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Wednesday
Jun232010

Mining Tax could cost Australian Prime Minister, Kevin Rudd, his Job

Kevin Rudd and Julia Gillard 24 June 2010.jpg
Kevin Rudd and Julia Gillard


On the air waves this morning we have the possibility of a change of leadership in Australia as the Prime Minister Kevin Rudd is well down in the popularity polls as the proposed mining tax becomes his Achilles heel.




June 24 (Bloomberg) -- Australian Prime Minister Kevin Rudd, whose support slumped after he abandoned a carbon-trading plan and proposed taxing the mining industry, faces a leadership challenge today from deputy Julia Gillard that may cost him his job.

Rudd needs a majority of Labor lawmakers when the party meets at 9 a.m. in Canberra. Gillard, who requested the ballot yesterday after Rudd began losing support, confirmed she would seek to oust Rudd, without further comment.

While Rudd said he was “quite capable” of beating back Gillard’s challenge, one analyst, Andrew Hughes, said the prime minister was likely to lose.

“He is a goner,” said Hughes, a political analyst at Canberra-based Australian National University, in a phone interview. “It’s the most significant political downfall in Australian political history.”
Three Labor Party lawmakers, including one minister and another who heads the party’s largest faction, also predicted Rudd’s defeat. They declined to be identified because of their party affiliation.

The Australian Workers Union, which represents over 135,000 people in such industries as agriculture, construction and hospitality and favors the mining tax, endorsed Gillard yesterday.
Rudd began to slide in polls in April after he shelved his carbon-trading proposal, a key campaign pledge when he won office in November 2007. Then he proposed a 40 percent tax on the “super profits” of resource projects in Australia, the world’s biggest shipper of coal and iron ore, and refused to back down even after members of his own party objected.




UPDATE 6.25am: JULIA Gillard is the red-hot favourite to lead Labor into the next election as Kevin Rudd faces a 9am challenge to his leadership.

Mr Rudd will put his leadership to the test at 9am today in a ballot of Labor MPs that could deliver Australia its first female Prime Minister.

Opening at $1.40 when betting commenced on sportsbet.com.au last night, Ms Gillard is now $1.20 to be in charge when voters next go to the polls, while Mr Rudd’s odds have blown out from $2.70 to $4.

Well it doesnt look good at the moment for Kevin Rudd and we will know the outcome shortly. We will publish the result in the comments section as soon as we the results of this leadership challenge is over.

Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

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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
Jun222010

Greg Gordon: Turn on to Big Utilities, Pt. I

Greg Gordon 23 June 2010.jpg


Source: Brian Sylvester and Karen Roche of The Energy Report  06/22/2010
http://www.theenergyreport.com/pub/na/6598

Big American utilities pay big dividends, some as high as 8% among regulated utilities, and right now they're as cheap, relative to the bond market, as they've been in about a quarter century. If you like investments as income, few people who know the utilities equities better than Morgan Stanley Analyst Greg Gordon. In this exclusive two-part interview with The Energy Report, Greg eloquently and frankly explains the utilities market and offers some picks in the regulated utilities space. Part II will focus on Greg's picks among the deregulated utilities.

The Energy Report: Greg, please give our readers an overview of the market for big utilities in the U.S.

Greg Gordon: First of all, in looking at utilities in the U.S., they're a little bit complicated because they're not all homogeneous in terms of business models. In certain regions of the country, state regulators have liberalized the power markets; in other regions they have not. So when you look at the market capitalization of the utility sector, about 45% of the market cap is traditionally regulated utilities that operate regulated businesses where the state government regulator mandates the prices they can charge and gives them a fixed return on their equity investment in the company. Southern Company (NYSE:SO) is like that in the southeast, and so is PG&E Corporation (NYSE:PCG) in California and Consolidated Edison Holding Co. (NYSE:ED), or ConEd, in New York for example.

Now, Southern Co. owns power plants, burns a lot of coal, but their assets are regulated; so, they charge a regulated rate. They buy the coal; they pass the cost on to their consumers. The regulatory model is called "Cost Plus." You recover the costs plus a reasonable return on your assets. ConEd is regulated exactly the same way, but ConEd doesn't own many power plants. They sold most of their power plants by regulatory mandate back in the early part of the decade, but like Southern Co., they're still "Cost Plus" on the wires and the pipes they own. They buy the power on the open market that they need to provide their customers and then they pass it on to their customers at no margin.

And PG&E sold some of its power plants, still owns hydro and nuclear plants and also has a mixture of power purchases and fuel purchases that it uses to generate the power it needs. But it's not earning a margin on the power. It's earning a fixed return on the assets it's got.

That's very different from an Exelon Corp. (NYSE:EXC); that's very different from an Entergy Corp. (NYSE:ETR), which has regulated utility businesses, but also owns merchant power plants in liberalized markets. They earn a deregulated price, and they have to manage their costs. They become basically big cyclical energy companies where their margins rise and fall based on their ability to profit from power market dynamics. Generally speaking, power prices go up when natural gas is rising because natural gas is the marginal fuel for power in the U.S. in most markets. Power prices go up when demand is rising because as demand rises, less-efficient plants have to serve the load and that drives up power.

So the profit margins of the diversified utilities cycle, whereas the profit margins on the regulated side tend to be much more stable and predictable and are set by regulators, not by markets.

TER: What about dividends?

GG: The regulated utilities also tend, because they have more predictable earnings and cash flow, to be higher paying dividend entities. The average regulated utility in the U.S. dividends about 65% of its income to its shareholders. The average diversified utility only dividends about 45% of its net income to shareholders, and that makes sense because the diversified utilities in our coverage universe have a riskier cash flow stream. The dividend has to be lower to reflect the fact that the cash flow fluctuates more.

TER: So regulated utilities tend to be better long-term investments whereas diversified utilities have more upside and more risk?

GG: Let's talk about the regulated investment profile and diversified needs separately because really you would own them for separate reasons. Regulated utilities are perceived sort of as income first, growth second, investment vehicles and they're perceived really to be an alternative to other income-bearing instruments like bonds by most equity investors. They tend to behave in a defensive fashion relative to market dynamics; they tend to be less correlated to what's going on in the market in terms of the S&P. And they tend to be much more positively correlated to what's going on in the bond market.

Right now, the average regulated utility in the U.S. is investing capital in things like transmission lines and distribution grid enhancements like smart meters and putting environmental equipment on their power plants and building renewable energy facilities—more than 30 states in the U.S. have renewables mandates. Through these investments, they're growing their rate base, which is the capital investment on which they're allowed to earn by about 5% per year. When you grow your rate base, you have an opportunity to grow your earnings because you earn on the capital you invest. You actually have to spend money to make money. The risk is that they're periodically going into the regulator to ask for the revenues they need to pay for the investments that they're making.

TER: These are the base rate case rulings?

GG: Yes, you're constantly seeing this kind of activity and it pertains to their ability to earn a return on the capital that they're spending. The two drivers that really differentiate a good utility investment story are demographics and regulation. How much capital are you being asked to invest to keep up with trends in your local service region? And, is the regulator giving you a healthy return over your cost of equity or a skinny return on your cost of equity? I said the average rate-based growth was around 5%, but it varies. In California, the utilities are spending well in excess of that; and, in places like the Midwest, they're spending less because there's less demand growth.

The return on equity that these companies actually earn is mandated by the regulator, and the last 12 months the authorized return on equity was 10.5%–11%, but the authorized returns have been as high as 12% and as low as 9%. Again, if you go from state to state, some regulators are more magnanimous than others. As a utility analyst and a utility investor, you try to identify the companies that have the best opportunity for rate-based growth; with the best opportunity to earn healthy returns over their cost of equity. The best opportunities to make investments are in places where there's change taking place, where a state regulator has been historically maybe a little bit tight on the returns that they authorize and we think they're going to start to be a little bit more magnanimous or where a company had not been spending a lot of capital and we think it's capital spending is going to increase, and they'll get an opportunity to earn a decent return on that.

TER: What about regulated utilities?

GG: Again, we think the most money is made in regulated utilities when you invest in positive change; and frankly, the most money is lost when investors fail to perceive the change in dynamics the other way. I'll give you three examples of stocks that I like in that space or that fit that profile: American Electric Power Company, Inc. (NYSE:AEP), CMS Energy (NYSE:CMS), and NV Energy Inc. (NYSE:NVE).

AEP is a big regulated utility that operates in multiple states all the way from Ohio down to Texas. They have a management team that has historically been not tremendously disciplined in allocation of capital. They have spent aggressively to grow the rate base, but they have spent more aggressively than regulatory outcomes have allowed them to earn. So their returns on equity have been low relative to the industry average. What happened is AEP spent so much money on their capital base going into this last recession that they got over-leveraged, and they were forced to issue a lot of equity at very low prices at the bottom of the market. That was very dilutive.

They've since put a new CFO in place and reined in their capital spending. Now that the economy is recovering, the returns on what they have invested should begin to improve as the economy improves. I think they've got some newfound discipline in terms of managing their capital spending and operating costs. I believe that the regulatory outcomes in the states in which they operate will be incrementally constructive.

If you believe that, you've got a company that can earn $3 per share this year and grow earnings at probably 4% a year for the next several years, and it's trading at under 10 times my 2012 earnings estimate of $3.25; the yield is 5.2%. By the way, at around 10 times earnings that's almost a two multiple point discount to other larger cap regulated utilities that, like a Progress Energy Resources Corp. (TSX:PRQ), for instance, are perceived to be more stable. The stock price is basically discounting earnings never going up. There is just skepticism that AEP have their act together. I believe over the next 12 months, as they prove that they've got their act together financially and the economy continues to recover in the Midwest and the regulatory decisions that they get from the multiple states they're in continue to be constructive, that that stock will appreciate because investors will embrace the change that is happening in the company.

TER: Tell us about the other two utilities you mentioned in the regulated space.

GG: CMS is a little utility in Michigan, and when the economy was really contracting, Michigan utilities were really hard hit for what appeared to be fairly obvious reasons. The auto industry went into a tailspin, so there was a perception of "Gosh, you know utilities in Michigan serve the auto industry and if the auto industry is in trouble, then their sales must be in trouble." For CMS that was less true because they don't have direct exposure to the auto industry as much as some of the other state utilities.

The other thing that happened is the utility regulators in Michigan really put a regulatory framework in place to protect the utilities' financial performance from suffering as the economy continued to contract. They instituted a rate-making model called "Revenue Decoupling." That means is there is a much larger fixed component and much lower variable component, if a customer consumes less, so that fluctuations in demand don't have a huge impact on revenues. They can have a much more predictable earnings stream.

The reason regulators have done so, I believe, is because they see the regulated utilities in the state as partners in economic development. They want healthy utilities to spend on state of the art infrastructure in Michigan so they can attract business. I think that is not fully appreciated by investors. CMS Energy stock trades even cheaper than AEP on our earnings estimates. We think that CMS is going to earn $1.35 per share and will grow its earnings at around 8% a year for the next couple of years.

Again, we don't think that investors believe they will be able to do that, given that the stock is trading at almost nine times earnings. Now, they've got a little bit more debt than the average utility, and their divided yield is a little bit lower; CMS Energy yields 4%. But even taking those two things into account, we see no reason why that stock can't trade demonstrably higher as they execute on their growth strategy and investors begrudgingly come to accept that the regulatory model actually indemnifies them for a lot of exposure to industries about which people are concerned. We believe the regulators will continue to be constructive.

TER: And NV Energy?

GG: NV Energy serves Las Vegas and Reno, Nevada. That stock went down during the economic crisis because they weren't exposed to manufacturing like CMS, but they were exposed to housing and tourism through the casinos and hotels in Las Vegas. The economy did contract quite dramatically in Las Vegas. We think their earnings over the next 18 months will recover for two reasons: one, the economy in Nevada hopefully will start to show some improvement as we get into the first or second quarter of 2011. Analysts here at Morgan Stanley that cover the dominant industries in Nevada think that they will recover a little bit later in the cycle than other areas of the economy.

And the company will file a base rate case for the Las Vegas jurisdiction next year. One of the things that is happening in that rate case is not only will they ask for revenues to compensate for the decelerated economy, but they also have a big power plant investment that will be completed early next year. That's going to add assets to their rate base. When that happens, we think the earnings power of the company rises from around $1 per share this year (and it will probably earn a $1 per share next year, which is kind of a 7% return on equity), to about a $1.35 per share in 2012, which is closer to 9%. The stock is trading on that $1.35 estimate at under nine times earnings; so, there's clearly a complete lack of belief that they will be able to drive their earnings back to a more reasonable return on equity. Remember, I said before that the average utility has been authorized closer to a 10.5% return on equity in the past year.

TER: A lot of the profitability of these companies seems to hinge on positive outcomes in base rate case rulings. It seems like shareholder success at least in terms of NV Energy is directly tied to the regulator, no?

GG: Well, you can never say with certainty that a regulator is going to act in any particular way, but you can look at the history of their decision making and look at the mosaic of activity in any particular state to gauge the level of risk. The regulators asked NV Energy to build this power plant; so when they put it into rates, we believe the regulator will do its best to allow NV to earn a reasonable return on that investment.

The last several rate reviews that the company went through they were actually treated reasonably by the commission in Nevada; they were given decent rate decisions. They've just filed a small rate increase for their Reno-based utility, which is the smaller of their two utilities; it only represents about one-third of the company's earnings. That rate decision will be resolved before they file the next one, so it will be sort of an indicator of the level of constructiveness or lack there of between the company and its regulator.

TER: So sometimes you get an early indicator as to the outcome of the crucial base rate case rulings?

GG: Yes, the other thing that's interesting about NVE is that it's the only utility that I cover that is trading at a discount to its tangible book value. I said earlier that utilities earn a return on their capital investments (i.e., their book value). That means that if you believe that it's got the ability to earn a return in excess of its cost of equity on its capital investments, by definition it should trade at a premium to book. So, the fact that this one trades at a discount to book means either that investors believe that they're going to never achieve a return in excess of their cost of equity or that their cash flows are insufficient to fund their growth, so they're going to have issue shares of common equity and dilute their current shareholders. I think both those fears are unfounded.

TER: Alright, NV Energy is building a new plant in Nevada. They clearly have some fixed costs of just running facilities and power lines and such, and, in an environment like Nevada, the revenues must have dropped dramatically with the economy. How do they have any return in the years before a rate increase?

GG: The answer is yes; by our measure, they earned a 5% return at their Las Vegas utility. In 2009, the company earned $0.78 per share on a consolidated basis. We think they're going to earn around a $1.05 this year, which is an improvement to around 7.5% return in Las Vegas. Then, we think they can get to sort of an 8.5%–9% return by 2012, after they receive the rate decision we're expecting next year and, hopefully, go from there.

We think it's an interesting investment because we think the stock can go up even if they continue to have a sub-par return; it just has to improve from where it is today.

TER: It seems like the regulator is all-powerful in some cases. What are some jurisdictions, as some of the top jurisdictions as far as regulators go in the U.S.?

GG: That's a good question. Many of the utilities that are perceived to be very stable and well-regulated companies don't look like interesting investment opportunities to me because that's appreciated already. As a value investor by training, I am always looking to invest in something that's underappreciated or misperceived. Those were three examples of regulatory jurisdictions that may be perceived as being more difficult than they really are. If you look at a jurisdiction like California, I think some of the utilities in California are trading a bit cheap to where their fair value is. But that is a jurisdiction that since the California Power Crisis in the early part of the decade has demonstrated itself to be highly constructive in the way it regulates its utilities. Those stocks are trading almost like there is this sovereign risk discount being applied to some of those companies. PG&E's got a great history of getting constructive regulation after coming out of bankruptcy in 2004, but what happens if the California government defaults on its debt? Are they going to be somehow indirectly exposed to that?

I think the regulatory environment in the U.S. is actually pretty good. If you look at the regulatory activity over the past 18 months and you think about what's happened as we've gone through the depths of this recession, the vast majority of utilities that asked their regulators for revenue increases got some meaningful amount of the money that they asked for despite how difficult the economy was.

I am a little bit concerned that it's going to be more difficult as we start getting into an inflationary cycle because when interest rates start to go up, cost of capital starts to rise, the operating costs start to go up, and the physical cost of capital expenditures start to go up. Then the rate increases that become needed start to stress the ability of the regulator to be dispassionate. Then they start to cap the amount they raise rates and that can cause problems.

TER: Thanks so much for your time today, Greg.

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 and Karen Roche of The Energy Report conducted this interview. They personally and/or their families own shares of the companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Greg Gordon: See Morgan Stanley disclosure that follows.*

*The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary.

For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.

Analyst Certification

The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Greg Gordon.

Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Important U.S. Regulatory Disclosures on Subject Companies

As of April 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, PG&E Corporation, Sempra Energy, Wisconsin Energy Corporation.

As of April 30, 2010, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, NV Energy, Inc., PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy, Wisconsin Energy Corporation.

Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of PG&E Corporation.

Within the last 12 months, Morgan Stanley has received compensation for investment banking services from American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy, Wisconsin Energy Corporation.

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, NV Energy, Inc., PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy, Wisconsin Energy Corporation.

Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, NV Energy, Inc., PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy.

Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, NV Energy, Inc., PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy, Wisconsin Energy Corporation.

Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, NV Energy, Inc., PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy, Wisconsin Energy Corporation.

Morgan Stanley & Co. Incorporated makes a market in the securities of American Electric Power Company, Inc, CMS Energy Corporation, Entergy Corp, NV Energy, Inc., PG&E Corporation, PPL Corporation, Progress Energy Inc., Sempra Energy, Wisconsin Energy Corporation.

The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-U.S. jurisdictions.
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.
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Have a good one.
Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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


Thursday
Jun172010

Kevin Shaw: Carpe Cardium, Kurdistan & the North Sea

Source: Brian Sylvester of The Energy Report  06/17/2010
http://www.theenergyreport.com/cs/user/print/na/6563

Wellington West Analyst Kevin Shaw lives in Alberta and believes there are few better places to invest than Canada's oil- and gas-rich provinces. But he also sees attractive international opportunities in such places as Kurdistan, the North Sea and Albania. "When you're putting a drill bit into the ground in Kurdistan," he says, "you're. . .'deep-sea fishing.'" In this exclusive interview with The Energy Report, Kevin explains why he's also big on the Cardium, Notikewin, Bakken/Three Forks and the Montney shale plays.

The Energy Report: Last week, the government of Alberta announced that it will reduce oil and gas royalty rates in the province to make them more competitive. You're based in Calgary. What impact will this have on the industry and the oil sands in particular?

Kevin Shaw: For Alberta's oil and gas industry, it's an overall positive move. For the last couple of years, we've been competing in the oil patch against some of our neighbors like Saskatchewan and BC. In Alberta, the regulations were changing every 6–12 months; Alberta didn't have a long-term vision. As a result, small to major companies in the oil patch were pushing their dollars into places that had more attractive fiscal regimes like Saskatchewan and northern BC. Now the government of Alberta has a long-term vision; it has reduced royalty rates and put incentives into some really, attractive technologies on which the industry is focused.

TER: What sort of technologies?

KS: Areas of application like horizontal drilling techniques into more mature oil and gas basins where it's really a recovery-type game to exploit more oil and gas. The government has hit the right spots; it's also stated that nothing will change for three years, so we've got a longer-term vision for our royalty structure, which is what investors, the markets. . .everyone wants to see.

TER: What's the new royalty rate?

KS: There is now a competitive 5% royalty incentive rate in the first 12 months that could extend up to 40+ months, depending on what types of targets are being drilled for oil or gas. Out of the gate, the 5% royalty rate will benefit all Alberta producers. There are a lot of drilling and horizontal resource-play incentives that, in some of the deep shale plays or even the shallower horizontal plays, can be upwards of $1 million per well. That's an incentive for the industry to increase activity in horizontal developments or go after some of the deeper targets—especially targets greater than 2,000 meters below surface. I believe this will bring more focus onto some of the well-known Alberta plays.

TER: What are some of those plays?

KS: The Cardium. It's is a major emerging oil-resource play in Canada. It has companies like PetroBakken Energy Ltd. (TSX:PBN), Daylight Energy Ltd. (TSX:DAY) and ARC Resources Ltd. (TSX:ARX; UN:AET), which are really ramping up and spending significant amounts of cash in the play this year and next. Other emerging mid-caps like Bellatrix Exploration Ltd. (TSX:BXE) and Equal Energy Ltd. (TSX:EQU; NYSE:EQU), two companies that I cover, and even smaller exploration and production (E&P) companies like Midway Energy Ltd. (TSX:MEL) and WestFire Energy Ltd. (TSX:WFE), which I also cover. These companies are going to benefit from the revised royalty regime, especially as horizontal wells extend out deeper into the plays.

Operators big and small are drilling longer, horizontal lateral legs and putting a higher density of fracks into plays like the Cardium or Viking Oil resource plays. Other key ones currently include the Montney and Notikewin gas resource plays, which are big in Alberta and in northeastern BC.

One of the companies I cover that has a huge acreage position in the Montney gas play is Painted Pony Petroleum Ltd. (TSX.V:PPY.A). They're surrounded by Progress Energy Resources Corp. (TSX:PRQ), Husky Energy Inc. (TSX:HSE), Talisman Energy Inc. (TSX:TLM; NYSE:TLM) and Royal Dutch Shell plc (NYSE:RDS-B). Those companies are developing huge reserves in the Montney right in the same neighborhood as Painted Pony, which currently holds ~126 net sections in the heart of the fairway.

To gain exposure to the liquids-rich Notikewin, we believe one of the best companies to own is Bellatrix, which is drilling horizontals that test 10+ mmcf/d with 40 bbl/mmcf liquids (mostly condensate) and receive up to ~$1 million per horizontal in Alberta royalty incentives.

TER: You mentioned companies like Midway and Bellatrix. Has the new royalty legislation caused you to re-evaluate some the companies you follow?

KS: You definitely look at who can benefit from it. Without getting into a lot of details, these types of royalty incentives in Alberta allow you to drill two or three wells and get almost a third or fourth for free. On a deeper well, you can now get over $1 million in incentives. If you drill three wells, you get $3 million. In a lot of these plays, you can drill a well for $3 million or less. The point is oil and gas companies in Alberta will be able to ramp up their drilling programs with the same capital budget as before but drill incrementally more wells.

TER: If there's more drilling, it stands to reason that some of the drilling companies are good investments.

KS: No question about it. Drillers are definitely going to get busier as activity levels increase. Because of heightened activity levels for horizontal drilling and multi-stage fracks, there's a long wait time to get wells fracture-stimulated because frack equipment is becoming very scarce. It's running around the clock. There's not enough equipment on either side of the border on some of the horizontal plays, which can delay operations in some cases. Frack equipment is becoming a hot commodity. If commodity prices, especially oil, continue to move further or stay in the current range—call it $60–$85—we're going to be very busy as an industry in a lot of these multi-stage frack, horizontal-resource plays. As that happens, we expect that the frack companies are going to be very good investments going forward.

TER: Any specific names?

KS: Trican Well Service Ltd. (TSX:TCW), Calfrac Well Services Ltd. (TSX:CFW) is another one. I don't cover the services as an analyst but those are two. There are lots of other companies, like Schlumberger Ltd. (NYSE:SLB) and Canyon Services Group Inc. (TSX:FRC)—another player that's evolving in the energy services space. It would be one to watch as a smaller entity in the frack business.

TER: In the U.S., the Obama administration ordered a moratorium on offshore oil and gas drilling as a result of the Gulf of Mexico (GOM) oil spill. What's Wellington's take of what's happening in the Gulf?

KS: Overall, it's a tragedy. For the next six months, obviously, the drilling permits have been stopped for the deeper drilling. Approximately 33 deepwater drilling permits were suspended for the next six months, and no further licenses will be issued until the cause of the explosion is known in more detail. My numbers say approximately 9% of U.S. oil production and about 3% of U.S. gas production comes from the deepwater drilling in the GOM. If you look at shallow drilling, the numbers are closer to 30% U.S. oil and 11% gas. Obviously, stopping deepwater drilling for six months will have an impact.

TER: Do you see an outright ban?

KS: No, I don't. Let's face it, offshore development for the energy industry is very important to the global supply and demand picture. Thousands and thousands of offshore well operations have been executed safely and efficiently. Quite honestly, the industry does a very good job of putting the right procedures in place and operates many safely run operations.

TER: What do you recommend investors do with offshore plays in the GOM?

KS: If people, who are currently invest only in GOM-based companies, want to have a portion of their portfolio in the offshore space, there are other places they can direct their money over the next 6–12 months while the GOM gets sorted out and back up and running.

TER: Where are those places?

KS: There's an awful lot of activity going on in UK's North Sea. Companies like Talisman and Nexen Inc. (TSX:NXY; NYSE:NXY), which are starting to ramp up activity there; and even smaller caps I cover that are growing steadily into the mid-cap space, in terms of overall asset base, like Ithaca Energy Inc. (TSX:IAE) and Sterling Resources Ltd. (TSX.V:SLG).

Ithaca is manufacturing oil in the North Sea and has steadily delivered results over the past 12 months, increasing oil production and boosting 2P reserves. And Sterling just started a six-well offshore drilling program with five of those in the North Sea targeting shallow depths (i.e., relatively simplistic operations, yet high impact oil and gas prospects).

There's offshore in Brazil and lots of other places around the world where you can direct money to the offshore side of the business. Many people in the investment world like the offshore space, given it provides exposure to big reserve targets per well and material changes in a stock's market performance overnight.

TER: A recent Wellington West investment presentation deemed Kurdistan "the world's hottest exploration region." Please explain.

KS: Kurdistan has what we would call "mega play" potential. There aren't too many multi-billion barrel areas that have been under-exploited or under-explored. Kurdistan is one of those regions because it hasn't been open for business to oil and gas nations or entities under the different government regimes of the last 20 years. There's huge hydrocarbon potential there, contained within huge seismic structures. That's the attraction to Kurdistan. You've seen companies like Heritage Oil Corp. (TSX:HOC) and Gulf Keystone Petroleum Ltd. (LSE:GKP), the United States Short Oil Fund (NYSE:DNO) and others positioning in Kurdistan, as well as the smaller companies like Vast Exploration Inc. (TSX.V:VST), Longford Energy (TSX.V:LFD), Range Energy Resources Inc. (TSX.V:RGO) and others that are trying to tie up land positions as more and more management teams see the big rewards if you drill into one of these mega, multi-billion barrel discoveries. The discoveries are so big—it is one of the only places in the world you can still get truly "BIG" oil in place.

TER: What's the risk?

KS: The risk with Kurdistan continues to be the geopolitical environment between Baghdad and the Kurdistan regional government. At the end of the day, you've got over 35 international oil and gas companies in the area. Many governments around the world are trying to work with Baghdad and the Kurdistan regional government to figure out a proper business "law" to move the oil and gas industry forward. Kurdistan is definitely at a real primitive stage, in terms of having a business system and set of regulations for investment into the area by oil and gas companies. That's the risk right now, but there's a huge prize for the government to resolve this situation. I believe it will get resolved, but it may take some time.

TER: What are some junior E&P companies that you're following in Kurdistan?

KS: I cover Vast and Longford. Vast just spud a well a few weeks ago with Niko Resources Ltd. (TSX: NKO), a large international operator in the area. It's pretty exciting times for Vast right now. Vast has several large structures on their block in Kurdistan. Most of the blocks there are on trend with some of the major producing fields, whether it's Kirkuk or Taq Taq. When you're putting a drill bit into the ground in Kurdistan, you're—what I call—going "deep sea fishing." You're not sure what you're going to hit! Oil and gas has been hit over the last 12–14 months across four different horizons of interest. Whether it's in the Tertiary, Cretaceous, Jurassic or Triassic, there's a lot of hydrocarbon potential to change a company's stock price materially overnight.

Vast is currently drilling three large structures, all of which could easily be 100–350 million barrels. You could hit a 1 billion+ barrels-a-day find like that which Heritage hit not long ago. Other big players in the area that have drilled successful wells like Addax Petroleum Ltd. (TSX.V:SLG), which has now sold; and Gulf Keystone, farther to the north in the Kurdistan region, has hit some big finds. Both Vast and Longford are run by the same management team. The Longford block is a shallow development play that already has a number of vertical wells that were put into the block that did produce or show oil. We believe, Range Energy Resources is the cheapest trading stock in the Kurdistan space, currently, and could have one of the most attractive blocks in all of the Kurdistan region, nestled between the Heritage discovery and the existing multi-billion barrel Taq Taq field.

TER: Congratulations on the success you've had with Bankers Petroleum Ltd. (TSX:BNK), Painted Pony and Arsenal Energy Inc. (TSX:AEI). Of all those companies, what are some common elements that allowed such dramatic appreciation of their respective share prices?

KS: I'm a technical guy—oil and gas engineer/operations—by background. I look for what I call a "manufacturing approach" to a lot of the plays. I like to see legs to the story, in terms of growth in proven and probable reserves (2P). A lot of companies in the oil and gas industry can go out and drill a few wells and press release some pretty big production numbers. At the end of the day, you have to build 2P reserves to build a successful oil and gas company—small or big. Companies like Painted Pony, Arsenal, Bellatrix, Midway, Ithaca and Sterling are all steadily building 2P reserves and increasing shareholder value. Many of these companies are involved in very repeatable-type plays in the oil and gas space. There is minimal geological risk in these plays, as the oil or gas resource is there. It really comes down to recovery and the application of technology for exploitation. They tie up the land, and then use technology—horizontal drilling, multi-stage fracks, etc.—to boost the recovery factor per well. They boost the production rates and focus on depleting the resource per section across their acreage in a very methodical "assembly-line" manufacturing approach. If companies are doing that and you can see that they've got low-risk acreage in front of them, reserve estimators will give them credit for the reserves.

TER: Where does the "manufacturing" come in?

KS: If companies boost recoveries on their assets, they'll continue to what I call "manufacture" oil or gas in the space. The Cardium companies like Bellatrix are doing that very effectively right now. Bakken players like Painted Pony in southeast Saskatchewan continue to do this very effectively and have made a lot of money for shareholders in the last few years with significant growth we believe still ahead of them in very repeatable plays both in the Bakken and in the Montney resource play in northeastern BC.

On our valuation, Arsenal Energy is a very undervalued company—one of the cheapest oil stocks in the entire domestic space. Arsenal has just recently released two very successful North Dakota Bakken horizontal results, with these wells coming in at over 1,000 barrels per day (bpd) gross for initial production rates. You get big reserves from both of those wells, anywhere from 400,000–800,000 barrels in 2P reserve bookings. Arsenal's acreage in North Dakota is very low risk, as it has a number of wells on its property that have been drilled successfully in both the Bakken and emerging Three Forks oil resource plays. Companies like Continental Resources Inc. (NYSE:CLR) and EOG Resources (NYSE:EOG) have been drilling up all around them and de-risked their acreage. NuLoch Resources (TSX.V:NLR-A) is another North Dakota Bakken and Three Forks player to watch, with a huge acreage position (over 100 net sections) in these plays and partnered with larger companies like Baytex Energy Trust (TSX:BTE). When you have companies that have acreage in the right spot and very definable and visible production ramps in a well-known play wherein they have a large inventory of drill-ready locations, the value growth going forward is present. That's why I believe a lot of these companies have, obviously, appreciated over the last year or so.

TER: What are some of your strong buys among the domestics?

KS: We've talked about a few of them already. Bellatrix is definitely a strong buy recommendation. It has one of the premier acreage positions in the Cardium play with 81 net sections. It is right alongside the PetroBakkens and Daylights of the world. Bellatrix is one of the most attractive valuations in the Cardium space compared with its peer group. If you reverse engineer the buyout matrix of some of the companies PetroBakken and Daylight have purchased in the Cardium space over the last six months, you get Bellatrix anywhere between $8 and $10 a share. It's trading just over $3 right now.

Bellatrix has a great management team. It's a sizeable entity—over 8,000 bpd right now—and planning to exit the year at around the 10,000-bpd mark. There are hundreds and hundreds of locations in two great repeatable resource plays (i.e., the Cardium), and then the very liquids-rich Notikewin play in Alberta. These wells are drilled for about $3 million each. They test at 10+ mmcf/d and make anywhere from 30–70 barrels per million of liquids, which is mostly all condensate. Even in a low gas price environment, the economics in those plays are hugely supportive at current gas prices due to the couple hundred barrels of condensate/liquids they get with these wells.

TER: Let's continue with the strong buys.

KS: Arsenal is a smaller company than Bellatrix; it is producing about 2,600 bpd now, but it is very heavily weighted toward oil—more than 75% oil. The company really has three different core areas of operation and drilling. Right now, they trade at about half of their net asset value (NAV). I think they are around $0.90 on the recent broader market pullback, and it's trading at about 0.3x its price to cash flow at the end of this year. Arsenal is one of the best buys, valuation-wise; its stock should be well over a dollar.

Painted Pony's current trading price is more than backed up by what I call its Bakken oil "manufacturing" in southeastern Saskatchewan. It's in and around $6 and has over 100 net sections of Bakken acreage, which is over 95% undeveloped. We also believe the company's getting next to no value in its stock price for having one of the best acreage positions in the Montney shale play in northeastern BC. Painted Pony is surrounded by Talisman, Progress, Husky, Shell and others, with 126 net sections in the Montney. Over the last few weeks, it issued a press release on a couple of very successful Montney drill tests on its 100%-owned land; and the company's strategically partnered with Talisman and Progress on some bigger scale developments in the area. Painted Pony is one to watch, especially if gas price appreciates.

Another company in the domestic space and one to watch that just converted from a trust to a corporation is called Equal Energy. The company generates about 9,500 barrels of oil equivalent (boepd) and has several different resource plays in its asset portfolio. Equal has 21+ different oil pools here in Canada; and several of the favorites like the 'Cardium, Viking, Pemiscot and Dina light oil plays." It's just starting to drill some of growth areas and has already had some solid initial successes. The company, which rebranded officially as of June, is under new management; and management has done a great job of paying down over $150 million of debt so far to reposition this sizeable producer as a newly focused, emerging "mid cap." It's just coming out of the gate to start drilling its first series of horizontal wells; so that's one to watch.

TER: Any thoughts you'd like to leave us with?

KS: I see lots of room for growth in the energy side of the business. At some point, I see gas prices coming back to more of our cost basis on the North American side, call it $6–$7. As the gas price appreciates, you're going to see that a lot of stocks—both in the small- and mid-cap space—have a lot of torque to them. As the industries continue to put horizontal technology to bear, there's going to be significant growth in the oil plays domestically and internationally. It's a good place to be for investors—there's a lot of money to be made both domestically and internationally with oil prices over $60 a barrel.

TER: Thanks so much for speaking with us today, Kevin.

Kevin Shaw has extensive industry experience, including engineering, operations and management positions with Imperial Oil Resources, Trimox Energy Inc. and Colt Worley Parsons. Mr. Shaw has a B.Sc. in Mechanical Engineering with a minor in Petroleum; and an MBA from the Haskayne School of Business at the University of Calgary.

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.

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


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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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

Have a good one.
Thursday
Jun172010

Geological anomalies are like opinions: Everybody has one

By Louis James, Senior Editor, Casey’s International Speculator





There’s a great deal of chatter in the press and online about the tremendous US$1-trillion-dollar mineral “discovery” in Afghanistan headlined by The New York Times recently. Most of the discussion seems to centre on whether or not this is really news and whether or not the NYT was played by the powers that be for purposes of their own. Few, if any, people seem to be questioning the value of the so-called discovery itself. The US$1-trillion-dollar figure, at best, cannot be anything more than the wildest of hopeful guesses.

One does not have to be a geologist or an engineer to understand why. When geologists find outcropping mineralization, or other signs that an economic deposit of minerals may be present, that is not called a discovery. Even if the signs come from the latest scientific equipment flown over the country, as the U.S. government appears to have used, the result is still just an anomaly: a hopeful indication of where to look. And anomalies are like opinions: Everybody has one.

Once an anomaly is identified, it takes extensive and very expensive field work to determine the best locations for drilling holes in the ground, which you have to do to calculate a volume of mineralized rock, from which you can estimate the metal contained. It usually takes at least a year, and often several, to identify targets for drilling. And drilling off a deposit of any significant size takes several more years, usually after many false starts and setbacks, because you can’t see through rock to know where the goods are.

But even after you drill off a deposit, and know how big it is, how deep it is, and roughly what’s in it, you still don’t know what it’s worth. For that, you have to conduct extensive testing on the mineralized material, not just to quantify the metals or other desirable minerals within but also to see if there are contaminants, or other elements present that can complicate, or even make impossible the economic recovery of the valuable mineral.

In short, until you know how much it would cost to mine and process any sort of mineralized material into a saleable product, like gold bars, copper concentrate, etc., you cannot say what it’s worth. Even a huge deposit of gold may be completely worthless if the grade is low and there’s lots of carbon that would mess up the gold recovery.

Now, back to Afghanistan. A “small team of Pentagon officials and American geologists” cannot possibly have drilled off these deposits, let alone done the engineering required to value them. At very best, they’ve spotted some outcrops and taken some samples. This is not a discovery — no serious exploration geologist would call anything a discovery until enough holes have been drilled into it to outline a significant volume of potentially economic material.

What we have here is a regional survey that may or may not lead to significant discoveries.

Where do they get the trillion-dollar figure? We can only guess but given their own description, they cannot have done the work necessary to generate any reasonable estimate. It’s worth pointing out that the vast majority of mineral outcroppings and other anomalies never lead to economic discoveries, much less mines. Even a very rich vein sticking right out on surface can turn out to be the last dregs of a system that has been eroded away, leaving nothing but a tease behind. For gold, the odds of an anomaly leading to an economic discovery are often cited as being on the order of 300 to one, against.

No responsible geologist would circulate a valuation figure at this stage of the process in Afghanistan. In fact, if a public company put out a press release like this story in the NYT, the exchange would likely reprimand it severely and require a retraction.

Now, the soldier quoted admits that “There are a lot of ifs,” but that does not excuse putting out the US$1-trillion figure, a number that cannot be reasonably supported at this point.

Note that this doesn’t mean the minerals are not there — Afghanistan has, for obvious reasons, not seen any modern exploration, or even antiquated exploration, for decades. It is, in all likelihood, a terrific place to look for minerals. But the government’s story sounds like the sort of PR stunt put out by Pink Sheet scammers.

It will take time for any real discoveries to be made, especially given the time required to draft a workable mining law and for physical security to be established in the country. It would be a great benefit to the people of Afghanistan, and of the world, if this would happen
----

Separating sound opportunities from all of the hype is something Senior Editor, Louis James, successfully does each month in Casey's International Speculator. By putting his boots on the ground and kicking rocks in the world's most remote locations, meeting geologists and company management on-site, and personally inspecting the find, he continually brings winning picks to his subscribers. In 2009 every recommendation he made was a winner, with an average portfolio gain of 80.8%.  And so far, the 2010 portfolio looks poised to smash last year's record. If you'd like to learn how you can profit from the natural resource and junior exploration companies Louis is recommending right now in Casey's International Speculator.


Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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


Tuesday
Jun152010

Adrian Day: Wanna Go ‘Green’? Go Geothermal

Adrian Day 16 June 2010.jpg

Source: Brian Sylvester and Karen Roche of The Energy Report 6/15/10
http://www.theenergyreport.com/pub/na/6536

Investment guru Adrian Day likes "green" energy but doesn't see many ways to make money in that space, save two. In this "Coles Notes" interview with The Energy Report, Adrian gives us his favorite juniors in the geothermal sector and even offers a few of the base metals juniors that he owns.

The Energy Report: Could you give us an overview of the alternative energy market?

Adrian Day: We all know the story of why green energy is attractive. We all know the story about oil, the risks and buying it from unstable foreign countries. . .how dirty coal is, and so on. So, we all know the potential advantages of what we might call "green" or "alternative" energy.

The big problem for me, being a realist, is that most of them don't make money. Wind, solar and biomass are really just marginal additions to energy. At least for the foreseeable future, they're marginal in the overall picture, and they're also uneconomic. The only reason they make money is because the government gives them ridiculously outrageous grants.

TER: But of these different sectors of alternative energy—wind, solar and geothermal—you seem to hold a preference for geothermal energy.

AD: The beauty of geothermal is that it is green, renewable and has a very, very low environmental footprint. . .and it actually makes money. Now, the two that I like—Ram Power Corp. (TSX:RPG) and Magma Energy Corp. (TSX:MXY)—are both small companies, but they are the largest of the juniors. That's really important; in the geothermal space, you really have to have scale to grow. In very simplistic terms—and you know I am a simplistic person—the big difference between say the metals industry, or gold exploration, and geothermal is that a lot of your costs come right up front in the initial stages of exploration. And so, the costs are pretty heavy at the early stage of exploration; but, once the thing's in production, the capital costs, and, in particular, the operating costs, tend to be very, very low indeed. The point I'm making, however, is that you need scale in order to get to first base.

These two companies are both large enough and have good enough balance sheets that they are able to do the adequate exploration; and, of course, once you've done the exploration in the U.S., you can get some grants back from the government to help reduce your costs. Both of them have strong entrepreneurial management; both of them are growing. Just in the last couple of weeks, Magma has taken over the half of Iceland's big Orka Project that it didn't own—but it now has taken effective control: 98 %.

And Ram has just made an all-stock offer for a small geothermal company called Sierra Geothermal Power Corp. (TSX.V:SRA), and that's a perfect illustration of what I was saying. Sierra has a very good pipeline of about 14 projects in the U.S., a very good pipeline, but it just didn't have the capital to explore them and without the capital to explore them, they couldn't get grants from the government. It was really just stuck; it couldn't move forward. So Ram has a wonderful deal by buying these things very, very cheaply, and it has the capital to pursue them. So, yes, I like those two very much, and they're both at very good buying prices right now.

TER: You have all these gold equities and some royalty companies, but these are the only two geothermals. How did they find their way into your asset portfolio?

AD: I'm not sure whether you're talking about my money management or my newsletter—we have a lot of metals companies, resources of various types in the money management, so these would not be the only non-gold assets that we own. But I think the attraction there is that they have sort of high potential that you can see from a junior gold-exploration stock, and the people involved—or the people behind both Magma and Ram—are people who have been involved in the gold-mining industry. So, I think it was a sort of a natural fit.

TER: I believe those companies were in your newsletter list.

AD: That's probably right. We have a couple of larger oil and gas companies; but in the money management, we own a reasonable amount of smaller, diversified metal companies. One of my long-time favorites, Altius Minerals Corporation (TSX.V:ALS), for example, is primarily base metals and uranium. You know we own some silver companies, obviously; and Lumina Copper Corp. (TSX:LCC), a copper company.

TER: Any parting thoughts?

AD: The next few months, I think, will offer some great opportunities for buying, but I also think one needs to be a little bit cautious and, in particular, one needs to be selective in the next few months. I do think prices have the potential to come down in the next couple of months, but that will be the opportunity to buy.

Adrian Day is a British-born writer and money manager, a graduate of the London School of Economics, who has made a name for himself searching out unusual opportunities around the world, with two books on the subject. At his money management firm, Adrian Day Asset Management, he specializes in global diversification and gold equities for individual and institutional clients. Adrian is a frequent speaker at international seminars, and is a frequently guest on CNBC and The Wall Street Journal Radio network and has been interviewed by Money, Straits Times, Good Morning America and others.

Adrian's forthcoming book Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks will be published by Wiley this autumn. He is also a contributor to the recent The Golden Rule: Safe Strategies of Sage Investors.

You may learn more about his services at www.AdrianDayAssetManagent.com, or via email AssetManagement@AdrianDay.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.

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


Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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


Monday
Jun142010

AEHI Signs MOU With Hyperion Power To Manufacture Small, Modular Nuclear Reactors In China And Market World-Wide

hyperion-power-plant-20-nov-09.jpg
 
Partnership to open untapped opportunities in commercial nuclear power

EAGLE, IDAHO - June 14, 2010 - Alternate Energy Holdings, Inc. (OTCQB: AEHI) - today announced the signing of a memorandum of understanding with New Mexico-based Hyperion Power Generation, Inc.  The MOU is the beginning of a joint venture between the two companies to license, build and market Hyperion's refrigerator-sized modular nuclear reactors on a world-wide basis.
 
"I am extremely excited and honored to be a partner with Hyperion and its equally impressive 25 MWe Hyperion Power Module.  It is one of the most innovative products I've seen in my 46 years in the nuclear industry.  Because of its small size the power plant's applications are limitless and could fuel a huge variety of important facilities including: hospitals, desalinization plants, emergency facilities, industrial parks, factories, military bases, and even small towns for many years.  Because of its innovative and exclusive design, Hyperion's technology can even open up applications that no other production reactor can perform.   Our partnership will make it possible to market the product internationally, and to locate specific applications in the United States," said Don Gillispie, AEHI CEO and Chairman.

"We chose AEHI to assist us in this endeavor because the company is independently operated, has unprecedented connections in the international community, especially in China, and is headed up by some of the most well-known and respected individuals in the nuclear industry.  If there is one company that has the ability to successfully place the Hyperion product in the international spotlight, it is AEHI," said John R. "Grizz" Deal, Hyperion CEO.

Hyperion knocked the nuclear industry on its heels last year when company officials announced the ultra-small reactor, which already has more than 150 purchase commitments from customers such as mining and telecom companies.  Unlike most reactors, Hyperion transportable reactors are sealed at the factory and are not refueled onsite.  When the reactor has exhausted its fuel, it is returned to the factory and a new reactor is simply installed in its place.

"The Hyperion Power Module practically sells itself," said Gillispie.  "It can be installed in a small vault, could power about 25,000 homes, and comes with an unbelievably affordable price tag. In, addition, the power plants can be stacked to provide exactly the amount of power needed now and still have the option to increase power supplies in the future if power demands increase. That combination opens up a limitless market, in which AEHI has a variety of customers who are ready to buy."

About Alternate Energy Holdings, Inc. (http://www.AEHIPower.com) -- Alternate Energy Holdings develops and markets innovative clean energy sources. The company is the nation's only independent nuclear power plant developer seeking to build new power plants in multiple non-nuclear states. Other projects include Energy Neutral™, which removes energy demands from homes and businesses (http://www.EnergyNeutralinc.com) Colorado Energy Park (nuclear and solar generation), and International Reactors, which assists developing countries with nuclear reactors for power generation, production of potable water and other suitable applications. AEHI China, headquartered in Beijing, develops joint ventures to produce nuclear plant components and consults on nuclear power. 
 
About Hyperion Power Generation, Inc. (http://www.HyperionPowerGeneration.com) -- Hyperion Power Generation Inc. is a privately held company formed to commercialize a small modular nuclear reactor designed by Los Alamos National Laboratory ("LANL") scientists leveraging forty years of technological advancement. The reactor, known as the Hyperion Power Module ("HPM"), designed to fill a previously unmet need for a transportable power source that is safe, clean, sustainable, and cost-efficient.
 
"Safe Harbor" Statement: This press release may contain certain forward-looking statements within the meaning of Sections 27A & 21E of the amended Securities and Exchange Acts of 1933-34, which are intended to be covered by the safe harbors created thereby. Although AEHI believes that the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that these statements included in this press release will prove accurate. As a result, investors should not place undue reliance on these forward-looking statements.



Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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

Monday
Jun142010

Hydroelectric Revolution: A River Runs Through It

River Power 15 June 2010.jpg

By Marin Katusa, Chief Investment Strategist, Casey Research Energy team


Two years ago, British Columbia’s premier electric utility company, BC Hydro, issued its “Clean Power Call” – a bid for the province to achieve electric self-sufficiency through renewable energy by 2016. That aggressive goal sparked an intense competition. Renewable energy companies of all stripes were jostling each other to prove that their project was the best, and to win a coveted Electricity Purchase Agreement (EPA).

When the EPAs were finally handed out, one green technology captured over half of the sixteen contracts awarded. The overwhelming winner? Not solar and wind, but a relatively obscure type of hydroelectric power that is quickly becoming all the rage: run of river.

It’s no secret that hydroelectricity sits near the top of the renewable energy list. But hydro invariably conjures images of soaring concrete dams, rerouted rivers and flooding, environmental damage and displaced people. Not to mention the stiff price tag that comes with such an immense engineering project.

However, as British Columbia is proving, hydroelectric power generation is not limited to just dams. For junior hydroelectric companies, these run-of-river projects are a less expensive, more efficient, and fish-friendlier way to get in on the energy game. They’re also a ground-floor investment opportunity.

Run of river exploits the elevation drop of a river. Power stations are built on rivers with a consistent and steady flow, either natural or regulated by a reservoir at the head of the facility. There is no need to flood large tracts of land to keep the plant humming during the dry season; run-of-river projects simply use a weir (a small, only partially blocking dam) to divert some water via a penstock (delivery pipe). As the water flows downhill, it picks up the speed necessary to spin the turbines in the powerhouse and create electricity. The diverted water then joins the river again through a channel known as a tailrace.



Everything is done within the natural range of the river. There’s no need for the concrete monstrosities that come with large-scale damming – or the associated environmental controversy. At the most, a weir is constructed to submerge the mouth of the penstock. Capital outlays are relatively low, the ecological footprint from the projects is quite small, and if the geology is right, engineers can tailor the technology to the terrain, rather than having to wrestle with it.

Run of river just might be the ultimate in green power. On the one hand, with its near-zero emissions, it stacks up favorably against conventional, polluting sources of energy. At the same time, it has a distinct advantage over other renewables, like solar and wind. There’s no need for the costly backup generation units these technologies require to operate on calm days or at night.

These power plants have actually been around since the 1970s, but the technology has only started to take off in the last few years. In countries that can, and do, use hydro as a power source, the competition for contracts is becoming fierce. And thanks to the comparatively low costs, junior, small-cap companies are making out especially well, leaving the big boys to handle the staggering debt and the environmental protests associated with huge dams. Smaller-scale projects mean fewer headaches while providing excellent returns on investment.

Of course, nothing’s perfect, and run of river has its challenges. One is that without a large dam or reservoir, there is no way to store energy and adjust power output according to peak periods of consumer demand. There are also still environmental issues, albeit much less drastic than with a traditional dam. Somebody will always object to new roads and transmission lines. And while the projects are usually sited away from fish-spawning grounds, aquatic life still can get trapped behind the weirs or at the mouth of the penstock.

But one of the beauties of the technology is its flexibility. Engineering solutions like fish ladders, water-velocity regulators, and careful site design can mitigate many of these concerns. The smarter companies also work closely with local communities, to head off problems early on.

The biggest limitation is geology. These generators can’t be built across just any old river; only regions with a favorable lay of the land will do. And the next biggest is probably politics. Some African nations that could really benefit are too unstable to attract sufficient investment capital. Other countries, like Venezuela, deter investors because of the risk of nationalization. Still, the good news is that there is immense potential to be found on almost every continent, while utilization remains in its infancy. And as construction designs improve and engineers innovate, project sites that were formerly only theoretically feasible will become economically viable.

Run of river will not completely replace conventional hydro. It’s not meant to. There’s no way naturally running water can compete with something like the Three Gorges Dam across the Yangtze River in China, a project which will eventually have a total electric generating capacity of 22,500 megawatts. By comparison, the premier U.S. run-of-river plant – the Chief Joseph Dam on the Columbia River in Washington State – produces a “mere” 2,620 MW.

Be aware, though, that 2,620 MW is hardly trivial. Apply the usual rule of thumb, where one megawatt will supply the needs of 500-900 average houses, and this run-of-river plant could serve as many as 2.4 million homes. Not bad.

As the era of cheap fossil fuels winds down, governments and entrepreneurs alike are searching for alternative energy sources. Given run of river’s advantages – low initial cost and maintenance, flexibility, environmental friendliness – it is poised on the brink of a major construction boom, in many more places than British Columbia. 

It’s going to be an exciting ride, for end users and investors alike.

----

If you’re interested in “investing green,” Marin Katusa has the best picks for you... companies that make sense not only environmentally but also economically. Learn how Marin keeps picking stock winners by sorting through the hype and being left with only the best of the best.Read more here.  








Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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

Thursday
Jun102010

Fadel Gheit: Gas Sector M&A Activity About to Ramp Up

Source: Brian Sylvester of The Energy Report  6/10/10
http://www.theenergyreport.com/pub/na/6500

Fadel Gheit.jpg

When folks want the straight goods on the oil and gas sector they go to Oppenheimer's sage Managing Director Fadel Gheit. That's what we wanted, too, when we asked him to spend some time with The Energy Report. In this upfront interview, Gheit rails against government inaction on oil price speculation and predicts low gas prices will soon lead to more M&A activity. Gheit's market commentary is frank and insightful and could certainly impact your investment decisions.

The Energy Report: The oil spill in the Gulf of Mexico (GOM) continues to get daily headlines. Is the spill affecting the oil price or only the prices of companies with exposure to the Macondo accident?

Fadel Gheit: The spill really did not have any impact on oil prices. Oil prices are basically reflecting increased concern about global economic growth and China slowing down its economy; Europe is obviously having problems with the bailout of Greece and the expectation of bailouts for Portugal and even Spain. That casts a shadow on global economic growth and therefore demand for oil is likely to be a lot lower than earlier forecasts. That's why oil prices came down from $86 to $70. The Gulf incident really did not have any impact.

TER: You have a perform rating on BP (NYSE:BP; LSE:BP) and Anadarko Petroleum (NYSE:APC), two companies involved in Macondo. What is the rationale behind those recommendations?

FG: Well, we have not changed our recommendation on BP. We downgraded Anadarko because its exposure to future liabilities relative to size is almost 1.5 times the impact on BP. It is less financially flexible than BP, so BP can go and borrow $10 billion and still have a relatively acceptable debt ratio while Anadarko is pretty stretched out as far as its financial flexibility. They are two totally different companies, but unfortunately they are in the same boat. Their stocks have suffered significantly over the last 30 days.

TER: But at the beginning of May, well after the accident, you still had an outperform rating on Anadarko.

FG: Correct. Anadarko and BP both lost 29% of their market value in the last month. I thought for a while that Anadarko could withstand the pressure a little bit because it has tremendous upside potential as far as drilling. But then a lot of people concluded, including myself, that it has very high exposure to offshore drilling, which is likely to enter a new phase of government regulations. That would make it less appealing than it was only 30 days ago. That's the reason for the downgrade.

TER: In another May report you had EOG Resources (NYSE:EOG), Pioneer Natural Resources Co. (NSYE:PXD), and Occidental Petroleum Corp. (NYSE:OXY) rated as outperform due to their lack of exposure to what's going on in the GOM. Tell us about these companies.

FG: By definition companies that have very large exposure to an unconventional play are immune to what is happening in offshore as a result of the oil spill. Companies like EOG have very little footprint or none when it comes to offshore. It is going into production in the U.S. and focusing on liquid production growth and because oil is selling at a significant premium to natural gas. EOG and the rest of the independent oil and gas producers have increased their focus on growing their oil production at a much faster rate than they had planned only a few months ago. That's one of the reasons that we still like EOG. We still like Chesapeake Energy Corp. (NYSE:CHK). We still like Devon Energy (NYSE:DVN). All these companies are basically or predominantly natural gas but they are increasing their focus on oil.

TER: Are there other buying opportunities related to the Gulf?

FG: I do not follow services companies, but obviously increasing regulations will force producers to use more services to do more tests and be more careful going forward. Money will go to the service provider, whether it's a helicopter company or companies that do basic drilling platform maintenance to make sure that we are safe and sound. There will be winners in the new era of government regulations.

TER: In another Oppenheimer report it's stated that investors dumped companies with exposure to the GOM after White House comments regarding a possible moratorium on new drilling. Nonetheless, drilling in the Gulf continues. Might this be a good time to pick up some of those companies?

FG: Investors will shy away from companies that are making headlines for whatever reason. But a company like Apache Corp. (NYSE:APA), for example, is the largest operator of shallow offshore platforms and a very good operator. It has a clean track record. Obviously the stock came down very sharply on the news that there could be a moratorium on drilling and permitting. It also has a pending acquisition of Mariner Energy Inc. (NYSE:ME), which is focused on deepwater prospects. A lot of investors looked at the acquisition as negative and sold off. I like Apache, it has a very good management team, a very strong balance sheet, a very strong track record, too. It has become an investment opportunity.

TER: You were on MSNBC the other day talking about supply and demand fundamentals in the oil price. In another piece you said that some of the big financial players like pension funds, Goldman Sachs and Morgan Stanley are manipulating the oil market. Can you tell us how that works and what sort of role this price manipulation is playing in the oil price right now?

FG: I truly believe that speculation is driving or has driven oil prices in the last four or five years. Congress believed it too that's why there were hearings. I testified before Congress on that subject. The CFTC (Commodity Futures Trading Commission) chairman, who is a former partner of Goldman Sachs, believed exactly what I believe. The question is can we get Congress to really limit speculation by financial speculators. That becomes a tall order because of politics and lobbying and all these sort of things. I believe that if we put limits on commodity trading by non-principals—basically the financial players—I think you are going to see little volatility. I think you are going to see the restoration of supply/demand driven markets instead of future speculation driven markets, which we have right now and have had for the last five years.

TER: Do you believe the government will step in?

FG: I'm not sure. Elizabeth Warren, who is overseeing financial regulation in Washington, said publicly that the financial lobby and the financial industry is extremely powerful. Basically, when there are bought politicians on both sides of the aisle it becomes really difficult for Congress to push through this kind of regulation. The fact is even the CFTC chairman could not convince Congress to impose restrictions because his own staff shut him down. I am not hoping for change.

TER: Are you saying that consumers can expect artificially inflated oil prices for the foreseeable future?

FG: It's not only in oil prices. We've seen it in real estate and look what happened—we had the financial meltdown. We're seeing it in commodities because of knee-jerk reactions, because of misinformation, because of a lack of government regulation. It's sad but this is the environment we live in. Government is either incompetent or corrupt and they put us in debt as a result. Like I said I'm a realist; I don't daydream a lot. If we believe that we are going to have (oil price) regulations, then we will be daydreaming.

TER: In your view what should the oil price be?

FG: Theoretically speaking, in my calculations I don't see oil prices justifiable above $60. There is an old rule called the one-third rule. Basically the replacement cost should be about one-third of what the oil price is. Right now the industry replacement cost is less than $20, so the commodity price should not exceed $60. This rule has been in place for 30 years and we haven't really changed much. Actually a company like Occidental Petroleum, they limit the replacement cost of a barrel of oil to 25% of what they think the price of the commodity is likely to be. Having said that, they'd love to see $80-$90 oil but they'd like to keep the replacement cost under $15.

TER: What is Oppenheimer predicting for oil in the next six months and then the next 12 months?

FG: We really don't predict too much because if you play the game by the rules and everybody else is cheating you're guaranteed to lose. I don't enjoy losing so in our income model we tell people what we fear and what we think. When we do our earnings estimate, we basically link our benchmark to whatever the NYMEX is telling us. If the futures index is telling us it's going to be $80 next year, we use 5% discount on that number. Right now we're looking at oil prices on average to be about $77 this year and about $80 plus dollars next year.

TER: How do investors profit from $75-$80 oil?

FG: There are a couple of things. Stable or lower oil prices will always favor larger companies like Exxon Mobil Corp. (NYSE:XOM), British Petroleum, Chevron Corp. (NYSE:CVX), ConocoPhillips (NYSE:COP) but if oil prices or natural gas prices increase significantly for whatever reason, whether through speculation or market events, investors usually flock into the stocks of the independent oil and gas producers because they have a higher beta. On the way down they decline the most and on the way up they gain the most. So I'm still very bullish longer term on domestic oil and gas producers.

TER: What do you see happening in the domestic oil and gas producer space?

FG: I think two things will take place. The survivors will get bigger. They will acquire smaller companies. Apache is buying Mariner at a decent premium, but they will extract good value out of it. I'm very surprised that we have not seen more mergers and acquisitions. If natural gas prices remain close to the current level and oil prices don't go much higher, I think we are going to see a lot of pressure on the smaller companies that have been waiting for a very, very big payday that might not come. These companies will probably settle for a lot less than what they had in mind; we are going to see a lot of mergers and acquisitions. As a result the independent oil and gas producers are very ripe for the picking by larger companies, whether domestic or international. And, as I said before, that will create value. These smaller companies have real growth. The larger companies have little or no growth. So I still like the oil E&P (exploration and production) stocks. I think this is the future. Investors are basically thinking the same way.

TER: Are there any high percentage takeover targets that you're looking at?

FG: Companies don't buy other companies for one or two reasons; they want to see the best fit. They look at value, not necessarily what they are paying for the company. I mean one plus two should not be three. It should be 3.5 or 4 or even 5. Then you're creating shareholder value. I would say most if not all the independent oil and gas producers are potential takeover targets. It's unrealistic to think all oil E&P companies are going to be taken over. Probably 10% of the independent oil and gas companies—if oil and gas prices don't move much higher from the current level—are likely to be acquired over the next couple of years.

TER: Are we more likely to see takeovers of onshore E&Ps? Offshore E&Ps? E&Ps in the oil sands? E&PS in the Bakkens? What's the focus going to be?

FG: The consolidation onshore is going to accelerate because I don't see any real spike in natural gas prices any time soon. It's going to be survival of the fittest. We are going to see consolidation in the major and unconventional plays whether the Bakken Shale in North Dakota or the Marcellus in Pennsylvania or the Eagle Ford in Texas or Haynesville in Texas and Louisiana. Timing will depend on where the commodity prices are going to be six months or a year from now.

TER: You see most of the consolidation in the gas and shale plays?

FG: Yes, because this is the area where people were betting on higher prices that never materialized. Most of them are beginning to think realistically. I mean don't hope for $10 gas because it's not going to come any time soon. You have to readjust your valuation of your assets so you're most likely to accept a much lower bid than you had in mind. That's essentially what XTO Energy (NYSE:XTO) did with Exxon. XTO is one of the largest E&P companies. It basically set the tone for what to expect in futures mergers and acquisitions.

TER: What sort of models are you using for the gas price?

FG: Almost everybody thinks that gas prices at best will reach $6 in two or three years. Might even reach $7 but that's about it. Any higher prices would bring more supply because everybody has perfected the technology—everybody. This is no longer an exclusive, private club. The smallest of the companies drilling in Haynesville or Eagle Ford or wherever can do a better job than the largest player in that play. If prices rise, supply is going to come at much faster rate. The market will have to reach an equilibrium. Every time we see higher prices, you're going to see more production. More production will bring the price back down and so forth. The $5 to $7 range is probably good for the next four, five, six years.

TER: A recent Oppenheimer report stated that replacing reserves at competitive costs is by far the biggest challenge facing oil and gas-producing companies. To what extent does this make secondary oil companies more likely to be takeover targets?

FG: This is the basis for our thesis that there are fewer and fewer areas for the large companies to go. National oil companies have taken over. They are no longer in the passenger seat—they are doing the driving. The oil companies basically serve those companies. Nationals want to pick their brains of the oil companies and give them whatever.

TER: Why is that?

FG: Because there is no access to large resources anywhere in the world. Iranco is just as good as Exxon or BP at drilling onshore. It's their backyard—every rock and stone in the desert. Why would they need an Exxon or BP or Chevron to share their wealth? Russia is learning very quickly. Five years ago they were inviting every company to go over there and invest a lot of money. They learned the game. Now they want to play it, so they try to push companies out. Venezuela! Hugo Chavez confiscated the assets of Exxon and ConocoPhilips. The fiscal regime is getting tougher. Terms are getting tougher. The profit per barrel in North America as a result of these changes is now the highest in the world for the large oil companies or for whatever companies. After all is said and done companies make more money per unit of production in North America than in any of other country.

TER: The last time you talked with us you talked about Exxon, Royal Dutch Shell Plc. (NYSE:RDS.A), ConocoPhilips and Chevron. Please give us an update on those companies.

FG: Conoco is undergoing major restructuring. They are selling some of their assets. These steps will generate about $15 billion. They are going to use $5 billion to pay down debt; $5 billion to buy back their stock. The other $5 billion will go to capital spending, growth projects, tactical acquisitions or to buy back stock. And to increase its dividend because they believe growing the dividend at a higher rate is appealing to shareholders.

Exxon is waiting for the final approval of the XTO acquisition, which could be the catalyst needed to get Exxon on the right track. Exxon stock has not done well at all in the last two years. The acquisition is not really going to move Exxon's production or reserves but it's going to double Exxon's gas production in North America. It will basically give Exxon all the tools of horizontal drilling, which XTO perfected, to use on a global scale. That's where the growth is likely to come. Royal Dutch is basically going through organization and cost saving measures to improve their competiveness and lower their operating costs under new CEO (Peter Voser). He used to be the CFO so he's focused on costs. I wish him luck and he seems to be doing a good job.

Chevron has the second best stock performance among major integrated oil companies. It has a very strong balance sheet with very low debt, and a very high level of cash on hand. It has a very rich portfolio of projects. They are progressing with one of the largest natural gas projects in the world—the Gorgon field in Australia. The gas in Australia is going to be converted into LNG onshore and then shipped to customers in Asia. It's a $42 billion dollar project—the largest in the company's history. It's going to take four or five years to build. They have a lot of projects that will be following this one, unfortunately they are mostly natural gas, which is what most of these companies are focused on right now.

TER: What are your ratings on these companies?

FG: We have “perform” ratings on all of these companies, unfortunately, they have been underperforming the market. Although the market so far this year is down about 4% all these stocks are down on average about 17% or 15%. The only stock that has outperformed the S&P 500 this year is ConocoPhilips. It's down but it's down less than the market.

TER: Are you more bullish on natural gas or oil producers at this point?

FG: You have to recognize the fact that oil is trading at 200% premium to natural gas. It's an undeniable fact. A lot of companies, if they have a choice, will increase their drilling on oil deposits instead of gas. They will keep gas until the price is right and to them the price is not right. Why waste the resource in an overcrowded and oversupplied market? Longer-term I think we should all be more bullish on gas. It's cheaper. It's cleaner. We should have plenty of it. The technology has been perfected by E&P companies and now the big and mighty from all over the world are coming to the U.S. to learn the technology at the hand of the masters. The masters happen to be the small E&P companies, whether it's Chesapeake, whether it's EOG, whether it's Range Resources (NYSE:RRC). It is really the future of this country. It's a commodity that relative to oil is undervalued and in more abundance now than oil and less political, which is very important. If the blowout in the Gulf of Mexico had been a gas field, we might not be in the mess we are in now.

TER: Who do you like among the independent gas producers?

FG: We like Devon Energy a lot. Devon recently sold its offshore assets and is now an onshore North American play. The safest you can get. The most stable area you can do business in. The focus is mostly on natural gas in the U.S. and unconventional oil, which is basically the oil sands in Canada. They are using the most advanced seismic deep technology, which is basically in situ processing. They produce oil by injecting super heated steam into the deposit and collect the oil. They are already producing from one project—Jackfish 1. They are duplicating it and have almost completed Jackfish 2. They have a permit to do Jackfish 3. Each project produces 30,000 barrels a day. Very profitable, very long reserve life, clean technology and a very well-managed company. Devon was one of the pioneers of horizontal drilling in the Barnett shale. They drilled more horizontal wells than any other company so they are expanding in other plays. The recent sell-off program gave them over $8 billion, which exceeded the high end of the forecast of $7.5 billion. The money is going to be split. Half of it is going to go to share buyback, which will be about 15% of the shares outstanding. The rest will be used to pay down debt. Two things that are likely to push the stock price higher. The reason the stock has not done much is basically because it's a predominantly natural gas play.

TER: Are there any thoughts you'd like to leave us with?

FG: I think price volatility will continue. I think it's a shame that the government knows what's going on and either does not want to do or cannot do anything about it. I think market transparency should be the norm, not the exception. I think it's the volatility that really hurts planning and future investment. Companies do not know how to budget if they don't know where gas prices will be a week from now or a year from now or whenever. Unfortunately, financial players can gain at the expense of consumers that have to pay dearly for the commodities that they are using.

Fadel Gheit is a managing director and senior analyst covering the oil and gas sector for New York-based Oppenheimer & Co. He spent six years with Mobil Oil and five years with Stone & Webster. He has been an energy analyst since 1986 with Mabon Nugent and JP Morgan and has been with Oppenheimer & Co. Inc. since 1994. He has been named to The Wall Street Journal All-Star Annual Analyst Survey four times and was the top-ranked energy analyst on the Bloomberg Annual Analyst survey for four years. He is one of the most quoted analysts on energy issues and has testified before the U.S. Senate and the U.S. House of Representatives about oil price speculation, and is a frequent guest on TV and radio business programs. Fadel holds a B.S. in chemical engineering from Cairo University and M.B.A. in Finance from New York University.

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Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

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

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

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





Tuesday
Jun082010

Hyperion Power Generation (Mini Nuke) Update

Hyperion plant.jpg


Get the facts and avoid the hype in this unique workshop on Small, Modular, and Mini Power Reactors. There's more to this market than old light water technology!

The Symposium will address:

New information on the designs and applications of small, modular, and mini nuclear power reactors

Exclusive!  Introduction to the new class of reactors known as Mini Power Reactors
Special Presentation on the ANS President's Committee report on generic issues for SMRs


Advantages of the new non-light water reactor technologies

A training symposium that will describe technical designs and operations

Perspectives on the challenges of design approvals by the NRC

Many conferences have been held to discuss the generalities of what Secretary of Energy Stephen Chu describes as "America's next nuclear option," small and modular nuclear reactors (SMRs).  However, most events offer repeats of the narrow slice of information that has already been presented.

Now, EUCI-a leading power and utility training firm- is bringing together experts and innovators that will provide attendees with a complete picture of the fast emerging SMR industry - including information on the promising non-light water technologies and the even smaller Mini Power Reactors (MPRs).  Join us to hear intriguing NEW speakers on the most important energy technology development in recent history.

Offering unique applications such as replacements for aging coal-fired plants, Small, Modular, and Mini Reactors can be built in half the time of large reactors and for as little as $4,000 per kilowatt capacity. In addition, smaller reactors have technical advantages over other reactors including increased safety and reduction of spent fuel challenges.  The new non-light water Mini Power Reactors (MPRs) play a different role. MPRs are smaller and simpler still, can be installed even quicker than SMRs and offer a more transportable solution for remote deployments, military and emergency response operations, on-site water purification and liquid fuel generation, and more.

In The Wall Street Journal, Secretary Chu said, "Their (SMR) size would also increase flexibility for utilities since they could add units as demand changes, or use them for on-site replacement of aging fossil fuel plants. Some of the designs for SMRs use little or no water for cooling, which would reduce their environmental impact. Finally, some advanced concepts could potentially burn used fuel or nuclear waste, eliminating the plutonium that critics say could be used for nuclear weapons."

In short, there are different applications, challenges and opportunities for the various sizes of the reactors that fall under the category of "new and smaller."  Come and get the complete picture on this new era of nuclear energy in a workshop format.  We'll discuss technical, logistical and licensing issues, as well as implementation and application considerations. Join us and be part of "tomorrow's nuclear" that's evolving today!





Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address.

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.


Sunday
Jun062010

Australian Miners not best pleased with proposed 40% tax

Map of Australia Mines 06 June 2010.jpg


One of the risks to investment in the mining sector is that commonly known as geo-political risk, which has now cast its dark shadow over Australia as the Rudd government look to raise more money from one of her booming enterprises.

We kick off with a snipit from the BBC as follows:



Mining group Xstrata has halted investment in two projects in Australia because of the government's proposed new tax on mining profits. It said it was shelving investment worth 586m Australian dollars ($500m; £338m) in two mines in Queensland. The investment is part of a planned A$6.6bn development in both of the projects, which Xstrata said would have created 3,250 new jobs. Australia's government is planning a 40% tax on mining profits from 2012.

Last month, Australian iron ore miner Fortescue Metals threatened to abandon $15bn (£10.2bn) of new projects unless the plans for the mining tax were watered down or axed.

Bad news travels fast as we can see in this article from Xinhua:



CANBERRA, June 5 (Xinhua) -- The federal government's 61 billion dollars (50.3 billion U.S. dollars) Future Fund called for the proposed mining super-profits tax to be completely revamped or abandoned because it is a risk to investment and a short-sighted use of the nation's resources, local media reported on Saturday.

David Murray, the former Commonwealth Bank chief executive who is the chairman of the Future Fund, on Friday joined a chorus of business leaders decrying the design and implementation of the resource super-profits tax.

Murray described the mining tax as significantly flawed, saying it robbed future generations and represented a risk to Australia's international investment reputation.

In an interview with Business Spectator, Murray said that if Australia could not "achieve a design that does not penalize the existing projects -- that's a sovereign risk issue and a design that does not discriminate between recurrent spending and long- term intergenerational wealth creation -- if those things can't be done, the tax should be abandoned."

Murray also said it did not matter in the longer term if the budget were returned to surplus in three or four years' time and that "this tax could cause more trouble". "It's a long-term tax being applied to a short-term purpose, really, that's where the problems arise," Murray said.

An overview is provided by Mbendi.com as follows:



Australia is a major global producer, containing 26% of the world's reserves. It is also the world's second largest producer after Canada, with mine production touching 8,931 t of Uranium in 2003. Exports in 2003 were estoimated at 9,614 t valued at A$398 million.One of Australia's largest producers is Energy Resources Australia (ERA), a subsidiary of Rio Tinto. ERA's operates the Ranger mining operation as well as developing the Jabiluka prospect in the Alligators River region, east of Darwin in the Northern Territory. However, the Jabiluka development has run into several problems with environmental agencies.

Three uranium mines operated in Australia in 2003: Ranger open pit (5,065 t in 2003), Olympic Dam underground mine (3,176 t in 2003), and the Beverley (689 t in 2003).

During 2003, 9.0 Mt ore were mined at Olympic Dam and the processing plant treated 8.4 Mt ore with an average grade of 2.4% Cu and 0.63 kg/t of uranium. The Beverley ISL mine was extended from the North orebody into the much larger Central orebody and plant capacity expanded to include a third train of ion-exchange columns..

The Western Australian Government has prohibited the mining of uranium for nuclear purposes from any mining lease granted after June 2002. The policy was ratified with an amendment to the Mining Act, which prohibits the mining and export of uranium for nuclear purposes. There are no uranium mines in Western Australia, but large deposits occur at Kintyre and Yeelirrie.
Since 2006 40 percent of the world's known uranium reserves are found in Australia.

As investors in uranium stocks we can only hope that something can be worked out that does not derail the mining industry altogether, taking uranium with it.


Have a good one.

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

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

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

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



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


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

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address.

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.