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Thursday
May202010

Eric Nuttall: Maximizing Oil and Gas Investments

Source: Brian Sylvester and Karen Roche of The Energy Report 5/20/10
http://www.theenergyreport.com/pub/na/6337

Eric Nuttall.jpg

"If you want to talk about the Gulf and the oil leak in terms of investment, I think it's creating some pretty interesting investment opportunities," says Eric Nuttall, portfolio manager of Sprott Asset Management's Energy Fund. The straight-shooting Nuttall never fails to opine or shine as he explains why onshore oil plays are solid investments and talks oil and gas juniors, shales and prices in this exclusive interview with The Energy Report.

The Energy Report: How do you see the European Union's sovereign bailout of Greece affecting the oil price?

Eric Nuttall: It relates to the overall psychology about global and European economic growth. We've seen the price of oil have unbelievable volatility on different headlines. A few weeks ago when Goldman Sachs was being investigated for fraud, oil took a tumble. It is largely being driven by traders looking for an excuse to buy or sell, depending on whatever headline they read that day. It's difficult now to appreciate the effect the bailout of Greece is going to have on European and global oil demand. I think that it's more of a knee-jerk reaction than an actual shift in fundamental demand or supply.

TER: The oil price is up a few dollars since we first heard about British Petroleum (NYSE:BP; LSE:BP)'s accident in the Gulf of Mexico, which is likely to delay further offshore exploration there. How do you see this incident influencing the oil price?

EN: As it stands, I think it has had almost no fundamental impact, and there's a few reasons for that. One, the route of oil imports into Louisiana has not been impacted because the slick is too far east. As long as there are no disruptions in actual imports of crude oil, there really should be minimal impact on pricing.

TER: And over the long term?

EN: Were there to be a permanent ban on offshore drilling, that would obviously have an impact given the Gulf accounts for a meaningful percentage of overall U.S. oil production. However, with the long lead-time to projects, be it three to five years to first oil or first gas, a short-term ban on drilling is not going to have an impact on longer-term supplies. I really don't see it having a large impact in either the short term or long term.

TER: What about the environmental implications?

EN: I think that it's too early to accurately say, though there is obviously a bias in the media to over-sensationalize at times. There are suspicions that 5,000 barrels of oil per day are leaking into the Gulf. I've read that over 2,000 barrels per day naturally leak from subsurface cracks in the seabed. Longer term, I think the impact is not going to be as significant as some people are predicting.

TER: Has the oil spill created investment opportunities?

EN: I think it has created some pretty interesting investment opportunities, one being British Petroleum. I started buying it the last Friday in April. It's turned into a sin stock, along with the tobacco companies. We've seen an erosion of over $21 billion in market cap, which I find just astounding. I put pen to paper in terms of what the maximum exposure could be, and my maximum cost scenario amounted to around $10 billion. That's less than half the market cap erosion. In the meantime, the price of oil is doing quite well. You can buy a company, with a PE at seven, yielding about 7% annually, and it's obviously out of favor.

TER: How much BP did you buy?

EN: I made it about a 2% weighting for the overall energy fund, thinking that it looks like a pretty easy 10% trade over an undefined time period, but I don't expect it to be a long-term holding. You get paid 7% per annum in the meantime.

TER: Why didn't the oil spill decrease all oil company stocks? Why just BP?

EN: There's no reason that it should have. There is some thought that for offshore drilling companies, it's going to become more expensive because of increased insurance costs; and secondly, there is likely going to be a need for more safety equipment such as a second blowout preventer, or maybe more servicing of the equipment. So higher cost, lower margins. Some companies that would actually benefit should a long-term offshore drilling ban be enacted would be the onshore oil producers. The Bakken names have been very, very strong. In addition, the Canadian oil sands become increasingly attractive, given that the Gulf of Mexico is one of the few areas of tremendous prospectivity. If reason goes out the window and there is a medium- to long-term ban on offshore drilling in the Gulf, then the only remaining large source of oil is either the Bakken or the Canadian oil sands.

TER: There's not much fundamental support for oil in the $80 range. Some experts believe the trading of oil derivatives is largely responsible for pushing the price to that level. What's really going on?

EN: I would agree that a price in the high $80s is probably not justified. The most important number to look at now is OPEC's capacity and compliance on production rates. We have seen a significant deterioration in OPEC compliance relative to what their production quotas are. I think we've had six months now of abiding to 50% overall compliance, and they're sitting on 5-6 million barrels a day spare capacity. They've publicly stated—at least Saudi Arabia has—that they find a price in the $70s or $80s to be "fantastic." The largest holder of spare capacity in the world is telling you that the high $70s and $80s is its price point. That tells me that in the medium to long term, that will probably be the going price until a global economic recovery is able to soak up a majority of OPEC's spare capacity.

TER: How long will that take?

EN: I think that could take several years. In the meantime, an $80 oil price is as high as we go for the short term.

TER: Among your Energy Fund's bigger holdings is Bankers Petroleum Ltd. (TSX:BNK), which is up to $9 now from about $1.70 a year ago. What are things you look for when you seek investment opportunities in oil companies like Bankers?

EN: We look for companies that have a very meaningful resource upside that is not currently being recognized by the market. In addition, we look for companies that are well funded, preferably have production, and are stewarded by good management teams.

TER: That sounds like Bankers.

EN: Bankers is a perfect example. We got involved in the company a few years ago. I had been following the asset, which is the largest onshore oil field in Europe and was discovered by the Russians in 1929. A new management team parachuted in and we had known the new CEO Abdel (Abby) Badwi and his technical team from a previous company that we had done extraordinarily well with called Rally Energy.

TER: Is that when you got involved?

EN: The day that Abby joined Bankers we offered, and they accepted, a $50 million financing. Bankers have used those funds to increase production, but much more importantly, it was able to delineate the field. Since our initial investment, the field has grown from about 2.2 billion barrels to over 5 billion barrels of oil in place. And they have used Canadian drilling technologies—pumping and horizontal drilling—to meaningfully increase the production profile of a typical well. They've been having wells come on at over 150 barrels a day on a horizontal basis, which is just phenomenal. It really increases the net present value of the company because you accelerate production. The company is producing over 8,000 barrels a day and has a visible window to grow to over 30,000 over the next several years.

TER: Is it a takeover target?

EN: There are very few assets like this that have the strategic nature of both being onshore and also being of a material enough size to attract the attention of a large state oil company. We think Bankers is likely to be taken over in the next, I would say, two years, most likely at a 50% to 100% premium from where it's trading today. I think that when Abby and his team are ready to part with it and move on, it should generate quite a bit of interest.

TER: You also hold a lot of Corridor Resources Inc. (TSX:CDH), which has exploded from about $2 this time last year to around $6.30. Tell us about it.

EN: Corridor has a lot of the same attributes as Bankers. It had a large land base in New Brunswick, which is not a province that is typically associated with hydrocarbon production. We saw quite a bit of running room in their McCully Gas Field. In addition, we thought that they had very significant onshore shale gas potential, as well as a huge offshore exploration prospect that could contain up to 1 billion barrels of oil. Corridor owns 100% of that prospect and we're hoping that they will be able to drill it later this year.

Since our investment, they've increased production at McCully and, most importantly, a very significant a shale gas producer called Apache Corporation (NYSE:APA) agreed to evaluate the commercial potential of natural gas in the Frederick Brook shale formation. Having such a premium quality shale gas producer come to New Brunswick really validated the resource potential.

TER: How is that working out?

EN: Corridor has drilled a few wells into it, had promising test results, and so now Apache is carrying them for $25MM, on an earn-in basis, which will take them through proof of concept. At that point, Corridor could have over 50 TCF (trillion cubic feet of natural gas) net to the company. That's a huge, huge potential resource and that's something I look for. We weren't paying for it at the time. It always makes me uncomfortable when you're expected to have to pay for exploration success. I much prefer to buy companies that are cheap with existing production; you get the resource upside for free, because exploration doesn't always work.

TER: Is that an investment philosophy?

EN: I tell my sales force I never want to come into the office and be afraid that I am going to have a name down 80% because they dusted one individual well. It's a tough way to get rich. I much prefer buying companies with existing production where you get the exploration as a free option as opposed to the exploration upside being the only thesis to the investment.

TER: What are some other juniors you have your eye on?

EN: One name that's done very well for us is Rock Energy Inc. (TSX:RE). It's a conventional producer of heavy oil in the Lloydminster area of Alberta, Canada; it's trading about four times cash flow on existing production, but at the same time, they're testing a natural gas play in the Elmworth area of Alberta. It's surrounded by the likes of Encana Corporporation (TSX:ECA), ConocoPhillips (NYSE:COP), and Daylight Energy Ltd. (TSX:DAY.UN;DAY) (formerly Daylight Resources Trust), all of which are well-regarded companies. These companies have either successfully tested or have existing production from two zones, which Rock is targeting, which are the Montney and the Nikanassin zones. They have had a successful Montney test rate. They should have a good Nikanassin test rate over the next couple of quarters. If 10% of their acreage works in one of those two zones, then it could triple their reserves. So they have a highly significant exploration program; but at the same time, it's trading at four times cash flow and existing production—so your downside is largely protected.

Delphi Energy Corp. (TSX:DEE) is also a name I like a lot for a one- to two-year investment. They have a great asset base in the Deep Basin of Alberta where they are targeting in 2010 over five new zones that have no meaningful reserve bookings. I see them having the potential to triple their production and quadruple their reserve base through a successful exploration program this year, which so far has been going extremely well. At the same time, they produce over 8,000 boe/d and trades at around six times enterprise value to cash flow, so it is not being valued at an egregious valuation.

TER: What about onshore oil juniors in places that are maybe not quite as stable as Canada but still relatively stable? Something like Tethys Petroleum Ltd. (TSX:TPL).

EN: Tethys has had some extraordinary well results in Kazakhstan; they're also in Tajikistan and Uzbekistan. 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. The geographical location of their discovery is kind of in the no man's land in Kazakhstan in terms of where it was thought you would find oil; it was thought to be a much more gas-prone area of the country. They could have an incredible material oil discovery; there have been some very large numbers thrown around, like several hundred million barrels recoverable potential. If further drilling is successful, then the company should do quite well, even though it's been a big winner over the past year.

TER: You also own a lot of Questerre Energy Corporation (TSX:QEC).

EN: Questerre is in the Utica Shale, an emerging shale play in Quebec. Of the juniors, Questerre has the largest and highest-quality acreage swath in the play. The stock has been weak recently; Questerre did a financing at over $4 and now trades around $3. They have had some very encouraging test rates from a recent eight-stage horizontal well that rivals the Marcellus Shale, We think, given the passage of time, assuming that future horizontal wells confirm the first test rate, Questerre could be sitting on a four-to-five net TCF discovery, and on a market cap today of roughly $700 million with well over $160 million in the bank, it's a pretty good higher-risk investment. However, they have limited production, so your risk is a little higher than other names.

TER: Could you provide with an overview of natural gas exploration over the last 20 years?

EN: Until recently, the majority of natural gas was produced from conventional sandstone; these would be highly permeable, high-porosity reservoirs of consolidated sand. You typically drill a vertical well that requires no fracking, which is when you put pressure on the reservoir to induce artificial cracks to enhance the flow rates. Until the last 15 years, sandstone deposits were the predominant focus of the industry. As large discoveries became more rare, the industry started targeting unconventional zones. These include tight sands, a sandstone where natural permeability is low. If you drilled a vertical or horizontal well into one of those without fracking it, it would yield an uneconomic rate. Tight gas has been a focus for about the past 15 years as large discoveries have been made such as the Pinedale anticline in Wyoming.

After that, the industry went toward coal bed methane—coal seams saturated with gas that must be desorbed. CBM, too, had a large increase in production but is now in decline. After coal bed methane, the industry started going toward shale gas.

Shale has natural gas in the actual porosity of the reservoir and the natural fractures; however, it really needed better fracking technology to make most plays economic. The revolution was to drill a horizontal well using a very long lateral hole and then be able to place not one frack but up to 30 different fracks in an individual well bore. The Barnett Shale was really the first to take off commercially. That led then to the Marcellus Shale, Fayetteville Shale, and then most recently the Haynesville Shale, which is being touted as probably the most economic shale play. It straddles the border between Louisiana and Texas.

TER: How has finding natural gas in shales changed the industry?

EN: In Canada, going back a couple of years, the average well would come on at about a quarter of million a day in initial production. In the Haynesville Shale, it is not uncommon to drill a 15 million-a-day well—or 60 times the average initial production of a Canadian conventional vertical well. This is a huge change in average productivity, which has led to a very bloated natural gas storage situation in North America, which has led to low prices.

TER: Is it true that certain shale leases are artificially inflating supply?

EN: A lot of companies acquired acreage in these shale plays, predominantly the Haynesville Shale, and the terms of the leases require a company to drill and produce within about a three-year timeframe. For a lot of these companies the expiration window is fast approaching. Companies are being forced to drill and produce on this acreage, even though the economics may not be as stellar as they once thought they would be. That's leading to an artificial influx of natural gas.

TER: Where do you see prices going for the rest of 2010 and then maybe for the next three to four years?

EN: I think for the next three years there's a cap of about $6 on natural gas. There is an unbelievable amount of supply that is highly economic at that price point. You have companies that are the largest in the industry such as Encana and Chesapeake Energy Corp. (NYSE:CHK), both sending out very aggressive growth forecasts. They're both growing by 50% over the next three to five years. So when you have the largest companies bringing on production at a time when natural gas pricing is in the $4-$5 range, it tells you that they view the marginal cost of supply to their portfolio as much less than historically. We used to think that we needed $7-$8 to grow natural gas profitably. That is no longer the case.

TER: What effect is hedging having?

EN: Much of industry in the U.S. is hedged, approximately 55%, at around $7; that's allowing companies to maintain a very active capital-expenditure program. This has led to a very over-supplied market, and my theory is that until the core areas of each of the shale plays are drilled up, which I think could take three to five years or longer, we're in a situation of a chronic oversupply. Four dollar natural gas is too low; I do not think $4 is sustainable, but at the same time, I do not think we need $7-$8 to bring on supply. I think a $5-$6 range, probably closer to $6 than $5, is probably what we should be expecting over the next three-odd years.

TER: Which one gets you more excited: the oil or the gas sector?

EN: It's a common question because a lot of people say oil is trading at $84 and gas is at $4, obviously you must be looking for oil companies and that's not necessarily the case. The valuations of oil companies now and the multiple that you have to pay is significantly higher than for natural gas companies. If we use a long-term natural gas price of $5, we can buy some natural gas companies at their proven net present value, which implies that you're getting the probable and possible reserves for free. Given the confidence in proven reserves, the risk/reward on that type of investment is extraordinarily low. I think as gas prices firm up from $5 over the next six months, those companies will be very good performers. Despite having the stigma of being natural gas producers, I think people are going to head to that area of the market over the next couple of months.

TER: Does that mean you're not looking at oil companies?

EN: There are some oil companies as well that are trading at very attractive valuations. It's not so much trying to target natural gas or oil; it's trying to be opportunistic in trying to find the most upside on a risk / reward basis.

TER: What's Eric Nuttall's tried-and-true method of playing the sector?

EN: Buy companies that trade at reasonable valuations on existing production but whom also have very meaningful reserve potential for which you don't have to pay. Make sure that their balance sheets are strong enough so that they can withstand a long period of low commodity prices so they won't be forced to liquidate assets. Invest in management teams that have proven themselves in the past, but make sure you're buying into good assets. You can have a good management team with a mediocre asset and they're still probably going to do okay. But if you have a good asset and a bad management team, you're probably not going to do terribly well. The quality of the asset is terribly important.

TER: That's all?

EN: One other thing. Try to recognize opportunities before others, and this just doesn't apply to the oil and gas sector, but it's something that we always try to do. Recognize opportunities before others; don't be afraid to be wrong; act quickly if you see a very exciting opportunity where the risk reward is very skewed; act quickly, act big.

TER: Is that what you did when you recently took a position in Massey Energy Co. (NYSE:MEE)?

EN: Massey is out of favor given that there was a significant mine explosion in April. The stock has fallen 30% or $1.2 billion. The ultimate cost of the monetary reimbursement for the families of the fallen miners is likely to reach $100 million. So you have about an 18-times decrease in market cap relative to ultimate exposure. You're buying a company at seven-times earnings. They have the largest net metallurgical coal reserve of any U.S. company. Met coal pricing has been extraordinarily strong due to strong steel demand worldwide. You need met coal to produce steel. You've got a market cap of $3.8 billion with some debt, so an enterprise of $4.5 billion and a coal reserve of almost three billion tons. It's not a bad value proposition. The memories from the tragic accident will pass with time and the stock should do quite well.

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) Brian Sylvester and Karen Roche of The Energy Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Tethys Petroleum and Rock Energy.
3) Eric Nuttall: I personally and/or my family own shares of the following companies mentioned in this interview: Rock Energy and Delphi. I personally and/or my family are paid by the following companies: None.

Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
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Email: jmallin@streetwisereports.com





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

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

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

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



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

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

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

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

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Tuesday
May182010

The Nuclear Option

AEI Chart 19 May 2010.jpg


by Marin Katusa, Chief Investment Strategist, Casey’s Energy Opportunities

Earlier this year, the Obama administration announced large new federal loan guarantees for the nuclear energy industry – totaling about $54 billion, or more than triple the current level of funding. Philosophically, we abhor government subsidies to any industry, but we also recognize that they’re a fact of life these days, with an inordinate influence on markets. So even though we’d prefer the government didn’t pick industry winners and losers, we must be mindful of what Washington is doing if we expect to reap profits as investors.

In this instance, the ramping up of government support means boom times are coming for the nuclear energy industry, which is about to awaken from a three-decade long sleep. And if you correctly position your energy investment portfolio, you can benefit from a comeback that’s baked in the cake.

Power is all about the numbers. Consider the illustration below, which shows how current electricity generation technologies stack up when it comes to producing energy (cost is in dollars per megawatt hour). Solar and wind generators are not cheap and don’t work when it’s dark or calm. They’re competitive only with heavy government subsidies and even then, will never contribute much juice to the grid.



Source: EIA. Adapted from http://www.investingdaily.com/tes/17201/sell-wind-and-solar-energy-stocks.html

Hydro, biomass, and geothermal fare much better, easily competing with more traditional technologies, and there are good investment opportunities among them that we’re following. But again, in the larger picture they’re minor players.

In terms of bang for the buck, it still comes down to coal, gas and nuclear, and Washington realizes we’re going to need all three to meet our future energy needs, especially as electric vehicles begin to replace those that run on gasoline.

The Obama administration is all for going as “green” as possible, but realizes that wind and solar are not going to cut it. Thus, after thirty years in the doghouse, the nuclear option has regained the respectability in America that it enjoys among nations such as China, where ten new plants per year are proposed (our last new construction project broke ground in 1977).

Despite lingering doubts among those who remember Three Mile Island, uranium has been dusted off and presented to the public as a safe, environmentally friendly, cost-effective source of power. And the new generation of plants is all of those things, compared with the dinosaurs of the 1970s.

Even bureaucrats can understand that. Thus there’s been a major policy shift in D.C., and a powerful new trend has been set in motion. That’s clear. But how to profit from it?

First off, companies that build new nuclear power plants will see an uptick in demand for their services. The problem there is that companies operating in this sector are huge conglomerates with diverse business lines. So an increase in revenues from the unit that constructs nuclear power plants could easily be offset by a corporate decline elsewhere that has nothing to do with nuclear energy.

Investing in conglomerates generally means an expectation of modest gains. That may be sufficient for some investors, but not for us as speculators. We prefer to look for opportunities to double our investment, or better, letting us put less money at risk for potentially greater returns. So, we want exposure to companies that will benefit from this new policy in a bigger way, those that are more of a pure play.

For one, that means uranium producers. An increase in the number of nuclear power plants will drive higher demand for the mineral, bullish both for those who pull it from the ground and those who reprocess spent fuel.

The price of uranium is not going to skyrocket overnight. What with regulatory hurdles and long lead times, new construction in the U.S. will take a while. But permits will be issued, and in the interim, everyone else is forging ahead, with some 60 plants currently going up worldwide. Demand will steadily increase.

On the supply side, keep in mind that the U.S. and Russian governments have their own strategic nuclear fuel reserves, in the form of nuclear warheads. At present, half of all U.S. nuclear electricity comes from reprocessed fuel from Russian bombs, through the “Megatons to Megawatts” agreement. That has acted as a ceiling on the price of uranium in recent years. However, in 2013, Megatons to Megawatts will end, and American utilities will have to secure fuel through alternative means.

A few enterprising Western utilities see the writing on the wall and have been proactively securing their cheap supply of uranium through long-term contracts. But the rest will be forced to pay more on the open market, squeezing their already razor-thin margins. The utilities whose management had the foresight to lock in their supply at good prices will have an edge over their competitors that will be reflected in their stock price.

The miners are looking good, as well. If you add demand growth to the termination of the Russian pipeline, you get steadily rising prices for their product. And that will translate into fattening bottom lines.

As an investor, you’ll want your money in the savviest utilities, along with select uranium mining companies that are poised to prosper. Then you’ll be on your way to profiting handsomely.


Want to know which uranium mining and utility stocks are set to explode to the upside? Try Casey’s Energy Opportunities risk-free for 3 months today and gain access to one of the best energy analysts of our day, Marin Katusa. Marin and his energy team know all the inside details and have prepared a shortlist of the best companies to own. For only $39 per year, they will keep you in the loop on oil, gas, nuclear, and renewable energies. Click here for more.



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

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

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

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



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

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


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

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

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

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



Thursday
May132010

Adam Michael: Exciting International Oil and Gas Opportunities

Source: Interviewed by Gordon Holmes, Publisher, The Energy Report 5/13/10
http://www.theenergyreport.com/pub/na/6291

Adam Michael.jpg

Oil and Gas Analyst Adam Michael is excited—in some cases very excited—about a lot of things in his sector, including Turkish gas and Latin American oil plays. He even gets excited about long-term oil price fundamentals. Just don't ask him about the domestic oil and gas market. It's just so yesterday's cycle.

The Energy Report: Adam, please give us a macro view of the energy market.

Adam Michael: On a macro level, it's important to look at inventory levels, but more importantly I think it's just fundamental economics. What do the global industrial production numbers look like? Are we building business inventories? We had a huge drawdown in business inventories during the last recession and those inventories need to be replenished to feed the global expansion. As we build inventories and increase industrial production, demand for energy increases. It's really that simple.

TER: What role does credit play in the energy sector?

AM: Credit is such an important part of the world economy. Without access to credit it becomes more difficult for companies to fund working capital and inventories at the wholesale and manufacturing level; you can't have a global increase in industrial production. During this last credit crisis people lost the ability to tap the capital markets. We saw demand for oil decrease and the price of oil plunged to $40 a barrel. Now we're seeing a complete reversal and it's no coincidence the credit markets have improved incredibly. Junk spreads have narrowed from 2,000 basis points to 650 basis points over the past year. Spreads continue to tighten. The appetite for risk in the credit markets is increasing. As new issues hit the market, most of that money goes toward working capital and building inventories, which creates demand for energy.

TER: What's your view on the price for oil and natural gas?

AM: In terms of the price of oil and natural gas, we are now where we should be. I think $75 to $100 per barrel is a pretty good range as long as OPEC has spare capacity. Eventually, that capacity is going to dwindle and demand is going to take over, especially in China, where demand never really tapered off during the recession. You have the Chinese using four barrels of oil per person a day and we're using 25, so that's going to converge with time. The incremental demand for oil is going to come from China. That's positive for the energy sector, especially on the international side.

TER: Reports suggest oil-exporting nations, especially those in Latin America like Venezuela and Mexico, are not sufficiently reinvesting in their oil assets. Is this going to influence the number of barrels that they are going to be able to export?

AM: I think ultimately it's going to be bullish for the price of oil. To meet the global demand we really need all energy sources producing at their maximum capacity. When you have a country with nationalistic ideas like Venezuela what you get is a lack of investment and you drive away key talent. It's tough to attract engineers or service companies to work in Venezuela, let alone maintain the country's oil assets and grow the reserves necessary to produce oil five years from now. Ultimately, these countries produce much less than they could, which is bullish for oil.

TER: How is technology changing the oil and gas sector?

AM: This last bull market was really kind of the emergence of unconventional energy, and technology is what really what drove it—especially domestically. For example, you have huge natural gas resources that weren't commercially viable until the emergence of horizontal drilling and multi-stage fracking. Applying this technology allowed companies like Chesapeake Energy Corp. (NYSE:CHK) and Petrohawk Energy Corp. (NYSE:HK) to explore places like the Barnett and Haynesville shales and find new sources of natural gas and produce them on a massive scale.

Going forward, I think the domestic natural gas sector is really going to be a game of who's the low-cost operator. So I'm not really big into the domestic natural gas plays like I was during the last cycle. They are widely understood now and appropriately valued in the marketplace. What I'm really excited about this go around are the opportunities I'm seeing on the international side. When I say "international side," I'm talking both unconventional and conventional energy.

TER: Are you more bullish on oil or gas?

AM: I'm bullish on the oil price. Oil is more of a finite resource, whereas natural gas is different. In this last bull market, we unlocked incredible domestic natural gas resources—all the shale plays and tight gas plays. I just don't feel that there is much upside for domestic natural gas going forward.

TER: What about on the international side?

AM: On the international side, there have been so many countries that are just now opening up that have been closed off for decades. These countries haven't been drilled or explored as much as ours. Places like Colombia have had security issues with the FARC (Revolutionary Armed Forces of Colombia) for decades that prevented energy companies from safely going in and exploring and drilling wells. As Colombia has driven back the FARC, all of a sudden they are hitting incredible wells. I've seen a few 10,000 barrel-a-day wells! You just don't see that domestically. The fact that that whole frontier is now opening is an exciting opportunity. There is a massive land grab going on internationally similar to what we saw in the last cycle domestically with unconventional natural gas.

TER: Any other areas abroad that present those opportunities?

AM: I really like what I'm seeing in Turkey. Turkey imports 90% of its energy, most of it from Iran and Russia, so you have much higher natural gas prices there. Natural gas is about $8 per mcf (a unit of natural gas equal to one thousand cubic feet of gas), whereas domestically it's $4–$5. I get excited when I see an energy-dependent country that has made it attractive to invest in a largely unexplored area.

TER: Any examples?

AM: TransAtlantic Petroleum Ltd. (TSX:TNP; NYSE:TAT) is a company I'm really excited about. You have a company that at the bottom of the market put together a land package of several million acres in Turkey. They added a couple million acres in Morocco and another 700,000 or so in Romania. TransAtlantic now has a producing asset, the Selmo oil field, that gives it some good cash flow. It has also identified a couple of other areas that are very prospective for both conventional and unconventional natural gas. And it has a new gas play that just started producing in a gas field called the Thrace Basin, where the wells literally pay out in three to six months. I don't even know if they've ever fracked a well in Turkey. TransAtlantic chairman Malone Mitchell and his company have a long history of applying modern technology domestically. TransAtlantic has not only gone to Turkey and put together a great land package, but they're also taking their expertise and technology to places where they can lock up enormous acreage positions. I think it could get really exciting when you apply that technology, especially in the Thrace Basin where it looks like TransAtlantic has some tight gas opportunity. As well as in the Paleozoic trend where there are a couple of areas, especially near Arpatepe, Turkey, that look like they could be perfect for fracking or horizontal drilling. It's really that combination of strong management, applying the right technologies and then having the real estate in the right areas. We're still at the very early innings of what TransAtlantic is doing there.

TER: What about some other areas or other companies?

AM: I'll head back to Colombia just because they've done everything right. Colombia is really three or four years ahead of other regions in the world that are trying to attract foreign capital and expertise to increase energy production. When countries revamp their hydrocarbon laws, they usually look at what Colombia did. You've seen incredible amounts of foreign investment flow into Colombia during the last few years. Everybody knows that Venezuela has had incredible reserves and energy assets that may be misused right now. The heavy oil and the natural gas assets don't stop at the border of Colombia— they run right through it and into Colombia. Now that the FARC's been pushed back you're seeing companies develop them.

TER: Any examples?

AM: One that I'm excited about is a company called Pacific Rubiales Energy Corp. (TSX:PRE;BVC:PREC). It has identified a heavy oil trend around the Rubiales Field. When Pacific went in a few years ago, it might have had a couple of billion barrels of oil in play that it was hoping to get a 15% recovery rate on. Essentially it has done step-out drilling around the known heavy oil deposit. I love companies that drill where known oil exists! Pacific Rubiales has an 80% exploration success rate and that's because the assets are that great. It just keeps stepping out and showing you that these heavy oil deposits are a lot bigger than we originally thought. The latest number is five billion barrels.

TER: Could that amount climb higher?

AM: As Pacific keeps stepping out and drilling more, you'll see that number increase, probably to 10 billion barrels. The whole process of proving up an asset is very similar to what unconventional natural gas companies did domestically in the last cycle, and is why companies like Ultra Petroleum Corp. (NYSE:UPL) and Southwestern Energy Co. (NYSE:SWN) were among the top-performing stocks in the last cycle. We are seeing the same thing again, only internationally this time. I like the risk/reward of companies like Pacific Rubiales where you have a very rapid increase in production. They've been doubling production the last couple of years. They'll do it again this year. They also have another 10 million acres between Peru and Colombia that are leased and that they plan to explore. That's the kind of stuff I look for on the international side that makes it exciting.

TER: Any similar companies come to mind?

AM: If we go down to Peru, there's a company called BPZ Energy Inc. (NYSE:BPZ) that operates in the northern part of the country. The chairman of BPZ Energy used to run Peru's state-owned oil company in the 1980s before it was nationalized. For a couple of decades, there wasn't a whole lot of exploration activity in Peru. In the mid-2000s, Peru opened back up to foreign investment and offered some pretty attractive fiscal terms to attract capital. The guys from BPZ, who knew where the good assets were, leased four very large blocks in northern Peru. They have hit a couple of really big oil wells offshore. It's exciting stuff. You're drilling conventional oil wells and hitting 2,000 barrel a day producers. You don't find that here in the States. It's a big opportunity. BPZ Energy has probably 10 years' worth of exploration properties in some really good land packages that they've put together. The amount of drilling that it's going to require is going to take billions of dollars. I wouldn't be surprised to see major oil companies move in and try to get onside with BPZ or maybe lease surrounding acres because BPZ has already proven that the oil and the natural gas is there.

TER: Any other companies you're particularly excited about?

AM: TransGlobe Energy Corp. (TSX:TGL;NASDAQ:TGA) has assets in Egypt and Yemen. I think about 70% of their production comes from Egypt, which is the part I'm most excited about. In Egypt you have a couple of big opportunities where TransGlobe has identified some large prospects that it is drilling. Those could be in the 50 million barrel range. Additionally, TransGlobe is applying modern technology by using fracking and horizontal drilling to increase production, in some cases by 10x. I think you'll see TransGlobe turn into a bit of a resource play as it applies horizontal drilling and fracture stimulation to some of its properties. It is currently producing about 10,000 barrels a day. I could easily see that becoming 15,000 or 20,000 barrels in a couple of years.

TER: Any high-risk, high-reward plays out there?

AM: I like to look at some of the more speculative stuff that is at an earlier stage. There's a company called Canacol Energy Ltd. (TSX:CNE) in Colombia that has put together a nice-looking land package. It has a 10% interest in the Capella heavy oil discovery, which is a multibillion-barrel discovery that was acquired by one of the Chinese state oil companies, Sinochem. Canacol has leased a couple of very large blocks around the Capella discovery and is in the process of shooting seismic surveys. I think we'll see some wells drilled sometime in late 2010, early 2011. The amount of leverage it has to that heavy oil trend is incredible. Having that large of a footprint at an early stage is important. I'm excited about Canacol because of the heavy oil possibilities. It also has some pretty good core assets that provide steady cash flow, which is so important. It's really a combination of two. You want to find something with a little bit of cash flow, but also a great land package. I think Canacol could be something like a Pacific Rubiales in five years. Like I said, it's still at a very early stage.

TER: Most of your recommendations are oil versus gas plays. Is that the trend?

AM: That's where I see the most opportunities—on the oil side. Unless you have a specific circumstance like in Turkey, where you have $8 natural gas prices and wells that pay out in three months, but that's the exception.

TER: With Obama possibly opening up some of the offshore drilling in the U.S., do you see an opportunity in the future for substantial finds? Although with the crisis in the Gulf, who knows if more offshore drilling will open up.

AM: That's a good question. I don't. Here's why. I think domestically we're probably going to see the tax breaks for energy companies repealed next year. That's going to cost our domestic energy industry about $40 billion. The Independent Petroleum Association of America (IPAA) thinks that if you take away $40 billion in tax breaks, production costs will go up. The IPAA thinks it could actually reduce production by 20% on the oil side and about 12% on the natural gas side. The offshore stuff takes time to explore—to shoot seismic surveys and identify prospects. Now we have the BP oil leak to contend with and there will no doubt be more regulation and higher costs associated with offshore drilling domestically. Longer term, it might help us out, but I don't think it will make this cycle.

TER: What about the deep sea drilling off of Brazil that we have been hearing so much about?

AM: I tend to shy away from Brazil. Petrobras (NYSE:PBR) has obviously been an enormous winner, but it just seems it has really got a lock on the deep sub-salt projects in Brazil. I'm really not that excited about what I've seen onshore in Brazil. There are a lot of eyes on Petrobras and I look for opportunity in places where others are not looking. Brazil is just not something I get really excited about.

Adam R. Michael, 35, founded Platform Advisors, LLC, a California registered investment advisor that manages the Platform Energy Fund. Mr. Michael has over 10 years of experience in the energy industry in various capacities. With the majority of his career based in Houston, Texas, he is able to use his energy background and industry contacts alongside his investment experience to identify energy investment opportunities in geopolitically stable countries with attractive geological prospects and fiscal regimes.

Mr. Michael has a bachelor's degree in Industrial Distribution from Texas A&M University (1997) and a MBA from Rice University (2004).

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) Gordon Holmes of The Energy Report conducted this interview. From time to time, Streetwise Inc. 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 or The Gold Report: TransGlobe and TransAtlantic Petroleum.
3) Adam Michael: I personally and/or my family own shares of the following companies mentioned in this interview: Pacific Rubiales, Canacol and BPZ Energy. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
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Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

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

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

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

We've done a bit of a write up on gold-prices.biz



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

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click 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.

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
May122010

Uranium Participation Corporation: In the Buy Zone

U Chart 13 May 2010.jpg


The stock price of Uranium Participation Corporation (U) has taken a battering over the last six months along with most uranium stocks and now looks to be oversold as the uranium sector remains on the floor. As we can see from the above chart the RSI dipped below the '30' level for a short time suggesting that this stock was a buy and the STO has just turned upwards and is now pointing to higher ground.

It is difficult to take an aggressive stance in this sector as it is being outshone by the opportunities in both the gold and silver sectors and no doubt one or two others. However, this may just be the time to be acquiring a few of your favourite stocks while the attention is focused elsewhere. If so, then this stock should be given due consideration.

Uranium Participation Corporation is an investment holding company which invests substantially all of its assets in uranium oxide in concentrates (U3O8) and uranium hexafluoride (UF6) (collectively "uranium"), with the primary investment objective of achieving appreciation in the value of its uranium holdings.


Uranium Participation Corporation trades on the Toronto Stock Exchange under the symbol of U.

Uranium Participation Corporation has a market capitalization of $606.04 million, a 52 week price range of $5.51 - $8.40 and closed yesterday at $5.70.



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

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

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

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


We've done a bit of a write up on gold-prices.biz




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

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click 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.

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

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

Sunday
May092010

Cameco Corporation: First Quarter Earnings Not Well Received

CCJ Chart 10 May 2010.jpg



A week ago Cameco released its first quarter results which unfortunately did not sit too well with investors as the stock was sold off. We have listed the highlights of the news release and ask the question has the sell off been overdone.

As we can see from the above chart the RSI has dropped below '30' to 16 which suggests that Cameco is now oversold, also note the STO looks to have bottomed and has turned up slightly and the MACD is in oversold territory.

Earnings highlights are as follows:


Cameco Corporation (TSX: CCO; NYSE: CCJ) today reported net earnings of $142 million ($0.36 per share diluted) for the first quarter of 2010, compared to $82 million ($0.22 per share diluted) in the first quarter of 2009.

Our net earnings were significantly higher for this quarter, primarily as a result of recording an after-tax gain of $31 million for unrealized mark-to-market gains on financial instruments, compared to a loss of $24 million in the first quarter of 2009.

Adjusted net earnings for the first quarter of 2010 were $111 million ($0.28 per share adjusted and diluted) (see Non-GAAP measures), 8% higher than in the first quarter of 2009. The 8% increase was attributable to:

higher profits from our fuel services business due to higher sales volumes and higher production

higher profits from our electricity business, relating to higher realized selling prices

lower profits in our uranium business due to lower sales volumes and slightly lower Canadian dollar realized prices, which were impacted by a stronger Canadian dollar ($US realized prices increased 15%)

"We are continuing to advance our outstanding portfolio of uranium assets through sound financial management and through continued commitment to operational excellence" said president and CEO Jerry Grandey.

"The long-term fundamentals of the nuclear industry are positive. Cameco is prudently investing today in production growth and new technology to pursue our vision to be a dominant nuclear energy company. Our nuclear focus, financial strength and management capability support our growth plans as we build for the future," said Grandey.

Montreal Gazette.jpg

The Montreal Gazette led with 'Cameco posts impressive Q1 earnings' even so the the investment community proceeded to sell the stock. We will take a closer look but for now it looks like a 'buy' to us.



Cameco Corporation trades on the New York Stock Exchange under the symbol of CCJ and on the Toronto Stock Exchange under the symbol of CCO and is currently trading at US$23.48.

Cameco has a market capitalization of $9.23 billion, with 392.97 million shares outstanding, a 52 week trading range of $23.01 to $23.85 with an average volume of 2-3 million shares traded and a P/E of 12.45.

Have a truly sparkling day and be prepared for a rocky week as the EU continues to dither and Britain has refused to put money into the current deal, another case of watch this space.

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.

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

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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

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

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




















Tuesday
May042010

Three Mile Island for U.S. Oil

By David Galland, Managing Director, Casey Energy Report

Willie Shakespeare may have summed it up best when, borrowing the voice of King Richard III, he penned “A horse! A horse! My kingdom for a horse!” 

History is replete with examples of how, but for the proverbial horse, kingdoms have been lost.

My reference point is an accident that will almost certainly lead to tragic miscalculations and havoc down the road. And, I might add, an exceptional opportunity for the patient and attentive investor.

It has to do with an impending shortage of easily accessible (read: inexpensive) oil to quench the insatiable thirst of the United States.

It’s also connected to the inroads the cash-rich and geopolitically ambivalent Chinese – among others – have been making in building strategic relationships, and making direct investments, with the world’s major energy providers. 

With only so much oil to go around, every new off-take agreement signed by the Chinese with the Saudis or Venezuelans, for example, is a net loss in supply to other bidders, notably the world’s largest energy consumer, the United States.

That the Chinese, and other countries, are aggressively securing long-term energy arrangements, coincidental with what appears to be an official U.S. diplomatic initiative to actively offend all the major energy producers, makes the securing of U.S.-controlled reserves and production critical.

The problem with cheap oil can be seen in the chart here.

Oil discoveries have been declining since 1964.jpg


And it has been confirmed in a recent report issued by the U.S. military, conveniently summarized by DailyFinance: “A recent Joint Operating Environment report issued by the U.S. Joint Forces Command suggests that the U.S. could face oil shortages much sooner than many have anticipated.

“The report speculates that by 2012, surplus oil production capacity will dry up; by 2015, the world could face shortages of nearly 10 million barrels per day; and by 2030, the world will require production of 118 million barrels of oil per day, but will produce only 100 million barrels a day.”

Bottom line: The U.S. needs secure oil sources, and “on the double,” as a military type might say. And so the pressure has increased for the U.S. government to remove its actual and effective regulatory bans on offshore drilling. 

While it’s more smoke than fire, the Obama administration recently made a tentative step in that direction – because even though its most ardent supporters may hate the extractive industries, Team Obama is not stupid enough to think that the energy gap is going to be closed by solar or wind power anytime soon.

Which brings us to the lost horse in this drama – the messy sinking of an oil rig off the coast of Louisiana, resulting in a spill of about 5,000 barrels, or 210,000 gallons, a day into the Gulf. It is estimated that it could take a month or more to cap the well.

The damage caused by this untimely sinking will extend far beyond wreaking havoc on the wildlife – the real importance is that it hands the luddites and enviro-fanatics just the ammunition they need to stick a brick wall in front of the baby steps underway for expanded offshore drilling. It is the equivalent of the accident at Three Mile Island, which set the nuclear power industry back by decades.

And that means precious time lost, and a near certainty that America will find itself hostage to the oil-producing nations in the years just ahead. That, in turn, means higher and higher prices, and hundreds of billions of dollars flowing overseas. Which, in turn, means a persistently high current account deficit, adding yet more weight to the pressure building on top of the U.S. dollar.

Even if the U.S. were to adopt the equivalent of a war footing in its quest for new offshore discoveries, the size of our steady demand assures that any new finds would still be insufficient over the medium to long term. If the military’s assessment is even close to being on target – with global shortages appearing in four short years – then even the most urgent action taken today would prove woefully inadequate.

But the U.S. is not adopting anything remotely close to urgent action in the quest for new oil supplies. Quite the opposite. The administration and its well-meaning but ill-advised allies are advancing legislation to hinder and penalize virtually all the base-load power providers. And thanks to the poorly timed sinking of the Deepwater Horizon rig, the opponents of “dirty” energy have been provided with a powerful weapon to be used in challenging all new offshore drilling initiatives.

How to play it? First and foremost, you’ll need to be patient. Oil prices aren’t going to skyrocket overnight, and the base-load power industries – oil, coal, gas, and nuclear – will still have to struggle through the coming onslaught of politically motivated regulatory hamstringing. Between now and the time that the depth of the nation’s energy problem becomes apparent to all, the energy sector will remain volatile.

The time to begin buying is when new legislation, coupled with a next leg down in the broader economy and markets, results in an across-the-board sell-off in the energy sector. That will be the time to get serious about building your energy portfolio. Between now and then, your goal should be to learn as much as you can about this critical sector.

And don’t forget to include the oil services sector in your studies. That sector could be the poster child for “feast or famine.” While the sector has bounced off its 2009 bottom, as the inevitable scramble for new offshore discoveries begins, the better-run companies will reward patient investors with multiples.

But first, thanks in no small part to the sinking of the Deepwater Horizon rig, the U.S. will take several steps back – away from anything that looks like energy security. 

The single best way to stay closely in touch with energy and the many opportunities to profit available is with a subscription to Casey’s Energy Report, headed up by the hard-charging Marin Katusa in close collaboration with Dr. Marc Bustin, arguably one of North America’s top unconventional oil and gas experts. It is no coincidence that of 19 stocks Marin recently picked, 19 were winners… a 100% success rate. Click here for more.



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.

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

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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

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

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













Saturday
May012010

One for All and All for… Myself

Why you shouldn’t believe OPEC’s reports

By Marin Katusa, Senior Editor, Casey’s Energy Opportunities

In December 2008, after OPEC warned of “substantial cutbacks,” I voiced my strong opinion that the members of the Dirty Dozen would cheat, because cartels always cheat. Sure enough, despite all the talk about production cutbacks, even more oil flowed out of OPEC.

The harsh truth is that the whole honor and brotherhood thing may work for the Three Musketeers, but it’s a non-starter when, like the OPEC members, you have to foot the bill for hefty social programs

On April 19, the Algerian energy minister said that OPEC would probably do nothing to restrain rising oil prices, despite concerns that persistently high energy costs would hurt the fledgling global economic recovery.


Take his comments with a pinch of salt.

With OPEC members currently violating production quotas at the same time that demand from industrialized nations is stagnating, our bet is that the 13-month rally in crude will soon come to an end and prices begin to fall over the next month.

What does this mean for investors? For reasons I’ll explain, get your dancing shoes on – the profit party is about to begin.

Prisoner’s Dilemma: Why Do Cartels Cheat?

Imagine you and an accomplice have been arrested for a crime that you did commit. The police lock you up in separate rooms and take their time in talking with you.

While you’re nervously waiting for the interrogator to arrive, you wonder what’s going on with your accomplice. Is he or she spilling the beans and sacrificing you in order to save their own skin? Or are they sticking to the prearranged story?

When your interrogator finally arrives, you realize your options boil down to these:

1. You can either confess to the crime before your partner does and go free.
2.You can remain silent (and pray like mad that your accomplice does too), and you’ll both get a more modest punishment.
3.You can wait until your accomplice confesses everything before you do, in which case they’ll go free while you’ll go to prison for years.

Now, if you trust your accomplice completely and they you, you know both of you are going to keep your mouth shut because all you’ll probably get is a slap on the wrist.

But what if the person in the other room is Libyan leader Muammar Gaddafi, or Venezuelan president Hugo Chavez, or Iranian president Mahmoud Ahmadinejad? Would you really trust any of them to put the interests of the group ahead of their personal self-interest?

Many readers will recognize this as the classic Prisoner’s Dilemma, but it is equally applicable to the situation in today’s global oil politics. Especially in that, regardless of what your accomplice does, you’re always better off betraying them.

Which is why when a cartel like OPEC sets an artificially high price by restricting the supply of a commodity, each member of the cartel always has an incentive to cheat. By offering the commodity at a slightly lower price, just one member of the cartel can attract all the customers and enhance their profit.

And if you’re Hugo Chavez and have quite a few expenditures to meet, these profits aren’t just a nice-to-have, but essential to retaining your tentative grip on power.

OPEC Cartoon 02 May 2010.jpg

The (Real) Future of Oil

Members of OPEC have no choice but to cheat. They’ve cheated in the past, they have done so recently, and they will do it again in the future. In the current context, global output is rising faster than the demand for oil, even with the rising demand from emerging countries.

While China and India, among other emerging economies, account for a large and growing share of the oil market, the United States remains the biggest consumer of crude oil. And U.S. demand for oil, along with the 30 countries in the Organization for Economic Cooperation and Development (OECD), is decreasing. In fact, the 2010 U.S. daily demand for oil is expected to drop by almost 2 million barrels from last year, while OECD consumption is down 8.3 percent from 2006.

At the same time, OPEC may be creating a surplus in the market, with output rising to 29.2 million barrels a day in March 2010, a 5.6% jump from March 2009. Of course, this doesn’t take into account non-OPEC producers, which are also expected to boost their production this year by about 600,000 barrels per day.

Amongst OPEC members, compliance with quotas fell to 53% in March, with Venezuela, Nigeria, and Saudi Arabia increasing production, even as the organization said it will need to pump less than previously estimated this year.

The Pump Jack of Profit

As you would expect, the combination of rising production and depressed demand is leading to a stockpiling of oil by countries and companies alike. Basic economics dictates that this makes US$87 a barrel unrealistic – prices are set to fall.

Of course, who are we to complain about low oil prices? Lower prices are a big plus for the broader economy, just as they are when you are able to pay less at the gas station.

But it may surprise you to also learn that falling oil prices create a lot of investment opportunities. Case in point, just after the price of oil crashed in the second half of 2008, our subscribers were able to lock in profits in excess of 50% in just six months – through very conservative energy investments such as Nexen (T.NXY).


Nexen Stock 02 May 2010.jpg

How? Using Nexen as a good example, we were able to use volatility to our advantage and pick both the right entry point and the right timing to buy the company’s shares just before they took off.

If you missed the boat the last time, don’t worry because the imminent correction in oil prices we expect will again allow you to get positioned in great companies, at great prices. But don’t put off planning your entry into the sector – that should start now, in anticipation of the enormous potential for profits that is coming.

Learn how the future of oil is creating enormous opportunities for savvy energy investors. Take us up on a risk-free 3-month trial of Casey’s Energy Opportunities. Considering the information you get out of it, the subscription fee of $39 per year is a steal. Details here.



Got a comment then please add it to this article, all opinions are welcome and

As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.


If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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

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

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














Friday
Apr302010

Gissen and Berol: Uranium Demand Outstrips Supply

Source: Tim McLaughlin and Karen Roche of The Energy Report 4/29/10
http://www.theenergyreport.com/pub/na/6188

Encompass Fund founders Malcolm Gissen and Marshall Berol see the demand for uranium continuing to increase in the coming years, meaning an increase in uranium prices. As more nuclear power plants come online around the world, the need for more uranium will increase. In this exclusive interview with The Energy Report, Malcolm and Marshall talk about the uranium companies they think provide good opportunities for investors, as well as opportunities in other energy sectors.

The Energy Report: First of all, congratulations on the Encompass Fund's returns of 137% last year. Morningstar ranked your Fund very highly in 2009.

Marshall Berol: In their database of over 16,000 funds, Encompass Fund was number five for 2009 and we were number one in the World Stock Fund category.

Malcolm Gissen: For the three-year period, the Encompass Fund ranked in the top 1% in the World Stock Fund category. The fund is about three-and-a-half years old.

TER: What did you see in the investment landscape last year that others apparently missed?

MG: I think it's a combination of things. We continued to emphasize resource companies and some healthcare companies, the sectors that we felt would perform well. The companies that we liked in those sectors did even better than the sector as a whole. For example, last year gold was up 24%. The gold companies that we liked, and also the silver companies for that matter, mostly doubled and tripled in value in 2009.

Early in 2009, Marshall and I discussed the fact that a number of these resource companies had been battered in 2008. We felt that they were performing well. They should not have declined in 2008 and they offered an even better opportunity. We had the courage of our convictions to add to our positions and to initiate new positions in some companies in these sectors. Our investors were well rewarded for our doing that.

TER: What do you think the difference was between 2008 and 2009?

MG: In 2008, a lot of hedge funds and other institutional investors had made money, as we had in prior years, by investing in resource companies, especially in the junior mining companies. We were pretty heavily invested in those areas in 2008. When the hedge funds and other institutional investors experienced significant redemptions and had to come up with cash to pay their outgoing investors, the first thing they sold tended to be the companies in which they had large gains. In many cases it was the resource companies that were sold.

In the case of the junior mining companies, those companies' stocks are thinly traded. So when these institutional vendors started simply dumping billions of shares of a thinly-traded stock in the market, a lot of the junior mining companies fell 50% to 95% in value during the second half of 2008. Marshall and I started calling these companies saying, "We don't understand. You just discovered 5 million more ounces of gold and your stock is down 15% or 20% in two days. This makes no sense."

The companies told us they didn't know what was going on, but somebody was clearly selling a lot of shares. It wasn't until about October that these companies were in the East visiting with a number of the East Coast hedge funds, and learned that many institutions had simply dumped their stock in the marketplace. That had a very negative impact on these junior mining companies. It certainly hurt the Encompass Fund.

MB: At that time, it was not only the redemptions that the hedge funds were getting. The hedge funds were getting margin calls. Individual investors were getting margin calls. Individual investors and the professional investors were very nervous. They were shell shocked as the second half of 2008 and the beginning of 2009 wore on. There was tremendous amount of liquidation.

One of the larger gold companies such as a Newmont Mining Corp. (NYSE:NEM) or a Barrick (NYSE:ABX;TSX:ABX) could absorb these liquidations and not decline that much. However, the junior companies could not and they declined precipitously, as Malcolm has said. They went down 50% to 90%. That really hurt the Encompass Fund's performance in 2008, the only year in which the Fund suffered negative performance.

We went back and looked through the portfolio. We went through the companies we owned and assessed what the attributes were, pro and con, of those companies. We looked at their finances, their management, and their projects. Then we decided to eliminate a few of the companies that we felt weren't as strong, weren't as solid. We added to existing positions in companies that we felt were solid and the prices were mismatched to what the company represented. Then when the markets started to recover in March of 2009, a number of these companies went on to perform spectacularly for the balance of 2009 and into 2010. That's certainly contributes to the excellent performance of the fund, and what we think will continue to contribute to a positive performance going forward. Of course as we all know, and as the SEC requires us to say, past performance is no guarantee of future results.

Having said that, it is important to look at where a company has been and is and to try and determine where you think it's going to go as a company and as a stock investment in the future.

TER: Malcolm, you had an interview with TheStreet.com last year and you were quoted as saying, "Uranium is supposed to be the hottest commodity." It's about six months from when you made that comment. Uranium has gone down. Where do you expect it to return to, do you expect it to return to being a hot commodity?

MG: I don't like the concept of the "hot commodity" because that's not how we invest. The demand for uranium currently outstrips supply, in terms of the amount of uranium that is mined and the demand for it. I think the imbalance will continue. In fact, our analysis projects that this supply-demand imbalance will become more severe because there are several dozen nuclear power plants either being constructed or in the planning stage right now. Over the next five years, a number of them will come online, and they will start to demand uranium. The sources of uranium around the world are not ample. So there's going to be a need for more uranium within the next five years. Where you have an imbalance between supply and demand and the supply is not meeting demand, we know that prices will rise. So I believe that within the next few years we're going to see considerably higher uranium prices.

TER: In your interview with TheStreet.com, you commented that Uranium Energy Corp. (NYSE.A:UEC) in particular had a good chance to become America's top producer of uranium. Is that still a top pick for you?

MG: Yes. In November and December, 2008 we made very significant additions to our previous investment in UEC at under $.33 per share. The stock is now trading above $3. UEC is likely to become the next American producer of uranium. Their facilities in Texas have gotten the permits necessary for them to get into production before the end of the year. It's anticipated that will happen. Last year they bought a facility where they can process the uranium. So we believe that it's likely before the end of the year that they will become a producer. We like the company's management and the experience they have in getting into production at reasonable costs. The stock more than tripled last year. It was the largest position in our mutual fund until recently and is one of the largest positions in our separate accounts. We continue to think it will do very well over the next two years.

MB: It has been the largest individual position in the fund for some time. It's an example of where the equities don't necessarily track the commodity price on the upside or the downside.

As Malcolm mentioned, over the past year to 15 months, Uranium Energy Corporation stock has more than tripled, while the price of the uranium commodity has declined somewhat in the spot market. It's certainly the type of situation that your readers are familiar with. Gold, or silver, or stocks, for example, can move higher and quicker than the commodities or vice versa.

We feel that over the longer term, the stocks of the junior companies in particular will give you more advantageous exposure to those industries and those commodities than investing in the commodity itself.

TER: With UEC, their price has been increasing significantly while prices in uranium have declined. To what do you attribute their success?

MG: Investors are looking ahead and realizing that this company has a very bright future. They're expanding their resource. They're getting into production. They have terrific management. They have a good number of very experienced people who have gotten other uranium mines into production and they're well positioned. They have other resources besides the Texas resources. People are looking for what's likely to happen to UEC over the next few years.

MB: They also made a very advantageous acquisition in the second half of 2009. It provided them a fully permitted plant that's ready to operate, as well as additional projects. The market has recognized that and the stock price has gone up.

TER: From an investment standpoint, how do you compare major uranium companies such as Cameco Corp. (NYSE:CCJ;TSX:CCO) and BHP Billiton Ltd. (NYSE.A:BHP;ASX:BHP;LSE:BLT) to the junior producers or explorers?

MG: Well, with the juniors, and particularly with the exploration companies, there's a lot more risk. You don't know whether the exploration will be successful. You don't know when they're going to get into production. You don't know if they're capable of raising the funds they need to continue exploring or to get into production. With a Cameco, it is producing and is in fact the world's largest producer of uranium with the world's largest uranium mine. They have very nice facilities. They've run into problems, of course. You get a sense of comfort in knowing that the company is already in production and realizing significant cash flow, they have very experienced management, and they are the dominant company in this industry.

TER: Is there more upside potential to the junior companies?

MB: From a price appreciation standpoint, yes. It's that way regardless of whether you're looking at uranium, gold, silver, copper, moly or whatever. There is more potential reward in a junior company. There is more risk in a junior company. If you look back at a Cameco and what it has done pricewise over the last year, or two or three years, versus a Uranium Energy Corp., or another midsize or smaller company, I'm reasonably confident that most of these smaller companies have outperformed. It would be the same in gold with Exeter Resource Corp. (NYSE.A:XRA;TSX:XRC; Fkft:EXB), which is not in production and won't be for some period of time; versus a Barrick or a Newmont or a Kinross Gold Corp. (TSX:K;NYSE:KGC). It's the same thing with a Freeport McMoRan Copper and Gold Inc. (NYSE:FCX), which is in copper and gold versus a junior gold company or a junior copper company.

Like with the pharmaceutical industry, a major drug company such as a Merck (NYSE:MRK) or a Lilly (NYSE:LLY) or a Pfizer (NYSE:PFE) is not going to have the stock price movement that a smaller research and development biotech company has on the upside, nor would they go down as much. That's where the reward is with a junior company and is the reason why we generally prefer investing in junior companies, rather than larger mining companies.

TER: In addition to UEC, are there some other uranium companies that you think are good investment opportunities?

MB: There are. We're invested in a company that is involved in both uranium and gold. That's Fronteer Development Group Inc. (NYSE.A:FRG;TSX:FRG) which has some significant gold projects. They're exploring and drilling in Nevada. Also, it has a very significant uranium deposit in Labrador. There is activity going on in the uranium component of the company but it's been somewhat slowed down because the local government declared a moratorium on mining going into production. They have not declared a moratorium on drilling and exploration. So Fronteer has continued with that, but for a while, it certainly had a negative effect on the company's stock.

A company that we have been in before, but we're not currently in, is Paladin Energy Ltd. (ASX:PDN;TSX:PDN), which is in production of uranium in Namibia and soon in Malawi in Africa. We continue to review the company and its progress. It's had some operational difficulties and we haven't gotten comfortable enough to reinvest in it, but it's a uranium producer that we certainly are keeping an eye on.

BHP is an excellent company. We do not own it in the fund. We do own it in individual client accounts. BHP is a very broad-based commodities company. They produce a wide variety of commodities that they mine worldwide, not the least of which is uranium.

TER: Marshall, I know that you've looked at alternative energy opportunities, but as of last year you felt that the sector was still some distance away. What's your perspective now on that?

MB: Our general perspective is that it hasn't changed in that context. From an investment standpoint, there are certainly companies that are making progress in expanding their operations in alternative energy, primarily solar and wind.

In the fund, we have a small position in a Chinese company, JA Solar Holdings Co., Ltd. (NASDAQ:JASO), which manufactures components for solar systems. But it's a difficult space because of the amount of competition. As production manufacturing has increased, prices have come down due to competition, and it's been difficult for the companies to make a good amount of profits. We continue to look at the solar industry and various aspects of the solar industry, but it's just not a compelling investment situation for us.

It's the same with wind energy. There are some companies that are involved in the manufacture of wind turbines or the operation of them. For the most part they're smaller companies. If they're not smaller companies it's just a small part of a large company such as General Electric (NYSE:GE). You have a whole set of other factors involved as to whether you want to be invested there or not. We continue to look at it.

We look at geothermal, which is an interesting industry and interesting business. There are a number of companies involved in it. However, it has been difficult technologically, and from a capital structure standpoint to develop some of these companies, and to have the confidence in them that we like to have before investing in them. But we certainly continue to look at them.

Hydroelectric is not so much thought of as alternative energy, but it certainly is. The Encompass Fund is invested in Calpine Corp. (NYSE:CPN), which is primarily known for producing electricity with natural gas. It is also the largest hydroelectric producer in the United States with the Geysers Project in Sonoma County, California and some other projects. Again there is not a lot of opportunity on a standalone basis to invest in hydroelectric operations.

TER: How about in the conventional energy space?

MB: We continue to be positive on coal exploration and production. We own several companies in the Encompass Fund that are involved in coal. Peabody Energy Corp. (NYSE:BTU), a very large, well-known company, is in the fund.

The fund also has investments in three smaller companies, each of which have some unique characteristics. One is L&L Energy (NASDAQ:LLEN). It's a U.S. company that has acquired coal mining and processing and washing operations in China. L&L has been doing acquisitions and consolidations, and has grown extremely successfully, from a company standpoint and from a stock results standpoint. The stock has had a substantial increase in price over the past year and has produced a five-times return for the Encompass Fund in 10 months. We're not necessarily convinced that now is the time to be investing in it, but on the other hand we haven't sold any shares. It has a very good business plan of acquiring newer coal companies in China and consolidating them. They're bringing western safety and western environmental practices and procedures to the coal industry in China and it's working very well.

Another substantial position in the Encompass Fund is SouthGobi Energy Resources Ltd. (TSX:SGQ). SouthGobi is a Canadian company that is operating in Mongolia. It is currently mining coal in Mongolia, 20 miles from the Chinese border. It is operating 24/7. It loads trucks around the clock at the mine, trucking the coal 20 miles to a railhead on the Chinese border. The coal is then utilized by Chinese companies. SouthGobi has done very well. It continues to do well. It received a major investment earlier this year by one of the Chinese sovereign wealth funds. It's a company that has done very well and we believe will continue to do very well.

A fourth company that the fund owns in the coal industry is Western Coal Corp. (TSX:WTN), which is a company that's operating coal mines in Canada. So we think there continues to be a major future for coal. It certainly has environmental issues. It has safety issues, as unfortunately we've seen both in China and the United States recently. Chinese electricity production is 70% coal-generated. U.S. electricity production is 50% coal-generated. We don't see any significant change in that for a good long period of time to come. Coal is going to be used and needed.

TER: Marshall, in our last interview, you pointed out that natural gas was way off its high of $15, and out of line with the historic relationship between natural gas and oil pricing. You felt it was undervalued at that point, and noted that "very few people have much good to say about natural gas and that causes us to look closer at that kind of situation." Have you found any natural gas investment opportunities after further scrutiny?

MB: I would say that those comments that you quoted are still the case, probably each of those in spades. The spread between oil, let's say at $85 a barrel, and gas say at $4 per MCF is over 20-to-1. Energy content of a barrel or oil and an mcf of natural gas is a six-to-one ratio. Historically it's been maybe a 10-to-1 ratio from a stock market standpoint and it's currently 20-to-1. Currently there are probably even fewer people that have anything positive to say about natural gas than was the case when we last spoke. This creates opportunities, but we have been very cautious about taking advantage of any of them because we just haven't seen any indication that gas prices have hit a bottom.

As value investors, which we are at heart, we're also contrarians. But it's often said that value investors can be too early and that is the case. We continue to have discussions among ourselves here in the firm as to whether it's timely or not. The bottom line conclusion we come to is it's still too early. We don't know when that will change. We're confident that it will change. We just don't know what the timing is. Natural gas is in oversupply. The technology that has led to horizontal drilling has led to the development of shale properties and an increased production of natural gas. Natural gas production has far exceeded what the analysts or the companies expected. It's far exceeded the demand and therefore natural gas prices are extremely low. It's still early, in our view, to be investing in natural gas situations.

Having said that, ExxonMobil (NYSE:XOM) and others are investing in natural gas situations by virtue of buying companies or buying into some of the large natural gas producers in this country. They feel it's timely. Whether it's timely or not we'll be seeing over the coming months and years.

TER: Marshall and Malcolm, you have been very generous with your time today and we really appreciate it.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. He has been an investment advisor since 1985 and has managed separate accounts since 1999. Mr. Gissen's management experience has focused primarily on investments in publicly traded companies, including real estate investment trusts. Mr. Gissen received a B.S. degree from Case Western Reserve University and a J.D. degree from the University of Wisconsin. Marshall Berol has been engaged since 1982 as an investment manager in San Francisco, CA. Since 2000, he has been the Chief Investment Officer of Malcolm H. Gissen & Associates, Inc. In addition, for more than 15 years, Mr. Berol has owned his own investment firm, BL/SH Financial. Mr. Berol's investment management experience has focused primarily on investments in publicly traded companies. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a J.D. degree from the University of San Francisco School of Law. He was in the private practice of law in San Francisco before entering investment management.

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) Tim McLaughlin of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Exeter Resources Inc.
3) Marshal Berol: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Exeter Resource Corp., Freeport McMoran, Uranium Energy Corp., Fronteer Development, Calpine, L&L Energy. I personally and/or my family are paid by the following companies: None.
Malcolm Gissen: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Exeter Resource Corp., Freeport McMoran, Uranium Energy Corp. Fronteer Development, Calpine, South Gobi and L&L Energy. I personally and/or my family are paid by the following companies: None.

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The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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Over on our sister site, silver-prices.net we have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit. We are looking for similar opportunites in the uranium space but we have yet to take the plunge as things are fairly steady at the moment.

As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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.

Thursday
Apr292010

Mickey Fulp: Bullish on Uranium and Rare Earths

Mickey Fulp.jpg


Source: Karen Roche of The Energy Report 4/29/10
http://www.theenergyreport.com/pub/na/6186

Mercenary Geologist, Mickey Fulp feels that much of the uranium production in the world is under the auspices of regimes or countries that are unstable or unfriendly to the West, leaving supplies vulnerable. He prefers "companies operating in Wyoming, New Mexico and the Athabasca Basin because that's where the majority of uranium has been produced in the past and will be in the future." In this exclusive interview with The Energy Report, learn why his eyes are on uranium right now and why the unique niche rare earth market is heating up and still at early stages, providing potential investment upside.

The Energy Report: Mickey, do you see undervalued sectors that make you think, "Boy, the market just hasn't gotten this yet?"

Mickey Fulp: The only sector that I think is absolutely undervalued right now as a whole is uranium. It certainly has been beaten up since mid-2007.

TER: Are things improving, in your opinion?

MF: Absolutely not. Although I first started saying in January of '09 that the uranium sector was down and I expected uranium prices to rebound, they haven't done that. However, as opposed to last year, there is a lot of analyst consensus now that the uranium sector is undervalued. I've been bullish on uranium for quite a while based on supply/demand fundamentals and that bullishness still exists. So, from a contrarian point of view, I would say that most uranium stocks are undervalued right now and present buying opportunities.

TER: Some interesting agreements have been made surrounding the Washington Nuclear Security Summit regarding enriched uranium, specifically the agreement between the United States and Russia to disarm one-third of their nuclear arsenal. Ukraine has also agreed to dispose of their highly enriched uranium stockpile. Will these developments have a continued impact on uranium prices?

MF: I think that is unclear as of now. These highly enriched uranium agreements could certainly supplement supply but weapons-grade material has to be converted into low-enriched uranium for use in nuclear reactors. Highly enriched uranium used for nuclear weapons is about 85% U-235. The typical light-water reactor uses light enriched uranium that's typically 3% to 4% U-235. This could certainly overhang the market. The spot price is $42. Long-term is about $58. I don't think it's likely we will see major increases or decreases in these prices in the short to mid-term.

Certainly all the new mines coming onstream have increasing costs of production. There are very few new mines proposed or in development that are going to make money at a $40 spot price, but between 80% to 85% of the uranium yellowcake market is sold on long-term contracts. That's somewhere around $60 right now. The other thing to note is that fuel is only 10% of the cost of producing electricity in a nuclear power plant, which is very minor. We see sovereign nations, companies and utilities as some of the biggest buyers of uranium and often those sovereign entities are not concerned with the price.

In the uranium sector, supply security is the important thing. We do know that demand is increasing significantly year after year. Mine production is about two-thirds of the world's use. There are 59 new reactors in construction which will need initial startup feed. Utility companies that produce power through nuclear power plants historically have signed supply agreements for about three years. Those secure supplies right now are averaging about a year and a half. Based on that, I'm very bullish on the demand for uranium.

What we have to take into account is the geopolitical situation of uranium production. Forty-six percent of 2009 production came from countries that are not stable or very friendly to the western world. Most uranium is consumed by the West, especially the United States, which consumes about 30% of world production on a yearly basis, around 55 million pounds. Yet we produced less than four million pounds last year. So where does our uranium supply come from?

For the last few years, a significant amount has come from the Russian Megatons to Megawatts program; high-enriched uranium being reduced to low-enriched uranium. However, the number-one producer of uranium last year was the country of Kazakhstan, which is arguably one of the most corrupt regimes on the face of the planet. There were internal corruption issues in Kazakhstan last year with the government showing indications of increasing nationalization of its uranium industry. Nevertheless, production continued to increase significantly. The number-five mine producer last year was Russia, followed by Niger, which had a coup in February. There is every reason to think that a significant economic reason for the coup was that over 70% of Niger's exports are uranium. It supplies France with 40% of its uranium. The number-seven producer in the world is the country of Uzbekistan. Investing in the "Stans" is a huge geopolitical risk and has been since the Soviet Union dissolved in the early '90s.

TER: But is it an increased risk because they won't sell to the West, or because they may not produce uranium because of political and economic turmoil?

MF: I think it's combination of both. Kazakhstan has increased its uranium production astronomically just over the last three or four years. It has replaced Canada as the world's largest producer. Whether or not it can sustain that production remains debatable. As the shallow, easy-to-get, in-situ uranium is produced and depleted, it gets more difficult to go deeper and deeper. Not many people are aware of the fact that in-situ recovery uranium operations have very steep decline curves. In other words, you get the easily extractable uranium out first and then you have a continuing decay of production as the field matures. That happens very quickly. So in Kazakhstan, not only do you have geopolitical risk, but there's also the economic risk that they can't maintain their production. Certainly in Niger, I think it's strictly geopolitical risk. There are two big mines that produce there. AREVA (PAR:CEI) is the partner. There is a third huge mine coming onstream that will produce on the order of 11 million pounds a year, which would be about 7% of world production.

TER: Considering supply and demand and geopolitical issues, which of these undervalued uranium companies represents good future potential?

MF: I concentrate strictly in North America and I invest in companies that operate in past producing and/or currently producing districts. In the U.S., I like companies operating in Wyoming and New Mexico because that's where the majority of uranium has been produced in the past and where current resources are likely to be developed. My favorite company is Strathmore Minerals Corp. (TSX.V:STM;OTC.PK SHEETS:STHJF). They are in a bankable feasibility study at Roca Honda, New Mexico, which is arguably the best undeveloped underground uranium deposit in the United States. They are proceeding with mine permitting at Roca Honda and in the Gas Hills of Wyoming, where they have the commanding land position for conventional open pit uranium development. In addition they have another eight development projects. They had 10 a few months ago and they've monetized two of those.

The company has every intention of monetizing its other development properties in New Mexico and Wyoming. Strathmore has $29 million of working capital and is absolutely the most undervalued uranium developer on any North American exchange. With a market capitalization around $60 million, $29 million working capital and 125 million pounds of uranium resources, I think Strathmore is a no-brainer at $.70.

Another company I like is Hathor Exploration Ltd. (TSX.V:HAT). Hathor has had recent exploration success in their winter drilling program at Roughrider and Roughrider East in the northeastern Athabasca Basin. Their resources have grown significantly. Exploration potential continues to expand around the current plays. They have a couple of other projects that are very interesting as well, including the Russell Lake project next to Denison's Wheeler River discovery in the southeastern part of the Athabasca Basin. There is also a project called Henday, a joint venture with Forum Uranium Corp. (TSX.V:FDC) about 10 kilometers north of the Roughrider discovery. The drilling they did this winter was very encouraging, encountering strong clay alteration. They'll be drilling there again this summer. It's a company that I've been buying on weakness.

I pick away at these stocks on weakness. Although I may cover 8 or 10 companies at any one time, I'm probably invested in 15 to 25. The ones I publicly talk about are those that probably have the best chances of success. I consider my investment profile to be of much higher risk than most people are willing to take or should take as lay investors. With those that I talk about, I may be accumulating on weakness because they are longer-term plays for me and I see possibilities that they will build successful mines, ultimately sell out to other companies, or enter into strategic alliances. The bottom line is that over the mid- to longer-term they should reward shareholders.

TER: Are you still bullish on rare earth elements (REEs)? Do you still see potential upside or has the market priced that in?

MF: I'm still bullish on rare earths. I've said more than once recently that this is a very early stage of a bubble supported by the U.S. government. Policies are being implemented by the government with a bill in Congress likely establishing a rare earth element stockpile. There is increasing demand for these metals that are completely controlled mine-to-market by China. There is an awareness and a mine-to-market philosophy developing in the U.S. I continue to be bullish on the sector as a whole and think it's still very early on.

I've used an analogy in the past of a nine-inning baseball game. I think we're somewhere at the bottom of the second or the top of the third in the rare earth element bubble. So there are still opportunities in the sector. Many of these companies have taken off with valuations that have increased anywhere between two to over 50 fold over the course of a year, but I see additional upside.

Over the last two weeks or so there has been a significant market correction of most of the rare earth element players. This is very much a junior exploration sector play within a niche or specialty metals market. The sector has not attracted major mining companies. If you look at the recent market correction, and if you look at the charts, these junior companies are building strong charts. When they build strong charts like that you can see additional upside. So once again, I may go in and buy on weakness. I want to caution your readers: I was in very early in this play so my cost basis is much lower than current valuations. As you know, we all talk our own books and that's what I'm doing here. But I see potentially higher valuations in the offing.

TER: How many years do you think this nine-inning game will last, to use your analogy? Are we looking at a decade of upside potential in the rare earths, or one-to-two?

MF: I would say somewhere in between. For U.S. and Canadian producers to come online and for the mine-to-market capability to be developed in this sector, we are looking at about five-plus years. The big player in the U.S. is no doubt going to be privately-owned Molycorp, because at one time they had the world's largest mine. They still have the world's second-largest deposit. It should be back in production sometime in 2011 or 2012. Molycorp will be producing significant amounts of rare earths again and trying to develop downstream processing along with new technologies and products for end-users. Demand is increasing from phosphor and lighting, high-tech electronics, hybrid cars, and wind turbine energy. These metals are also crucial to national defense and security. I think there will be a significant time period before this bubble is ends, unless there is another world economic meltdown.

TER: Can Molycorp satisfy the mine-to-market needs of a country like the U.S.?

MF: I think that Molycorp will start up Mountain Pass soon. They're currently producing about 3,000 tons of rare earths a year from stockpiles. In a global market that produced 125,000-130,000 tons in the last year, it's currently a relatively small producer. The mine is projected to produce about 20,000 tons per year once it's fully operational. But we see year-over-year world growth in demand projected at 10% a year. Molycorp will not be able to supply all the needs of the United States. Furthermore, it's a light rare earth deposit. The heavy rare earths, although not a significant part of the total world tonnage, are very much a significant part in terms of value because they're very high-priced as well as being relatively rare. I personally see room in the sector in North America for additional light rare earth and heavy rare earth element mines. I picked companies that I consider to have the best prospects for

TER: Can you share those with us?

MF: I cover Avalon Rare Metals Inc. (TSX: AVL;OTCQX:AVARF), which had a new resource come out in the last couple of months and very good news on the metallurgical end. They are now proceeding to a pilot plant test and cost benefit analysis on the metallurgical process. We can expect a prefeasibility study in the next six to eight weeks on their Thor Lake deposit.

Another company I am bullish on is Rare Element Resources Ltd. (TSX.V:RES). They recently completed a big financing and have a working capital of about $12.5 million. A new resource estimate is expected soon and based on the drilling that they did last summer and fall, I would expect a significant increase in tonnage and also dollar value per ton. The drill results indicated strong values in neodymium, which is in very high demand in the magnet sector. The deposit is going to have a relatively high dollar value in the light rare earth sector. A prefeasibility study is expected in June. The other interesting note about Rare Element Resources is that it's really a two-for-one. There's a gold play adjacent to the rare earth element play in a joint venture with Newmont Mining Corp. (NYSE:NEM) and I think that Newmont will bow out within the next couple of months. So Rare Element will own 100% of the gold project and I expect a new round of drilling and then a significant 43-101 resource.

The other company I cover is Quest Rare Minerals, Ltd. (TSX.V:QRM) (formerly Quest Uranium Corp. (TSX.V:QUC), which recently announced a 43-101 qualified inferred resource, basically a geological mineral inventory, from their initial drill program late last summer and fall. They have a potentially huge resource at Strange Lake in far northeastern Quebec. Less than one-half is drilled where they know it occurs from mapping and sampling and it's completely open in all directions and at depth. All their shallow drill holes ended in mineralization.. They'll be back drilling in June and we expect the resource to grow significantly. It's a heavy rare earth element deposit.

TER: Is Quest diversifying beyond their uranium deposits and focusing on rare earths?

MF: Well, it was once a uranium-focused company. Quest was a spinout from Freewest Resources Canada Inc., which you may remember sold out to Cliffs Natural Resources (NYSE:CLF) for their chromite deposit a few months ago. Their uranium and rare earth element projects were spun out as Quest previously, and long before the REE sector started to heat up last year. Quest changed exploration emphasis to its rare earth element plays and it's paid off handsomely. A year ago it was a $.04 or $.05 stock. It's undergone a market correction in the last few days and is currently trading at about $3.25, off from a high of $4.18. It's in the process of changing its name to Quest Rare Minerals to reflect its role as a rare earth explorer. The uranium plays Quest had were not compelling to someone like me who likes to pick uranium companies in established districts of the Athabasca Basin or the western U.S.

TER: How can investors make unique plays in the rare earths sector?

MF: There are a few options. A company which I'm fond of and in which I've participated in private placements is Tasman Metals (TSX.V:TSM). It's run by a couple of really good Australian geologists that I met in Peru in the late ‘90s. They are focused on creating Scandinavian rare earth element plays and have acquired several advanced rare earth deposits in Finland, Sweden and Norway. They have announced initial drill results from Norra Karr and final results from winter drilling will be coming out soon. They've recently acquired the Bastnes deposit where rare earth elements were originally discovered in the early 1800s. We may see a number of additional acquisitions in Scandinavia. This gives investors a way to get a European REE play through the Toronto Venture Exchange. The European Union certainly will have demand for rare earth elements and this could be the company that supplies that demand.

Then there are a couple of other ways to play REEs. NEO Material Technologies (TSX:NEM) is a company which is a magnet powder, rare earth element alloy, and specialty metal producer in Toronto. It generates positive cash flow and could be a mine-to-market player or perhaps an acquisition target for someone (and I'm purely speculating here) like Molycorp, because they have current downstream product capabilities.

TER: How large is their project and when you say it's alloy what does that mean?

MF: They are a producer of rare earth element and rare metal alloys. An alloy is a combination of two or more metals. They're a downstream company with no exploration or mine projects. Perhaps they would be looking for an off-take agreement with someone who will become a miner. Perhaps they will become a takeover target of a larger company such as Molycorp, which needs to build downstream capabilities; or Lynas Corp. (AUS:LYC) of Australia which may want a presence in North America. These are pure speculations but NEO Material is a cash flow producing company on the downstream side of the rare earth element supply chain.

A company that gives you another way to play REEs is Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF).They intend to establish a rare earth element ETF, where they warehouse REE metals and compounds and buy and sell them. The company is fronted by Stan Bharti and his group and has increased its market cap by about 50% over the last month or so.

TER: What do you see in the green alternative energy space with uranium?

MF: I see uranium as a proven green technology which is established, economic, and expanding. Now certainly the solar and wind industries will contribute to the green energy agenda that governments are propagating to reduce carbon emissions. However, I do not follow any companies in the solar and wind arenas and there is a logical reason for that. Uranium has a long history of production and profitability. The kilowatt-hour unit cost from a uranium power plant is much cheaper than natural gas- or coal-powered plants. The solar and wind sectors are not economic without direct government subsidies. I am reluctant to invest in entrepreneurial, venture capital companies that depend on government subsidies and the current whims of elected government officials.

TER: Anything else you'd like to advise our readers?

MF: It's incumbent to do your own due diligence, because you and you alone are responsible for your investment decisions. Careful and diligent research will allow the lay investor to make better speculations in the high risk junior resource sector.

TER: Mickey, we appreciate your spending some time with us today.

The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has over 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, writer and speaker, Mickey launched MercenaryGeologist.com in late April 2008 and can be reached at Contact@MercenaryGeologist.com.

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

DISCLOSURE:
1) Karen Roche 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: Avalon Rare Metals, Strathmore Minerals, Rare Element Resources.
3) Mickey Fulp: I personally and/or my family own shares of the following companies mentioned in this interview: Strathmore Minerals, Hathor Exploration, Forum Uranium, Avalon Rare Metals, Rare Element Resources, Quest Uranium, Tasman Metals, Neo-Material Technologies, Dacha Capital. I personally and/or my family are paid by the following companies: Strathmore Minerals, Avalon Rare Metals, and Quest Uranium are paying sponsors of my website. I have done consulting work for Strathmore Minerals.

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As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

Today we sold our Call Options in Silver Wheaton Corporation, June $15.00 series, for a profit of 106%, however, we cant find such opportunities in the uranium space at the moment, but they will come.

If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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

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

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

Tuesday
Apr202010

Shale by the Pail: Europe Shakes Its Fist at Russian Hegemony

Reliance on Gazprom as a Percentage of Consumption 1.jpg




By Marin Katusa, Senior Market Strategist, Casey’s Energy Report



The latest buzzword on investors’ lips is shale, and it’s everywhere. Shale gas production is rapidly growing, and the domino effect of unconventional gas development on the global energy market is staggering.

North America has already seen the stampede of companies staking their territories and is now in the next phase: consolidation. However, buying into the American industry giants now, where even a major strike creates only a blip in share price, is like catching a ship that’s left the harbor.

But at Casey Research, we wouldn’t advise you to despair just yet, because the next big opportunity is just over the horizon. Coming up next – the basins of Europe.

The new techniques in drilling and well completion have transformed this formerly unprofitable source into a gold mine. Add that to the success that shale gas has enjoyed in North America, and you see why shale gas is creating a stir and intrigue throughout Europe.

Possibilities for shale gas production in Europe are endless – the American Association for Petroleum Geologists estimate a total resource of 510 trillion cubic feet (enough to power 27 European countries for over 30 years) of unconventional gas for Western Europe alone – and the rewards for investors in the right place could be huge.

In addition, unlike the United States, where major gas companies started snatching up land and smaller companies as shale gas became more popular, Europe’s shale market is still in its infancy. This puts the junior and smaller companies on the same playing field as the biggest players.

If commercial amounts of gas are found on a junior company’s land, it’s not inconceivable that its share price will multiply by ten. At the very least.

Taking on the Bear

But the main attraction of shale gas in Europe, and what gives it government support across the board, is the increasing urge to break the stranglehold of the Russian gas giant Gazprom. Almost all of Europe is heavily dependent on the state-controlled Gazprom for the majority of their gas supply. Gazprom’s tap-twisting of Ukraine’s prices, through which flows almost 80% of Europe’s gas, has made it clear that Russia has a big stick and it is not afraid to use it.
       

With the installation of a pro-Moscow president in Kiev, Europe’s interest in a non-Russian source of gas has escalated, and should a U.S.-style shale phenomenon turn up in Europe, the energy landscape could drastically change.

Knowing Your Enemy: The Other Side of the Story

That is not to say that there aren’t any challenges facing the companies. The lack of equipment in Europe – 20 fracturing sets vs. 2,000 in North America – is a major obstacle and at millions of dollars each, companies aren’t exactly falling over fracturing sets.

Then there is the chance that the rush for land will lead to overstaking of territories, with more than one company claiming a piece of land. This will invariably lead to quarrels, even legal battles, which would delay exploration and create a mess for companies and shareholders alike. And after all this, no two shale basins are the same, and techniques that work on one may not translate to the other.

So companies looking for shale gas in Europe in largely unexplored regions face significant risks – the initial production rate, its sustainability, and costs of the well are all unknowns... and that’s precisely what makes it so exciting.

What Would You Do With a 670% Return?

Shale gas is the hot topic in Europe today, and we knew this would happen back in 2007. Our subscribers bought one 25-cent stock, then sold it at $1.80, netting a quick gain of almost 700%.

With the huge potential just waiting to be explored, investors need to have their ears on the ground to know about the “me too” companies, the ones that will hit the payload. For now, the watchwords are “oil shale in new markets.”

Casey’s Energy Report has its finger on the pulse of the world’s most exciting energy plays… and its readers are the first to know which companies have the equipment, the management, the property and the expertise needed to make the big returns in oil shale.

At Casey Research, we know the sector better than others, and we know who is strong and who is weak. Don’t miss out on the incredible opportunities that await investors in oil shale – subscribe to Casey’s Energy Report today with a generous three-month, no-risk, money-back guarantee. Details here.



As a suggestion for those who do want leverage to the precious metals bull, the gold and silver funds together with the careful application of options trades could be a possible solution for you. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for the faint hearted. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your money and its your call.

Got a comment then please add it to this article, all opinions are welcome and appreciated.


If you would like to get a bit more bang out of your buck, then check out our Options Trading Service please click here.

For the analysis of a recent options trade that we have just closed please click this link.


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

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

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