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Sunday
Oct102010

U.S. Objects to Russian Uranium Deal

The Moscow Times 11 October 2010.JPG


This deal appears to be hampered by its inclusion of the Iran in the mix, by association it makes the American authorities a little uneasy as a Russian producer attempts to acquire a 51% stake in Uranium One, who in turn control 20% of the uranium market in the United States.

This is an extract from The Moscow Times on the subject:

Russian uranium producer Atomredmetzoloto maintained a calm front Friday in the face of objections by powerful U.S. legislators to a deal that would give it control over a uranium mining operation in the United States.

The Rosatom subsidiary is completing a complex transaction with Canada's Uranium One that would raise its share in the Canadian company to 51 percent. The transaction requires approval from the U.S. Treasury Department's Committee on Foreign Investment because of Uranium One's mining activities in Wyoming.

"We have provided all relevant information requested in the U.S., and elsewhere and we expect approval in due time," ARMZ spokesman Dmitry Shulga said. He declined to comment further.

Four Republican members of the U.S. House of Representatives sent a letter to Treasury Secretary Timothy Geithner urging him to block the Russian-Canadian deal, The Washington Times reported Tuesday.

According to the newspaper, the lawmakers pointed out past links between Rosatom and Iran, and wrote that the Russian federal agency has "shown little if any inclination to effectively address the widespread and continuing corruption within Russia, particularly its energy sector."

Additionally, the senators wrote that they "remain concerned that Iran could receive uranium supplies through direct or secondary proliferation," despite Uranium One assurances to the contrary.

Rosatom spokesman Vladislav Bochkov responded to the mention of corruption with perplexity.
"It's some sort of nonsense," Bochkov said Friday. " You can only respond emotionally to that kind of statement. What are they referring to? It's hard to speak without facts."

The legislators, Ileana Ros-Lehtinen of Florida, Spencer Bachus of Alabama, Peter King of New York and Howard McKeon of California, stand to become heads of House committees that could potentially intervene in the deal, should the Republicans take control of the House in the November elections.

Uranium One controls 20 percent of the U.S. uranium market through its mines in the Powder River Basin of Wyoming. The United States is the world's largest consumer of uranium products.
Anton Khlopkov, director of the Center for Energy and Security, saw the U.S. politicians' actions as an example "of how Russian business can or cannot work abroad, especially in the U.S."

"People understand this is unfair, especially when the Iran issue is raised," Khlopkov said.


Its a knotty problem yet to be resolved so we will keep an eye on it to see just how it unfolds.


Back to our latest venture which was the launch of an Options trading service, we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

SK Chart 11 October 2010.JPG

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


Stay on your toes and have a good one.

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



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

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

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


Friday
Oct082010

Cameco Corporation Up 4.15% Yesterday

CCJ Chart 09 October 2010.JPG


Despite all the turmoil in the stock markets Cameco Corporation (CCJ) has been making steady progress culminating in a 4.15% rise yesterday, as we can see on the above chart. Also worthy of note is the 50dma which looks set to cross over the 200dma, in an upward motion. This cross over when it occurs is usually a positive indicator for the stocks progress. However, the technical indicators are at the top end of their ranges, in particular the RSI is in the overbought zone, so we might be in for a breather shortly. The volume was heavy yesterday which was also nice to see.

Cameco is a world leader in low-cost uranium production. Our operations provide 16% of world mine production and we have approximately 480 million pounds of proven and probable uranium reserves and extensive mineral resources.

Cameco has controlling ownership of the world's largest high-grade uranium reserves and low-cost operations in northern Saskatchewan, Canada. Cameco produces nuclear electricity through our 31.6% share of the four Bruce B reactors at the Bruce Power nuclear power generating site, North America's largest nuclear generating station, located in Ontario, Canada.

The flag asset is of course, Cigar Lake, which is the world's largest undeveloped high-grade uranium deposit. The mine is currently in the development phase with the latest target completion date being mid-2013 for the first production. Mine construction began in January 2005, but setbacks occurred in October, 2006 and August, 2008 through separate water inflows into the mine. The source of these inflows were identified and then sealed prior to dewatering. Remediation work continues underground through the remainder of 2010 to restore mine infrastructure after successful dewatering of the mine was achieved in February, 2010.

Cameco Corporation trades on the NYSE under CCJ and on Toronto under the symbol CCO with a market cap of $11.74B. It has a P/E ratio of 21.32 and earnings of $1.40per share.


Meanwhile, over in our options trading den they were stopped out of one trade last night for a profit of 33%, having closed a trade the night before with a profit of 82% which follows the recent success of closing a trade which generated a profit of 50% in 30 days on GLD Call Options, so they now need update their progress chart, yet again, which will probably be done this weekend as things are a little hectic at the moment. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

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

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

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

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


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

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

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







Friday
Oct012010

Where Are Oil and Gas Prices Heading Next?

Oil to Gas Ratio 02 October 2010.JPG

By Marin Katusa, Chief Energy Strategist, Casey Research

Oil is heading to US$200 per barrel. This isn’t speculation but hard fact. But forewarned is forearmed, and with this price expected within the next five years, investors have plenty of time to position themselves.

We recently have been talking about tools that investors can use to navigate the economic landscape. The gold-to-oil ratio is one such tool, but another popular compass is the oil-to-natural gas ratio.

The oil-to-natural gas ratio relates more to nuances within the energy complex, rather than the gold-to-oil ratio, which relates to monetary values. It’s the WTI Cushing price of crude oil per barrel to the Henry Hub Spot Price for natural gas per million thermal units.

In theory, based on an energy equivalent basis, crude oil and natural gas prices should have a 6-to-1 ratio. Market characteristics, however, have dictated that since 2006, the price of oil follow a pattern of 8-12 times that of natural gas.

As the chart below shows, historically the oil-to-gas ratio from 1990 to 2008 was in the low 9s. This means one barrel of crude oil was equivalent to about 9,000 cubic units (Mcf) of natural gas.
 

 
Improved drilling techniques and access to immense shale gas fields across the country have seen a boom in domestic gas production. Nor can gas wells just be shut down willy-nilly. The complexities of a gas well mean that it takes anywhere between three to six months to shut down operations.

And while the number of rigs sprouting up each year is decreasing, natural gas production is on the rise, with many of the shale wells coming online with their sources fresh and untapped.

Thanks to this flood of shale gas, the oil-to-gas ratio has risen to almost 17 on average. That is, one barrel of oil is now worth 17 Mcf of natural gas (17,000 cubic feet of gas)!

When we defined the oil-to-gas ratio, we used the term “thermal units.” It is interesting, then, that based on thermal units, one barrel of oil produces as much energy as roughly 6 Mcf of natural gas. So from a financial perspective, the oil-to-gas ratio is very different than in terms of energy.

Some companies and analysts use this disparity to their advantage, using the 6 instead of the 17 value to come up with the “barrels of oil equivalent” conversion for the value of gas. That’s a fudge factor of 2.8!

It’s an accounting mechanism that’s been turned into a completely legal but very shady promotion mechanism, one we watch for carefully.

It’s worth knowing that things can change very rapidly in the natural gas market. We do believe, though, that the current trend will continue for years to come, with the oil-to-natural-gas ratio ranging between 15 and 20.

For long-term investors, the oil-to-gas ratio is indicative of a paradigm shift in the markets. It is yet another tool in our collection of crystal balls for the economy and, if read correctly, is a great way to add some valuable holdings to a portfolio.

(Fortunately, you don’t need a crystal ball to profit from energy. All you really need is a subscription to Casey’s Energy Report, which you can try for three months, risk-free, by clicking here now.) 



Over in our options trading den they have updated the chart to show all the closed trades as of today, so you can see exactly how it is going, please click this link.


OptionTrader Profits



Stay on your toes and have a good one.

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

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

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

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


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

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

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



Silver Wheaton has certainly outperformed so far this year securing a long term supply of silver at fixed prices.



Tuesday
Sep282010

Hoeing the Rough Row with Porter Stansberry


Source: Karen Roche of The Energy Report 9/28/10
http://www.theenergyreport.com/pub/na/7474

Three decades' worth of no-holds-barred credit led to oppressive debt for Americans and America. It left us a financial wreck; with our currency collapsing and efforts to spend our way back to prosperity stumbling at every turn. For more about Stansberry & Associates Investment Research Founder Porter Stansberry's take on the perilous predicament—and his coping strategies—read this exclusive Energy Report interview.

The Energy Report: The National Bureau of Economic Research announced last week not only that we are out of the recession but that in fact, it ended in June 2009. They did note that it was the longest recession since the Great Depression. Did this announcement surprise you?

Porter Stansberry: On one hand, I expected the authorities to come out and say everything is getting better at some point, and I also expected that pumping enough money into the economy could stimulate some economic activity. So, I guess in that way, I was expecting it.

Then, in a deeper, more intrinsic way I wasn't expecting any significant improvement to the economy whatsoever. I would argue about the meaning of this conclusion, too, and point to measurements of our national net worth as being the appropriate gauge to measure whether we're experiencing any genuine economic growth. America's net worth continues to fall in terms of the average household net worth, and also, of course, our government's net worth is growing in the red dramatically every quarter.

So while I'm pleased that there is more economic activity, I wish there was more employment, and that we were heading in the right direction in terms of growth of median incomes and net worth. But I'm unfortunately very pessimistic that any real increase to net worth, either measured by the government or by individual households, can be achieved when the government continues to paper over our problems with more credit and more money instead of making our economy more competitive on a global basis.

TER: But measuring net worth as the true driver, hasn't individual net worth really been decreasing over the last decade? Wasn't the perceived net worth really based on debt?

PS: The average household income has really stagnated since 1971. For a while, it continued to increase in terms of statistics, because more and more families had two wage earners. During the '70s, household income looked as if it was still increasing but factoring in the additional wage earner, it didn't change at all. And then it began to decline in the late '90s, and has continued down for the last 10-12 years.

So in terms of household incomes, we've definitely gotten much poorer over the last 30 years, and that's just a measure of income. In terms of net worth, meaning all of our balance sheets—our assets minus our liabilities—America was richest on paper in the spring of 2007 before the start of the mortgage crisis and the real estate bust.

TER: You're talking about individual net worth, not corporate net worth?

PS: Exactly, talking about median household net worth, median household income. So, individual incomes have been stagnant and/or declining for more than 30 years, and individual net worth has fallen precipitously since 2007 and continues to do so.

You can survive your income falling if it's not dramatic. Your income can decrease for a long time before you start living beyond your means. I think what's happened to America, in a cultural sense, is we stopped getting richer as a country in the early 1970s, but we haven't adjusted our consumption patterns in any way, shape or form to meet the realities of the new lower income. As a result, debt has piled up over the last 35 years. And of course as you add debt without increasing income, you're reducing your net worth.

And look at the size of the U.S. federal government debt outstanding today—not the unfunded obligations; just the bonds that are outstanding—and you look at the federal government's annual revenue, the debt is now 356% of the revenue. If the federal government didn't own the world's reserve currency, you can imagine that it would be impossible for that government to get credit anywhere. No one would lend to an entity that's so far in debt as the government already is. And yet it's the government that continues to provide additional stimulus to the economy by adding to its already swollen obligations.

So the government continues to pump money into the economy via expansion of credit and/or straight out printing money (via quantitative easing). That has a diminishing-returns effect, so people would argue now that "cash for clunkers" and TARP, etc., didn't do anything.

In the middle of this train wreck, our currency is gradually being debased and efforts to restart the economy with additional spending aren't working. They probably can't work. How long does this continue? How much debt gets racked up before real, true panic sets in and people simply start to flee the currency at all costs?

TER: How long? How much?

PS: I don't know the answers. But I don't believe the current strategy is feasible. I think the only thing that really can be done—it would be painful, but less painful than the calamity we're heading toward—is to demand that people be responsible for their private obligations. No more bailouts, no more stimulus, no cash for clunkers. You, the American people, have to live within your means starting on this date.

If we then defaulted on the U.S. government bonds, we'd tell our creditors, "We're going to give you a certain percentage of our tax receipts, but we have to renegotiate our debt because we can't pay it back." It would be really bad for six or nine months, but then I think things would be great because you would have washed out all the excesses, people could get back to work and the dollar would fall to a value that would make our economy very competitive on a global basis.

TER: Demanding people live up to their private obligations on a par with the defaulting on U.S. government bonds strikes me as curious. On one side, I see individuals who have benefited least from any stimulus—in fact, many of them are unemployed, losing their homes and going into bankruptcy. The banks are the ones getting bailed out.

PS: When I say that people have to be responsible for their private obligations, I'm talking about the big banks, right? If a bank actually had to be accountable to its depositors, there's probably not a major bank in the United States that would be open tomorrow. I mean we're all comfortable with the banks because we know that the printing press stands behind them. But that's no way to run an economy. For the economy to work, there has to be winners and losers and people have to be responsible for their obligations. We're living in a socialist dream right now, and it's going to end up becoming a socialist nightmare. These dreams always do.

Creditors of people cannot continue to expect the government to guarantee every obligation. It simply isn't feasible. It can't be done. You can't guarantee every mortgage in the United States. You can't do it. Likewise, the U.S. government's creditors have to understand that there is such a thing as government default on debt. It happens all the time. If you make a loan to a government that is in as far over its head as our government, you're making a bad bet.

TER: In terms of stagnant individual income, enormous obligations and declining net worth, is what you've described unique to the U.S. or would you also put other leading countries in that same bucket?

PS: In scale, I'd say it's unique to America. The scope that we have continued to consume above our level of income is oppressive, and it was enabled by the fact that our paper currency is the world's standard. So we had no barriers to credit, which meant that we could borrow a heck of a lot more than anybody else and end up with a lot more debt than anybody else.

The macroeconomic problem of stagnant-to-falling median household income is common throughout the developed world. That has only one cause, which is poor competitiveness. We don't work as hard as our Asian competitors, to put it in plain terms. But in America, unlimited access to credit exacerbated the problem.

TER: To what extent has government debt increased to cover the increased credit provided to individuals?

PS: Over the last three years, what's happened is a huge transfer of obligations from private balance sheets to public balance sheets, right? The biggest and most important example—which isn't even discussed in Congress or in Washington as being a problem, which is truly amazing—was shifting $10 trillion of obligations owed by two private corporations, Fannie Mae and Freddie Mac. We shifted responsibility for all those credits onto the U.S. Treasury. That had the impact at the time of doubling—doubling!—our entire national debt in one swipe of the pen. That's just an incredible transformation that took place when the government decided to guarantee all of Fannie's and Freddie's creditors, when you know what Fannie and Freddie really own with all that money they borrowed is pretty much every mortgage in the United States.

You can see that we as a nation have decided that the government ought to be responsible for our mortgages. In a way, that's us saying we believe the government ought to be responsible for all of our private debts.

TER: And where does that lead?

PS: It's interesting isn't it? That was the goal of every socialist regime in history, right? And yet, here we are in America living in the new socialist utopia where no private citizen is really responsible for their private debts. It all becomes a matter of social obligation.

You know, I don't think it's any real great surprise to any thinking person when I say I doubt this experiment has a happy ending. I don't think you can socialize everyone's private obligations and end up with a good economic result.

TER: Is the only outcome some big train wreck?

PS: I'd argue that we're in the midst of the train wreck. We're going to see a continual increase in sovereign debt around the world, even though, according to any standard model of repayment all the leading sovereign debtors are already bankrupt.

I got a report in my inbox last week from Morgan Stanley (NYSE:MS) in London, basically going over all the different sovereign debt problems. It's really amazing because this is sort of a mainstream investment bank, and they had reached all the conclusions I had reached independently, which is that all these Western countries are completely upside down. Their economies aren't growing, their populations are aging and there's no way that they can generate enough revenue to begin to repay their debts, which continue to grow every year. And all the evidence out there says that risks of a major, major financial catastrophe in the Western economies continue to grow.

TER: Won't all the equity markets crash in that kind of catastrophe?

PS: No, not necessarily. As I mentioned, I'm not particularly bullish, but in some situations equities offer better value than bonds, and in some situations stocks will do well, at least in the short term, because of exposure to Asia.

But the truth of the matter is that equity offers you a hedge against inflation as well because the company's earnings and the company's assets will continue to grow in price along with inflation. In theory, dividends also should increase to match inflation. The case study here is the share price of The Hershey Company (NYSE:HSY). I have studied the price of chocolate and Hershey's bars over the last 70–80 years. Hershey went public in 1926; so, it offers a really nice template to see how changing rates of inflation and even periods of financial catastrophe such as The Great Depression affect a blue chip stock. The answer was really fun; it turns out that chocolate is a slightly better hedge against inflation than even gold. So, the world's leading branded maker of chocolate did quite well, thank you, and there are plenty of other examples from businesses of all stripes. Companies that have a good competitive position can typically raise prices as much as inflation, or more.

Equities should do well even in hyperinflation. The downside is that during periods of hyperinflation, the earnings multiples on equities disappears. So, even really good companies like Hershey and Wal-Mart and Johnson & Johnson will be trading at four, five or six times earnings, maybe even less. And that's really tough for investors if you happen to buy the stock at 12 times earnings or—heaven forbid!—at 18 times earnings. That reduction in the earnings multiple can wipe you out.

So that's why I've been telling my readers to be extremely, extremely, extremely conservative. Buy the very best companies only when they're trading at absurdly cheap prices and offering you a nice yield to protect you. And if you're not willing to short stocks as well, don't buy stocks at all; stay in cash and gold. If you had been in cash and gold this year, you would have been just fine. If you had been following my portfolio, you would have done very well, too, not because we did great with the stocks we bought, although they did okay, but we did great with the stocks we shorted.

TER: So, looking through to the end of 2010, will you maintain an aggressive shorting strategy?

PS: I have pulled back the reins on new shorts; I haven't added to my short position in the last two months due to the return of quantitative easing. I expect we'll probably end up covering most of our short book before the end of the year. After that, it depends on whether we find good opportunities to short on an individual company basis, and it depends on how the markets and the asset prices react to the quantitative easing. I can't make any prediction about what exactly our strategy will be in 2011 because we're not there yet. I'm still trying to survive 2010.

TER: The default discussion has been going on for quite a while, and with elections coming up, it seems that we can expect either additional stimulus or quantitative easing. What's the straw that finally breaks the camel's back?

PS: I can only tell you that no one really cares about a creditor's debt load up until the moment that everyone cares. The Greek bond yields didn't move at all until the market went into a panic six months ago over them, and yet the creditors all had the data on the way the Greek economy was working for years. I vividly remember reading commentary in the late 1990s of well-known economists saying there's no way Greece should ever be part of the EU because they have a kleptocracy, basically a government of thieves. But they still were able to borrow money on ridiculous terms up until the moment people decided not to lend them anymore.

TER: Well, they're actually still lending them money.

PS: Yes, but only with that $185 billion bailout fund standing behind the Greek credit. Otherwise, no one would have lent them any more money. Greek bonds that are denominated in euros are not going to default. Rightly or wrongly, creditors believe that they can get an extra 200 basis points at yield by buying Greek debt instead of German bunds, because to the creditor it's the same thing. Now that the Germans have not allowed the Greeks to default, in reality the credit risk of the Greek bond is no more or less than the German bund. So you're giving speculators all the basis point difference for free. That's the way they see it.

Even more interesting than the fact the Greeks were bailed out, the stock market has picked up noticeably in the last several weeks, which coincides exactly with the beginning of the latest European quantitative easing. The same thing happened in the spring of 2009 in the U.S.—asset markets and asset prices of all types start going higher every time there's more quantitative easing. It's not because those assets are becoming more valuable, but because people are fleeing the currency every time the printing presses come on.

TER: And how likely is more quantitative easing in the cards in the U.S.?

PS: The answer is absolutely, 100%, for sure, yes, there will be. And I think it will cause asset prices to rise. I don't think it will cause our economy to have any real benefit.

Of course, it's not just the federal government that's in big trouble. If there were a real rating agency, California's rating would be lower than Greece's. I read somewhere that something like 300 separate agencies have the power to issue bonds under State credit in California. And there are going to be bankrupt municipalities all over the United States; Harrisburg, the capital of Pennsylvania, declared bankruptcy this month.

TER: Earlier this year you advised your readers to not be upset to be sitting in cash and be really careful about the markets because there's tremendous volatility. For those who didn't want to truly hedge themselves in equities, you recommended short-term Treasuries and gold. If asset classes are going to increase in value in every quantitative easing, why wouldn't you recommend equities?

PS: When the quantitative easing started in March of 2009, I was wildly bullish, the most bullish I've probably been in my entire career. I told people straight out that equities are much cheaper than precious metals; they're cheaper than bonds. I did put my readers into a lot of stocks in 2009, and we made a lot of money.

This year, the Fed had promised to stop its quantitative easing, which made me very cautious because I believe as soon as the quantitative easing stopped, asset prices would fall again. And so I've recommended more individual short positions this year than I ever recommended before.

TER: How's that working for you?

PS: I think I recommended at least eight new short positions, and so far, not surprisingly, all of them have been profitable, some wildly so. Now that the quantitative easing is beginning again with the Europeans, I think that will be seconded at some point by the U.S. and, therefore, I think it is time to consider buying stocks again. But I'm simply not as wildly bullish as I was before because on an overall basis, stocks in general aren't as cheap as they were in March of 2009.

Having said that, I think there are some uniquely good values out there—most notably global blue chip companies that are exposed to growth in Asia. You don't have to be a stock analyst to know these companies because you're familiar with their brands—Johnson & Johnson (NYSE:JNJ) and Wal-Mart Stores Inc. (NYSE:WMT), Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT). You'll find a lot of situations where you can buy global blue chip businesses that have big exposure to Asian growth where your dividends in the stock are going to pay you more money than buying the bonds! That's an incredible anomaly.

TER: Do bonds currently represent more risk or is this purely a yield calculation?

PS: I don't want to scare people out of high-quality bonds. I am not expecting any sort of corporate bond market catastrophe in the near term, and as long as you're dealing with relatively short duration stuff you will be fine. If you're buying a bond that matures in five years, you're taking some inflation risk, but not really all that much. But still. . .why would you take any inflation risk in a bond when you can buy stock in the same entity that is yielding more? You wouldn't. And yet, some people are doing exactly that. . .

TER: Point taken. Are you shorting U.S. Treasuries?

PS: Not any more. I got out of that trade a couple of months ago because it started to go against me, and I didn't want to have a loss, but I think you're completely out of your mind if you buy U.S. Treasuries that are yielding—what are they yielding now?—less than 3%? It's mind-boggling; I can't begin to understand it. I really can't. People holding long-term—i.e., 20-year—U.S. paper are sitting on a ticking time bomb. The losses in this asset class will be epic, of historic proportions.

TER: In our last conversation, you predicted something that was extremely contrarian at the time, when you said that the total environmental impact from the Gulf spill would not be as draconian as was being published. You also suggested at that time to buy BP Plc (NYSE:BP; LSE:BP) and Anadarko Petroleum Corp. (NYSE:APC) because they were undervalued, and indeed, both BP and Anadarko have had some pretty nice increases since July. Is there any continuing upside on these types of oil stocks or will an overhang of negativity restrict these stocks from reaching their former highs?

PS: Well, full disclosure, I ended up buying both equities this summer. That I own them both personally should tell you a little bit about what I expect. Obviously, I must believe there's more upside to each stock or I wouldn't own them. But we have a policy as newsletter publishers; I don't write about any position that I am in and I don't buy the stocks that I cover in my newsletter. I understand the argument about having skin in the game, but as an independent publisher, it's very important to analyze each situation and each company completely objectively without giving any thought to whether I am in the stock personally.

TER: When we had that conversation, the issue of increasing regulations on offshore oil drilling was constantly in the news. It isn't getting much attention now, but do you feel there will be any significant regulatory changes as a result of the spill?

PS: No. Any regulatory effort will be captured by the industry and would be used to protect the incumbents against new competitors, and I am sure that will happen. As a nation, we need onshore and national oil and gas production, and I am sure we're going to continue to have lots of it. So I am not at all concerned about the regulatory burden for any of the oil companies in the country.

And I'll go a little bit further. There's been a lot of talk about the risks of fracking and these gas reservoirs. Someone made a movie suggesting that an oil company in the area was responsible for people having natural gas in their water wells. While I'm certainly not denying that oil and gas reservoirs sometimes leak into water reservoirs, it goes on all the time as a consequence of natural geography much more so than drilling pipes, which are usually less than four feet across. It's much ado about nothing, and the oil industry has always had its critics, going back to Rockefeller and Ida Tarbell. People making claims against oil and gas companies are as old as the oil and gas business.

TER: As you've noted before, the world will continue to rely on oil because it's such an efficient form of energy, relatively easy to find and extract, dense and portable. Considering the growth in Asia you alluded to earlier, do you buy into the peak oil argument?

PS: No, peak oil is one of the greatest promotional ideas ever created to the benefit of oil and gas speculators and investment bankers. To me it represents such bad thinking and it's so intellectually bankrupt that I get frustrated just commenting on it. It just doesn't make any sense because if peak oil were a real phenomena, if it were truly possible to exhaust the world's reservoirs of hydrocarbons in the earth's crust, how come every single prediction of when hydrocarbon production will cease has been wrong, every single time in every single region?

One of the graphs that the peak oil guys would pull out in early 2000 showed onshore natural gas production has been declining since 1974, and that chart was accurate up until 2001, when we discovered a new way of extracting natural gas. Ever since then, natural gas production has gone up, and is now approaching a new all-time high.

The point is that our ability to produce hydrocarbon energy—oil and natural gas—is not limited by the supply of hydrocarbon energy, it's limited by our knowledge and technology for extracting it. Human beings are remarkably adaptable and resourceful and creative, and we will continue to discover new and more efficient ways of creating, extracting and using hydrocarbons. The idea that we will run out of hydrocarbons is mostly used to scare people who probably shouldn't be investing their own money.

TER: Given that and what a barrel of oil trades for, is oil a good investment at this point or will it really just be going sideways?

PS: Is oil a good investment? Oil is really a good investment over the long term because it is remarkably useful to such a degree that the lower the price goes, the more people will use it, which tends to put a floor under its price. If you study the history of oil, you know it certainly goes down a lot sometimes when people start using less of it because of economic declines. But it doesn't stay down very long, and it always comes back and goes higher.

So oil is a great investment, but that said, I am very conservative about buying oil today due to the economic problems I expect in a lot in the major developed countries. With those problems, I don't think global demand for oil is going to go anywhere for a while, and I know the supply is increasing dramatically because of new technologies and new discoveries.

So I am not particularly bullish on oil right now, and I don't expect to become bullish on oil for a long time. But that doesn't mean that oil is a bad investment, and it doesn't mean that you can't do very well buying lots of different aspects of the oil complex.

TER: Are you still bullish on nuclear energy? Do you still see undervalued companies in the sector?

PS: Yes, I'm still relatively bullish on nuclear energy on a global basis, but when we talked last I was particularly bullish on both Exelon Corp. (NYSE:EXC) and Duke Energy Corp. (NYSE:DUK) because they were really, really cheap. They were trading for four or five times cash flow, and yielding more than 5%, which seems like a fantastic opportunity in an era of less than 1% government bond yields and all the other uncertainties.

Both of these companies remain undervalued. They're both well run, regulated utilities. I would favor Exelon a little bit over Duke just because they have more of a nuclear plant, and I am still very wary of cap and trade. I don't know if cap and trade will pass this year as I once anticipated, but unfortunately the global warming madness is not going away. Efforts to retard the consumption of coal here will be continual. If you want cheap, reliable electricity in the United States, you're not going to do it with paddle fans and mirrors on top of buildings. If you want to get off of hydrocarbons, the only option that's even reasonably affordable is nuclear energy.

TER: You've been really savvy at picking out opportunistic investments themes. You've shared some today with the global blue chips. Are you looking at any new investment opportunities that you can share with us?

PS: Just to reiterate, I really think that the highest quality blue chip companies in America that have good global businesses are really cheap. Most people don't realize that Wal-Mart does more than $100 billion—$100 billion, with a B—a year in sales in emerging markets. They're just now really getting going in China, and just opened their first couple of stores in India. So I think Wal-Mart has an enormous amount of growth ahead in those markets.

I would also point to Intel, which is also in my newsletter as a recommended buy for the same reasons—super cheap, great global business, the absolute leader in its field—as with Wal-Mart, as with Johnson & Johnson, as with Microsoft. I like all those kinds of blue chip stories, and I really think it's an exceptional opportunity when you can get these stocks that have a great global business and are paying you more in dividends than you'd get from coupons on their bonds.

But let me be perfectly clear about this: I am not expecting any home runs, you know? If you can make 10% to 15% a year in these stocks over the next 10 years, count yourself lucky.

TER: At the beginning of our conversation, you were talking about how household net worth has been deteriorating. How does one build wealth at that rate?

PS: Those are actually very, very good returns—exceptional returns.

TER: Assuming inflation doesn't take it away.

PS: Right, assuming that. But of more than 21,000 mutual funds in the U.S., do you know how many did better than 10% a year for the last 10 years? Not even 250 of them. And you know what else? All of those funds that did better than 10% a year specialized in either precious metals or emerging markets—all of them. You're not going to get rich just by buying domestic U.S. stocks. I just don't think it's going to happen. If you want to do well in this period of global turmoil, in this period of very, very poor competitiveness in the U.S. and in the developed economies compared to the emerging economies, you have to really pick your spots like I did when I bought BP and Anadarko. You can make money on a crisis like that, or you need some real specialty in finding the right kind of resource situations. That entails taking on enormous risk, which isn't appropriate for most retirees.

But a typical individual investor, someone over the age of 50 with net worth of less than $1 million, really the only thing you can expect to do for the next 10 years is just survive. The best way to do that is to buy these really good global blue chip companies when they're paying reasonable dividends. If you're making 5% a year on the dividend on something like an Exelon, the stock doesn't have to go up all that much for you to get to that double-digit return.

TER: That's encouraging.

PS: It is. If you're getting a double-digit return on U.S. stocks, you're doing a great job.

TER: Very good. Would you expect better than double-digits in U.S. stocks that focus exclusively on emerging markets?

PS: I would, but I also would caution anybody against getting involved as a direct resource play investor or a direct emerging markets investor if they don't have a lot of financial experience and expertise. Those markets are very difficult. This is what I do full time and it's not easy for me, so I just don't think that's appropriate for most people. That's why I've told my readers if they're not willing to short stocks, go to cash and gold and just sit on it, because it isn't going to be a great year in stocks. It's not going to be worth the risk.

So far, fortunately, that's been the right advice.

You have to realize the enormity of the problems our governments have gotten us into and you can’t forget about them. There was a $185 billion bailout in Europe? Well, Europe's governments are $3 trillion in debt. That little bailout that kept Greece will not solve their problem. Likewise, $1.7 trillion of quantitative easing in the U.S. is tiny in contrast to $15 trillion in debt. In other words, we're at the very beginning of these problems. They haven't gone away.

If you try to get really aggressive under these circumstances, if you try to go after growth stocks or start buying whatever the latest commodity is, you'll end up taking a beating. In this environment, it's going to pay to be cautious.

TER: Very good perspective. Thank you, Porter.

After serving a stint as the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter, Porter Stansberry put out his shingle at Stansberry & Associates Investment Research, a private publishing company. Celebrating its 10th anniversary last year, S&A has subscribers in more than 130 countries and employs some 60 research analysts, investment experts and assistants at its headquarters in Baltimore, Maryland, as well as satellite offices in Florida, Oregon and California. They've come to S&A from positions as stockbrokers, professional traders, mutual fund executives, hedge fund managers and equity analysts at some of the most influential money-management and financial firms in the world. Porter and his team do exhaustive amounts of real world, independent research and cover the gamut from value investing to insider trading to short selling. Porter's monthly newsletter, Porter Stansberry's Investment Advisory, deals with safe value investments poised to give subscribers years of exceptional returns, while his weekly trading service, Porter Stansberry's Put Strategy Report, shows readers the smartest way to book big gains during the ongoing financial crisis.

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

DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Porter Stansberry: I personally and/or my family own shares of the following companies mentioned in this interview: BP and Anadarko. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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Over in our options trading den they have updated the chart to show all the closed trades as of today, so you can see exactly how it is going, please click this link.





OptionTrader Profits





Stay on your toes and have a good one.

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

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

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

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


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

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

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






Monday
Sep272010

Denison Mines Corporation: Up 7.32% Today on heavy volume

Denison Chart 28 Sep 2010.JPG


Taking a quick look at just what others are saying regarding Denison Mines Corporation (DNN) we have three differing opinions as below:

Thomson Reuters: Under Perform
Smart Consensus Report: Hold
Market Edge Second Opinion: Long

Nothing conclusive there then!

However when we look at the chart we can glean that Denison Mines has improved of late and yesterday the stock price increased 7.32% as turnover increased dramatically to 2.8 million shares. The technical indicators are high and are now in the overbought zone suggesting a breather could be on the cards which could be a buying opportunity for those who are looking to add Denison Mines to their portfolio.

As an overview of the company this is an extract from their web site:


Denison Mines Corporation is a diversified, growth-oriented, intermediate uranium producer with three active mines in the United States. Denison’s assets include an interest in two uranium mills in North America, with its 100% ownership of the White Mesa mill in Utah and its 22.5% ownership of the McClean Lake mill in Saskatchewan. Both mills are fully permitted. Denison also has other mines and projects on stand-by in Canada and the U.S.

Denison’s 2009 production from its two mills was 1.4 million pounds U3O8 and 0.5 million pounds of vanadium. 2010 production is estimated to be 1.6 million pounds U3O8 and 2.8 million pounds of vanadium.

Denison enjoys a global portfolio of world-class exploration projects in close proximity to the company’s mill in the Athabasca Basin in Saskatchewan, including the Wheeler River project where Denison announced the new Phoenix discovery in 2008. Denison also has exploration and development properties in Mongolia and Zambia which will provide future production in two to three years.


In a recent report regarding the results from the final 13 holes of the summer drill program on its Wheeler River property in Saskatchewan, Denison said that significant results included WR-343 which returned 16.20% eU3O8 over 1.7 metres and WR-345 which intersected 2.7 metres grading 17.59% eU3O8, both of which were in Zone A of the Phoenix Trend. In Zone B, WR-347 returned 9.88% eU3O8 over 2.0 metres andWR-348 intersected 6.28% eU3O8 over 2.8 metres. The attached map illustrates the results of the summer drill program.

Ron Hochstein, President and C.E.O. of Denison, commented, “We are very happy with the results of the summer drill program as it has extended the overall strike length of both Zones A and B, by approximately 55 and 110 metres, respectively, confirmed the continuity of the high grade mineralization over the entire strike length, and identified two new mineralized zones along the highly prospective Phoenix Trend on the Wheeler River property.


With the spot price of uranium improving recently just maybe things are looking up for Denison mines and this sector in general.

Denison Mines Corporation trades on the AMEX under the symbol of DNN and on the Toronto Stock Exchange as DML.

Market capitalization is $597.91million, average volume is sub 1.0 million shares traded, however, yesterday saw 2.8 million shares change hands, 52 week high $2.07, 52 week low $1.08, closed yesterday at $1.76.

Over in our options trading den they have updated the chart to show all the closed trades as of today, so you can see exactly how it is going, please click this link.



OptionTrader Profits


Stay on your toes and have a good one.

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

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

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

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


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

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

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

Uranium Spot Price chart 28 Sep2010.JPG





Thursday
Sep232010

Edward Guinness: Solar-Powered “10-Baggers”

Source: Brian Sylvester of The Energy Report  9/23/10
http://www.theenergyreport.com/pub/na/7446

Edward Guinness.JPG

Edward Guinness, co-manager of the Guinness Atkinson Alternative Energy Fund, says the best opportunities in the alternative energy space involve solar power. "We are unusually positive on the solar sector," Edward says, noting that power produced from solar sources will double in 2010. Edward divulges some solar-powered "9- or 10-baggers" in this exclusive interview with The Energy Report.

The Energy Report: Edward, please tell our readers about London-based Guinness Atkinson Asset Management and its namesake Alternative Energy Fund.

Edward Guinness: The origins of Guinness Atkinson go back to the early 1990s when Tim Guinness and Jim Atkinson set up the U.S. division of Guinness Flight Asset Management. After Guinness Flight had been sold to Investec, Tim and Jim were able to buy the U.S. business in 2003 and called it Guinness Atkinson Asset Management. At that time, Guinness Atkinson had around $100 million under management. We have since grown that to around $500 million, and we have launched three additional funds, two of which are in the energy space.

We run a conventional energy fund, the Guinness Atkinson Global Energy Fund, and the Guinness Atkinson Alternative Energy Fund. We have been running funds with our conventional energy strategy since 1998. The average annualized return, even though we have had such terrible markets recently, is still around 16%. Within that we had been looking at the alternative energy space, but we had only ever made one investment in an alternative energy stock.

Tim decided that the alternative energy industry had reached the size where there was a big enough universe for us to form a separate fund, and that it merited a separate fund because the long-term dynamics of the industry are highly attractive and are different from those of the conventional energy space.

In March 2006, with Matthew Page and myself as co-managers, we launched the Guinness Atkinson Alternative Energy Fund. We had very good success in the first two years; we built the fund up to $150 million under management. We're now back to around $45 million under management. I feel the sector and the fund have been through quite a rough period, but we're getting to a point where concerns about the economy are built into stock prices, and absolute valuations in terms of price multiples are very low. We're pretty excited about the next 18 months for the fund.

TER: You launched the Guinness Atkinson Alternative Energy Fund in 2006 for U.S. investors. Then you launched the Guinness Alternative Energy Fund in 2007 for non-U.S. investors. Do you think European investors' appetites for alternative energy exceed those of U.S. investors? If so, what do you think accounts for that?

EG: I think European investors generally have a greater understanding and enthusiasm for the sector. That's based on the fact that in Europe there is much greater visibility of the actual technology in terms of the huge number of wind and solar projects and the returns that are being generated by those projects.

At the same time, I think investors in Europe are more cautious on investing in funds, whereas American investors are much more sophisticated in recognizing the benefits funds bring to an area like this.

TER: That's noteworthy. So with American investors and alternative energy, is it a case of "out of sight, out of mind?"

EG: Perhaps. I think people in the U.S. are more concerned about the broad market, and if people are worried about the broad market, alternative energy is another area that they're worried about. I don't think investors have returned to thinking this is an area that is actually going to outperform even if the economy goes sideways, which is what I think will be the case.

TER: You see alternative energy as something of a hedge against the broad market?

EG: I wouldn't describe it as a hedge, but I think it's something that over the next 5 to 10 years can do well even if the broad market doesn't. You might say that's a hedge, but it's not in the sense that it should perform very well if the broad market actually goes up.

TER: All right, let's play devil's advocate for a moment. A recent Guinness Atkinson research report said, "Oil is fine, but running out; yet demand for energy is rising. We have to find alternatives that will be affordable and secure." But the world's proven oil reserves stand at 1.3 trillion barrels or enough to last 80 years at current consumption rates. It's also thought that the industry will discover at least half of those reserves or more during the next 80 years. Are we getting ahead of ourselves when it comes to short- and long-term demand for alternative energy versus fossil fuels?

EG: I think the question as posed is not looking at the whole picture. I think that the other piece is that the oil still in reserve is becoming more and more expensive to extract. If we pay enough, we will keep finding oil for hundreds of years because clearly that would subsidize more and more advanced extraction techniques. What that means is that prices are going to rise over the next 10 to 20 years. Even if you look at extraction from the oil sands, my understanding of the cost of production there is $50–$60 a barrel. For natural gas, there's been a huge enthusiasm about shale gas, but the marginal cost of production there is not at $4 per thousand cubic feet (MCF), which is where the current gas price is. I understand that it's more like $6 or $7 per MCF.

I think we are quite weak "peak oil" believers; while the reserves are finite, we don't think we've peaked yet. We're consuming 86 million barrels a day today; we think that in the next 15 years consumption is going to go to 100 million barrels a day. We think that demand will be met, albeit at higher prices. Actually, our view on demand is that it's going to be even stronger than that based on the strength of Asian demand.

The reason to be enthusiastic about alternative energy is because of the rising costs for fossil fuels, rather than the idea that next Thursday we're suddenly going to run out. The flipside for the alternative energy industry is that you have technologies that are still falling in costs.

TER: But nonetheless, prices for alternative energy remain comparatively high at the moment, if you were to average the various forms.

EG: That is a fairly common myth. If you look at the core technologies that are deployed today of hydro, biomass and geothermal, sources of alternative energy are competitive with coal, nuclear and natural gas on a price basis. And the cost of wind can be as low as $0.05 a kilowatt-hour on good sites, which is broadly competitive, provided that the wind supply remains below 25%–30% of the mix, and we're nowhere near that yet. Solar is clearly a lot more expensive, but it's getting considerably closer. The path for solar to reach a point where it becomes quite a viable distributive source of electricity without significant subsidies is within our grasp.

Germany has put the most effort toward getting it there, and they do have high electricity prices. The electricity prices in Germany are north of $0.30 per kilowatt hour, and the feed-in tariffs that they are now paying to the solar providers are only just above that. The tariffs will fall through those levels in the 2011–2012 timeframe..

TER: So Germany's taken the approach that "it's expensive now but will only get cheaper, and it's sustainable." Is that correct?

EG: The way the German industry works is that if you install a solar panel, you get a guaranteed price for the electricity that it generates, which is actually not subsidized by the government. It is subsidized by the energy consumers and the cost is passed across all users. The additional uplift to people's bills to pay for that is between $2–$3 a month per household—that's not a crazy amount in the vast scheme of things. The government does not fund this, so it doesn't weigh on government finances. We're not worried that that's going to be one of the first schemes to be cut, although we do expect the tariff declines to continue as planned.

Once you start to have a feed-in tariff that is below the retail electricity price, you will then start to lower the blended cost of electricity as you get more and more solar panels installed.

TER: In America, some states have introduced progressive legislation to encourage the adoption of different forms of alternative energy. Do you believe that the United States needs a broad alternative energy plan akin to what Germany has introduced?

EG: Clearly, the German policies have effectively resulted in a high level of installation; so to a point, yes. I think the U.S. at the moment is a market that shows huge potential in the solar space that it is struggling to fulfill. The main areas being worked on in the U.S. are utility scale projects. Such projects have been a struggle with the weak economy, because the price that the large utilities are prepared to pay for power purchase agreements (PPAs) is low. That also relates to low natural gas prices. But the cost the people are paying in the U.S. is still 20%–30% higher than what people are now paying in Germany for fully installed projects. There's huge fat yet to come out.

We are optimistic that the U.S. is a bit like a large ocean liner, and that once it gets pointed in the right direction and gets going, it will build up a huge head of steam.

On the wind side, the U.S. had a market-leading position four to five years ago, albeit with jerky levels of installation. Every other year the government would introduce a two-year extension to the subsidy program. You would have one year of massive construction, and then everyone would put away their tools for a year, which was pretty unhelpful.

China has overtaken the U.S. as the world's leading installer of wind turbines. Our understanding is that the prices that the utilities are prepared to pay for PPAs means that lots of wind projects in the U.S. are now on hold. And we're looking for that market to be a smaller market in 2010 than it was in 2009, which is something we'd like to see addressed because it's not a very long-term view on things.

TER: You mentioned China. What impact is China having on alternative energy?

EG: It's been reasonably popular to paint China as the bad guy of change in the last five or six years, and I am not convinced that that is entirely warranted. While they are still building new coal plants because they have to, they have some of the most progressive policies—aggressive policies as well as progressive—for putting new wind and hydro plants in place.

They have been supportive of the solar industry in terms of expanding the manufacturing base, which has been a key driver in getting costs down. The cost of solar modules has fallen by over 50% in the last two years.

They're also looking at putting in place tariffs that would encourage the installation of solar photovoltaic (PV) in China. I think they've identified the industry as a real core growth sector in which they can be key players on a global basis. About 25% of our portfolio consists of Chinese companies. And those are Chinese companies that typically have their listings elsewhere.

That's a sign that this industry is moving to a much more commoditized level where the ability to manufacture at low costs is what's most important. The Chinese are doing the same in the wind industry, although they're probably five years behind where they are in the solar industry.

TER: In your fund's portfolio, 17 of the 36 companies are solar energy companies. Why is there such a heavy weighting toward solar?

EG: First, we are unusually positive on the solar sector. Industry analysts were expecting this year to be a terrible year for the solar industry. Actually, it looks like the industry is going to have grown from around 7 gigawatts (GW) last year to somewhere in the 13–14 GW range this year. The industry's size has doubled. This means that companies have been able to operate plants at full capacity or above, which has been hugely positive for margins.

People are very worried about demand next year. But what we're seeing from the core players is that these companies are managing to sell out 2011 demand because the companies doing the major installations have good project pipelines on which they can make decent internal rates of return (IRRs). They are planning on pushing ahead with those.

Here is another thing to think about. Solar is mostly a utility product now, but as the costs come down, it's going to be much more of a residential offering. Residential solar in Germany now accounts for 70%–80% of all sales. I think that the mobile phone industry will at some stage prove to be an interesting parallel because people are talking about residential solar in the U.S. being a very niche product. You see some new developments with the installation. But once the costs come down to a point where people can generate $0.10–$0.15 per kilowatt hour and receive financing so that they're not actually carrying all the up-front costs, I think you will start to see the dynamics of the industry in the U.S. change dramatically.

It's hard to say how quickly it will develop, but at the right price, a large percentage of the households in the U.S. will have solar.

We're really excited about the solar space. We think the evaluations are hugely attractive, and solar is the space that has the most potential to grow. It's the area where we're most likely to catch some 9- or 10-baggers within the portfolio.

TER: What are some of those companies that you believe could actually increase 9 or 10 times?

EG: I would pay attention to Yingli Green Energy Holding Co. Ltd. (NYSE:YGE). Then there's Trina Solar Ltd. (NYSE:TSL). Trina and Yingli are, I'd say, top-tier Chinese module manufacturers. They are both getting good brand positioning, as well as good brand awareness in European markets.

I would also look at LDK Solar Co Ltd. (NYSE:LDK) and Renesola Ltd. (NYSE:SOL; AIM:SOLA). These are two companies that have been hugely punished for being highly leveraged. But as things turn around, that leverage becomes a huge plus in terms of the potential returns.

Both of them are low-cost wafer manufacturers, which is part of the manufacturing process for making solar panels. They are cost leaders in that specific space, which is actually starting to experience something of a bottleneck.

TER: How about some other alternative energy ideas?

EG: Two other companies are in a completely different area that highlights another interest we have. We have holdings in companies called WaterFurnace Renewable Energy, Inc. (TSX:WFI) and LSB Industries, Inc. (NYSE:LXU), both of which are leading manufacturers of ground source heat pumps. Those are two stocks we hold in the efficiency sector.

What I am really excited about is that when we start to see a pickup in U.S. housing starts, I think they will be primary beneficiaries. It seems like every new development has a major focus on energy, and ground source heat pumps are the most cost-effective way of improving the energy consumption of a development. We think they'll become, if not required by government, de rigueur among developers. Both those companies have performed really well through what have been extremely difficult times, which shows the recognition for those products and how strong the demand is.

TER: Why do you only have two geothermal companies in your fund's portfolio?

EG: In terms of geothermal, I would love to have more in geothermal because I am a huge geothermal enthusiast. However, the number of listed companies in the space is very short, and some of them are lower-quality companies where we might have some concerns. And a number of companies in this space have been trading at very, very high multiples, which we haven't liked.

Take Ormat Technologies Inc. (NYSE:ORA), which is one of our holdings. I would describe them as the Google Inc. of the geothermal space. They're the ones with lower-temperature geothermal sites, which I think will be key to the growth of the sector. They do installation and they've built a huge portfolio of plants, which they're not getting full value for in the market. I would love to find more companies like Ormat that we could hold at the same sort of valuation, but there just aren't the opportunities out there.

TER: One of your holdings in the Guinness Alternative Energy Fund is First Solar Inc. (NYSE:FSLR), which is ranked seventh on Fortune Magazine's list of the world's fastest growing companies. Tell us about that one.

EG: We try to have the 30 best ideas in our portfolio, and it is one of those ideas. First Solar is the world's leading thin film manufacturer. They have a cost advantage on a dollars-per-watt basis for installing solar, which makes them very, very attractive for large-scale utility projects. Notwithstanding that, they have a low efficiency cell, so if you're looking to get the most energy from your roof, they're not the best way to go about it. If space is not a constraint, they are definitely on the list of people that will be considered for any project.

The shares are actually expensive compared with other stocks we have in the solar space, probably because of their product differentiation and strong management team. First Solar's management has promised quite aggressive targets and has over-delivered on those targets. We think very highly of the company, notwithstanding the fact that its multiples are in the high teens on an earnings basis. It is very well placed to be one of the leaders over the next 5 to 10 years.

TER: Yes, but its Q210 results were $1.84 per share, down from $2.14 per in Q209 and $2.00 per share in Q110. Those results were based on lower margins for their panels. To me, that suggests that there is growing competition and it has forced them to lower prices. Is that a threat?

EG: It is a threat, but to put it in perspective, I think they're at around $0.80–$0.90 cost per watt for manufacturing panels today. The best-in-class solar companies in the PV space in China are hoping to get to $0.80 a watt in about two year's time. I understand that the road map for solar takes them down to the $0.50–$0.60 level. We're reasonably optimistic that they are going to be able to maintain their advantage.

Clearly, margins are a little bit tighter. They now have price competition coming from panels that are much closer to their price point, but they are still below the general PV module price point.

They're expanding the business into what I describe as higher quality earnings. They have a very good pipeline of projects that they are developing. While the margins in those projects are lower, they will enable First Solar to keep growing the core business and position the company for growth.

You have to think about the margins not just in terms of them being squeezed, but also the fact that their margins are going to be higher quality. By higher quality, I mean margins that can't be eroded because they're direct cash flows from projects.

TER: What's First Solar's share price upside?

EG: That's a stock where I'm hoping to make maybe two to three times my money over the next three to five years. It has a $12 billion market cap. I think turning it into a $30 billion company is quite doable, but also quite a challenge.

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

EG: Yes, I think people should be looking to make the alternative energy sector a small part of their portfolio that is focused on growth. Clearly, alternative energy is still at an early stage, but I really want investors to be clear that this is not a technology play. You are investing in companies with real revenues and real earnings. And you're not relying on huge changes in technology for the industry to grow.

We're only at the foothills today. I mean if the wind industry continues growing at 20% per year, which has been its growth rate for the last 10 years, we would only get to 10% of the world's electricity generation by 2023. And the solar industry, which has been growing around 30% a year for the last 10 years, would only get to around 5% of world electricity from solar by 2023. At that point, I think investors will have seen substantial returns on their investments in this space.

TER: Many thanks, Edward. We appreciate your time.

Edward Guinness joined Guinness Asset Management in 2006. Mr. Guinness is co-manager of the Guinness Atkinson Alternative Energy Fund. Prior to Guinness Atkinson Asset Management, Mr. Guinness worked for HSBC in corporate finance beginning in 1998, and then in 2002 joined Tiedemann Investment Group, New York, in merger arbitrage. Mr. Guinness graduated from Magdalene College, University of Cambridge, with a Master's degree in Engineering and Management Studies in 1998.

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

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



Over in our options trading den they have updated the chart to show all the closed trades as of today, so you can see exactly how it is going, please click this link.



Stay on your toes and have a good one.

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

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

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

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


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

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

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





Wednesday
Sep222010

Harmony Gold Mining Company: Uranium project hit by price slump

Harmony Gold Chart 23 Sep 2010.JPG

Its thanks to one of our subscribers who alerted us to an article regarding the feasibility of a uranium project at the current price levels. In a nutshell Harmony are not too keen to push ahead with an investment into a uranium mining project while the uranium price languishes around the $45/lb level.

Although it makes sense to wait until uranium prices improve we have always found it surprising that prices have to rise to a pre-determined level before a project gets the go ahead. When the price triggers a go ahead it then takes years to bring the project on stream and the price may well have have soared and then retreated again as the project enters the production phase. The other problem is that a number of projects are triggered at the same time thus making it difficult to recruit the staff and the associated resources necessary to execute the project. In our humble opinion the economic advisers to these companies need to take a longer term view when putting together the business model for a particular project. Maybe then companies such as Harmony could build such projects when labour is available and not everyone and his dog are fishing in the same pool for plant and equipment etc. Easy for us to say as its not our money and uranium is out of fashion at the moment.

Anyway here is the bones of an article from miningmx.com:



CONSTRUCTION of the proposed R3.5bn Rand Uranium plant to be built near Randfontein could be delayed because of current low uranium prices.

That’s according to Harmony CEO, Graham Briggs, who was replying to a question posed after his presentation to the Denver Gold Forum being held in Denver, Colorado.

Harmony holds a 40% stake in the unlisted Rand Uranium into which it injected assets formerly belonging to the Cooke and Randfontein sections of the Randfontein mine including the high uranium grade Cooke tailings dump.

Briggs told the conference that: “Rand Uranium is a great project at a uranium price of $65/lb. At prices closer to $45/lb it is not so great and you probably would not make that investment.”
Uranium prices have been depressed for the past 18 months with the spot price currently sitting around $48/lb and the long-term contract price stuck at around $58/lb.

The contract price is the more important of the two because most nuclear power stations buy their uranium on long-term contracts to ensure security of supply.

A number of uranium industry executives – most notably Paladin Energy CEO, John Borshoff, – have predicted that a sharp rise in uranium prices is imminent because of looming supply shortages.

Jonathan Leslie, CEO of Extract Resources, which is developing the Rossing South project in Namibia, commented in Perth recently that: “Current sentiment towards the spot price is for a strong rebound in uranium concentrate prices over a two-year price horizon to satisfy the new growth in demand.

“Spot prices of around $70/lb can be expected to provide uranium producers with the right incentive to develop new supplies.”

Interviewed after his presentation Briggs confirmed to Miningmx that the current outlook for Rand Uranium was not good given present uranium prices.

He said a key issue would be whether Rand Uranium could negotiate long-term supply contract prices with customers that would be high enough to justify going ahead with the project.
Briggs added the Rand Uranium board was due to make a decision on the future of the project within the next two to three months.


He commented, “We have had the first pass estimate on the capital and that is now being reviewed to see if we cannot get it below R3bn.”

DRDGold executive Charles Symons told financial media during a recent visit to the group’s Ergo gold recovery plant near Springs that a price of $113/lb for uranium was required to justify a decision to restart the former Ergo uranium plant.

“Uranium is clearly not feasible for us at current prices but it’s an option should uranium prices ever get that high in future,” he said.

Said Briggs: “I don’t know the precise details of the Ergo operation but I would say the difference between the price they say they need and what we need is down to the grade of the dumps.

“The grade of the Cooke dump is more than double the average uranium grade found in all the other dumps on the Witwatersrand.”

To read the article in full please click here.


Harmony Gold is appearing on a screen near you and trades on the following stock exchanges:

JOHANNESBURG: HAR
NYSE: HMY
LONDON: HRM
BRUSSELS: HMY
BERLIN: HAM1

Harmony Gold Mining Company has a market capitalization of $4.85 billion, a 52 week range of $8.73 to $11.37 and closed today on the NYSE at $11.32.

For disclosure purposes we do not any of this stock.

Over in our options trading den they have updated the chart to show all the closed trades as of today, so you can see exactly how it is going, please click this link.



Stay on your toes and have a good one.

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

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

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

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


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

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

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




Tuesday
Sep212010

Alexander Montano: “Technology Is Key” with E&P Plays

Alexander Montano.JPG

Source: Brian Sylvester of The Energy Report 9/21/10
http://www.theaureport.com/cs/user/print/na/7419

Alexander Montano, managing director of the Corporate Finance Group with California-based C. K. Cooper & Co., puts a lot of faith in technology when it comes to making oil and gas plays pay. Alex sees major opportunities for new technology in old oil basins and suggests some names making good on that thesis in this exclusive interview with The Energy Report.

The Energy Report: Alex, oil traders seem to be showing a growing confidence that U.S. economic growth will rebound next year. This is evidenced by the fact that they're taking advantage of the gaps between the current prices for crude and the six-month contracts, which are due early next year. Is C. K. Copper seeing similarly bullish prospects for the U.S. economy and oil prices in general in 2011? What's your outlook?

Alexander Montano: Well, we understand that oil prices are to some extent linked directly to economic growth. But we think that more and more the outlook for oil prices is going to be less dependent upon U.S. economic growth and is going to become more a factor of global growth. We are not extremely bullish on the U.S. economy in 2011. We believe the recovery is happening, but we expect it to be slow and drawn out. We don't think it's going to be much fun.

But we believe that global demand is growing. We believe that the macroeconomic picture looks very strong. We remain bullish on oil into 2011 with a price between $70 and $85 a barrel.

TER: In which regions of the world do you see growth occurring?

AM: We think that it's going to continue to come from China and India. We think Latin America is going to remain pretty strong. We think that a lot of the emerging players are whetting their appetite on oil and that appetite is going to continue to grow.

TER: Along those lines, OPEC, the Organization of Petroleum Exporting Countries, turned 50 last week. Its control of the oil market is obviously less substantial than it used to be. What impact is OPEC having on the market now?

AM: Well, I think you correctly said that its direct impact in the supply/demand equation has been watered down over the last couple of decades. But I think that from a market leadership standpoint, they are still the clearest voice out there. I think that when OPEC establishes what they believe the oil price should be, whether it's directly a result of their production or not, the oil markets generally adapt to that. As far as short-term swings in production and the ability to fill necessary gaps go, OPEC remains the primary supplier. It's an organization that's been up and down, but I think they continue to be the leader as far as sentiment on world oil prices. I think people still respect that position.

TER: OPEC leaders are on record saying that they consider the current oil price "ideal" and that they will try to keep the oil price where it is. Do you think that they still hold enough influence to keep oil in the $80 range?

AM: I do. We're believers that demand growth is going to continue. I think if you couple demand growth with OPEC's willingness to basically manage supply better than they have historically, then we think that that price target is doable. If you could have a relatively defined price range and the commodities stay within that range, it is a win-win. It's a win for the industry. It's a win for the consumer. We understand that and believe in what they're trying to accomplish.

TER: What's your investment philosophy when it comes to oil and gas?

AM: We focus on technology. We believe that this is a much more technology-driven industry than anything else. Here in California there's a lot of heavy oil. Heavy oil has become a very fundamental piece of the supply picture in the United States. You take a look at what's happening with the heavy oil from the oil sands in Canada. Technology is revolutionizing the economic threshold there. We believe that there are lots of known reserves that will have a meaningful impact on the market in the future. It'll be technology that will make those resources work.

We, generally, try to target companies that are going to apply proven technology in areas that have not been subjected to that technology before. We believe that as these companies are successful, they become an attractive target for larger companies. We tend to focus on companies with a market cap of $1.5 billion or less that we believe have some core thesis that's going to drive their share price. We believe there are companies working in certain geological plays that are hopefully bringing a proven technology to unlock the value there.

TER: Are you talking about things like old oil basins that are no longer economic with vertical wells, but that could perhaps be economic again through horizontal drilling and other newer extraction methods?

AM: Yes, horizontal fracking, water floods and tertiary recovery. The amount of knowledge in the industry is increasing quickly. A lot of times it's just a question of applying the right technology.

TER: What are some names that have found the right technology in some older plays?

AM: Evolution Petroleum Corporation (NYSE:EPM) is a company that, in our opinion, developed and put together a play for a CO2 flood at the Delhi Field in the southeastern U.S. They were able to turn that over to Denbury Resources Inc. (NYSE:DNR). They got a pretty nice upfront payment, and they have a production royalty. That was four or five years ago. Denbury has since basically developed the project to a point where it's a solid, safe annuity.

Evolution just came out with year-end reserves in the neighborhood of 9 million barrels, and it's a little company. Here's a company that's got a base value, but at the same time they're going into the Austin Chalk to apply new technology there and hopefully increase value. And they've got this new "artificial lift" technology that they're applying to uneconomic wells in Texas. With Evolution, the downside is protected because of their Delhi Field with Denbury, and all the other stuff is upside. If you're an investor and you've been waiting for three or four years, that risk has been basically removed and you're in a position to reap the upside.

TER: What's their position in the Delhi Field versus Denbury's?

AM: They basically have a back-in option after Denbury recoups its investment. That's somewhere between 20% and 25%. The reserves they booked are based on that deal. Our equity analysts have a target price in the $9 range for Evolution. They believe that the company is already worth $7 or $8, and the stock's still trading at a discount to that.

TER: Is there another investment thesis you like that's being applied and that looks appealing?

AM: Like I said, we like the idea of somebody buying an asset, unlocking its value and having another company buy them. That's why we like a company called Miller Energy Resources (NASDAQ:MILL).

They probably did the deal of the year in 2009 when they acquired the assets of a Canadian company called Pacific Energy. Pacific had bought those assets from Forest Oil Corporation (NYSE:FST) and probably invested in the neighborhood of $500 million in them. But when the credit crunch hit, Pacific was overleveraged and it ended up in bankruptcy.

Basically, through tenacity, Miller bought the cherries of Pacific's Alaskan assets for $5. Their fair market value is probably somewhere around $300 million. It's almost too good to believe. But as Miller restores a lot of the production that was shut down or fixes wells that aren't producing at maximum rates, the market is really going to take notice. We think Miller's fair value is in the $12 range; it's currently trading somewhere just below $5. There's very little institutional ownership at this point. We think it's one of those companies where somebody is going to come along and say, "Thanks guys, you really cleaned up these assets. We'll take it from here."

TER: Among the micro-cap stocks on a list I saw recently, Miller is listed as fourth in terms of return on assets over the last 12 months. Obviously, they're getting a lot out of those assets already. But what about their being in Alaska?

AM: While Alaska may be maturing, I still would characterize Alaska as a bigger company kind of play. I think that Miller pulled off a small miracle, but to develop everything that's there is going to take really, really deep pockets. I think there will be a point where somebody with a lower cost of capital than Miller is going to buy it. I don't know if that's in two years or six years, but I think that is the ultimate exit strategy.

TER: All right, so buy and hold Miller Petroleum. What are some other E&P plays that you're excited about?

AM: Domestically there's a smaller company that we like called EnerJex Resources Inc. (OTCBB:ENRJ).

We made a decision about four years ago that we thought oil was a better commodity to invest in versus gas. If we could find oil in proven, safe locations, then that was the place to go and bet that technology could make it work. So we like Canadian production. We like U.S. production. EnerJex operates only in eastern Kansas, which is maybe not recognized as a leading hydrocarbon region. But Kansas is among the top eight oil-producing states. The thing about eastern Kansas is that it's older production, so ownership is very fragmented. I think there's something like 10,000 different operators in Kansas with the majority producing 50–80 bpd.

EnerJex basically said: "We're going to acquire those mom-and-pop shops and aggregate them." Most of these operations are so small that they aren't water flooding. They aren't down spacing. They aren't using artificial lift; they aren't using any kind of horizontal-drilling technology. Enerjex believes that they can apply these technologies and take production from their current 200 or 300 bpd to 3,000, 4,000, 5,000 bpd over the course of four or five years. At that point they become a nice target for somebody.

There's very little exploration risk. It's more of a manufacturing process because we know the oil reserves are there. It's just a question of getting them out economically by achieving economies of scale.

TER: But that premise depends largely on the acquisition costs. And how is the company going to afford to buy many of these assets? They're going to have to dilute their equity, and that reduces value.

AM: They can use bank credit pretty effectively because there's very little risk. They're good assets to leverage. They have also found that so many of these assets have been neglected that in many cases the producers are also the landowners. It might have been a farmer that drilled two or three wells just because that's what everybody was doing 20 years ago. EnerJex has had some instances where people are willing to give them the well leases on the condition that they will go and drill it out because the royalty revenue would be greater to that landowner than what they're getting currently. I think that if they can maintain a certain pace of activity, then that starts to create the traction. In 2007 and 2008, they took about $9 million of capital and turned it into $40 million of proven value.

TER: It's certainly an interesting business model. But what about exploration drilling costs?

AM: Their biggest issue isn't the exploration risk. The biggest sensitivity in the company is operational leverage. Right now they're producing 200 or 220 bpd. Their fixed costs associated with that don't really change if oil prices go down. Could they produce 400 or 500 bpd without really changing their cost structure? They probably could. But they have tended to be very sensitive to commodity prices. When oil prices went down in late 2008, it really hurt them. But if they can add mass, then their operating margins will improve and their sensitivity to commodity prices will decline.

TER: Alex, you talked earlier about the global market for oil. Are there some companies that C. K. Cooper likes that are not based primarily in the United States?

AM: Yes, there are, although we try to shy away from political risk. We think that's a risk that cannot be quantified or that you can't factor into a model.

TER: Well, you can use a steeper discount.

AM: Yes, but how do you discount what Hugo Chavez might do in Venezuela next month? We're basically looking for plays in what we believe are politically stable regions with strong markets. One company that we like is a natural gas player called FX Energy Inc. (NASDAQ:FXEN). They are focused on natural gas production in Poland.

Poland normally imports the bulk of its gas from Russia. And as we've seen over the last couple of years, gas can become more of a point of leverage if the Russian government chooses to utilize it. That means there's a ton of pressure in Europe, and in Poland in particular, to develop alternative supplies of natural gas. It's not that Poland doesn't have the reserves, it's that they're just underdeveloped. We think that FX got in early. They have a huge land position there. It is one of these plays where they have so much land under lease that anything else positive that happens in Poland indirectly benefits them.

FX has gone from the incubation stage to a program of steady drilling. They're starting to become more of a production and development company. We think that if Eastern Europe experiences a really cold winter, they could become a very attractive takeover target.

TER: Possibly by Russian company?

AM: I doubt the Poles would support that. Their partner is the Polish National Oil Company, so I'm sure they would have some say in that.

But you're seeing a lot of transactions that are effectively technology transfers. A lot of companies in Europe are trying to bring U.S. and Canadian drilling and completion technologies to apply on their unconventional plays. I think that as that starts to gain traction, people will look for low hanging fruit, companies with proven assets and a decent reputation. I think FX fits the bill.

TER: Moving over to natural gas, the U.S. Department of Energy expects total natural gas consumption to increase 4% this year. That means an extra 65 billion cubic feet of gas per day. And the CEO of one of the majors, Royal Dutch Shell Plc (NYSE:RDS.A), recently said that Shell will be more gas than oil by 2012. What's that telling us about the natural gas market, and should investors be taking long-term positions there?

AM: We think that natural gas is the fuel of the future for the United States. You can't look at the abundance of it, the infrastructure that's generally in place and reach any other conclusion. I think in the long term, you absolutely need to have a position in natural gas. The problem is that there's been such an advancement in technology in developing gas out of unconventional plays that there's an oversupply of gas in the market. And there probably will be for the next 12 or 18 months. While we favor oil in the short term, we believe that you can selectively add natural gas companies to your portfolio and you'll do well. But in the meantime, there's going to be a rough period as the market adjusts to the new supplies.

TER: Are there some predominantly natural gas plays that our readers might be interested in?

AM: We really don't have any that are at the top of our list. We like particular plays. We think that the Eagle Ford Shale is going to make sense. The Marcellus obviously is going to make sense. There are a lot of companies that are positioned there, but there's nobody near the top of our recommendation list that is really gas focused.

TER: But are you recommending that investors should be cautious when it comes to plays in the Marcellus, given that there's a moratorium on fracking in New York and there's growing concern about a similar ban in Pennsylvania?

AM: Yes, absolutely. But I think that in the long term, economic necessity is going to outweigh those issues and technology will continue to improve.

A lot of gas development, in my opinion, is about a land grab. I mentioned that none of the companies near the top of our list are focused on gas. That doesn't mean they don't have gas or don't have exposure to gas. They're just not putting a lot of money into it.

If you've got companies that have large acreage positions in places like the Marcellus, but aren't being forced to drill it to defend those acreage positions, it's like having a long-term annuity. Those positions are going to be worth something in the future.

TER: But we will likely see some consolidation because companies may have to take writedowns on those acreages, and that will result in shrinking share prices.

AM: Well, it either makes them targets or it drives them to go out and acquire assets elsewhere where they can do something over the next two or three years. I think that a lot of companies that maybe made a push into the Haynesville or the Marcellus have their acreage positions and can manage that land. The question becomes: Where can I go and buy something that I can sell to the Street for the next two or three years? To us, the opportunity lies in these more proven oil basins.

TER: Are there some companies that have sizeable positions in the big shale plays that are looking to diversify?

AM: I think a good example is Goodrich Petroleum Corp. (NYSE:GDP). They spent a lot of money to push into the Haynesville in northern Louisiana and eastern Texas over the last couple of years. I think they kind of realized: "Hey, this isn't bad stuff, but we don't want to have all of our eggs in this one basket." Now you've seen them go out and start moving aggressively into the Eagle Ford Shale, which has a lot more oil in it.

Another company you can look at is EXCO Resources Inc. (NYSE:EXCO). They aren't abandoning their gas plays, but they're trying to diversify their asset portfolio either through acquisitions or JVs. If they fail, then they will likely become targets.

TER: Do you have some parting thoughts on the sector today?

AM: Well, we would say that technology is the key. With lots of plays, when capital is relatively tough to come by, you want to be able to manage your capital budget. Most of the time, that means long-term lease positions—acreage held by production. If you have that, you can wait. . .let technology develop. Let guys with deeper pockets develop new completion or fracking techniques. You basically benefit through serendipity. Those are the companies we target.

TER: Alexander, this has been great. Thanks.

Alexander G. Montano is managing director of the Corporate Finance Group for C. K. Cooper & Company, a full-service investment bank. Montano has been responsible for the development of the firm's investment banking practice, including cultivating client relationships, strategic planning and transaction management and execution. Prior to joining C.K. Cooper, since 1991, Montano was an equity analyst, and focused on smaller exploration and production companies starting in 1995. His comments and analysis have been quoted in such publications as Hart's Oil & Gas Investor, CNNfn, Forbes, BuySide magazine, Standard & Poor's Platts Oilgram News and various regional newspapers. In addition, Mr. Montano was rated a 5-Star, All-Star Analyst by Zacks Investment Research in 2002 and top oil analyst by The Wall Street Journal in May of 2003.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Enerjex and Shell.
3) Alexander Montano: I personally and/or my family own shares of the following companies mentioned in this interview: None. C. K. Cooper & Company owns equity of EnerJex Resources, Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. However, C. K. Cooper & Company has provided investment banking services to EnerJex Resources, Inc. and FX Energy, Inc. and may solicit investment banking business from other issuers mentioned herein.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592
Email: jmallin@streetwisereports.com



Over in our options trading den they have updated the chart to show all the closed trades as of today, so you can see exactly how it is going, please click this link.



Stay on your toes and have a good one.

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

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

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

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


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

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

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




Thursday
Sep162010

Eric Nuttall: Look for Underlying Oil/Gas Catalysts

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

Eric Nuttall.JPG

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Stay on your toes and have a good one.

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



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

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


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

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

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





Tuesday
Sep142010

Scott Koyich: Oil & Gas Upside Potential

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

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

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

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

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

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

TER: For example?

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

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

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

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

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

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

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

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

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

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

TER: Any other thoughts on the energy area?

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

TER: Do you see that as a problem?

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

TER: Any other companies that come to mind?

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

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

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

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

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

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

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

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

TER: Very interesting.

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

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

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

TER: Very good.

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

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

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

TER: Terrific. Thanks, Scott.

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

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DISCLOSURE:
1) Karen Roche and Gordon Holmes of The Energy Report conducted this interview. Karen personally and/or her family own shares of the following companies mentioned in this interview: None. Gordon Holmes: From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Energy Report: TransGlobe Energy Corp.
3) Scott Koyich, DSK Consulting Ltd. (DSK): DSK is an investor relations firm. DSK provides, for remuneration, corporate communications and investor relations services to client companies represented in this interview. The information contained in this interview is based on existing disclosure documents or other publicly available information. Neither DSK nor the above-mentioned client(s) are offering securities, advising or soliciting the purchase or sale of securities. Information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. This material is not an offer to sell or a solicitation of an offer to buy any securities, nor is it an endorsement of the companies by DSK. DSK is not responsible for any claims made by the companies. Investors should independently investigate and fully understand all risks before investing. Statements included may contain forward-looking statements within the meaning of the Private Securities Litigation Reform ACT of 1995. Such statements may involve a number of risks and uncertainties. Further information on potential factors that may affect each company's financial results can be found in their specific financial reports, which are filed with the Securities and Exchange Commission (SEC) and/or the British Columbia Securities Commission (BCSC).
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On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time, however, with uranium showing signs of life just maybe we are closer than we think.


Stay on your toes and have a good one.

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


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

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


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