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Thursday
Jul222010

Mickey Fulp: Solving the Uranium Price Puzzle

Source: Barbara Templeton and Karen Roche of The Energy Report 7/22/10
http://www.theenergyreport.com/cs/user/print/na/6871

Mickey Fulp

Apparently flouting the law of supply and demand and mystifying experts and analysts alike, depressed uranium prices present some excellent bargain-hunting opportunities for investors, according to Mercenary Geologist Mickey Fulp. In this exclusive interview with The Energy Report, Mickey shares some thoughts about his favorite players in the uranium space. He's also keeping an eye on natural gas stocks.

The Energy Report: When we talked in April, Mickey, you said that the only sector you thought was absolutely undervalued as a whole was uranium, and that it had been beaten up a lot since mid-2007. You felt uranium prices should have started to rebound beginning in 2009, but they haven't done so yet. What's keeping prices down? Should we see a rebound soon?

MF: There has been a little encouragement in the fact that the spot price was up $1 over the last couple of weeks of June, but trading at $41.75 on the spot market is still very low compared to the uranium boom run up. Although it's a minor part of the entire market for uranium, the spot market very much influences the price of uranium stocks.

TER: Will uranium ever return to the 2007 peak?

MF: That was an anomaly, so not in the foreseeable future. Hedge funds basically came in and bought up a bunch of uranium. The crash started earlier for uranium, but all those exorbitant commodity prices in '07 and '08 were due to hedge fund buying.

TER: If we take out that anomaly, where would you say uranium's price stands today?

MF: I think we're still relatively low, in the fact that the cost of production is going up. All the new mines coming on will have higher costs of production than the established mines. We'll need higher uranium prices in the mid to long term to make these mines profitable.

TER: But nuclear facilities are being built, coming online in China and Europe and the United States. Why isn't the additional demand pushing uranium prices up?

MF: Your guess is as good as mine. The long-term contract market for uranium is very opaque. The spot market is a little more transparent. Spot market prices are basically set by whatever trades happened last week or last month, when buyers and sellers sat across the table from one another and negotiated a price. Why the spot price has barely moved puzzles most people in the business and most analysts, because we do see this increased demand and we don't know where the uranium will come from.

There are a couple of wildcards out there though. The U.S. Department of Energy has something on the order of 158 million pounds stockpiled. The price is probably suppressed right now, too, because the Russians still supply a significant amount of uranium through the "Megatons to Megawatts" deal, which ends in three years. Mining currently supplies two-thirds of the world's demand. Secondary sources, the heavy to light enrichment process and stockpiles, have supplied the rest. Most analysts say that certainly within three to five years demand will exceed total supply from these sources. Therefore, it appears the price has to go up. What's the timing of the price going up? ¿Quién sabe?

Demand is exceeding mine supply right now. Obviously, there has been enough uranium to keep power plants going. One thing that's become apparent in the last few months is that utilities and governments, consumers of uranium, are carrying something on the order of 18 months' average forward supply. Historically, that supply stockpile has been more like three years. That difference may represent supply tightness.

I wish I had better answers. I think everybody in this business is grasping for straws as to why prices are still relatively depressed, especially in terms of cost of mine production.

TER: At the close of the G20 Summit in Toronto last month, India and Canada signed a nuclear agreement supposedly paving the way for Canadian firms to export controlled nuclear materials, equipment and technology to India. What does this portend for the sector in North America?

MF: I wouldn't put a lot of stock in the importance of that agreement. We've seen the U.S. and seven other countries already sign deals like this with India. India's building 12 nuclear reactors in the next decade, and because they are not a large uranium producer, they need a uranium supply. That's probably one of the motivating factors. India is one of three countries that never signed the Nuclear Nonproliferation Treaty, the others being China and Pakistan. So for a long while, they were blacklisted.

Both the Climate Conference in Copenhagen and this G20 Summit in Toronto dealt somewhat with world movement to reduce the amount of heavy-enriched uranium (i.e., uranium that could be made into bombs) and convert that to low-enriched uranium. There have been myriad such agreements between countries over the last two years, all in response to the idea that we need to get the bomb-capable uranium into secure facilities to downgrade for use in power plants.

Something that I think would perhaps be more important is the fact that Cameco Corp. (NYSE:CCJ; TSX:CCO) has just signed a contract to sell 23 million pounds of uranium to China over the next decade. China has an aggressive goal of increasing nuclear capacity for electricity generation from about nine gigawatts (GW) to as much as 160 GW by 2030. So what we're seeing now is that yellowcake, or low-enriched uranium, will cross international boundaries freely. Of course this will not be the case with rogue nations such as North Korea, Iran and other places where the civilized world would not be certain about that uranium being used for peaceful purposes.

TER: If non-peaceful nations got the uranium, they would still have to enrich it to make weapons?

MF: Right. And they need the facilities to be able to do that. It's fairly apparent that North Korea and Iran have those capabilities. Low-enriched uranium is something on the order of 3% to 4% U-235, whereas high-enriched uranium—the bomb-making stuff—is more like 85% U-235. So there’s considerable upgrading to achieve weapons-grade uranium and it's an iterative process to get those high concentrations. Conversely, it’s also a laborious process to downgrade weapons-grade uranium to concentrations suitable for power plant fuel.

TER: As with the Megatons to Megawatts program.

MF: Exactly. You take high-enriched uranium, bomb-capable uranium, and downgrade the enrichment factor 25–30 times.

TER: That's why it's lasting so long in terms of being part of the supply.

MF: Right.

TER: So we now have international demand and capability to ship uranium internationally. We've got the supply chain now 18 months out as opposed to three years. We've got the Russian program starting to wind down. What are some good investments for people who agree with you in that this is an undervalued sector?

MF: Well, my favorite company for a long time has been uranium developer Strathmore Minerals Corp. (TSX.V:STM; OTC.PK SHEETS:STHJF). I call them a development generator. They have two flagship properties in the Grants Mineral Belt of New Mexico and the Gas Hills of Wyoming. They are a development generator because they're in the process of monetizing all their non-core assets, including seven other development projects in the Western U.S.

I see some sort of unitization in the Grants Mineral Belt in the mid-term future. There are half a dozen major deposits in the Grants Mineral Belt, which is the largest uranium province in the United States. Ownership of all of those deposits is divided among multiple owners. Strathmore, Uranium Resources, Inc. (OTCBB:URIX), Neutron Energy and Rio Grande Resources—two private companies—are the major players. All of them except Rio Grande own bits and pieces of everybody else's deposit. At some point I expect to see deals made where one company controls a particular asset and another company controls another asset. So I think we're going to see some movement toward unitization in the Grants Mineral Belt. That would be very positive for Strathmore. It's already happening in South Texas.

TER: Any other plays in the uranium space that you like?

MF: Sure. I like Hathor Exploration Ltd. (TSX.V:HAT). Hathor keeps getting bigger. The exploration potential in the northeastern Athabasca Basin continues to grow. Fission Energy Corp. (TSX.V:FIS) has a discovery along the same east-west structural corridor. They will expand that. Both Hathor and Fission Energy will start drilling soon.

Another play on the Midwest trend and joint ventured with Hathor is Forum Uranium Corp.'s (TSX.V:FDC) Henday project. I've been accumulating that stock on weakness and it's been pretty weak so I continue to accumulate it at lower and lower prices. It'll be next March before we can expect drill results from a winter time drilling program. That's a bit of a longer-term play.

Another company maybe worth looking at would be Uranium Energy Corp., (NYSE.A:UEC), which is moving toward new production in South Texas in the fourth quarter this year. All these companies are pretty beaten up right now in terms of share price.

TER: Speaking about South Texas takes us pretty close to the Gulf of Mexico and a very serious situation. What's your take on the future of deepwater offshore drilling?

MF: With something on the order of 25% of our domestic oil production coming from the Gulf of Mexico, it is very important to the U.S. economy. Among the ramifications, I think we're going to see increased regulation, permitting delays and environmental lawsuits. All of this means less drilling for both production and exploration, which means we'll have less oil and more dependence on the Middle East. It's also going to mean an increasing move to onshore oil. It's a very sad situation.

TER: Do you expect a greater focus on alternative energies as another possible outcome?

MF: I think that's likely.

TER: How might that play out and which players stand to benefit?

MF: Uranium first and foremost. I certainly think the rare earth elements (REE) sector will benefit because these are so-called green metals. They are necessary for alternative energies; for example, wind turbines need a lot of neodymium. Hybrid cars require lanthanum, neodymium, dysprosium, terbium and europium. So an increase in the green-and-clean energy technologies will benefit the REE sector.

TER: You've called the REE sector one of your favorites. Do you still feel that way?

MF: I do, but as we've seen lately, it's very dependent on the health of the world economy. I have several core positions in the REE sector that I hold for the long term.

TER: Who do you like, and why?

MF: Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF) just put out the first economic study of any junior in the sector, a prefeasibility study. The market reacted negatively because of high capex and relatively low internal rate of return (IRR). I spent a long time talking with CEO Don Bubar about it. There are lots of low-cost tweaks available in the mining, processing and marketing at Thor Lake. For instance, a 1% increase in metallurgical recovery results in a 1% increase in IRR. After talking with Don, I was very pleased and had somewhat of a different idea about what this prefeasibility study means. This is a mine-to-market sector, and those of us who cover it have been saying from the get-go that offtake contracts will be paramount. Western world consumers of rare earth elements are very worried about mid-term supplies, and are now positioning themselves for product for the next three to five years. I think that's all behind the scenes, but I expect some movement in this regard in the short term.

TGR: So you're seeing production in the short term?

MF: Not production, that's four to five years away, but commitment to product flow from mines. Consumers will line themselves up and make sure they have a secure source. They're concerned about where their raw materials will come from.

TER: If consumers are lining up to buy, why, then, would the IRR cause a decrease in share price?

MF: The market doesn't understand that. The market looks at a very large capex and a 12% IRR and says it's a marginally economic deposit. It may be, but the Western world requires rare earths—and they'll have to come from somewhere other than China.

TER: What companies do you see lined up to take advantage of these offtake agreements?

MF: Avalon will be first in North America. Quest Rare Minerals Ltd. (TSX.V:QRM) is one of my favorites. They are trading somewhere around 50% of their yearly highs, just initiating a 15,000-meter drill program, with four rigs at their flagship Strange Lake heavy REE project. They'll delineate the west half of the deposit, drill the east half—which has never been drilled—and their metallurgical results probably will come out in early August.

I particularly like Rare Element Resources Ltd. (TSX.V:RES), with their Bear Lodge light REE project. Their new resource estimate is 50% larger than before and they're drilling now. They're also drilling on the adjacent Sundance Gold project and will follow that with a resource estimate. I can speculate that eventually this will be a two-for-one; there will be a gold company spinout.

My other favorite is Tasman Metals Ltd. (TSX.V:TSM), a European REE play. Since we last talked, they've raised $3 million, completed a drilling program with positive results at their Norra Kärr project in Sweden and acquired the Bastnäs project. That's particularly interesting, because Bastnäs is where rare earths were first discovered in the early 1800s. The mineral bastnäsite is named for this locale. Tasman also has acquired an advanced deposit in Finland (Korsnäs), and I think you'll be seeing a pipeline of additional projects coming in the door. This play is especially important because the European Union has stated they want to become more self-sufficient in critical and strategic metals, and Tasman is well positioned for that.

Dacha Capital Inc. (TSX.V:DAC; OTCQX:DCHAF) has an interesting business model. It's a rare earth element ETF.

TER: Can you describe Dacha Capital's approach?

MF: Their corporate strategy is to buy REE metals, alloys and oxides in China and take them out of China; presently, they're storing in Singapore and South Korea. They can monetize that various ways with the net asset value of the stock. With the increasing REE prices we've been seeing, Dacha Capital's stock price will go up; and, if things go up very rapidly, they can always sell these stores to consumers.

TER: So to the extent that it brings alternative energies more front and center, rare earths may benefit from the Gulf disaster. Any other sectors?

MF: Yes. I also think it will benefit the natural gas industry because that's much cleaner than other hydrocarbon products. The U.S. is the world's largest gas producer now. Gas is cheap and relatively clean; but gas storage is still high. The oil-to-gas price ratio right now is way out of whack, approaching 15, with historical ratios somewhere around 6. So in relation to oil, gas is quite cheap.

TER: What about solar?

MF: I don't particularly like the wind or solar sectors because they still require government subsidies to be economic. I don't like private industry depending on elected government to generate cash flow.

TER: And geothermal?

MF: Especially in the junior resource sector, I look at geothermal as too long term and the junior plays too risky. The payback schedules for geothermal electrical generating plants is okay for monopolistic utilities, but I just really don't get it for a junior that has a limited lifespan. In my opinion geothermal is best suited for local space-heating needs where the geothermal fields exist.

TER: OK, any other energy sectors that you follow?

MF: I follow natural gas. As a contrarian, I like to find things that no one else is looking at right now, are off people's radar screens or are not the flavor of the year. So uranium and natural gas have piqued my interest lately.

TER: Is it a good time to buy natural gas stocks?

MF: I'm watching right now. I haven't waded into this sector yet. I would say that if you do, you want to buy the best and strongest companies with good balance sheets and the ability to generate cash flow and not exceed their revolving credit lines. It's a bit of a different philosophy because all oil and gas companies carry debt whereas juniors in the metals sectors generally don't carry debt.

TER: What's keeping you from jumping into the market at this time?

MF: I think it's a little early. I'd like to see some more positive indications that gas prices are going to be relatively strong and that demand is going to increase in the mid to long term. I think it will because it's cheaper and cleaner than burning coal or burning gasoline or diesel in your car.

TER: What cues are you looking for to make your move?

MF: I generally listen to other analysts, take it all in and try to make my own decisions.

TER: Is that time drawing close?

MF: I'm not sure. If it were getting close, I would be going into the natural gas sector right now. I'm still on the sidelines watching.

TER: Mickey, you are a big proponent of investors doing their due diligence. For those new to investing in energy, what conferences, books, seminars or newsletters would you recommend to them?

MF: There are numerous investment conferences every year, and I personally speak at about 10 or 12 of them. They're held in various large cities—Vancouver, Toronto, Calgary, Chicago, Phoenix, New York City, New Orleans, San Francisco. I encourage investors to go to these; most of them are free to the investing public. At the upcoming San Francisco show (Hard Assets Conference, November 21–22), some educational workshops will be free and some will have small fees.

TER: You'll be there?

MF: Yes. I will be presenting my educational workshop called "Geology for Lay Investors." Probably the most difficult thing for lay investors to get a handle on is the geology of these junior resource companies' projects. We geologists tend to speak our own language; we understand the jargon, but it's probably puzzling to the investing public with no background in the science. In an hour-long seminar, and however long I stay for questions—which tends to be quite a while—I try to boil it down into the basics of geology. Geology is a science, but the best geologists are artists. So through these educational seminars, my mentoring of investors and a book I'm writing on resource investing for the lay investor. . .

TER: When is that coming out?

MF: I keep saying a year, but it keeps getting put off as I keep adding more chapters, kind of like most juniors' Gantt charts. I'm chipping away at it but then I get busy with other things. I'm writing it chapter by chapter, so it's a work in progress.

TER: Any final thoughts you'd like to share today, Mickey?

MF: Yeah, I've got two. "There ain't no cure for the summertime blues" except that. . ."Time is on my side, yes it is."

TER: You ought to set that to music.

MF: I think that's already been done.

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 more than 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, newsletter writer and speaker, Mickey 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) The Energy Report Publisher Karen Roche and Barbara Templeton conducted this interview. They personally and/or their families own 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: Strathmore, Dacha, Rare Element and Avalon.
3) Mickey Fulp: I personally own shares of the following companies mentioned in this interview: Fission Energy, Forum Uranium, Hathor, Strathmore Minerals, Avalon, Quest, Rare Element Resources and Tasman. I personally am paid by the following companies mentioned in this interview: Avalon, Quest, Strathmore and Tasman are sponsors of my website.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
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Stay on your toes and have a good one.

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Tuesday
Jul202010

Geordie Mark: Glowing Reviews for Uranium Plays

Geordie Mark.jpg


Source: Brian Sylvester of The Energy Report 7/20/10
http://www.theenergyreport.com/cs/user/print/na/6850

You don't hear a lot of talk about uranium these days. It's just not as sexy as gold or silver. But with a host of reactors slated for construction, the sector is rife with opportunities. Haywood Securities Analyst Geordie Mark visits numerous uranium projects each year, researching plays at all levels. In this exclusive interview with The Energy Report, Geordie tells us why he's given "sector outperform" ratings to no less than 11 companies. It could be the most comprehensive global roundup of uranium plays anywhere.

The Energy Report: The spot price for uranium was $40.75 a pound on June 21, when the long-term price for uranium was $58—a spread of $17.25, or 42%. What's poised to support a 42% price increase?

Geordie Mark: The spot price actually moved up to $41.75 that night, the first move to the upside in quite a number of months. It's a positive response to demand coming onstream. The long-term contract market is very different from the spot market; and, historically, it's significantly bigger in terms of the volumes that are traded. We're seeing the spot price moving to meet those contract prices going forward. We also think there's a backdrop of significant demand increase due to a delay in the development-stage projects resulting from financial crisis issues and general market conditions.

TER: How far out do you see the spot price and the futures price meeting?

GM: We're looking at a marriage maybe even by the end of 2011, with a spot price of $65 and a long-term move out to $70. We certainly expect to narrow the current gap by that point.

TER: And you said part of that is due to the number of projects coming onstream?

GM: That's right. A few development-stage companies will go into production but, certainly compared to 2007, there have been delays due to equity raising. The number of new projects going forward has been stymied when those projects needed significant capex for development.

TER: At the same time we have a number of new reactors being built.

GM: That's true. Over the last two years, we've seen some significant growth in the number of reactors going into construction. I think something like a 58% increase in the number of reactors are on the planning board; that's a very good size in terms of a steady increase in future demand.

TER: Given the number of reactors being built or scheduled, why haven't uranium stocks performed better of late?

GM: There's a relationship between share prices and general market conditions. Over the last two years, both spot and long-term prices have come off somewhat in response to global financial conditions. I believe spot has come down from about $59 and long-term prices from $80. Company valuations are quite closely linked to commodity prices, so you're basically seeing the relationship to a softening in the commodity price over that two-year period.

TER: So with demand slated to rise significantly, we should see a corresponding rise in share prices of uranium miners and explorers?

GM: That's our target forecast for our covered companies and where we see the commodity price going in response to increasing demand. I think the interesting thing is that increasing demand not only corresponds to the number of new reactors coming onstream but also policies echoing out of Europe regarding extending the life of existing reactor fleets. You're seeing a number of different avenues in which nearer-term demand could increase, which only adds to the longer-term demand of new reactors. There are incremental policy changes toward nuclear power, too, certainly across Europe and coming across through North America. Obviously it's happening in Asia, with China and South Korea furnishing fairly large reactor-unit increases for their countries.

TER: Some of the most promising uranium projects are in Australia. Although the country is considering a new tax on miners, the Mineral Resources Rent Tax (MRRT), a recent change in leadership in the governing party could be a favorable development. Could you update us on the political climate in Australia as it pertains to the uranium players there?

GM: Well, Australia is interesting. It has the world's largest accumulated known uranium resources and the largest uranium deposit—Olympic Dam. At the moment, Australia's federal government allows uranium mining, and other regulations basically filter down state by state. Western Australia is now open to uranium mining. South Australia has an active uranium mining history, as does the Northern Territory. The more recent super-tax proposal, which the Labour Party put forward, created an uncertainty in terms of the value of both current and future mining projects. Julia Gillard, the new Prime Minister, has made motions toward the industry in terms of coming forward and talking about possible modifications to the mining taxation rules. For the time being, it's hard telling how ultimately this will break down.

TER: Your research talks about some sector outperformers among the conventional explorers. You've mentioned Energy Fuels Inc. (TSX:EFR), Mega Uranium Ltd. (TSX:MGA) and Strateco Resources Inc. (TSX.V:RSC). Please update us on those companies.

GM: They provide investors with exposure to uranium in different jurisdictions. For example, Mega has the Lake Maitland project in Western Australia, which is opening up for uranium mining and where a significant proportion of Mega's assets are located. The company has good partners in a Japanese consortium, which owns about 35% of the asset at Lake Maitland. Mega provides people with exposure to a near-term uranium producer that has a significant support base in terms of these partners. I think that's one of the more favorable new projects in Australia. We anticipate production maybe in 2013. It would be a lower-cost producer, probably in the high $20s in terms of USD per pound of production.

TER: How much would Mega produce annually at Lake Maitland?

GM: We're looking at about 1.65 million pounds; it's small-scale production. It's basically a thin layer at surface that doesn't require conventional mining. It's unconsolidated mud effectively, so 1.65 million pounds a year for the life of the project.

TER: Does Mega have any other projects in Australia?

GM: Lake Maitland is their primary project. Their second main asset in Australia is Ben Lomond, up in far northern Queensland, just outside the city of Townsville. It's a modest-grade deposit; it's got potential. They've got a bunch of other exploration plays around the world, particularly in Canada.

TER: What's your target price on Mega?

GM: $0.80.

TER: Before we go further, could you give us an overview of cash costs—low, medium and high—in terms of uranium production?

GM: Sure. Certainly low cash costs now would be below around $25 a pound. Medium would be upper $20s and $30s. High costs are $40s and above.

TER: Okay. What can you tell us about Strateco?

GM: Matoush is a very nice deposit in Québec; very handsome grades, close to 0.6% U3O8. It has a resource of about 20 million pounds of uranium U3O8—small, but higher grade. Our interpretation is that Matoush is the most advanced project for a development-stage company in Canada. Strateco has a big program going at the moment —another 60,000 meters of drilling this year to look for extensions of mineralization, and another 60,000 meters planned for 2011. The orebody is still open. Guy Hébert, the president and CEO, is also working out permitting. We're looking at permits for the project to start underground development for bulk sampling.

TER: How long would it take for them to get the assay results from that bulk sample?

GM: We're looking at a couple of years, probably 2012. They have to develop the underground workings first. The main thing in the interim is the underground development itself, and also the exploration drilling they're doing. It takes time. That's why we think Strateco is ahead of its peers in terms of submitting proposals to the Canadian Nuclear Safety Commission (CNSC) for licensing and permitting approval. Canada is highly regulated, which is a good thing. It's mandated, and these things take time.

TER: Alright, what about the others?

GM: Energy Fuels, that's a uranium-, vanadium-oriented company in Utah and western Colorado. We like them because of the duality of the commodities. In addition to uranium, they have the vanadium, which is an integral component in steel manufacturing. That gives them a bit of a boost. Energy Fuels would be a moderate to higher-cost producer and shares many similarities with Denison Mines Corp. (TSX:DML; NYSE.A:DNN) and its mining and processing operations in the United States.

TER: What are some of their assets?

GM: They have the Piñon Ridge Mill project, permits for which are under review. That process should be complete by early next year. They have a couple of mines that are fully permitted and will be underground mining on the Colorado Plateau. Energy Fuels has the potential to go into production at their Whirlwind Mine, but they don't have a mill there yet.

TER: A recent edition of Haywood Securities' Uranium Weekly gives sector outperform ratings to Paladin Energy Ltd. (ASX:PDN; TSX:PDN) and Denison. What upsides do you see there?

GM: I favor Paladin simply because they have two conventional open-pit mines in Africa where they're ramping up production. There's one in Namibia, which is the world's fourth largest uranium-producing country. The new mine that they commissioned last year in Malawi is Kayelekera. Paladin's a conventional player with production costs of around $30 a pound; it's a Tier-2 producer at the moment and is looking to expand from there. The company also has development plans in Australia and elsewhere in Africa. They've done quite well—they've proven themselves to be the new player in terms of conventional mining and milling in the uranium sector.

TER: Are they approaching Cameco Corp. (NYSE:CCJ; TSX:CCO) status?

GM: No, not yet. Cameco is fairly substantial, quite diverse; but Paladin is a Tier 2. There are not many Tier 2 producers out there; they include Uranium One Inc. (TSX:UUU), Paladin and Denison in that fold.

TER: Tell us about Denison.

GM: Denison is basically a North American uranium producer and also produces vanadium from its Utah operations. It's a higher-cost producer, and certainly the leveraged play in the space. Denison has basically reconstituted itself over the last year and a half in terms of raising equity to minimize long-term debt. They've also brought in KEPCO as a partner—Korea Electric Power Company (NYSE:KEP). Basically, Denison is slowly ramping up its production in the U.S. They've cut down a few of the higher-cost producing mines to be more prudent in their mining and producing operations. For example, they have a partnership with AREVA (PAR:CEI) at the McClean Lake facility in Canada, which is probably going on care and maintenance in July.

TER: Why is that?

GM: AREVA operates that, so it's largely their decision. . .probably looking toward future prices to see when it comes back onstream. Denison also produces vanadium, and they have a very exciting discovery in the Athabasca Basin—the Phoenix Zone in the Wheeler River joint venture. Phoenix has had some outstanding drill results over the last year. They're aiming to get a resource estimate out on that by the end of 2010. Quite an exceptional discovery, I think.

TER: In that same issue of Uranium Weekly, you talk about some in-situ miners. Among your sector outperformers are Uranium Energy Corp. (NYSE.A:UEC), Ur-Energy (NYSE:URG; TSX:URE) and Uranerz Energy Corporation (TSX:URZ; NYSE.A:URZ). Tell us about those.

GM: Uranium Energy, Ur-Energy and Uranerz are all in the U.S., all looking at in-situ uranium recovery—so no physical mining, all sandstone-hosted. We see near-term production out of all three of the companies. That's this year for Uranium Energy, probably next year for Ur-Energy and late 2011, early 2012 for Uranerz.

TER: This year for Uranium Energy?

GM: Yes. We're looking at Uranium Energy entering production in October from their Hobson plant and mining from their well fields at Palangana—both in Texas; so, with this timeline, it will effectively be the world's next uranium producing company. It's quite an exciting development for the space and the company. They have another project, Goliad, which could potentially add to their production and should get its final permitting by the end of this year. We like Uranium Energy's lower-cost production base. They're not large but their cash costs are probably around $22, so quite good there. Production scale potentially 1M–2M pounds annually.

TER: Has the share price moved in anticipation of production?

GM: No, not as yet.

TER: Given that its pending production profile hasn't been taken into account, might it be a good buying opportunity?

GM: We certainly like them. Our target there is $3.90. They're trading at around $2.40, so we think that offers a good opportunity. They have a number of catalysts going forward and a big exploration plan around their existing resources. They will update their resource estimate in September; production in October. We're looking at getting a second well field project 'Goliad' permitted by the end of the year. A third project called, Seager-Salvo, could have an initial resource estimate by year-end, as well.

TER: What about Ur-Energy?

GM: Ur-Energy and Uranerz are good peer companies. They're both in Wyoming, and both submitted applications to go into mining around the end of 2007, beginning of 2008. We're looking at production next year for Ur-Energy and early 2012 for Uranerz. Let's go through Ur-Energy. They've got a very good cash position and have the Lost Creek and Lost Soldier deposits. They've been operating from Lost Creek first—they're looking at development there. We're looking at the Nuclear Regulatory Commission (NRC) ultimately providing final permits and licenses to go into production in the second half of this year. It's the same for Uranerz. We're looking at probably starting to build at the end of this year, beginning of next year. Lower-cost producer, small scale.

TER: Let's go back to what's happening in Africa. Haywood's research would seem to agree that Africa has a number of promising uranium explorers and developers. Could you talk about some of the juniors Haywood thinks are poised for significant share appreciation?

GM: Africa is blossoming as a region for uranium discovery. Mantra Resources Ltd. (TSX:MRL; ASX:MRU) and Extract Resources Ltd. (TSX:EXT; ASX:EXT) have made some genuine new discoveries there over the last year or two. I think the best thing about Africa is the probability of making discoveries that are more easily exploitable in terms of being at or near surface, so they're amenable to open-pit mining. Mantra has an exceptional deposit, the Mkuju River Project in Tanzania. I think the company published its first resource estimate at the beginning of last year. . .more than doubled it within a year and still has the potential to increase that resource. They're looking at production in the second half of 2012. That's a very quick timeline to production. They're still looking at increasing the capacity from their plant and milling operation. We're looking at a modest cash cost of about $25 a pound. Mantra has a lot of positives going forward.

Extract made an outstanding discovery at Rossing South in Namibia. This is 6 km. south of the existing Rossing Mine that Rio Tinto Ltd. (LSE:RIO; NYSE:TP; ASX:RIO) operates. They have close to 300 million pounds of defined resources, which they identified in rapid time. Their resources are significantly higher grade than the existing Rossing operation and they're looking at expanding on that. It's a world-class discovery, a fact that their share price has reflected over the last 18 months.

TER: That's great. Any others?

GM: Bannerman Resources Ltd. (TSX:BAN; ASX:BMN) has done a lot of work in terms of defining the Etango deposit, which has about 160+ million pounds of uranium. It's tens of kilometers away from Extract's Rossing South. They're all very close together, and all alaskite-hosted. That means the mining and processing techniques are well known and understood given the long history of mining at the Rossing Mine.

The Etango deposit is defined over 6 km. of strike length. It crops out—it's at surface and shallow. Bannerman doesn't have the grade that Extract has, so they're a more leveraged play in the space; but we still like Bannerman in terms of a large strategic resource. We're looking at cost of production in the high $30s or maybe $40 a pound.

The big thing there is that they should get their ultimate mining license over the next few months, so they'll be one of only three operations to have licenses to go into production. The big players are looking for resources with potential for large-scale production in areas that allow uranium mining. And that's where Bannerman, Extract and Mantra all come out quite well.

TER: Thank you, Geordie, for updating us on all of these exciting developments.

Dr. Geordie Mark, a research analyst with Haywood Securities, focuses principally on uranium companies involved in exploration, development and production. He joined Haywood Securities from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Immediately prior to joining the exploration industry full-time, Dr. Mark lectured in economic geology at Monash University, Australia and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University's Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Mega Uranium.
3) Geordie Mark: I personally and/or my family own shares of the following companies mentioned in this interview: Paladin Energy. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) As of the end of the month immediately preceding this publication either Haywood Securities, Inc., its officers or directors beneficially owned 1% or more of Mantra Resources.
5) Haywood Securities Inc. or an Affiliate has managed or co-managed or participated as selling group in a public offering of Extract Resources, Mantra Resources, Mega Uranium and Uranerz Energy in the past 12 months.
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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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Have a good one.

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

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

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

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



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

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


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

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

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

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

Monday
Jul192010

China Stockpiling Uranium

Uranium Chart 20 July 2010.jpg

We missed this article earlier but fortunately one of our sharp eyed readers sent us a heads up, its about China stockpiling uranium while the uranium prices remain at current low levels. “We could start to see fairly substantial price increases in the spot market later this year.”


China is buying unprecedented amounts of uranium, signaling that prices are poised to rebound after three years of declines.

The nation may purchase about 5,000 metric tons this year, more than twice as much as it consumes, building stockpiles for new reactors, according to Thomas Neff, a physicist and uranium- industry analyst at the Massachusetts Institute of Technology in Cambridge. Prices will jump by about 32 percent next year, the most since 2006, RBC Capital Markets said.

India and China are leading the biggest atomic expansion since the decade after the 1970s oil crisis to cut pollution and power economies growing more than twice as fast as Europe and North America. The boom, combined with slowing supply growth, may benefit Cameco Corp., a co-owner of the world’s largest uranium mine, and Areva SA, the largest builder of reactors.
“China’s demand is insatiable,” said Dave Dai, an analyst at the Daiwa Institute of Research in Hong Kong. “They will have to take almost whatever is available.”

Uranium will climb to an average $55 a pound next year as demand erodes supplies, according to Adam Schatzker, a metals analyst at RBC in Toronto. Max Layton, at Macquarie Bank Ltd. in London, forecasts it will climb to $56.25 next year and $60 in five years.

Uranium for immediate delivery was at $41.75 a pound on July 5, according to the Ux Consulting Co. weekly price assessment. Spot trades of uranium oxide totaled 20.9 million pounds this year, about $873 million in today’s prices, Roswell, Georgia-based Ux Consulting said.

Price Slump

Uranium has tumbled 69 percent since peaking at $136 a pound in July 2007 as companies boosted production, according to the firm’s data. At least 27 mines in nine countries began operating in the past 10 years, adding as much as 65 million pounds a year to global output, according to Saskatoon, Saskatchewan-based Cameco, part owner of McArthur River mine in Canada, the world’s largest deposit of high-grade uranium. Six mines are scheduled to start in 2010.

“The uranium bull market of 2006 and 2007 stimulated the development of new supply, but we do not think it is enough,” Schatzker wrote in a report. “The prevailing uranium price is too low to stimulate sufficient supply to cover future reactor requirements.”

The cost of mining one pound of uranium is about $31, up from $26 in 2007, according to Edward Sterck, an analyst at BMO Capital Markets in London.
‘Stockpiling Like Crazy’

China’s demand for uranium may rise to 20,000 tons a year by 2020, more than a third of the 50,572 tons mined globally last year, as it boosts output to 85 gigawatts, nine times its current capacity, according to the World Nuclear Association. The nation agreed on June 24 to buy more than 10,000 tons over 10 years from Cameco.

India’s needs will grow 10-fold to 8,000 tons as it quadruples capacity to 20 gigawatts, according to Jagdeep Ghai, finance director at state-owned Nuclear Power Corp.

“They are essentially stockpiling in anticipation of new reactor build,” Neff, who is an independent director of GoviEx Uranium Inc., a privately held exploration company with interests in Niger, said in a July 6 telephone interview. “They are stockpiling like crazy.”

China plans at least 60 new reactors by 2020, Xu Yuming, executive director of the China Nuclear Energy Association, said in Beijing on July 6. The average 1,000-megawatt reactor costs about $3 billion, according to the World Nuclear Association. Loading a new reactor requires about 400 tons of uranium to start, Neff said.

Areva, Cameco, Paladin

China’s economy may grow 10.1 percent this year, while India’s expands 8.6 percent, according to analysts’ forecasts compiled by Bloomberg. U.S. gross domestic product will increase 3.1 percent and Europe’s will grow 1.1 percent.

Companies that build reactors may be among the biggest beneficiaries. Areva’s shares have tumbled 53 percent in the past three years. Miners including Cameco, whose stock has fallen 60 percent since then, Paladin Energy Ltd., which has lost 63 percent, and Darwin-based Energy Resources of Australia Ltd., which is down 25 percent, may also benefit.

Cameco advanced 4.9 percent in Toronto. Energy Resources jumped 3.4 percent in Sydney, while Perth, Australia-based Paladin gained 2.2 percent. Areva slid 1.9 percent in Paris.
“Longer-term it does look as though there’s going to be a shortfall of uranium and ERA and Paladin should benefit from higher prices if that plays out,” said Lyndon Fagan, a Royal Bank of Scotland Group Plc analyst in Sydney.

Cutting Pollution

Chinese Premier Wen Jiabao aims to cut pollution by reducing energy consumption 20 percent in the five years through 2010. The country pumped 6.5 billion tons of carbon dioxide into the atmosphere last year, U.S. Department of Energy data show, more than any other nation. Atomic plants produce virtually no greenhouse gases, though spent fuel remains radioactive for thousands of years and requires re-processing and storage.

China National Nuclear Corp., the nation’s first operator of reactors, said on June 28 it’s exploring for the fuel in Niger, Namibia, Zimbabwe and Mongolia.

“We’re just beginning to see the initial stages of China going abroad to buy stakes in uranium mines, but this is a trend we’re going to see more and more in the future,” said Stephen Kidd, head of strategy and research at the World Nuclear Association in London.

Growing uranium use may create a shortfall by the second half of this decade because not enough new production is planned, according to Friedel Aul, director of fuel services at Nukem Gmbh, an Alzenau, Germany-based uranium trader and broker.

Slowing Production

“Current production is based on mines that have been in operation for a long, long time,” he said. “With startup costs, certainly to bring a mine on line today is much more expensive than it was 10, 15 years ago.”

Production growth, including supplies recycled from Russian warheads under an agreement ending in 2013, may slow to 4.8 percent this year and 3.4 percent in 2011, according to RBC. It increased almost 12 percent last year.

The last time this many reactors were planned was in the 1980s, after the 1973 and 1979 oil shocks prompted the Organization of Petroleum Exporting Countries to boost prices for crude. By 2015, a new reactor may start every five days, compared with an average of one every 17 days during the 1980s, according to the World Nuclear Association.

‘Speculative Interest

Commissioning new plants is a “game-changer” for uranium, said Mark Pervan, head of commodity research at Australia and New Zealand Banking Group Ltd. in Melbourne. Though many won’t come on line for as long as two years, “speculative interest” may drive prices to the “$60 to $80 range pretty quickly.”

Prices may recover as demand improves, said Dustin Garrow, a Denver-based executive general manager of marketing for Paladin, the world’s ninth-largest uranium producer.

“We see demand picking up noticeably and it is not just the Chinese, there are other utility consumers that are now showing interest,” Garrow said in a July 6 interview. “We could start to see fairly substantial price increases in the spot market later this year.”


So just maybe there is some light at the end of this tunnel.

Have a good one.

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

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

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

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



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

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


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

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

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

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


Monday
Jul192010

Blackouts Predicted for the UK

Nuclear Power Plant 19 July 2010.jpg



BRITAIN faces years of blackouts and soaring electricity bills because of the drive toward green power, a leading energy expert warned last night, according to an article in todays Daily Express.

A growing obsession with global warming and “renewable” sources threatens the stability of our supply.

Derek Birkett, a former Grid Control Engineer who has a lifetime’s experience in electricity supply throughout Britain, warned that the cost of the crisis could match that of the recent banking collapse


And he claimed that renewable energy expectations were now nothing more than “dangerous illusions” which would hit  consumers hard in the pocket.

“We are going to pay a very heavy price for the fact there has been a catalogue of neglect by the former Government which has focused on renewable energy sources,” Mr Birkett said.

We need a mix of sources and this takes time. Renewables have the problem of being intermittent, particularly wind, and we need more back-up capacity. By having all our sources in one basket we are risking disruption.

There is a lot of over-enthusiasm by governments to push global warming, which makes me very suspicious.” Less than five per cent of our energy comes from renewable sources but the “disproportionate” cost of implementing green technology runs into many millions of pounds, he said.

In a new book, When Will the Lights Go Out, published this month, Mr Birkett claims things will only get worse. He said the “lavish incentives” being offered to developers of green energy are being passed on to customers as the UK struggles to meet EU directives on carbon emissions.

He also warned that a growing reliance on renewable energy is creating widespread uncertainty in the electricity supply chain.

With many nuclear power stations and coal plants ending their lives and being taken out of service we “can’t rule out” people being left without power. The real problem is the cost of making sure this does not happen, and Britain’s lights “do not go out”, he warned.

The country is going to have to make a choice whether to go along with green ideas of renewable generation or go back to coal and nuclear power.”

This guy is right we hope that he gets a little more air time.


Have a good one.

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

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

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

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



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

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


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

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

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

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

Thursday
Jul152010

Porter Stansberry: “We Can’t Live without Gulf Oil”

Gulf Oil Spill 16 July 2010.jpg

Source: Karen Roche of The Energy Report 7/15/10
http://www.theenergyreport.com/cs/user/print/na/6811

Tragic as the situation is, "everything is going to be okay" in the Gulf of Mexico, according to Stansberry & Associates Investment Research Founder Porter Stansberry. Porter, who built his reputation on finding safe-value investments poised to give his followers years of exceptional returns, also has a reputation as an independent thinker with a penchant for "out-of-consensus" viewpoints. He shares some of his contrarian opinions in this exclusive interview with The Energy Report. Porter sees no risk of bankruptcy or default with BP, the Macondo emerging as an enormously beneficial well, and more drilling there in the future because 1) there are no good replacements for oil and 2) "we can't live without oil from the Gulf."

The Energy Report: The major discussions on the energy front in the United States seem to lead to a single conclusion, that we have to start using domestically generated alternative sources of energy and stop relying on foreign oil. We all know the hot topic since April. What are your viewpoints on the impact of this disaster—not only on the Gulf of Mexico, but also on BP (NYSE:BP; LSE:BP), deep-sea drilling and on the energy sector?

Porter Stansberry: First, full disclosure. I have recommended to my subscribers Anadarko Petroleum Corp. (NYSE:APC), BP's partner in the well that's leaking in the Gulf, and I personally own shares in BP. I bought my stake in BP recently because I don't believe the total costs of cleaning up the spill will be material to the company's earnings over the next decade. I think BP today is a phenomenal opportunity for any investor who has the emotional wherewithal to handle some volatility.

If you look at BP's debt, it barely budged. BP's bonds fell a bit more than 20%, with prices never falling below $80. Currently BP's debt is yielding 5.9%. There's no real risk of a bankruptcy or default. Folks like Matthew Simmons saying bankruptcy was likely was simply laughable. BP generates $30 billion a year in cash from its operations, and the total cost of the cleanup will not exceed $30 billion. I just don't believe it. So I think BP is a fantastic buy at current prices, and I recommended Anadarko because the way my publishing company works, we're not allowed to recommend things that we own ourselves, and I think Anadarko is a lot less at risk. I gave what I think is the better play to my readers.

TER: How is Anadarko a better play?

PS: Anadarko has fallen more than BP has, and it has even less exposure to this well. It only owns 25% of it. Even if you assume that Anadarko will be responsible for 25% of the cleanup costs, in my estimation, you're still only looking at a total bill of between $3 billion and $5 billion. That's very affordable for Anadarko. But more importantly, Anadarko has a fantastic case in that it doesn't owe a penny of the cleanup because from what we already know, it seems 100% certain that BP was negligent in operating this well. Pretty much everyone who's looked at the facts has said so, including some independent guys I hired to look at the situation. So I think Anadarko will walk away from this thing without a penny lost.

It hasn't occurred to many people yet that this one well is producing about 30% of Anadarko's entire global production. I mean this thing is a monster, and they're going to get it under control. Meanwhile, Anadarko owns something like 3 million acres around this well. They are the largest independent operator in the deepwater gulf. And they're going to drill more wells eventually. I think we'll see a big turnaround in this whole process. I think the well can be cleaned up; I don't think that it's a disaster of the scope that people are saying. And I think the discovery will eventually lead to large increases in production for Anadarko.

Look at what happened in the Persian Gulf when Iraq's troops withdrew from Kuwait. You're talking about a much smaller body of water and you're talking about much, much larger volumes of oil that were spilled—in that case deliberately—into the water. Nobody paid to clean it up. They just left it. Nature took its course, the oil eventually was broken down and everything was fine. Going back there two or three years later, you couldn't even tell it had happened.

Listen, I am not saying it's not a tragedy; I'm not saying we shouldn't try to prevent it from happening, but I am saying it's not the end of the world. There have been spills this big in the Gulf of Mexico before, and they didn't destroy it. [Editor's Note: As of the date of this interview, (6/29/10), the Deepwater Horizon Gulf oil spill had not surpassed the Ixtoc 1 oil spill (6/3/79) in the Gulf.] Everything is going to be okay. But if you turn on the news right now, you'd think the entire Gulf of Mexico is a big boiling pot of oil and that the whole Gulf Coast will never going to be the same. I just don't believe those things are true.

TER: But perception is reality when it comes to regulation. In that context, why wouldn't this have the impact on oil that Three Mile Island had on nuclear?

PS: That's a good question, but if you believe the government is here to protect us, I just think that you're naïve. There's no doubt in my mind that the companies supposedly being regulated are easily capable of influencing those regulators, through lobbying or simply the essential corruption of the entire government-corporate structure, especially in the oil business. And then finally, like it or not, we can't live without the oil from the Gulf.

Will there be regulations? Sure. Is it going to be harder for smaller companies to be entrants into that marketplace? Absolutely. But is that bad for BP or Anadarko? No, it's good for them. If their costs go up, guess what else is going to go up? The price of oil will, so those are passed on to you and me.

TER: Meanwhile, in the wake of this spill, many people are talking more about alternative ways of getting oil. For instance, I've seen oil shale discussions on morning TV. How realistic is it to expect more production out of tar sands, etc.?

PS: Well, the Eagle Ford shale has a lot of condensate in it, which isn't necessarily oil, but actually in some cases is more valuable than oil because it's easier to crack it into gasoline. There's already a lot of natural gas liquid production today in various shales across the country, and I expect big increases in that.

I have an out-of-consensus view here, but my sources—all practicing oilmen in Texas who own land in the Eagle Ford and have drilled wells there themselves—tell me that they believe the Eagle Ford will be the largest single oilfield in the history of the United States. And they said oil, not natural gas. They're talking about natural gas liquids, which are just as good as oil—or as I indicated, even better in a lot of cases.

TER: That sounds like good news.

PS: Depending on your outlook, I'm afraid it means that natural gas prices will stay depressed for a very long time, but it's definitely going to be a big game-changer for domestic, onshore production. Just last month, Reliance Industries Ltd. (BSE:RIL), the biggest conglomerate in India, paid around $1.3 billion for 40% of Pioneer Natural Resources Co.'s (NYSE:PXD) Eagle Ford property. China hasn't bought anything in the Eagle Ford, but they will. I personally think they're likely to buy Petrohawk Energy Corporation (NYSE:HK). I have no evidence of that, just an instinct. Petrohawk has some of the best properties, but China is probably the only one willing to pay the very high price they're demanding. So that's the next deal I expect. You're definitely going to see a lot more deals.

TER: What stands out about Petrohawk?

PS: I think its first year's drilling campaign was in 2009, and they drilled something like 28 different holes without a single dry one. When you have no dry holes, the return on your capital from your drilling program is vastly higher. It's a whole new ballgame. It's just vastly more efficient and therefore the eventual profit margins from production will be even higher than they already are.

In my mind, horizontal drilling and the existence of liquids in these shales is the game-changer for the energy business, and I really don't think people appreciate how big a change it's going to be or how large the production from these fields is going to be. But there is one big hiccup in all of this.

TER: What's that?

PS: There are a lot of environmental concerns about the fracking process, and I don't think that they're going to go away. Thus, I anticipate much tighter controls going forward on the horizontal drilling technologies that these companies have been using, which will make drilling progressively more expensive. Right now a single well costs them about $5 million to drill, but it wouldn't surprise me at all to see the price increase significantly to $10 million or $15 million per well just because of the costs of using these chemicals and making sure they get cleaned up.

TER: Does this provide an investment opportunity—looking at the drilling companies as opposed to the oil producers?

PS: That's a tough question. When you can buy a drilling company at a 50% discount to the value of its rigs, it's a good buy, but drilling isn't a high-margin business, so they inevitable trade at a huge discount to book as soon as the price of the commodity falls. In my mind, that makes them really speculative for the average investor. I think it makes more sense just to buy the companies with the best acreage in the field, and sooner or later you're going to make a lot of money. Even if it takes a long time to get all the holes drilled, the resource is there.

I don't think most investors appreciate that there aren't any dry holes in these fields because they use seismic technology to look before they drill. They know the exact depth of the shale and once they know they're in it, they just drill sideways.

TER: You talked about how massive Eagle Ford is. Are other fields in the U.S. exciting much discussion?

PS: Absolutely. And they're pretty much all over the place. I think they have shale gas production now in 30 different states. The big ones are the Marcellus, Haynesville, Barnett and the Bakken. I think the difficulty is trying to produce these wells in a way that isn't very destructive to the environment, because horizontal drilling and the fracking process are very disruptive to groundwater supplies. They have to be really careful where they do this kind of drilling to avoid the risk of contaminating a large reservoir.

TER: Considering the contamination in the Gulf of Mexico, and the risks to groundwater in horizontal drilling for oil, why isn't there more focus on alternative energies? Or, considering that we have so much natural gas, why not focus on going to natural gas instead of oil?

PS: To get the natural gas out involves a lot of environmentally risky things, too, because these shales are tight rock formations, and you can't just drill a hole in them. You have to blast them apart, and blasting underground rock apart using high-pressure liquids inevitably risks busting through into underground aquifers, which can lead to a lot of problems. There are places where people can light their water on fire now when there's been drilling nearby.

So even natural gas is not risk-free, and I think it's absurd for the American people to believe that you can have natural gas at $4 and not take any risks in your discovery and drilling programs. I am not saying we should take silly risks. But look, how long have we been drilling in the Gulf of Mexico, and how many accidents have there been? The safety record's pretty damn good. Are we going to get rid of commercial airlines because sometimes they crash? You can't go on without taking any risks.

But as far as the answer to your more important question, we can't get off oil because oil is a fantastic source of energy; relatively inexpensive to find and produce, extremely dense and portable. There aren't any good replacements. Other ideas that people have put forward are not very workable. For example, the notion of powering the entire transportation infrastructure of the United States with electricity is complete nonsense. If everyone plugged in their automobiles and trucks, the entire grid would melt.

Where would that electricity come from? How many more coal-fired power plants would we need to build if everyone tries to plug in their vehicles? If you do the math, it's a very large number. We don't have the capital to build them, and couldn't survive the pollution from the coal. So there are no cheap and wonderful and easy solutions. Solar power is not going to amount to anything, despite Al Gore's claims to the contrary—certainly not in the next decade, and probably not in my lifetime. It's just too incredibly inefficient, and, of course, it doesn't work when the sun isn't up.

Likewise with windmills. How many windmills would you have to build just to replace the existing coal-fired power plants? It's an absurd number; it's not feasible; it's not economic. Not compared to a huge well like BP and Anadarko discovered.

TER: In our last conversation related to energy in December, you didn't really see anything happening in coal and natural gas, either, nor at that time, in the nuclear arena. You didn't see any of those as representing any realistic investment opportunities. Do you still feel that way?

PS: I tell you what I am getting very, very bullish on, the shares of a leading nuclear power company in the United States, Exelon Corp. (NYSE:EXC). I've recommended it to investors in my newsletter for many years. We bought it at $21/share or something like that after the correction in the tech boom in 2002, and it pays a really nice dividend, $2.10. We're getting paid 10% a year just to hold the stock, and meanwhile it's a regulated utility. There's no way it's going out of business, and if you buy it at the right price, it's a wonderful long-term investment.

It hasn't been at the right price for a very long time, but right now you can buy it for about five times cash earnings, and the yield on the stock is 5.5%. We're in the range where I would be willing to allocate capital to Exelon's common stock. It's the largest operator of nuclear power plants in the United States, and I certainly believe that going forward nuclear power is the only realistic alternative to coal-fired power plants. It's the only way to generate enough electricity at a reasonable price.

TER: Are there other nuclear facilities, or nuclear companies, that you also see as also being undervalued at this time?

PS: I am sure the large-cap nuclear stocks are all going to be pretty cheap. Another large operator I like a lot is Duke Energy Corp. (NYSE:DUK), which is probably roughly the same in terms of price and value as Exelon right now. I just happen to like Exelon better because I have owned it for longer, and it's actually cheaper than Duke when you look at it on an enterprise value basis. When you get 5.5% owning the best nuclear operator in the U.S., you don't have to look anywhere else.

TER: That's true. A moment ago, you said that nuclear is the only way to generate enough electricity at a reasonable price. If that's the case, do you foresee a play in uranium again, as there was three or four years ago?

PS: That's a whole different question. To tell you the truth, I just haven't looked at uranium. Some analysts I'm friendly with follow it, but I haven't been excited about uranium in a long time. At the New Orleans Investment Conference in 2007, I put up a chart on uranium and said, "This is the biggest bubble in the world." I was maybe 60 days early and the whole thing just collapsed. I am not saying you can't make a lot of money in uranium mining, because I am sure you can. To buy a uranium producer, though, you've got to really know a lot about the quality of the ore and that goes well beyond my expertise.

TER: Any other insights you would like to give to our readers?

PS: We have been in such a bizarre period since 2006. Nothing makes any sense in terms of economics or finance globally. It didn't make sense for people to be able to get a 30-year mortgage with no income, no job and no equity in the home. We haven't yet recovered from all of that and other nonsense that's been going on, and it continues. It doesn't make sense for General Electric Company (NYSE:GE) to be levered 30 times tangible equity. It doesn't make sense for America's largest and most important conglomerate to have that much debt. It doesn't make sense for a country like Italy, which has a horrible record of repaying creditors, to be able to borrow 110% of GDP. So we have all these things that just don't make any sense going on, and then people ask, "What should I do with my money?"

And the thing to do, my friends, is be very, very careful because there are tremendous panics and volatility to come. We are a long way from the lifeguards coming out and declaring the "all clear." So be very, very cautious; don't be upset about having a large cash position. I told my readers earlier this year that if they weren't prepared to put half their portfolio in short stocks, if they weren't prepared to truly hedge themselves this year, that they should be 50% in short-term Treasuries and 50% in gold. That's the only way to have a totally safe cash position, because you're hedged with the gold versus the dollar. I am happy to sit in that position for a long time until I see some terrific values.

TER: Porter, once again, we appreciate your time and your insights.

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

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

DISCLOSURE:
1) Karen Roche, publisher of The Energy Report, conducted this interview. She personally and/or her family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Porter Stansberry: I personally and/or my family own shares of the following companies mentioned in this interview: BP. 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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From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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Have a good one.

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

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

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

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



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

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


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

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

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

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



Wednesday
Jul142010

Mini Nukes Event in Arlington

Hyperion plant.jpg

EUCI Conference on Small and Modular Nuclear Power Reactors to Offer Complete Story on the Promising New Industry
 
Just one more week before the July 19-20 event in Arlington

Washington, D.C., July 12, 2010 - Promising an enlightening break from routine Small Modular Reactor conferences, EUCI says it has scheduled a unique slate of speakers that will address new information and the untold story of the promising industry. "Licensing is important, but there's much more to the story of this exciting and promising industry than just the licensing," said Vince Gilbert, Chief Knowledge Officer at Excel Services who is one of the speakers. "This conference will provide some interesting information and view points that have not been fully explored before." 
 
In addition to Gilbert, speakers will include Hyperion Power's CEO John Grizz Deal, Former Assistant Secretary of the USAF William C. Anderson, Hawaii Senator Fred Hemmings, High Bridge Associates' Phil Moor, The Chamberlain Group's Andrew Marchese, global law firm Hogan Lovells' Mary Anne Sullivan and Daniel Stenger, David Johnson of ABS Consulting, and Jay Harris from Bruce Power among others. Special panels are set to include the U.S. Nuclear Infrastructure Council's David Blee, The Pegasus Group's Ed Davis, Annie Caputo of the U.S. Senate Committee on Environment and Public Works (invited), Frank Caliva of the Department of Commerce's Office of Energy and Environmental Industries, Paul Murphy from Milbank, Tweed, Hadley & McCloy, and Ajay Kuntamukkala from Hogan Lovells.
 
EUCI's Small Modular Nuclear Reactor Systems Symposium will take place July 19-20 at the Hyatt Regency Crystal City in Arlington, Virginia. 
 
While the conference will cover all the leading technologies for the burgeoning SMR industry, special attention will be paid to those that have not been at the forefront of publicity yet offer new advancements in science and engineering, and benefits to the end user. One such example is the new sub-classification of SMRs known as Mini Power Reactors aka MPRs.
 
The Hyperion Power Module (HPM), under development at U.S. Los Alamos National Laboratory (LANL), is one of the designs categorized as a Mini Power Reactor (MPR). The 25 MWe reactor utilizes the known components of uranium nitride fuel and lead bismuth eutectic as a coolant that eliminates the need for a location near a source of water. Hyperion Power Generation Inc. is a New Mexico-based small business "spin-out" from LANL that is paying for and utilizing the "brain trust" of the lab through a CRADA (Cooperative Research and Development Agreement).

Hyperion Logo 20 Nov 09.jpg


EUCI is a leading power and utility training firm offering a number of pertinent conferences this summer including its "Nuclear Power Fundamentals" course in Chicago in July, and "Nuclear Power Plant Operations" and a "Nuclear Power Probabilistic Risk Assessment" course, both in Atlanta in August. More information can be found athttp://www.euci.com.
 

Press Contact:
David M. Hickey
EUCI, Training Producer
dhickey@euci.com
Phone: (720) 988-1239
Fax: (303) 741-0849
www.euci.com



Have a good one.

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

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

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

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



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

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


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

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

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

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

Saturday
Jul102010

Uranium Stocks Update 11 July 2010

Uranium Spot Price Chart 11 July 2010.jpg

The average spot price for uranium has remained steady for most of this year as the above chart from u308.biz indicates with the long term uranium price currently standing at $60.00/lb according to uranium.info. The sector remains flat for uranium stocks with very little in the way of movement other than a general drift to lower stock prices.

Long Term Price Indicator 11 July 2010.jpg

From time to time we see the odd sign that things are moving in this tiny sector or a recommendation to buy a particular stock hits the air waves which is all fine and dandy but the fizz soon dissipates as this sector is still not in vogue and therefore continues to be ignored. There are many examples of this lack of popularity as you are probably aware if you own some of these stocks including Cameco Corporation (CCJ) whose stock price has fallen from around $32.00 at the start of the year to close on Friday at $22.84. Another hot stock, Extract Resources (ASX:EXT) traded just a tad above $11.00 last September, closed on Friday at $6.95. Some of the smaller stocks have also been hammered and now trade at what appear to be silly prices. Is this a buying opportunity you ask? Well it could be, but until we some really positive signs of a turn around we prefer not to put any more cash into this sector. How long do have we to wait, maybe a year or so as this pattern of consolidation continues to move sideways.

Maybe there is a pleasant surprise waiting in the wings which would be most welcome, however, for now we will remain in observation mode until an opportunity presents itself.











Have a good one.

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

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

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

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



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

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


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

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

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

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

Friday
Jul022010

The Hungry Dragon: China’s New Oil Market

The Hungary dragon 02 July 2010.jpg

By Marin Katusa, Chief Investment Strategist, Energy Division

If you ever happen to eavesdrop on a conversation between energy investors, two words are sure to crop up – China and oil. Usually, they’re used together and usually, it’s about China’s increasing presence on the global oil scene.

It’s a pretty safe bet that, as one of the world’s fastest growing economies, China needs a lot of energy. And with an oil appetite that grows by 7.5% each year, seven times faster than the U.S., the country’s reserves don’t even begin to compare to the consumption.

But fuelling the blistering pace of its economy is China’s number one priority, and it is on a mission to lock down its energy interests all around the world. The emerging powerhouse has often felt that it was the last one onto the energy playing field with a lot of catching up to do.

Today, Chinese national oil companies (NOCs) are setting up shop everywhere from the Middle East all the way to the oil sands of Canada, and they’re open for business. The three NOCs – CNPC/PetroChina, Sinopec and CNOOC Ltd – are slated to produce a record breaking one million barrels daily. That’s Australia’s daily fuel consumption!

It isn’t just their oil production that’s going through the roof. Since 2009, China has committed nearly US$25 billion into corporate and asset acquisitions. China isn’t going it alone either, and fully realizes the importance of forging partnerships with other international oil companies to develop oil fields.

And with Beijing firmly behind them, they’re only doubling their efforts this year. Chinese NOCs accounted for nearly 20% of all global deal values in the first quarter of 2010. This share will only get bigger as the year carries on and energy security continues to dominate the agenda.

Armed with strong finances, an aggressive approach, and implicit government backing, Chinese companies are well placed to spearhead the nation’s mission of diversifying its international energy portfolio. The latest thing to catch their attention: the mysterious oil elephants of East Africa.

Hunting for Elephants: Fortune Favours the Bold

Africa might be the last place left on Earth where elephant deposits – very large oil and gas deposits – remain to be found. But contrary to popular belief, the real money in African oil is not in the West nor the North, but thousands of miles away in East Africa.

It is here that one of the last oil elephants of the world waits. A lack of significant discoveries and long-term instability left the region largely unexplored and ignored for the last 50 years. Until last year, when Irish giant Tullow Oil found over two billion barrels under the waters of Lake Albert, Uganda.

The excitement running through the region’s oil market at the moment is palpable. The first annual Eastern Africa Energy Week held this year in Nairobi, Kenya, was resplendent with the heavyweights and superstars of the oil business; prominent amongst them were delegates from China’s CNOOC, who were out in full force. That they were all there to study strategies, policies and regulation, and the critical issues facing companies in the market shows exactly how seriously they’re taking East Africa.

In a region where the market is populated largely by smaller-cap firms hoping to get in on the ground floor of emerging energy-nations, the takeover potential is enormous. It’s no surprise then that CNOOC is jostling with the big names of oil exploration in Africa – Tullow, Total SA, and Anadarko – to get a slice of what could be an energy goldmine.

But East Africa will be no cakewalk for oil explorers. They will face a multitude of challenges and there is risk by the bucket in each venture. Only those companies with the right project locations and the right people to execute business plans in the difficult working conditions of East Africa will survive to win the jackpot. So pick your portfolio wisely and buckle up for this jungle ride… it’s going to be intense.

[Ed Note: If you aren’t already investing time in understanding the developing opportunities in energy and energy-related investments, you risk missing one of the most important big trend profit opportunities of the next 20 years. Casey Research offers several research services that are dedicated to the sector, including our baseline Casey’s Energy Opportunities. Sign up today and you’ll get 12 issues, including Chief Investment Strategist Marin Katusa’s carefully researched picks, for just $39 a year – just over $3 for each issue. Add to that a 90-day 100% money back guarantee, and it’s a no-brainer. Details here.]






Have a good one.

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

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

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

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



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

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


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

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

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

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

Thursday
Jul012010

Michael Blum: ABCs of MLPs

Source: Brian Sylvester of The Energy Report 7/1/10
http://www.theenergyreport.com/pub/na/6697

Interested in long-term, high-yield investment plays with certain deferred tax advantages? Master limited partnerships (MLPs) may be for you. Even through the recent downturn, most MLPs were able to maintain distributions and fund capital projects—especially investment-grade names. MLP units are traded on public exchanges just like corporate stock. "The difference," says Wells Fargo Senior Energy MLP Analyst Michael Blum, "is that MLPs are structured as partnerships." In this exclusive interview with The Energy Report, Michael explains the ins and outs of MLP investing and provides some names to get you started.

For a list of MLPs, check out The Energy Report's new MLP Directory.

The Energy Report: Some of our readers may not know how MLPs work. Please give us an overview of the sector and some advantages and disadvantages of investing in MLPs.

Michael Blum: Master limited partnerships are high-yielding publicly traded entities, which trade on major exchanges similar to a corporation. The difference is that MLPs are structured as partnerships; they don't pay corporate taxes at the partnership level and investors avoid double taxation. Investors receive cash distributions instead of dividends.

To be eligible as an MLP, the partnership has to receive at least 90% of its income from what's called qualifying sources (natural resources, real estate rents and dividend income). For practical purposes, MLPs are involved mostly in the energy sector—of the 91 publicly traded MLPs, 71 are involved in energy. Most energy MLPs provide midstream services (i.e., they handle various commodities for a fee). Many MLPs operate pipelines and storage facilities, so they generate pretty stable cash flows with little direct commodity risk.

MLPs distribute available cash flow—cash left over after paying debt service, maintenance, etc.—at the end of each quarter to their unit holders. Therefore, MLPs have pretty high yields, averaging between 6%–8%.

TER: Explain the tax advantages.

MB: The basic value proposition for an MLP investor is a low double-digit annual total return consisting of a 6%–8% yield with 3%–5% annual distribution growth and certain tax-deferred advantages. Investors are required to pay tax on only 20% of that distribution, typically. The rest of the tax is deferred until the investor sells the security, which could be many years in the future. From a tax perspective, it can be very efficient for investors.

TER: Does that mean that MLPs are long-term investments?

MB: Yes, I would consider them long-term investments; they certainly own long-lived assets. About 70% of MLPs are owned by retail investors, and retirees own them for the income.

TER: Recent healthcare legislation will tax dividends for people making more than $200K/year but will not affect MLP distributions. I suppose this makes MLPs even more attractive.

MB: Yes, the recent 3.8% tax on interest dividends, annuities, etc., which also includes families earning more than $250K. This will not impact MLPs in terms of their distributions. On a relative basis, yes, the MLPs become more attractive.

TER: What are the risks?

MB: MLPs present some additional tax-filing burdens that you don't find with C-Corp investments. MLP investors receive K-1s instead of 1099s because they're partners in a partnership–not corporate shareholders. MLPs also have relatively low liquidity in terms of trading volume, so they're not easy to trade in and out of if you want to take large positions. Large MLP positions shouldn't be held in IRAs or tax-free accounts because they generate unrelated business taxable income (UBTI), which triggers tax consequences if it exceeds $1,000 per year.

In terms of actual investment risk, there are some legislative risks. For example, many of these are oil and gas companies and current, proposed legislation could impact them. MLPs are also very reliant on access to capital markets; when those markets become stressed, the MLPs tend to trade poorly.

TER: So, were MLPs a bad place to invest in the 2008 market crash?

MB: Everywhere was a bad place to be in 2008, including MLPs. But if you just owned MLPs for income, about 80% maintained or increased their distributions during that period. MLP prices declined precipitously in line with the market. From that perspective, it was not a great place to be.

TER: But unit holders still received distributions. Are you saying that MLPs are pretty much bulletproof in terms of economic downturns?

MB: Nothing's bulletproof, but certainly most MLPs that own pipeline assets have very stable cash flows and have—over many different economic and commodity-price cycles—been able to maintain and even grow their distributions. Some MLPs have more commodity price risk, and some of those were forced to cut or eliminate distributions during the last downturn.

TER: You said there is a legislative risk. Is there an MLP lobby?

MB: The National Association of Publicly Traded Partnerships (NAPTP), a trade association, represents publicly traded limited partnerships. They lobby on behalf of the MLP sector; and, historically, have made a good case for leaving MLPs' tax status intact.

TER: In your research, you said a lot of an MLP's performance is determined on a macro level. Moody's recently downgraded Greece's credit to junk and oil prices are projected to be relatively soft through 2010 and into early 2011. How will that affect the MLP sector?

MB: We have a relatively cautious near-term outlook on MLPs for those reasons. The correlation between high-yield credit spreads and MLPs is quite high. Because MLPs are yield products, they move in sympathy to yield spreads. MLPs pay out most of their cash flows in the form of quarterly distributions, yet they're growing by acquisitions and new pipeline and asset investment. They must have access to debt and equity markets to fund those investments. MLPs are very sensitive to happenings in the equity and credit markets. Credit spreads are continuing to widen due to Eurozone issues, which could put more pressure on MLP prices. Commodity prices also play a role, as some MLPs have direct commodity exposure. Generally speaking, MLPs move in sympathy with commodity prices because they are energy companies; so, weaker oil prices imply lower MLP prices.

TER: Given that many MLPs are energy companies, will the Gulf of Mexico (GOM) spill impact the sector?

MB: Very little. Only a handful of MLPs have direct exposure to the Gulf.

TER: You follow a number of segments within the MLP sector: large- and small-cap pipelines, upstream, propane and shipping. Please provide an overview of these sectors and the investment opportunities there.

MB: Let's start with pipeline MLPs. There are different types of pipeline MLPs—crude oil; natural gas; natural gas liquids (NGLs), which are produced in association with natural gas, and refined product pipelines. They all have different characteristics but, in general, they generate mostly fee-based cash flows. Sometimes they're driven by volumes, but often they're regulated with automatic adjusters for inflation. Generally, pipeline MLPs are the lowest risk; sometimes their growth is more modest, but still relatively healthy at 3%–5%.

Gathering and processing MLPs collect and process—remove impurities—and separate the NGLs. The natural gas is then pipeline-ready, and is shipped via larger pipelines to consuming markets. NGLs are shipped on a separate pipeline grid for their markets. NGLs include ethane, propane, butane, isobutene and natural gasoline; and each has its own distinct market. Ethane is used by the petrochemical industry to make plastics. Propane is also used in that industry, primarily as heating fuel for homes. The others are used in the refining and gasoline-production industries. Gathering and processing MLPs have higher yields and more risk, as they have more direct exposure to commodities and natural gas production trends.

Upstream MLPs are traditional oil and gas producers actively drilling for oil and gas. Upstream MLP properties differ in that the reserves they own are typically mature, low-decline assets. . .the boring stuff. They make good MLP assets because they throw off relatively predictable cash flows. Upstream MLPs also have the most commodity exposure and, typically, the highest yields; however, they do hedge for several years out to mitigate that commodity price exposure.

Propane MLPs distribute propane via propane-delivery trucks to residential tanks. Companies are able to adjust their margins as propane prices change, so there's not much direct commodity exposure; so propane MLPs have been pretty defensive investments in downturns. The main risk is weather; these MLPs are dependent on cold winters.

Shipping MLPs cover domestic and international shippers—oil, liquefied natural gas (LNG), etc. Local shippers ship refined products and crude oil only around local markets, up and down rivers and between states.

TER: It seems like they were created as a way to invest in infrastructure.

MB: Yes, Congress created MLPs with these special rules to encourage energy infrastructure investment. Over the last five to seven years, there's been a multi-billion dollar buildout in natural gas pipelines. The MLPs have been spending most of that capital and building most of those pipelines. So, in terms of attracting private capital to build the U.S. pipeline infrastructure, it's worked.

TER: Have you seen corresponding growth in the number of MLPs over the last few years?

MB: Tremendous growth. In 2000, there were 18 energy MLPs and the sector's market cap was $16 billion. Today, there are 71 energy-related MLPs with a combined market cap of about $180 billion.

TER: Can you explain the difference between general and limited partners?

MB: MLPs are structured with a general partner and limited partners. The general partner controls and manages the MLP and, typically, owns a 2% equity interest. The limited partners provide capital. General partners own incentive distribution rights; that is, they're entitled to an increasing percentage of incremental cash flow as they raise the distribution to limited partners at incremental rates. This provides incentive for the general partner to raise distribution levels to limited partner unit holders. Almost all MLPs have a general partner. In recent years, some MLPs formed without general partners and incentive distributions rights (IDRs). Or some MLPs eliminated their general partner or IDRs.

TER: Basically, it's like a managing partner. What's the maximum they can own?

MB: I don't think there's any maximum; most own only a 2% interest, but the incentive distribution rights entitle the general partner to receive up to 50% of incremental cash flow. They start out at 2%, then, when the distribution reaches a certain level, the general partner is entitled to 15% of the incremental cash, then 25%, and then 50%. Most general partners own a large percentage of limited partner units, as well; so they are aligned with the limited partner unit holders from that standpoint.

TER: In a recent research report, you wrote: "For investors that are more cautious in their macro outlook we would focus more on the large-cap defensive pipeline names." You named the following companies in your research: Enterprise Products Partners L.P. (NYSE: EPD), Kinder Morgan Management, LLC (NYSE:KMR), Magellan Midstream Partners L.P. (NYSE:MMP), Sunoco Logistics Partners L.P. (NYSE:SXL). Tell us about those names.

MB: During periods when there's more risk aversion, the investment-grade pipelines tend to outperform on a relative basis. Enterprise Products Partners is the largest MLP in the sector. It has a franchise position in pipeline and storage, and fractionation in the NGLs market. We think EPD can grow distribution about 6% annually for the next several years. A lot of that has to do with where its assets are located, as well as some expansion projects it's pursuing. EPD is expanding a pipeline out of the developing Haynesville shale and its NGL assets at Mont Belvieu, Texas, which is the premier market and pricing point for NGLs. EPD is very well-positioned and cash flows are very stable, in our opinion.

TER: What constitutes an investment-grade MLP?

MB: There are only 13 investment grade-rated MLPs, which are primarily the large-cap pipeline MLPs. The rest of the MLPs are non-investment-graded or "junk." The yields on these MLPs are higher because there's more perceived risk and, as a result, their cost of financing is higher for both debt and equity. To the extent that an MLP can move from non-investment-grade to investment-grade, that should improve its valuation and capital cost. It's a big advantage.

TER: Alright, what's the yield from Enterprise Products?

MB: 6.6%.

TER: How long will that continue?

MB: In general, we forecast the stock should continue to yield somewhere around 6%–7%, with roughly 6% annual distribution growth. We think that's sustainable for several years.

TER: What about Kinder Morgan?

MB: Kinder Morgan is another one of the franchise MLPs in the sector. It has a large natural gas pipeline business, a refined product pipeline segment and a terminal storage business, wherein they store and handle various materials for a fee, as well as an oil production company. The cash flows are also relatively stable. Kinder Morgan Energy Partners, L.P. has two securities, Kinder Morgan Energy Partners (KMP) and Kinder Morgan Management (KMR). KMR pays a stock dividend instead of a cash distribution. As a result, KMR, which pays the stock dividend, does not generate a K-1. It eliminates a lot of tax-filing requirements that some investors don't want to deal with. We think the distribution there is secure and is probably going to grow around 4%. We prefer KMR to KMP because it priced more attractively and the distribution is based on the same assets and underlying cash flow stream.

TER: Magellan?

MB: Magellan Midstream Partners is a refined product pipeline and storage company. Again, stable cash flows, very strong balance sheet, in our opinion. What attracts us to Magellan is its acquisition prospects. The oil majors such as Chevron Corp. (NYSE:CVX), Exxon Mobil Corp. (NYSE:XOM) and ConocoPhillips (NYSE:COP) and others have announced plans to sell some of their midstream assets in the U.S. as a way to raise cash. We think the MLPs and Magellan in particular, due to the elimination of its IDRs, are well-positioned to acquire some of those assets. This should lend itself to higher distributions in the future.

TER: What's the yield on Magellan?

MB: The yield at present is 6.4%.

TER: And Sunoco?

MB: Sunoco is also in the refined product and crude oil pipeline and storage business. What's unique there is the company has a lot of organic opportunities. It has assets in the Gulf Coast and Northeast that are in growth markets. As a result, SXL is spending money to expand its asset base. Therefore, you can point to visible 10%+ distribution growth for the next couple of years. You've got a stable yield at 6.5% with 10%+ growth in distributions. We think that'll enable the partnership to outperform.

TER: Are there some other companies you would like to talk about in that space?

MB: The other one I might mention is Energy Transfer Partners. The company is principally a natural gas pipeline company. It has a number of interstate pipelines and also a large Texas intrastate pipeline system. What's unique about Energy Transfer is that management has done a really good job of positioning the company in many of the emerging natural gas shale plays in the U.S., such as the Barnett, Haynesville, Fayetteville and Woodford. ETP has many of the new pipelines that are delivering supply out of these new basins. Going forward, the partnership has a number of pipeline projects that are coming into service in 2011. So, as those come into service, we think you're going to see a step up in cash flows and, therefore, increases in the distribution. That stock has a very healthy yield right now of 8%.

TER: What are some of the smaller-cap MLPs that you like?

MB: I would first highlight a gathering and processing MLP, Regency Energy Partners L.P. (NASDAQ:RGNC). This company is going through a transformation. It originally owned mostly gathering and processing assets. Through acquisitions and organic expansion, RGNC added significant pipeline and compression assets—all of which are fee-based. It now generates roughly 70% fee-based cash flows and is only 30% exposed to gathering and processing. The partnership hedges its commodity exposure, so there is very little volatility in cash flows. Over time, we think this company has a good chance of becoming an investment-grade credit-rated company by virtue of adding the fee-based cash flows, strengthening the balance sheet and growing in absolute size. If it does achieve investment grade, we think you'll see a revaluation where the MLP will be revalued like a pipeline MLP, such as Kinder Morgan or Enterprise. Right now, it's yielding about 7.8%; but the thesis is that, at some point, that becomes a 6%- to 6.5%-yielding stock.

TER: Who decides if an MLP is investment grade?

MB: It's all up to the rating agencies but, in general, you have to have a certain size and scope, your cash flows have to be of a certain stability and your balance sheet has to be of certain metrics. From a size perspective, I think it's $250 to $350 million in EBITDA. From a balance sheet perspective, it means having a debt-to-EBITDA ratio of 4x or less; and from a cash flow-stability perspective, probably 70%+ fee based. By the end of 2011, we think Regency will meet all those requirements, but its rating will still be up to the rating agencies.

TER: Another one you seem to like is Blueknight Energy Partners L.P. (OTCPK:BKEP), a small-cap pipeline MLP.

MB: This is what we would call a 'speculative outperform-rated stock.' This is a turnaround story. The parent company of the MLP was originally a company called SemGroup Corporation, a private oil trading company in Tulsa, Okla. They had an MLP called SemGroup Energy Partners L.P. (OTC:SGLP). The parent company went bankrupt and was the MLP's primary customer. Control of SemGroup Energy Partners was acquired by Vitol, a global energy trading company, and the name of the MLP was changed to Blueknight Energy. The company's assets are crude oil storage and pipeline and asphalt storage. It's a relatively a low-risk, fee-based business. Right now, the MLP is not paying a distribution and, in our view, has too much debt. Our thesis is that Vitol will recapitalize the company by year-end. In doing so, Blueknight would reinstate additional distribution at $1.25 per unit, which should cause the stock to rebound nicely.

TER: What about some upstream MLP names like Encore Energy Partners (NYSE:ENP) and Legacy Reserves (NASDAQ:LGCY)?

MB: I'll start with Legacy. Legacy was created from a third-generation, family owned oil and gas business located in the Permian Basin in West Texas, which is one of the oldest oil-producing basins in the country. The two families took their Legacy business and put it into this MLP. The advantage is that these families have been operating in the Permian Basin for many years, so they know all of the well and oil-reserve owners in the region. Over time, they've been able to make acquisitions in the Permian Basin to grow cash flows. LGCY is mostly an oil company, so it's tied to the oil price. The partnership hedges about 70% of its cash flow for the first year out, and then decreasing levels going forward. Overall, we believe it's a well-managed, disciplined company with very attractive assets for this asset class.

Encore Energy Partners is interesting. Its general partner parent company was acquired by another publicly traded oil and gas company called Denbury Resources Inc. (NYSE:DNR), which has since announced plans to sell Encore. We think a number of MLPs, private equity firms and others will be interested in it. Encore has very attractive long-lived assets, mostly oil in the Permian Basin and Rocky Mountains. There's potential upside tied to a takeout of the MLP.

TER: How does a gathering and processing MLP differ from an upstream MLP? And what are some of your picks in the gathering and processing space?

MB: An upstream MLP is an actual oil and gas producer, whereas the gathering and processing company gathers the gas from the wellheads, processes it and strips out the NGLs, which are produced along with natural gas to ensure it meets pipeline-transport specifications. Some of our favorites? One we talked about already is Regency. Another would be Targa Resources Partners L.P. (NYSE:NGLS), which has gathering assets in several basins in North Texas, West Texas and South Louisiana. Over time, the volume on those assets has proven to be relatively steady even in what's been a difficult gas-price environment. Targa also has NGLs, pipeline and storage and fractionation assets, which lends a fee-based nature to some of its cash flows. So it's a better mix of overall cash flows and provides some growth opportunities (e.g., the partnership is expanding one of its fractionation facilities in the Gulf Coast right now).

TER: Fractionation?

MB: The NGLs are separated from the natural gas at a processing plant. They're in a mixed form. They're called mixed NGLs or Y grade. They're then transported to a fractionation facility where they're separated into the individual purity components. The ethane, propane butane, etc. are then sold to their individual markets. It's all part of the NGLs energy-value chain.

TER: Your research talks some about Energy Transfer Equity, L.P. (NYSE:ETE) Tell us about that one.

MB: Energy Transfer Equity is the general partner of Energy Transfer Partners. To make it even more confusing, it recently acquired the general partner interest of Regency Energy Partners as well. ETE now owns two general partner interests in MLPs. A general partner is attractive because its growth rate in cash distributions is 2x or greater than that of the underlying MLP, typically. You get a lower yield; but, in many cases, your total return could be higher than owning the underlying MLP. Also, in many instances, the management team owns a large percentage of the general partner, so your interests are more aligned if you own the general partner units. ETE is interesting because, on the one hand, Energy Transfer Partners, one of the MLPs it controls, has some future growth prospects tied to new pipelines going into service. On the other hand, Energy Transfer's management is very active in the acquisition market. The team plans to use Regency, potentially, as a vehicle for acquisitions. If it's successful, you could see cash-flow growth accelerate at ETE.

Michael J. Blum is a managing director and senior analyst at Wells Fargo Securities covering energy master limited partnerships. He began his Wall Street career in 2000 at First Albany Corp. as an associate analyst covering alternative energy securities and joined Wells Fargo in 2001. Since 2003, he has been following master limited partnerships and integrated natural gas securities at Wells Fargo. Before joining the sell side, he spent a year as the investor relations manager for a publicly traded internet startup during the dot-com boom. Michael has been recognized twice as a Wall Street Journal "Best On The Street" winner, ranking in two categories in 2010: No. 3 for the oil and gas producers sector and No. 5 for oil equipment, services, and distribution; he also ranked No. 4 for oil equipment, services, and distribution in 2007. In 2010, Michael was ranked as the No. 1 MLP analyst in the Greenwich Associates survey of institutional investors. In 2009, Michael was named the No.1 oil and gas pipelines analyst by Forbes magazine and was ranked as the No. 3 analyst for the master limited partnership sector in a survey conducted by Institutional Investor magazine. Michael graduated magna cum laude from the University of Pennsylvania with a BA in English literature and a minor in economics.

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DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Michael Blum: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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Additional Information Available Upon Request

I certify that:
1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.
Wells Fargo Securities, LLC maintains a market in the common stock of Energy Transfer Partners, L.P., Enterprise Products Partners L.P., Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC, Legacy Reserves, L.P., Regency Energy Partners, L.P., Targa Resources Partners, L.P.
Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Encore Energy Partners, L.P., Energy Transfer Partners, L.P., Enterprise Products Partners L.P., Kinder Morgan Energy Partners, L.P., Legacy Reserves, L.P., Regency Energy Partners, L.P., Sunoco Logistics Partners L.P., Targa Resources Partners, L.P. within the past 12 months.
Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from Encore Energy Partners, L.P., Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Enterprise Products Partners L.P., Kinder Morgan Energy Partners, L.P., Legacy Reserves, L.P., Regency Energy Partners, L.P., Sunoco Logistics Partners L.P., Targa Resources Partners, L.P.
Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Encore Energy Partners, L.P., Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Enterprise Products Partners L.P., Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC, Legacy Reserves, L.P., Regency Energy Partners, L.P., Sunoco Logistics Partners L.P., Targa Resources Partners, L.P. in the past 12 months.
Encore Energy Partners, L.P., Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Enterprise Products Partners L.P., Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC, Legacy Reserves, L.P., Regency Energy Partners, L.P., Sunoco Logistics Partners L.P., Targa Resources Partners, L.P. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to Encore Energy Partners, L.P., Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Enterprise Products Partners L.P., Kinder Morgan Energy Partners, L.P., Kinder Morgan Management, LLC, Legacy Reserves, L.P., Regency Energy Partners, L.P., Sunoco Logistics Partners L.P., Targa Resources Partners, L.P.
Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Regency Energy Partners, L.P. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided nonsecurities services to Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Regency Energy Partners, L.P.
An affiliate of Wells Fargo Securities, LLC has received compensation for products and services other than investment banking services from Blueknight Energy Partners, L.P. in the past 12 months.
Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Energy Transfer Equity, L.P., Energy Transfer Partners, L.P., Regency Energy Partners, L.P. in the past 12 months.
Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Blueknight Energy Partners, L.P., Energy Transfer Equity, L.P., Legacy Reserves, L.P., Sunoco Logistics Partners L.P., Targa Resources Partners, L.P.
Wells Fargo Securities, LLC, is acting as financial advisor to Denbury Resources Inc in the announced exploration of strategic alternative surrounding its ownership interest in Encore Energy Partners, LP.
BKEP: Risks to our valuation range include counterparty credit risk, lower crude oil and asphalt volumes, and rising interest rates.
ENP: Risks to the units trading below our range include a dependence on acquisitions to fuel growth and partially offset the depletion of reserves, the inability to hedge at favorable prices, and rising interest rates.
EPD: Risks to EPD trading in our range include weakness in the petro-chem industry, low or negative frac spreads, and a decline or delay in deepwater GoM production.
ETE: Risks to ETE trading in the range include (1) unsuccessful execution of an acquisition or an organic growth project; (2) potential conflicts of interest; (3) competition in the Texas-Louisiana natural gas market; and (4) a decline in natural gas prices.
ETP: Risks to ETP achieving our valuation range include: (1) execution risk related to integrating acquisitions and completing organic growth projects; (2) negative outcome from third-party litigation; (3) competition in the Texas-Louisiana natural gas market; and (4) abnormally warm weather.
KMP: Risks to the units trading in our valuation range include (1) delays/cost overruns on expansion projects and (2) rising interest rates.
KMR: Risks to the units trading in our valuation range include (1) a final resolution to the SFPP rate case, (2) delays/cost overruns on expansion projects, and (3) rising interest rates.
LGCY: Risks to the units trading below our range include a sustained decline in crude oil prices and dependence upon acquisitions to fuel growth.
NGLS: Risks to the units trading below our valuation range include a slower-than-forecasted rate of dropdown acquisitions, a decline in commodity prices, and rising interest rates.
RGNC: Risks to the units trading below our valuation range include a slower-than-forecasted rate of dropdowns, a decline in commodity prices, and rising interest rates.
SXL: Risks to the units trading below our valuation range include customer concentration, refinery turnarounds, and rising interest rates.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLC's research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.

STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY
2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL

SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.

VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: 6/25/2010:

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Have a good one.

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

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Tuesday
Jun292010

Greg Gordon: Big Deregulated Utilities, Pt. II

Greg Gordon 23 June 2010.jpg


Source: Brian Sylvester and Karen Roche of The Energy Report  6/29/10
http://www.theenergyreport.com/cs/user/print/na/6669

Big deregulated utilities pay solid dividends and offer investors a means to leverage the ongoing economic recovery. But it's a complicated business; that's why we asked Morgan Stanley Analyst Greg Gordon to break it down in this exclusive interview with The Energy Report. In this second half of our two-part interview, Greg explains the difference between deregulated utilities and their regulated counterparts and shares some of his favorite names in the space. (Read Turn on to Big Utilities, Pt. 1.)

The Energy Report: As an investor in today's unpredictable economic environment, you don't really know what part of the economy might be taking off and what part might continue to be sluggish. Do non-regulated utilities represent a better general investment strategy than regulated utilities?

Greg Gordon: If you're looking to get more leverage to an economic recovery, you can own companies in the deregulated universe like Entergy Corporation (NYSE:ETR), a Gulf states utility that also happens to own a 5,000 MW fleet of deregulated nuclear power plants in New York and New England. Their earnings are exposed to the power price in that merchant portfolio and to a fairly significant degree.

The earnings profile of Entergy looks like it's going to decline over the next several years. They're going to earn about $7 a share this year. We think that declines to about $6.75 in 2012. But they're highly leveraged to a very small change in the power price. If I change my power pricing assumption by $5 per MW hour, it boosts their 2012 earnings nearly $0.45 a share. So if the economy is up in that region, their earnings stand to benefit; and right now, the stock is trading at just $74/share—not a very high multiple relative to what I consider cyclically depressed earnings.

TER: What is $5 per MW in terms of a percentage increase?

GG: In their region, that would be between 5% and 10%.

TER: What does that increase translate to in percentage of earnings?

GG: That would increase it $0.45 on $6.75; about a 7% increase. So they've got a lot of leverage to recovery and power markets; and the stock is certainly not expensive compared to where power prices are today, given that they could still earn $6.75 at current forward curves for power. And the stock is not at a very high PE multiple on that number—it's at 11x those earnings. It's also a very well-run company that's actually buying back stock right now; they've got extra cash flow, and they're buying back stock. It's now got a dividend yield of 4%.

TER: What are some other deregulated utilities you like?

GG: There are two that I really like. The first one is PPL Corporation (NYSE:PPL). The company's based in Pennsylvania, but they're actually quite diversified. They own utilities and power plants in Pennsylvania, some power plants in the Pacific Northwest and a distribution utility in the UK. PPL just announced the acquisition of regulated utilities in Kentucky— E.ON U.S. LLC (PKSHT:EONGY; Fkft:EOA), the parent company of Louisville Gas and Electric Company and Kentucky Utilities Company.

PPL stock has declined quite dramatically on the back of the acquisition announcement, because investors were initially unhappy with that decision. At around $25.50/share, the stock is overly discounting people's disappointment with the decision to buy those assets. In fact, the acquisition is reasonably strategic in that they're moving the business more toward being regulated and less diversified in order to mitigate earnings volatility. They're also buying assets in a region where a lot of capital spending is needed, and that means a lot of base rate opportunities.

The earnings power at PPL is declining much like Entergy's because commodity prices are low currently. So, the earnings power at PPL declines from about $3.40 in 2010 to about $2.50 in 2013; that sounds pretty bad, except the stock is trading at about $25; it's trading at 10x that number. The stock yields 5.5%; and, in this particular case, they also have exposure to recovery in the power price. So, a $5 change in power price, which would be around 10% in their market, would change the earnings power by $0.30 off of $2.55, or 12%. I think the overhang on the stock right now is that they have to finance these transactions, so they will be issuing equity between now and year-end. It looks very interesting to me, even if power prices don't go back up.

TER: You mentioned two that you like. What was the other?

GG: Sempra Energy (NYSE:SRE) is even less exposed to commodity prices. It is more of a de-risking story in that one of its biggest businesses is a joint venture (JV) European bank, the Royal Bank of Scotland (RBS). The company had a commodities trading JV wherein they traded gas and power domestically and oil internationally. How they wound up in those businesses is a long story, but the bottom line is government regulators forced RBS to divest of the trading businesses; Sempra had to divest as well, and is now in the process of selling them.

We think they're going to raise about $2 billion, buy back a $1 billion of stock and reinvest the remaining $1 billion into their core businesses, which are utilities in California and San Diego, pipeline systems, gas storage and liquid natural gas (LNG) terminals. So Sempra becomes this very complicated higher-risk sort of energy conglomerate, and it converts into a simpler infrastructure growth story.

We estimate earnings growth from around $3.50 per share to $5/share between 2010 and 2013; and the stock is trading at $46. Pipeline assets tend to trade at pretty good multiples, and their utilities earn very, very good returns and have a good earnings visibility. So, when the announcement of the asset sales comes out—and people believe that they've, fundamentally, got a window to de-risk the business—the stock will trade back up into the low $50 range. Right now, they're trading at this big discount because people are afraid they won't be able to find a buyer for those assets. I am confident that they will find a buyer. But, for the sake of argument, even if they couldn't find a buyer and had to wind down those businesses, the company could still get something close to $1.5 –$1.6 billion just winding them down. I like the risk-rewarded Sempra a lot. Again, it's more of a special situation that isn't that exposed to commodity prices but is more of a de-risking story.

TER: So, if you were a financial planner, it seems like you could effectively put investors into a utilities-only portfolio that would give them consistent earnings with limited risk—and still have fairly high growth potential. Would you agree with that?

GG: You can buy growth at a reasonable price in the utility space, and I think that's underappreciated. Utilities investors tend to gravitate towards big, liquid companies that simply pay high dividends but don't offer much growth.

Con Edison, Inc. (NYSE:ED), for instance, trades at a 5.6% dividend yield and pays out 75% of its earnings. It has been a predictable dividend payer but doesn't offer much growth. Yet, it trades at 12x PE multiple just because it offers a fat yield. You can buy American Electric Power Company, Inc. (NYSE:AEP), which offers a 5.2% yield, not much less, and you can buy that under 10x earnings and get almost the same total return at a much better price. You could get CMS Energy (NYSE:CMS), which gives you 8% growth with a 4% yield and at a 9x multiple. While that is a little bit lower income, it is more than offset by the above-average growth you get.

So, yes, within regulated utilities, I think you can get pretty consistent total return without a lot of risk, and I do think that is underappreciated. They also look very cheap vs. other market alternatives, such as bonds. They're trading as cheap in the bond market as I've seen since the mid-1980s. From an absolute and relative perspective, they look like good return investments.

In the diversified names, you are making more of a cyclical investment decision regarding where we are in the power cycle. Are the stocks poised to benefit from a recovery, or do they stand to be hurt in a downturn? The diversified utilities have suffered mightily in the last 18–24 months—they have all declined dramatically. Many of them look poised to rebound, especially if the economy continues to improve and power prices go back up.

TER: Many people out there who believe inflation is just around the corner, some even argue hyperinflation. If investors believe we're moving into an inflationary environment, would returns from these regulated utilities vs. non-regulated utilities be relevant?

GG: Regulated utilities are generally perceived as poor performers in an inflationary environment because it's very difficult to get the regulators to provide timely and effective recovery of costs when their costs are rising rapidly. In an inflationary environment, you'd want to be much more exposed to the diversified utilities (presuming that you were also getting inflation in commodity prices). That way, they would benefit from the rise in gas and power prices. If you were to make a bet on hyperinflation, you'd want to be overweight with diversified utilities and less exposed to regulated utilities.

That being said, I think that a lot of expectation for rising inflation is somewhat built into those regulated stocks. We use a macro model that compares the dividend yield on the utility stocks in the regulated universe to yields in the bond market to see where they're trading vs. bonds. And because they haven't traded this cheap to the bond market on a spread basis since the mid-1980s, investors are implicitly discounting them because they're afraid of rising rates and/or higher inflation. So, I think a lot of that fear is already discounted into the PE multiples.

TER: What is the impact of government incentives for alternative energy capital investment? How does that impact these big utilities or is it so small it's irrelevant?

GG: No, it's very relevant. You've got over 30 states that have their own independent renewable portfolio standards, which require utilities to procure a certain amount of power from non-fossil-based sources on deadline. A lot of capital investment is being made on the margin in these areas; so, utilities in many states are participating in that capital spend.

Obviously, the government has stimulated that by granting tax credits for wind and solar. They've also stimulated spending on what we call "smart grid investments" through Department of Energy (DOE) grants. They've granted money to defray the cost of installing smart meters in some states and other new technologies on the transmission grid, etc. There's absolutely been a benefit.

We talked about CMS. Well, part of their rate base growth is driven by the fact that they must comply with the mandate to build renewables in Michigan. And they're going to be constructing wind farms as part of their regulated assets—that's a growth opportunity for them.

A piece of Sempra's rate base growth in their core utilities is from infrastructure they're building to accommodate wind and solar investment. While they're not a direct owner of many of these projects, they have to build transmission that brings the power to their customers, which is a rate base growth opportunity.

A lot of capital spending is going directly into renewable energy—or infrastructure that supports renewable energy—which is part of that 5% rate base growth profile we talked about. The risk there is that these wind and solar resources are expensive. It costs a lot more money to make power from the sun and wind than it does currently with cheap natural gas. You worry that, somewhere down the line, investor appetite for such investments could wane if commodity prices stay low.

TER: Do you see any one type of renewable energy as being out in front of the others—geothermal, solar, wind?

GG: Wind and solar are growing resource bases in the U.S., but they still represent small fractions of the supply. Geothermal is also a minuscule fraction because, obviously, you can only harness it where there is volcanic activity. The problem is a lot of these resources are where people aren't. The big challenge is not just harvesting them but delivering that power to the population.

Greg Gordon joined Morgan Stanley as a Managing Director in July 2009. He has over 17 years' experience analyzing the power and utility industries. Before joining Morgan Stanley, he spent over six years at Citigroup covering the power and utility industries. Prior to that, he spent over three years at Goldman Sachs covering Electric Utilities and Independent Energy. Institutional Investor recognized Greg as one of the top research analysts in his field for the past four years, and he was ranked as the top research analyst in his field by Greenwich Associates for the past three years.

Before joining Goldman Sachs, Greg was managing director at CIBC World Markets in the power and utilities group. Prior to joining CIBC in 1993, Greg was an analyst at Regulatory Research Associates for the electric, gas, and telecommunications industries. He graduated magna cum laude from Drew University with a major in economics and holds the CFA designation.

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1) Brian Sylvester and Karen Roche of The Energy Report conducted this interview. They personally and/or their families own shares of the companies mentioned in this interview: None.
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*The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary.

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Important U.S. Regulatory Disclosures on Subject Companies

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

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

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