for your time and your insights, Neal.

Neal Dingmann has more than 12 years of equity research experience, most recently at Wunderlich Securities where he covered over 30 companies in the exploration and production and oilfield services sectors. He previously held similar positions at Dahlman Rose, Pritchard Capital, RBC Capital Markets, and Banc of America Securities, where he worked on the number one-ranked Oilfield Services research team.

Neal was recognized last year by The Wall Street Journal as "Best on the Street," and as a "Home Run Hitter" by Institutional Investor magazine. He is a frequent guest on Bloomberg TV and has a large network of industry contacts. He received his Masters in business administration from the University of Minnesota and his Bachelor of Arts degree in business from the University of Arkansas.

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: Atlas, Energy XXI, Shell and TransAtlantic.
3) Neal Dingmann: 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.

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Over in the options trading pit the team have just updated the progress chart to includes yesterdays closed trades, now 51 winners and out of 53 trades, the latest two trades have been written up on gold-prices.

sk chart 19 Nov 2010.JPG



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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.

Friday
Nov192010

Stuck for a Christmas present for someone dear to you?

You can make this purchase without even leaving your seat, its different, valuable, inexpensive and could prove to be beneficial to them for years to come.

Subscribe for 6 months - $499

 

Subscribe for 12 months - $799

 


Or you could battle through shops for hours and buy a cardigan, make sure that they like colour before you flash the plastic. Please check our trading record here.

Thursday
Nov182010

LAM Up 5.29%, MGA Up 5.19%, URE Up 8.81%, URZ Up 8.65%, UUU Up 6.24%, CCJ Up 2.94%, CXX Up 16.13%

LAM Chart 19 Nov 2010.JPG

Another cracking day for uranium stocks with most of them putting on excellent gains and in some cases they have doubled in three months which is terrific for those who are in a position to acquire some of these beaten down stocks.

The above chart shows Laramide Resources Limited (LAM) up from a $1.00 in August to $2.20 as we write and it now appears to be in a steady upward trend. The STO has just turned positive and from a low level which is nice to see, hopefully an indication of things to come.

The chart below depicts the spot price for uranium which we can see is also trending north and lets hope that it continues as many investors are under water with stocks acquired at much higher prices. This is the second week in a row that the price has moved higher, we could see some serious action if uranium can push on to the $65/lb level.

Uranium Spot chart 19 Nov 2010.JPG

A snippet from TradeTech as follows: November 12, 2010–The spot uranium price continued its climb upward for the second consecutive week, but failed to break through the $60.00 price barrier. Additionally, the pace slowed with TradeTech’s Uranium Spot Price Indicator moving higher by $1.75 to $59.25 per pound U3O8, as compared to the $5.50 and $4.00 per pound increases posted in recent weeks. A total of six transactions were concluded this week, with traders and financial entities purchasing the bulk of the material sold. China and its appetite for uranium supply continues to attract attention from market participants and the investment community, with the announcement today that China Guangdong Nuclear Power Group signed a contract with Kazakhstan’s Kazatomprom. Delivery timing continues to be a significant factor in the spot market. Near-term uranium supplies for delivery by year-end are extremely thin, and the emergence of significant mid- and long-term demand, combined with buyers competing to purchase material, continues to exert upward pressure on prices


Over in the options trading pit the team have just updated the progress chart to includes yesterdays closed trades, now 51 winners and out of 53 trades, the latest two trades will be written up on gold-prices later today.

sk chart 19 Nov 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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
Nov172010

Crosshair Exploration and Mining Corporation Up 24% Today

CXX Chart 18 Nov 2010.JPG

We kick off with a quick look at todays chart for Crosshair Exploration and Mining Corporation (CXX) which is another uranium stock that has doubled since July, gaining 24% today on heavy volume when 2.4 million shares changed hands. The RSI is a touch high at the moment so we might get a breather might be on the cards. The MACD and the STO are also up there too which may entice chartist to take profits.


Having purchased this uranium stock at $0.25 on 6th January 2009 with the view to participating in its recovery we are pleased to see it close at $0.31 today, to show a paper profit of around 24%.



This is what the chart looked like back then:

CXX Chart 5 Jan 2010.JPG


A summary of their activity is as follows and can be found on their web site:



Crosshair is a dominant player in the exploration and development of gold, uranium and vanadium in the US and Canada. Crosshair continues to advance its gold projects in Newfoundland. The company recently completed 7,220 m of drilling and has a bulk sampling program that is set to commence Q3 2010. Stantec Consulting Ltd. has recently been contracted to prepare an Environmental Compliance Plan and design a method of removing the overburden for the trenching that is anticipated to begin September 2010.

The Bootheel Project is located in uranium mining friendly Wyoming and with its in-mining potential and initial NI 43-101 uranium resource estimate of 1.09 M lbs indicated and an additional 3.25 M lbs inferred, the project has exceeded the minimum mining threshold and is designed for near term production.

The CMB Uranium/Vanadium Project is located in Labrador, Canada and Crosshair has demonstrated the multi-deposit potential of the project by successfully developing four currently defined resources -- C Zone, Area 1, Armstrong and Two Time Zone. All four resources are open for expansion.

Vanadium, already irreplaceable in several industries including aerospace, aviation and construction due to its unrivaled ability to strengthen steel, has also become very important in the advancement of battery technology and its use for connecting large-scale power grids. Phase 1 of the Vanadium Resource Expansion Program is complete and Phase 2 is set to commence at the beginning of July 2010.

Crosshair currently trades on the Toronto Stock Exchange as CXX and the NYSE Amex as CXZ.

Crosshair's market capitalisation is $40.76 million with 131.48 million shares outstanding, the 52-week high is $0.32 and the 52-week low is $0.10 and is trading at $0.31 as we write.

Over in the options trading pit the team have just updated the progress chart to include last weeks closed trades as follows:

sk Chart 14 November 2010.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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
Nov162010

Josh Young Finds Value in Oil and Gas E&Ps


Source: Brian Sylvester of The Energy Report 11/16/10
http://www.theenergyreport.com/pub/na/7876

Josh Young.JPG

Josh Young, a portfolio manager with Los Angeles, California-based Young Capital Management, is a value investor on the hunt for undervalued companies in the oil and gas space. He launched his fund in September, has earned enticing returns so far, and in this exclusive interview with The Energy Report, discusses some of his hedge fund's equity holdings that are poised to get some love in the market.

The Energy Report: Josh, What makes your hedge fund different from others?

Josh Young: We're focused on oil and gas investments, and we make those investments generally through oil and gas (O&G) equities. We focus on companies that are generally under-followed and find companies which are trading at a big discount to their intrinsic value, with identifiable catalysts that are going to unlock that value.

On the short side, we find companies with some sort of fraudulent reporting or with very high valuations that are in fundamentally challenging situations that they are unlikely to work out.

TER: You're a true value investor.

JY: Yes, I am philosophically a value investor. I focus on the oil and gas space because there's a lot of volatility and there are lots of changes and catalysts. With the right approach to managing the commodity risk, there are regularly opportunities to generate significant returns and invest at the sort of discount to intrinsic value that can't be found in other sectors these days because there's so much investment competition.

TER: You mentioned that you buy companies that are trading at a large discount to their intrinsic value and that have identifiable catalysts for further growth. Do you have much trouble finding those companies in the energy space? And what are some catalysts you like to see?

JY: The opportunities are there, but it takes a rigorous investment process to exploit them. It's an incredibly labor-intensive process to identify those companies, research them and make sure they are, in fact, undervalued and that the market is missing something. The risk-adjusted returns from this space, and that I've generated running the strategy, justify the effort.

I identify catalysts as a part of my investment process. I look for companies that have already announced that they're going to sell assets or that they're going to do an equity raise that will help them finance substantial growth. Those are some examples of catalysts.

TER: What about drill results? Would you consider those catalysts?

JY: Yes, but those are generally harder to predict and so I don't focus on them as much. Sometimes it's possible to figure them out before the market does, and sometimes the market does not immediately price in meaningful drilling results. But I'm not generally looking to make investments in anticipation of wildcat exploration drilling prospects.

TER: Most of my experience is on the mining side. I noticed when I was combing through your research, a lot of the companies you follow have small share floats compared to mining companies at similar stages of development. Is there a certain range you look for in terms of the float size? For example, if a company has more than 50 million shares outstanding and isn't as far along the development path as a comparable company with 30 million shares, is that a red flag for you?

JY: I'm less concerned with the number of shares outstanding and more concerned with the percentage of shares outstanding that are in the free float versus percentage held by one or more major shareholders, especially when those major holders might have to liquidate some or all of their holdings. I definitely watch for that. But I honestly don't care if there's 1,000 shares or a billion shares outstanding. I care about the fundamentals of the investment and the liquidity of the stock.

TER: So, you don't like companies that are held largely by a handful of shareholders? Is that what you're saying?

JY: It depends on the situation. Let me explain. One of the companies I follow, Gastar Exploration Ltd. (NYSE:GST), had several large shareholders, and the share price suffered as those large shareholders exited their positions. In 2008, about 20%–25% of Gastar stock was held by a hedge fund that dissolved and the Gastar stock got dumped into the market as a part of the dissolution process. That substantially hurt its stock price. More recently, another investment fund that held more than 10% of Gastar also dissolved its energy fund. There were a number of other factors but that, essentially, led to Gastar's stock price falling from $6. to below $3. even though the company was doing better than before. That said, it's actually another catalyst in that when a major shareholder is no longer a shareholder it can create a really positive environment for the stock and allow it to start appreciating closer to its fair value.

TER: During a recent conference, Barclays VP of Commodities Biliana Pehlivanova said the equity markets like seeing gas production growth from companies because the markets consider it a measure of success. She added that the market rewards gas producers for the metric and, further, investors won't punish companies for low commodity prices because they figure it's beyond any one company's ability to correct the situation. Do you believe that's what's responsible for the growing disconnect between share prices and commodity price in the natural gas space?

JY: I think it's complicated. I'm not sure that's necessarily the answer. A few big things have been happening. First, companies have been drilling into a low gas price because they're hedged. They view their hedges as locking in high prices and, even though gas is selling at $3.50 or $4, they make another $2 or $3 on their hedge contract. They're basically producing gas at $7. Investors see the earnings and cash flow as if the company was actually achieving a $7 gas price.

In other cases, companies spent a significant amount of capital on leases in the Haynesville Shale or elsewhere and they're drilling to hold those leases and retain some of the value in relation to the high prices they paid for them. In those cases, companies are growing their gas production by default. I think a lot of the current oversupply in natural gas is actually coming from those first two factors.

The third factor is that the general market wants to be long on natural gas. Retail investors believe in natural gas. They believe in commodities. They're concerned about quantitative easing 2 (QE2), and the general growth of the money supply. People want to be long on natural gas but they've lost money on the natural gas ETF, UNG, so they've been buying natural gas companies. One of the only ways a retail investor can access natural gas is by buying these natural gas companies through either ETFs or directly owning shares. I think that's where some of the disconnect comes from. The people trading natural gas futures aren't necessarily the same people as the people buying the stocks.

TER: Do you think investors should just ignore the low gas price and invest in companies with good balance sheets and solid management, or are there better places for their capital right now?

JY: I'm not sure I should be telling investors what they should and shouldn't do. What I'm doing is finding companies that are trading at a discount to their intrinsic value at the current gas price and on the current forward curve. I intend to benefit both from the undervalued stock price of the company, as well as any uplift they might get from rising gas prices. So I'm not ignoring the gas price completely, but I'm not letting it drive my investment decisions. It's been a headwind and it will be a tailwind at some point going forward, driving additional return for some of my investments.

TER: Let's talk about some of your fund's equity holdings. One company in your hedge fund is Cabot Oil & Gas Corp. (NYSE:COG). It's trading at around $35, which already exceeded a target price set by Macquarie Equities Research. J.P. Morgan has a target of $50, but Oppenheimer has mixed opinions about Cabot. What do you see in the company, and how high do you think it could go?

JY: Cabot has traded down a lot over the past few months, after receiving a lot of negative press about its operating activities in Pennsylvania. My understanding is that the company's operations are not substantially different from other Pennsylvania operators. Cabot just happens to be in Susquehanna County, an area with a very high visibility, and the people there are concerned about the water supply. I think that negative news about Cabot has scared investors. Large investors are reducing their positions or not increasing their positions as much as they would have relative to Cabot's intrinsic value.

Cabot is really in the core of the dry gas window in the northeast. It's in an area of the Marcellus Shale where it and the operators around it have achieved some of the highest and most impressive initial production rates on their wells. Cabot is highly economic even at current gas prices. It has high-quality management, too. I think it's attractive just because it's been picked on so much. To be able to buy a low-cost natural gas producer in the U.S. at a discount to its intrinsic value is extremely rare.

TER: Are there some catalysts there that you're eyeing?

JY: There are a few things going on. First, there's industry consolidation. Atlas Energy, Inc. (NASDAQ:ATLS) recently got bought out by Chevron Corporation (NYSE:CVX), and EXCO Resources Inc. (NYSE:EXCO) is in the midst of a take-private transaction that may not close but is priced much higher than Cabot's current market valuation. There have been a number of deals in the Marcellus, joint ventures (JVs) and acquisitions over the last few years at generally increasing prices. Cabot hasn't done a JV yet in the Marcellus, but it may at some point. The company may even get bought out—it's in the core of the Marcellus. If I were a big multinational oil company and I wanted a large position in the core of the Marcellus, I would buy Cabot or go to the company and make a really attractive JV offer. That's a harder to predict catalyst from a timing perspective; it's something I think may happen over the next couple of years.

Nearer term, it looks as though Cabot is going to monetize a portion or all of its Haynesville acreage. Based on other transactions happening there, I think that would be very positive and provide the company with additional liquidity.

Cabot's acreage is in great locations in the Eagle Ford Shale, and it looks like the company should expect some high return wells there. They are also in the Heath Shale in Montana and the things I'm seeing in the Heath Shale are positive so far. But I don't attribute a lot of value to Cabot's Heath positions right now. Like I said, I don't really invest based on exploration prospects; but it's always nice to have the upside. It's possible that the company could pull in a few good wells in the Heath and that would significantly differentiate it and possibly lead to positive movement in the stock.

TER: You mentioned Gastar earlier. That's an exploration and production (E&P) company with a market cap of about $200 million. A recent Canaccord Adams research report said, "Gastar is an attractively priced Marcellus producer given its relative growth potential." Canaccord has a buy rating of $4.50 on it. Meanwhile, Rodman & Renshaw has a target of $5.50 on Gastar. What are some of the catalysts there?

JY: Well, Gastar just did an acquisition but the stock doesn't seem to have priced in the value creation from that acquisition. The company hasn't announced the metrics on the transaction; but, based on the understanding of some of the research analysts that I've spoken with and some back-of-the-envelope math, Gastar just bought north of 50,000 acres at $1,000 an acre or less in the Marcellus. They bought it in the dry gas area, but in a very good area of West Virginia. That's tremendously positive for the company. There are some big questions, though. What is the exact price Gastar paid? How will they finance the acreage acquisition and development? And did their existing JV partner decide to participate with it in the acquisition, or will they seek an additional JV partner?

Gastar recently sold acreage to its joint venture partner at more than $4,000 an acre, and here it is buying similarly high-quality acreage at $1,000 an acre or even less. That's huge, especially for a company as small as Gastar. Gastar is now likely the most levered company in the Marcellus by enterprise value, at least among those that are publicly traded.

Gastar has really transformed itself to a certain extent into a Marcellus acreage play, and an extremely attractively priced one at that. This catalyst has already played out and it's just a question of the price the company is paying. I think the market will be further surprised by other additional upcoming catalysts, such as the results from their oily Eagle Ford and Glen Rose wells in East Texas—you could see upside to the $5.50 price target that Rodman & Renshaw put out, and I really respect the analysts at both Rodman and Canaccord. Rodman recently upgraded RAME and raised their price target, and I suspect that could happen for Gastar as these catalysts play out.

TER: You mentioned earlier that Chevron took out Atlas. The deal hasn't closed yet, but it's all but done. Atlas has a huge position in the Marcellus. Is that transaction affecting companies like Gastar? Are people adding a little extra value to such companies given the transaction?

JY: I think they should. I think it has affected companies like Cabot and Range Resources Corporation (NYSE:RRC), but I don't think it's affected companies like Gastar yet. I think it's important, even if I don't expect Chevron to buy Gastar or any major oil company to come in and buy a company like Gastar. It is important because Chevron's Atlas takeover is a validation of the play. I think it will give private equity firms and domestic and international oil companies more confidence in doing JVs in the area and buying companies to access their assets. I think it helps highlight Gastar's intrinsic value in the asset market even if it hasn't yet translated into a higher share price.

TER: Another company in your fund is GMX Resources Inc. (NYSE:GMXR). GMX increased proven reserves by about a quarter in fiscal year 2010 (FY10). And it recently subleased a number of drills to cut back on drilling in the Haynesville in order to reduce its capital costs. C.K. Cooper & Company has a hold rating on GMX, whereas both MKM Partners LLC and Stifel Nicolaus have buy ratings with a $6. target. Tell us about your outlook for GMX.

JY: GMX is interesting to me because it has a tremendous amount of proven natural gas reserves on its books and is in the process of reducing the cost of adding additional reserves. Relative to the company's enterprise value, you pay less than $1. per 1,000 cubic feet of proven natural gas reserves. A large portion of those proven reserves are developed and producing. The company is profitable right now—primarily because of its hedges—but it is profitable.

GMX has done a couple of things that have substantially increased the company's value and the value of its assets. First, it has significantly increased the amount of reserves it accesses per Haynesville well drilled. At some point couple of years ago, GMX was booking 3–4 billion cubic feet (bcf) of reserves per well. Now it's up to somewhere around 6–6.5 bcf per well in reserves, with associated higher production. Based on the type of improvements the company is achieving, it could get reserves as high as 7–8 bcf per well, comparable to some other places in the Haynesville historically considered more "core" than GMX's area. These are $9 million wells, so GMX's finding costs are pretty low. It's not the lowest-cost producer, but the company has definitely improved its cost structure. That's one really big positive.

Another big positive is that it did a deal with Kinder Morgan Energy Partners, L.P. (NYSE:KMP), one of the big pipeline companies. GMX sold a minority interest in its gathering system in East Texas for more than $40 million. I think it was a 40% stake or somewhere in that range. GMX still has the majority ownership in that system. Valuations on mainstream and gathering assets have gone up a lot in since that transaction. So GMX has what's probably a $60–$70 million asset that no one seems to be giving them credit for. The company's valuation is very low because people are worried it will outspend its cash flow. Yet, it has this asset that it will be able to sell to fund its development, increasing expected future reserves and cash flow. When GMX sells that gathering asset, it's really going to unlock value there. It will highlight how discounted the stock is relative to its fundamental value. And this is the kind of discount I look for and the kind of misunderstanding I take advantage of for my fund.

TER: What are some of your other holdings that you'd like to talk about, Josh?

JY: One of my largest positions that has done fairly well recently, but still has a lot of upside potential, is RAM Energy Resources (NASDAQ:RAME). RAME has a number of more mature oil assets, primarily in Texas and Oklahoma. They also have an oil field that they recently did some exploration work on and achieved some really positive results. Their stock is attractive because it is trading at a large discount to its proven reserve value, at a low cash flow multiple, while benefiting substantially from the above $80 price of oil. RAME's enterprise value/BOE is effectively ~$11/BOE, or $11 per barrel equivalent of energy in its proved reserves, which is substantially lower than the going rate for other oil stocks and in the asset market.

On the surface, RAM appears to be overleveraged, but it recently did an asset sale for more than $40 million. The asset they sold appears to have been one of the company's weakest assets. It was a high-percentage natural gas field that was providing a relatively small amount of cash flow to its value. Even though RAM announced positive exploration results on a trend where SandRidge Energy, Inc. (NYSE:SD) and Chesapeake Energy Corp. (NYSE:CHK) have been very successful a couple of counties west in Oklahoma, RAM's stock has not received much credit for the substantially improved liquidity position nor the recent exploration success. And given that the majority of RAM's reserves are in oil, the company continues to trade at a substantial discount to its proven reserve value, which was calculated at a lower oil price. So, there's even more value there that should be recognized in the market at some point.

TER: Any others?

JY: One more is Lucas Energy, Inc. (NYSE.A:LEI), a micro-cap company. It's a small position for me, partly because it is not the most liquid stock and is a small company, but it's definitely one of the more interesting oil and gas companies. The company is entirely in the Austin Chalk formation and the Eagle Ford Shale. Lucas did a JV with Hilcorp Energy Company, a private company, whereby Hilcorp is going to drill a number of Eagle Ford oil shale wells. Lucas is getting carried on the first couple of wells, and they are going to maintain a 15% interest.

Lucas is currently producing 120 barrels of oil per day (bpd), so it's a very small amount of production. These Eagle Ford oil wells are coming on at anywhere from 500–1,000 bpd, so the company should have one well in production before the end of the year; and it should have a couple additional wells in the first quarter of next year. Lucas could more than double its oil production just from these first wells that Hilcorp is bringing on. And it has a number of other locations that Hilcorp will be drilling over the next several years, and has recently acquired additional Eagle Ford acreage at prices that were likely compelling. At oil prices north of $80, Lucas' oily Austin Chalk wells should be highly economic. You could expect the company to accelerate drilling there and increase production at very attractive margins in a play that was less attractive at that lower oil prices. Even though it's still very small, it's still an interesting company.

As you can see, my investment process entails finding value and taking advantage misunderstood opportunities, and there are a number of attractive opportunities that I've found recently in the oil and gas space. It takes a lot of research and involves developing an understanding of the companies, but it is worthwhile in terms of the opportunities it generates for attractive risk-adjusted return investments like some of the ones I've mentioned.

TER: Thank you, Josh for your time today.

Joshua Young is the founder and portfolio manager of Young Capital Management, LLC, which launched Young Capital Partners, LP in September 2010. He previously served as an analyst at a multibillion-dollar single-family office in Los Angeles, which was nominated for single-family office of the year by Institutional Investor magazine in 2008. At the family office, he was involved in the sourcing, evaluation, purchase and sale of primarily public equity investments in a value-oriented long/short equity strategy. He also led the energy investment effort, evaluated third-party investment managers and assisted in the development of this relatively new, multibillion-dollar family office. Prior to that, he was an investment analyst at Triton Pacific Capital Partners in Los Angeles, a middle-market private equity firm. Prior to that, he was a corporate strategy consultant at Mercer Management Consulting and DiamondCluster in Chicago. He graduated with honors from the University of Chicago with a BA in economics. Josh can be reached at josh@youngcm.com.

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: Atlas and Ram.
3) Josh Young: I personally and/or my family own shares of the following companies mentioned in this interview: Cabot, Gastar, RAM Energy, GMX Resources and Lucas. I personally and/or my family am paid by the following companies mentioned in this interview: None. I reserve the right to buy or sell any stocks I have mentioned here at any time.
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

Over in the options trading pit the team have just updated the progress chart to include last weeks closed trades as follows:

sk Chart 14 November 2010.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today?


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.



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.