By The Energy Report, on July 15th, 2011
 The new California gold rush is about black gold, not the yellow variety. At least that’s where Global Hunter Securities Partner and Senior Analyst Phil McPherson is looking for his edge in exploration and production. He’s also finding names in Bakken and Colombia that may have been forgotten (or just plain misunderstood) by investors. In this exclusive interview with The Energy Report, Phil elaborates on his best ideas, some of which could yield huge multiples for investors.
The Energy Report: Do you have an overall theme right now?
Phil McPherson: Yes, I have always been much more oil-weighted and a big proponent of what I kind of call the “California revolution” that’s occurring. We saw it happen in the Bakken formation with the Williston Basin, and now we’ve seen it in the Permian Basin. I think California is on the cusp of reversing the decline trend that has occurred for the past decade.
The other trend that has kind of emerged is what I call the hybrid model where companies have been 100% natural gas for the majority of their lives and have now shifted their capex (capital expenditures) to liquids. What has been surprising is those companies have actually outperformed the oil-weighted names over the last three to six months. So, money has shifted from the traditional oil-weighted names that got more expensive because they were oil-weighted.
TER: So, in a nutshell your theme now is California oil and liquids.
PM: California oil and liquids. I’ve been a natural gas bear for the better part of three years. At $5/mcf (thousand cubic feet) gas, I’m a seller. I just don’t see it from a supply and demand equation. The supply is pretty empirical in that we have a ton of natural gas reserves in this country and the demand side is tepid at best.
TER: I haven’t figured out why the U.S. and the International Energy Agency decided to release 60 million barrels (Mbbl.) of oil from our strategic petroleum reserves (SPR) in July. Do you have any ideas as to why these reserves are being tapped?
PM: Yeah, I was just as surprised. I was in a meeting and jokingly said that we woke up today with a new type of geopolitical risk. What I mean is that we’ve already got the 2012 election on the headline, and it feels like this is a very politically motivated way to drive down oil prices in the hopes that it would spur consumer confidence and, hopefully, some votes at the polls.
You know, at the OPEC meeting prior to this release we clearly saw for the first time a division among OPEC members, and you could clearly see which members are aligned with the West and which weren’t. The more important thing is that Saudi Arabia is really the only OPEC member that can increase production rapidly, but its crude oil tends to be sour, and right now, the market is missing Libyan crude, which is much sweeter. So, I think the SPR release was a hope to alleviate that perceived shortage for light sweet crude.
Interestingly enough, what’s happened with the Libyan crude and what’s happened in the European markets, most notably Brent Crude, has actually benefited our California theme. A lot of investors are still unaware that California oil prices are now trading at a premium to West Texas Intermediate (WTI) prices, and that’s a combination of the two factors. One is that the Libyan supply has come off the market, and two, that the Cushing storage facility in Oklahoma is oversupplied with WTI because of Bakken and other oils that flow into there.
So, California producers, which are typically used to a $5-$10/bbl. or $8/bbl. discount on their heavy oil here in California, are now getting a $5-$8/bbl. premium. It’s been interesting for some of the names that we cover.
TER: It appears that Libyan rebels have been negotiating with Muammar Gaddafi, and it sounds like he’s going to exit the scene. How much is the Gaddafi premium? How much will oil drop when he exits?
PM: Well, the price has already dropped a little bit, and his exit might already be built-in because we went from the mid-$80s/bbl. to almost $120/bbl. during the initial phase of the Arab revolts. Now, we have already come down below that. I think the market has already priced some of that in there. But what would really be the big deciding factor is how long it would take to get that production back in place. A lot of people don’t realize that it’s not like flipping a light switch to turn things on and off for an oilfield. It can take a lot of time—as much as a year in some cases—to get things back to normal.
TER: Since you spoke to The Energy Report six months ago, oil is up about 30%, including the recent pullback. You commented at that time on how fretful investors became when oil was down. What about now? How do investors currently feel?
PM: I just spent three weeks on the road meeting with investors across the U.S. and I was actually pleasantly surprised that most people were not concerned about a sustained downturn of oil prices. Usually, when you are in a six-week downturn like we’ve had recently, everyone is very nervous. The first question is, “What’s going to happen to oil prices?” And now the first question I’m getting in about 80% of the meetings is, “What’s your favorite name to buy on a pullback?” I think a lot of people missed this last move, were under-invested in oil from the low $70s/bbl. to over a $100/bbl., and they don’t want to miss that next potential move up.
TER: Your Global Hunter Securities Conference in San Francisco is coming up in a few days. What is the overall agenda?
PM: I think when people meet management, it makes them feel better about owning these companies, and that’s the purpose of the conference. Every summer, people take some chips off the table. If they made money in the first quarter, they’re willing to book gains, sit back and take a fresh look at things. It allows them to dust off their files on companies and start updating their modeling numbers to decide where they want to put their chips going into the fall. We downgraded some stocks earlier in the year when they hit our targets and now we’re starting to dip our toe back in. This conference gives investors a chance to meet with management to kick the tires of some companies they’ve been waiting for a pullback in, or that that they may have missed on the last move.
TER: Phil, how important are the breakout sessions following the 20-minute presentations?
PM: Well, you get your initial questions answered in the breakout sessions, but we also have one-on-ones—the next level where you get the most valuable information. Investors get to sit by themselves with management teams and ask the questions that they don’t want to ask in front of their competitors. I often notice that a lot of the buysiders sit quietly in breakout sessions and take notes. But when it comes to one-on-ones, you can ask anything you want. In this day, when everyone can read headlines and make quick, snap decisions, access to management is the difference between being an investor and being a trader. The one-on-ones allow you to dig a little deeper.
TER: How are you currently advising investors to play energy? Can you give us some of your ideas?
PM: Sure. We have highlighted some of our favorite names that have pulled back like GeoResources Inc. (NASDAQ:GEOI), which has a foothold in the Bakken. It’s having issues like a lot of other companies, so you probably need to wait until the second quarter to see how those issues hit the numbers, but after that, you should feel pretty confident owning this stock. GEOI also has a significant presence in the Eagle Ford, a basin that has just blown away everyone’s expectations. To give an example, the Eagle Ford has gone from about 25 rigs to over 180 rigs running in less than a year and a half. It’s now matched the rig count in the Bakken. So you have two of the hottest basins there under one company.
As we’ve talked previously, California has been a huge win for us. One of our top picks this year has been Berry Petroleum Co. (NYSE:BRY). It’s a heavy oil producer that has been hampered by some permitting issues in California and has recently received a kind of next-to-the-last-step on the final permitting issue. Once they get that, they will have clear sailing to drill over a 1,000 wells over the next five years. That will take their oil production from around 18,000 barrels per day (bpd) to over 30,000bpd. That’s a great place to be.
TER: Berry has been one of your better performers. It’s doubled over the past 52 weeks and it’s now up to almost a $3B market cap. Do you still expect to see big returns?
PM: Yeah, I think Berry is still misunderstood. We’re in the process of redoing some of the numbers with this new permit that is supposed to come in. It gives a lot clearer view so investors can model the thing out to 2015 or so. Berry’s benefiting from a couple of things. One, it’s the first to get through this permitting process. That could open some doors for them to make some acquisitions. So you could see some growth that is not currently in our numbers. Two, it’s receiving a premium on its oil as we discussed earlier. In the second quarter, it averaged a $5/bbl. premium over WTI. In the previous 20 years, it has averaged a $5-$8/bbl. discount to WTI. So, that’s a pretty big bump up from a price realization standpoint. Lastly, the company consumes about 50 Mmcfe/day of natural gas to extract its heavy oil. With natural gas prices bouncing around between $4 and $5/Mcfe, their input costs have never been lower. When you combine this with California oil prices, margins have never been better.
TER: Another California play?
PM: One of our names that has underperformed, but that we still believe in is Venoco Inc. (NYSE:VQ). This company has been pushing the exploration pedal out here in California targeting deeper zones—the Monterey Shale. Thus far, the results have not been all that great. It’s been taking longer, but the opportunity is so huge that I always remind people when they are in a new play—particularly an exploration play or what we call an unconventional play—it takes time to figure out how to drill these wells and perfect the science. The best example that I can give is that it took the folks at the Barnett Shale almost 15 years to figure it out. Now it’s the largest producing natural gas basin in the lower 48. It took the Bakken Shale about two to three years to get to the point where people were really committing a lot of capital. It was 2003 when I first heard the term Bakken Shale at a conference in Houston. Through 2004 and 2005, people drilled a lot of bad wells. Now, some of those same areas that had poor well design and performance are producing exceptional wells.
The only other oil company that has gone after the Monterey and announced pretty impressive numbers is Occidental Petroleum Corp. (NYSE:OXY). I don’t cover OXY, but I have been forced to do a lot more work on it because it’s intermingled with Venoco. On a recent conference call, OXY talked about the potential of having 20,000 wells to drill on the Monterey and recovering as much as a .5Mbbl. per well bore. So, without putting it in writing, OXY said it had 10Bbbl. of Monterey oil to recover, and if Venoco, as a small-cap company, can attain a fraction of that, it could be an easy double and further out a five-bagger.
TER: Are there any other California plays?
PM: Yeah, there’s a little one that we cover that’s kind of under the radar, called NiMin Energy Corp. (TSX:NNN). It has this interesting field in California called Plieto Creek that is a heavy oil field, and it has a patented process to recover that oil using the injection of oxygen, of all things. The company recently completed its pilot test, and showed it can recover more oil and reverse a well’s decline curve. NiMin is in the process of ramping up operations in California where I can see it taking production from say 200bpd–300bpd to over 500bpd the next year and perhaps 1,000bpd in two years. In the bigger picture their patented technology could open doors for joint ventures, licensing to other E&P companies or they can simply acquire older mature fields and do the work themselves.
TER: Like so many of its small- and micro-cap peers, NiMin is down about 18% over the past three months. Is this a great buying opportunity?
PM: I would be buying it here. I have warned investors not to chase it too much because with these smaller stocks if you try to buy large volume, you can bid it up on yourself. Additionally, the company has its two-year anniversary of going public this September. In the IPO, shareholders received one share of stock and one warrant, like most Canadian IPOs. That leaves about a 7M warrant overhang going into that September expiration. That could put a little pressure on the stock going into September. But I think once you get past that, the stock could easily get back up above $2. We currently have a $3 target, so we obviously believe in it in the long term.
One other name that we just raised our target price on pretty significantly is Houston American Energy Corp. (NYSE.A:HUSA). The company is about to drill one of the biggest wells in the space in Colombia of all places. It partnered up with a major private oil and gas company called SK Energy, which is kind of the GE of South Korea. Houston American has a 37.5% working interest on the 350,000 acre CPO-4 block. There have been wells drilled next door to this lease that have come on in excess of 10,000bpd. We don’t have anything like that in the U.S. This first well, which is scheduled to start drilling any day, will produce results in the middle of August. If HUSA’s first well hits at 10,000bpd and oil prices are in the $90/bbl. range, it will pay for itself in about 40 days. Then, it becomes a self-funding operation, and you don’t need to worry about the company needing outside capital.
The company currently has about $25M in cash on the balance sheet. It’s fully funded for the next six wells, which are already permitted. Colombia has had such a renaissance over the past 10 years as new, democratic leadership has ramped up the military spending, the country became cozy with the United States and pushed a lot of the terrorist activities out to the border regions.
TER: This is an interesting stock because its relative strength has been tremendous compared to many others of its size. It’s just amazing; it’s up 21% over the past three months and I don’t see anything else close to that.
PM: We’ve been waiting for this well to be drilled for a couple of years. So, it’s pretty exciting times.
TER: Phil, many thanks to you. It’s been very interesting.
PM: Thank you.
Philip McPherson joined Global Hunter Securities in June of 2007 as a senior equity research analyst in the firm’s energy group. He was recently ranked in the top five by the Wall Street Journal’s Best on the Street Survey out of 123 E&P analysts in the U.S. Prior to joining GHS, Mr. McPherson was director of research at C. K. Cooper & Company, a boutique investment-banking firm located in Irvine, California, which focused exclusively on small-cap exploration and production companies. In his role at C. K. Cooper, Mr. McPherson was responsible for new initiations of E&P companies; additionally, he generated the firm’s macroeconomic analysis in relation to oil and natural gas price forecasts, which generated the firm’s price decks. Mr. McPherson was rated a five-star analyst by Zacks in 2002, 2003, 2005 and 2006. Prior to joining C. K. Cooper, Mr. McPherson was a partner in Mission Capital, which was acquired by C. K. Cooper in 2001. Mr. McPherson began his career in the securities industry at Mission Capital in March of 1998 as a retail stock broker. He graduated from East Carolina University with a B.A. in economics.
By Christopher Briem, on July 15th, 2011
If you want to read the one news article that you didn’t see which covers the single most important development that will shape future of the City of Pittsburgh over the next couple of deades?? and as collateral damage a whole lot of other local public finance as well. Then take a scan at least of this article in Bond Buyer: GASB Unveils Pitch on Pensions.
Everything else is just kind of fluff in comparison. It is also why I am no longer going to get myself amped up over the rump debate of the parking controversy because it just does not matter. State takes over pension system or not. Does not matter. City finds some new revenue from the parking authority or not. Does not matter. Take the city’s current pension liability and instead of using an 8% discount rate, try recalculating using half that… and then see what it gives you. If you really push it to 3%, or say something close to what is used in private sector pension accounting and…
Ni!
Never has something so esoteric meant so much in the real world.
Whatever.. just the most important thing that may shape all local public finance for decades. Will be big news most everywhere, but we are the singularity. Beyond anything to do with the City proper, there is another big local connection to all of this as well.
By Simon Grey, on July 15th, 2011
President Obama on Tuesday said he cannot guarantee that retirees will receive their Social Security checks August 3 if Democrats and Republicans in Washington do not reach an agreement on reducing the deficit in the coming weeks.
“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it,” Mr. Obama said in an interview with CBS Evening News anchor Scott Pelley, according to excerpts released by CBS News.
If one were to look at box 4 of IRS form W-2, one would see that part of their pay goes specifically to Social Security. Why, then, if part of one’s taxes are earmarked for specifically for Social Security, is the government unable to mail out Social Security checks as promised? They claim on everyone’s W-2s that they have earmarked a certain amount of tax money for Social Security. Why are they suddenly unable to pay it? Yes, people, you’ve been lied to. For all intents and purposes, there is no Social Security fund. There are simply a bunch of empty promises made by soulless parasites, and now there is no denying the fact that Social Security was a Ponzi scheme from the get-go. We were all suckers for believing politicians about Social Security, and we get what we deserve. Let’s not make the same mistake about the debt ceiling.
By B.P.T., on July 15th, 2011
At 8:30 AM EDT, the Consumer Price Index report for June will be released. The consensus is that CPI decreased by 0.2% last month, and there was a 0.2% increase in CPI when food and energy are removed.
At 8:30 AM EDT, the Empire State manufacturing index for July will be released. The consensus is that the index value will be 8.0, which would be 15.8 points higher than the value reported in June.
At 9:15 AM EDT, the Industrial Production report for June will be released. The consensus is that there will be an increase 0f 0.4% in production and an increase of 0.2% in industrial capacity utilization.
At 9:55 AM EDT, Consumer Sentiment for the first half of July will be announced. The consensus is that the index will be at 71.0, which would be a decrease of 0.5 points from the level reported in the second half of last month.
By The Gold Report, on July 14th, 2011
 The lure of platinum is driving Energy and Scarcity and Outstanding Investments Editor Byron King’s investment choices for precious metals. In this exclusive interview with The Gold Report, he explains the looming demand and global opportunities. “We could see platinum prices skyrocket,” he says.
The Gold Report: Let’s start with politics. In your opinion, would a Republican president in 2012 be good for the gold price?
Byron King: Whether Obama remains in office or a Republican wins the election, it is going to be tough to deal with the inflation and the built-in spending that is driving gold prices up. Republican or Democrat, either way, if you want a stable gold price you are going to be disappointed. If you want to see higher gold prices, you are going to get your wish.
TGR: Do you think we could see dramatically higher inflation?
BK: I think that’s already cooked into the pie, yes. For the last 18 months, much of U.S. federal debt has been purchased by the Federal Reserve. It’s not people buying U.S. Savings Bonds who are funding the deficit spending by owning the national debt. The Federal Reserve is just issuing new money into the system. That money is floating around the world somewhere and it’s coming back in terms of inflation. We see it in the rising prices for energy, especially oil, plus gold, silver and other commodities. We see it in inflation in other currencies and trading zones—the Chinese yuan in Asia, the euro in Europe and even in South America’s otherwise strong currencies. These things all reflect the inflation that’s coming out of Washington D.C. to fund U.S. deficit spending.
TGR: The CFTC (Commodities Futures Trading Commission) said at the end of June that money managers have slashed their net bullish positions in gold futures to the lowest point in more than four months and silver to the lowest point in more than a year. Do you think that will affect the price given that hedge funds seem to believe in the economic rebound and may be starting to get out of gold and silver?
BK: I think that people trade in and people trade out. What we’re seeing is a thought process that says, “We’ve had a nice run and it’s time to take some profits off the table and show some gains to the bottom-line.” This is a blip in the long-term upward trend. I go back to the point that inflation is already baked into the pie.
TGR: Gold hit a six-week low to end the second quarter, but was up 5% and led all precious metals during the quarter. Meanwhile, silver was down 7.5% after nine straight quarterly increases. What performance do you expect from both metals in the third quarter?
BK: I think that both will trade in a range without any real breakouts. The world economy isn’t panicked enough to drive prices through the roof. But, it also isn’t healthy enough for people to decide that they would just as soon liquidate their gold and silver positions and invest that cash somewhere else. That’s because the next question is: where is somewhere else? What are the latitude and longitude of “somewhere else” that you would invest if you liquidated?
TGR: You recently wrote in Agora Financial’s Daily Resource Hunter that “Smart money is holding gold. Never sell the real metal. Hang tough with the mining company shares.” But equities, by and large, have vastly underperformed gold in 2011. Why aren’t you telling people to sell?
BK: I was writing that for a retail audience, not for professional traders. When I say, “don’t sell the real metal,” I mean if you own gold, keep it in your safe deposit box. Real metal is the absolute last thing you want to sell, because looking 2, 5 or 10 years out, you may never ever see it again at current prices, and in the worst case at any price. I think that the scarcity of the physical stuff is that profound, and it’s going to be even more profound as the rest of the world begins to catch on.
As far as hanging tough with mining company shares, I mean that, too. Implied in that statement is the idea that you’ve got to grit your teeth and deal with the fact that mining company shares have lagged the performance of gold over the past couple of years. It’s annoying from an investor’s standpoint because the mining companies are mining gold, which is going up in price, but so are the companies’ costs for energy, labor and other production factors.
I have selectively told people to sell a couple of mining shares in the last six months or so. I got Outstanding Investment readers out of two of the large South African players, AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG; LSE:AGD) and Gold Fields Ltd. (NYSE:GFI). Still, overall, I’m not telling people to sell gold mining shares because, what do I tell them to do instead? Where do they go with the money? I’m nervous about walking away from the gold miners in this particular precious metal environment.
TGR: You recently spent time touring projects in southern Africa. Did you return from that trip with any new investment ideas that you could share with our readers?
BK: South Africa is investable if you understand the level of risk. The large, deep gold mines have profound problems because they’re large and deep. There are limits to how deep you can put human beings underground and have them work. There are limits to what technology can do in those deep, very hot, very stressful environments. When you dig holes three and four km. deep, you get these things called rock bursts where the walls explode inwards because of the pressure of the weight of the rock above. It’s very deep, very dangerous mining. I think that within a couple of years, we could see a dramatic falloff in overall gold production out of South Africa, which would affect the world gold price.
In terms of the good news, the best investable item I brought away from two recent trips to South Africa is platinum. South Africa is one of the world’s most significant platinum producers. There’s a looming shortage of platinum, which is used in the chemicals industry, in the automotive and electronics industries and in jewelry. It’s become an investable item as well, in terms of bullion.
There aren’t enough large platinum projects to replace what is being mined out. We could see platinum prices skyrocket. In terms of larger companies that have an acceptable risk profile, I recommend Impala Platinum Holdings Ltd. (JSE:IMP). I think it’s going to do well over the next two or three years.
TGR: Is it on the London stock exchange?
BK: Impala trades on Johannesburg, London and on the Pink Sheets in the U.S.
TGR: Do you have some smaller platinum names?
BK: Another one that an Agora colleague has recommended—he sort of beat me to it—is African Rainbow Minerals Ltd. (JSE:ARI). It’s a mining conglomerate. They mine iron, titanium, coal and platinum. I don’t want to say it’s small, because it’s a fairly substantial company in South Africa. It is very well run, a solidly positioned company. Impala Platinum and African Rainbow are two nice ways to get exposure in the South African platinum space. You can look elsewhere in the world for platinum, but I think the South African plays are among the best.
TGR: As far as North American companies producing platinum, does it comes down to Stillwater Mining Co. (NYSE:SWC)?
BK: Yes, in North America there’s the Stillwater play. It’s a $2.4 billion company that’s done well over the past couple of years.
Here’s what I think about platinum overall. It gets back to the medium- and long-term future. If someone discovered a platinum deposit tomorrow morning in Montana, Canada or Alaska, how long would it take to get that mine up and running? How long would it take to get the processing system up and running? We’re looking at 10 to 15 years.
As platinum goes into shortage in the next few years and prices skyrocket, you want to be positioned in the companies that have the best chance to move quickly. You’re looking for the best ideas in the here and now. Those two African plays are at the top of the heap. If you’re too nervous about South Africa, then Stillwater will also do fine in a rising price environment.
TGR: In the April 6, 2011 edition of Energy and Scarcity you wrote about Scorpio Mining Corp. (TSX:SPM). Do you still recommend Scorpio? And, what’s the next step for that junior?
BK: I like Scorpio and would still recommend it. Trailing price earnings have gone from 8 to about 12, which is still low. It is a smallish miner, but it’s not one of those mining development plays you see all over the landscape. It has a true up-and-running, producing mine. When the company initially built the project, it installed capacity, poured the concrete, did all the design work for future expansion. And the future is now. It’s expanding.
When silver and lead zinc prices were higher a couple months ago, Scorpio was up around US$1.60 a share. Now it’s in the US$1.45 range. I think it still has an upside for the patient investor. If you’re looking for something to hang on to for the next two or three years, I think you could do worse than Scorpio Mining. They mine; they produce a profit. Can you imagine that, a small mining company that produces a profit?
TGR: According to Google Finance, it has a P/E ratio of 5.5.
BK: Going forward, yes. Scorpio is profitable; the numbers appear to be improving and it’ll stay profitable. It’s going to be selling product into a strong market. As far as I know, the political and the crime issues in Mexico haven’t affected Scorpio, but those factors are a caveat on investing in Mexico.
TGR: Are there other precious metals names you could share with our readers?
BK: I just spent a week in Serbia, looking at a company I’ve followed for a year and a half now called Reservoir Capital Corp. (TSX.V:REO). Reservoir is several different things wrapped up in one company. It’s an energy play in terms of hydropower development. But it also controls significant land position in the Balkans, next to what was once the largest copper mine in Europe. Reservoir is spinning off its mineral side into a group called Reservoir Minerals. Right now the way to play it is to buy Reservoir stock until they spin off Reservoir Minerals.
Reservoir has a 20-square-mile position over a known copper district adjacent to a place called Bor, an old mining town in Serbia. Nearby, it has a very strong land position in a historic gold mining district called Deli Jovan. This was the home of several historic gold mines from the early 1900s through the late 1930s. The old, Serbian gold mining company stopped gold mining not because it ran out of gold, but because it ran out of time when World War II came along. It sealed up the mines and the former Yugoslavian government never reopened them. It wasn’t part of the five-year plan. Just last week I saw some of the operations. Reservoir and its subsidiary, Reservoir Minerals, have a strong copper and gold development future.
TGR: Are there any ownership security risk in Serbia?
BK: Serbia is a poorly understood place. But, it’s working very hard to achieve EU membership and with that comes the legal obligations of having a property system and a title system that meets EU standards.
In terms of legal, claim and title security, the Reservoir people have a very strong relationship with the Serbian government. As an example, Reservoir arranged a meeting with the Serbian Prime Minister for me and a couple of other Reservoir investors. Management has a good relationship with the government.
TGR: Three visits in a year seems like a lot. What’s behind that?
BK: The first visit was to see things. The second time I was invited by Serbia’s Minister of Energy to speak at an energy conference in Belgrade. While I was there I went out to see other things that I hadn’t seen or hadn’t seen enough of the first time around. The third time I led a group of Energy and Scarcity Investor readers to show them what is going on and let them make up their own minds.
TGR: Will the gold assets be rolled into Reservoir Minerals or will they be in another company?
BK: Currently, they are part of Reservoir Minerals. How things will play out is still a bit of an open book. The copper is being developed in cooperation with Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). Freeport has a huge drilling program going on right now; in fact, the drilling rigs were on site last week during our visit. Reservoir has another joint venture on the gold mining side, with a London-listed company called Orogen Gold Ltd. (LSE:ORE). It’s a bunch of Irish guys who understand gold mining in this kind of geology.
TGR: Is it part of a greenstone belt?
BK: It’s right at the edge of a mineralized Paleozoic gabbro complex. Geologically it’s good, solid hard-rock mining. It’s right up the alley of these Orogen guys.
TGR: It would probably be very amenable to high gold recoveries.
BK: There’s a lot of very good data, so far. You know the old expression, “The best place to build a mine is next to another mine.” Well, this place has historical gold production from about 1904 until World War II. In its day, the Deli Jovan gold mines made Serbia one of the wealthiest countries in Europe. By the 1910s, the Kingdom of Serbia was so rich that it made the Austro-Hungarian and the Turkish Empires jealous, which had a lot to do with the origins of World War I. Historically it’s a very rich place. Some of the assays from the old historical data on the Deli Jovan mine are up to 200 g/t.
TGR: In a couple of weeks you are scheduled to speak at an Agora Financial investment symposium in Vancouver called Fight or Flight: Your Capital at Risk. What do you plan to talk about there?
BK: My talk is titled “Re-Mining the Wealth of Nations Past; Discovering Assets Hidden by History.” I’m going to give several examples of mining or resource plays that were simply lost to history over time, and that are now coming back into vogue. It’s the idea of what’s old is new again.
TGR: Do you have some parting thoughts on gold and silver and precious metals in general?
BK: Considering the uncertainly of government currencies such as the dollar, the euro, the yen and the yuan, and even commodity currencies like the Canadian dollar, the Russian ruble, the Brazilian real, you must understand the need to have solid exposure to precious metals in your own physical holdings of metal. Take delivery. Don’t comingle it in somebody else’s vault. That goes for gold, silver and platinum—and invest in mining shares.
I just don’t trust the politicians to do the right thing. Nobody truly knows what the right thing is. I don’t think the current group of political leaders will be able to steer the ship through the rocks without punching a few holes in the hull. And if you’re an investor out there? Well, you may as well have a steerage ticket on the Titanic. There won’t be any lifeboats for you. You’ll have to come up with your own means of saving yourself.
Byron King is the editor of Outstanding Investments and Energy & Scarcity Investor. These publications reach over 60,000 paid subscribers. He is also a contributor to the Daily Resource Hunter. King is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, Marketwatch.com, Fox Business News, and PBS Newshour.
By Simon Grey, on July 14th, 2011
The quick fix that got both Democrats and Republicans off the hook with a temporary bipartisan tax compromise, several months ago, leaves investors uncertain as to what the tax rate will be when any money they invest today starts bringing in a return in another two or three or ten years. It is known that there will be taxes but nobody knows what the tax rate will be then.
Some investors can send their investment money to foreign countries, where the tax rate is already known, is often lower than the tax rate in the United States and — perhaps even more important — is not some temporary, quick-fix compromise that is going to expire before their investments start earning a return.
Although more foreign investments were coming into the United States, a few years ago, than there were American investments going to foreign countries, today it is just the reverse. American investors are sending more of their money out of the country than foreign investors are sending here.
Since 2009, according to the Wall Street Journal, “the U.S. has lost more than $200 billion in investment capital.” They add: “That is the equivalent of about two million jobs that don’t exist on these shores and are now located in places like China, Germany and India.”
President Obama’s rhetoric deplores such “outsourcing,” but his administration’s policies make outsourcing an ever more attractive alternative to investing in the United States and creating American jobs.
One cannot have free trade, an anti-market domestic trade policy, and a growing domestic economy simultaneously. One might be able to have two of the three, but there is no way to have all three. Unfortunately, Obama is trying to have all three, and it’s just not going to work out.
By Trace Mayer, on July 14th, 2011
This has to be one of the most ironic and ignorant statement I have heard come out of Washington. The tail risk is with people like Bernanke running the Federal Reserve, Trichet running the ECB, the eurocrats trying to run the rating agencies and politicians trying to design everyone else’s lifestyle.
It appears that despite a fairly short consolidation that the next gold upleg has started. The gold 50dma is $1,522.03 and the 200dma is $1,423.69. The silver 50dma is $36.06 and the 200dma is $32.24.
During this upleg that will likely last until November before a correction or consolidation may see gold run to $1,800 and silver to the $55-60 range. It will be important to see the activity over the next week or so to determine whether the strength will stay. If the monetary metals pull back slightly and continue their usual summer consolidation then it will help the 200dma continue to rise which will lay a stronger base for the autumn and winter rally.
By B.P.T., on July 14th, 2011
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 405,000 new jobless claims last week, which would would be 13,000 less than the previous week.
Also at 8:30 AM EDT, the Producer Price Index for June will be released. The consensus is that the index decreased 0.3% over last month, and increased 0.2% when food and energy are excluded.
Also at 8:30 AM EDT, the Retail Sales report for June will be released. The consensus is that retail sales were unchanged , after a 0.2% decrease last month.
Also at 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:00 AM EDT, Federal Reserve Chairman Ben Bernanke will testify before the Senate Committee on Banking, Housing, and Urban Affairs regarding the Semiannual Monetary Policy Report.
Also at 10:00 AM EDT, the Business Inventories report for May will be released. The consensus is that inventories increased 0.8% from the previous month.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
 Join the forum discussion on this post - (1) Posts
By The Energy Report, on July 13th, 2011
 Oil and gas markets, as well as the technology to produce, distribute and utilize them, are evolving to meet growing global energy needs. In this exclusive interview with The Energy Report, Frank Curzio, editor of the Penny Stock Specialist newsletter, brings us up to date on his views for what lies ahead in the energy markets and offers several ideas for investors seeking underpriced bargains with great growth potential. While his newsletter’s definition of penny stocks extends beyond pennies, he believes that the opportunities are in the dollars.
The Energy Report: Frank, when people hear “penny stocks” they usually take those words quite literally and think in terms of stocks certainly trading under a dollar, if not under two bits. Your definition, as editor of Penny Stock Specialist, is a little broader. Tell us why.
Frank Curzio: Sure. Penny Stock Specialist is more of an under-$10 newsletter. We do have some penny stocks in there, but you may see some large caps that trade under $10 as well. About 80% is in small caps. In May, most small caps were trading at their most expensive valuations to large caps in more than three decades. That was before we saw seven straight weeks of declines. I may lean toward recommending even more mid- to larger-cap companies going forward.
TER: You follow the energy industry in a broad context, which includes everything from small oil and gas exploration companies to international majors as well as various types of service and technology companies related to energy production. Can you give us a brief overview of how you see the energy arena now compared to your last interview with us in October?
FC: There have been a lot of major changes. I do like oil right now. Most analysts and people I talk to see lower prices in the short term. But, looking at the long-term picture I think oil is getting more difficult to find. The political landscape is more challenging than ever. That is probably why every major oil company is spending billions of dollars buying shale gas assets in North America. Short term, we may see oil prices push under $90/barrel (bbl.), especially with the political motivation to release oil from the strategic oil reserves, a step that is only supposed to be taken under extreme emergency conditions.
The last time we released any significant oil from strategic oil reserves was 2005 during Hurricane Katrina. That was an emergency. Also during the Gulf War. That was an emergency, but oil at $100/bbl. is not an emergency. So, it seems more like another short-term stimulus package aimed at pushing the price of oil under $90/bbl. ahead of an election year. But longer term, I like oil and I think it goes a lot higher from here.
TER: So, what do you think the prospects are for developing any significant new reserves in the U.S. at this point? Probably not great.
FC: No, it’s not great. The majors are using a big chunk of their capital expenditures buying up shale gas assets across the U.S. That tells me they are looking to transition into natural gas. I think if they could find oil they would use that capital expenditure (capex) to continue drilling to find more. Longer term, I think oil is going to be more difficult to find. And that’s going to reflect in supply and demand, making the price go a lot higher.
TER: So, it appears that natural gas is the game of the day. Give us a little summary of what you think is going on there since we had the big peak in gas prices back in 2005 and 2006 and then another, lower peak in 2008. What’s in the future?
FC: I think we all know by now we have a huge supply of natural gas. It’s keeping prices below $5 thousand cubic feet (Tcf) at current demand levels, with roughly 80 years of supply. However, I think demand’s going to pick up sharply. I think liquefied natural gas (LNG) is a major factor as we begin to export natural gas to huge growth markets like India and China. This may take a decade, or even longer, but eventually it’s going to happen. Natural gas use for electricity production continues to grow each year. Right now it accounts for 23% of electricity generation in the U.S., with coal at 45%. In 15 years, I would not be surprised to see these percentages reversed. Finally, many truck companies including UPS, Huntsman and Ryder, are transitioning their truck fleets from diesel to natural gas. More than 5 million heavy duty diesel trucks in the U.S. could convert. I see all of these trends accelerating over the coming 5 to 15 years. That will increase demand and cut into supply, resulting in higher natural gas prices over the long term.
TER: We’ve been hearing a lot about the “fracking” controversy lately related to natural gas production. What do you see happening there and what are the possible consequences?
FC: I think the environmentalists may be bored right now. That’s the only way I can explain why they hate natural gas. Maybe they prefer we use more coal. But, seriously, there have been reports that fracking leads to contamination of water. Numerous independent studies show there is no contamination being caused by fracking after tens of thousands of wells used this technology.
TER: People can’t be opposed to every source of energy and domestic natural gas seems to be a more benign a source of new energy than coal or imported oil, isn’t it?
FC: I’m a facts guy. I just haven’t seen any evidence that supports most of these claims that are being made. If I did, then I’d probably change my outlook on the industry. Right now, there’s just nothing there. So, I think there’s still tremendous opportunity in natural gas. And, yes, fracking is going to be used for a very long time. That’s why I continue to like the industry, especially the service providers, which continue to see enormous demand. Companies like Tetra Technologies Inc. (NYSE:TTI), Canyon Services Group Inc. (TSX:FRC) and Weatherford International Ltd. (NYSE:WFT)—which are dirt cheap at these levels—provide a broad range of oil and natural gas services.
TER: In your newsletter you follow a number of companies in the oil and gas production industry and related support and technology businesses. Can you tell us about some you particularly like there?
FC: One company I do like is Abraxas Petroleum Corp. (NASDAQ:AXAS). It’s a great buy under $3.75. The company has over 160,000 acres in shale areas across the U.S., including in the Niobrara, Eagle Ford and Bakken regions. Bakken has experienced terrible weather conditions. Most companies operating in the sector lowered production estimates last quarter as roads were damaged. Many of the areas were flooded and Abraxas was no exception. So, they happened to report very weak earnings in May and the stock got crushed. However, they expect to drill five wells in the Bakken over the summer so I think the company is a steal at this price.
Moving on, GMX Resources Inc. (NYSE:GMXR) is a great play. Six months ago the company made a major transition from just a natural gas producer to an oil and natural gas producer to take advantage of the higher oil prices. This company recently entered the Bakken and Niobrara regions as well. That gives them the potential to drill over 300 wells. We’re talking about a very small company here. They do have some debt issues, which is why it’s trading below $5. But, they have enough cash to cover their capex through 2012. It’s very cheap—trading at a 25% discount to its peers.
I also like Tetra Technologies, which I mentioned earlier. That’s more of an oil and natural gas services play. As long as companies are drilling for oil and natural gas, this company is going to continue to print money. Customers include all the major oil and gas companies. We’re talking BP Plc. (NYSE:BP; LSE:BP), ConocoPhillips (NYSE:COP), Royal Dutch Shell Plc (NYSE:RDS.A; NYSE:RDS.B), Chevron (NYSE:CVX), Chesapeake Energy Corp. (NYSE:CHK), Encana Corp. (TSX:ECA; NYSE:ECA), Devon Energy (NYSE:DVN). . .Tetra is the largest provider of idle well services in the U.S. After the BP oil spill, the Department of the Interior announced that 27,000 non-producing wells in the Gulf may need to be plugged. It was called the Idle Iron program. This could add a ton of business for Tetra. I think it’s a big catalyst that few people are talking about. I believe the company’s a steal at under $13 a share. It got hit along with the rest of the market and it’s now trading at a very favorable valuation. Demand is there and growth is there as well.
TER: Do they plug these wells temporarily, pending future market changes?
FC: These are non-producing wells. The government says 3,000 definitely need to be plugged for good and it is evaluating the other 27,000 wells. Tetra is the largest provider in the U.S. of these services. So, a lot of these will need to be plugged just in case you see a possibility of another oil spill. Whenever we see major unexpected events happen, there’s always an overreaction. But, Tetra Technology is going to get a lot of that business from this initiative.
TER: That sounds like some great potential. What else do you like?
FC: The last company that I have for you is called Westport Innovations Inc. (TSX:WPT). It manufactures truck engines that run on natural gas. The company has a partnership with Cummins, the largest engine manufacturer in the U.S., Weichai Power, which is a $90B engine manufacturer in Hong Kong, and also one with Volvo, the European giant. That’s a $35 billion market cap company.
A lot of companies with trucking fleets are making the switch from diesel engines to natural gas. Companies used to wait for incentives from the government. Today, the economics make sense and if the government does provide incentives, that would be the best case scenario for Westport. We could see 50% of the trucking fleets in the U.S. switch to natural gas. That would be roughly 2.5 million trucks and Westport is a clear leader in this space. I think the stock will surge if this happens. The company has exposure to India, China and Europe, where millions of trucks could also make the switch to natural gas. I recommended the stock at roughly $15 a share. We are up about 50% right now. But, I think it’s a huge buy under $24. I see a lot more upside for Westport.
TER: What do they have in the way of competition?
FC: There’s very little competition and they’re well ahead of it. They just took over an Italian competitor to get more exposure to India and other markets in Europe. In fact, they have partnerships with the major engine manufacturers in almost every area of the world. They are the cream of the crop when it comes to manufacturing engines that run on natural gas. It’s a very strong buy here.
TER: What about the stations for the fuel?
FC: Well, there are other companies, like Clean Energy Fuels Corp. (NASDAQ:CLNE), which actually make the gas stations. As this transition takes place, more gas stations are going to provide natural gas over the next five to ten years. A lot of people are on hold right now to see if the government will pass the $64,000 per truck tax credit in T. Boone Pickens’ proposed Natural Gas Act. But, when you’re seeing companies like UPS, Ryder and Huntsman making the switch now, that’s a sign the economics work right now. So, Westport is building revenue right now and if the government provides these incentives I think Westport will really skyrocket a lot higher.
TER: Do you have any other interesting situations you think our readers ought to be aware of at this point?
FC: The good thing about Penny Stock Specialist is that we’re not limited to one or two industries. Right now I see tremendous opportunity in gold stocks. I think we’re going to continue to throw money at every major problem we have in the U.S. We’re going to see inflationary conditions eventually. I think a company like Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU), a major producer trading at 10 times earnings, is a very good buy. The economics behind it make sense and it’s a huge growth model. A lot of gold stocks, if you’re looking at trading, are at the same levels now as when gold was trading at $1,000/oz. So, I think there are good opportunities right now. Some small cap gold companies have sold off 20%–30%. Gold stocks seem to still have a tailwind behind them, especially on the economic front. So, it’s one of the sectors I’m looking at right now.
TER: What are you expecting to happen over the summer and through the rest of the year as far as price outlook and market performance? And, what kinds of things should investors be considering in making decisions at this point?
FC: When it comes to oil and natural gas I think it’s important to think in terms of the long term. Short term, it’s going to be rough. I mean almost every stock that I mention here has been trading in a 40% trading range over the past two to three months. So, if you’re going to buy into some of these companies, and say you want to buy 1,000 shares of a company, don’t buy the whole 1,000 shares at once. Try to scale into these positions. Take advantage of volatility. So you buy 200 here, 200 there, even if it takes you six to nine months to establish a full position. If you really have a three- to five-year outlook, or even longer, you can look back and say, wow I was buying these natural gas companies below $5. Westport at $22, $23 would be a fantastic buy. The short term is going to be extremely volatile. But longer term, I think those tailwinds for natural gas and oil are still behind these companies and I think they’re going to do very, very well.
TER: Do you see anything particular on the horizon that could either make the market go up drastically or down drastically if a particular thing happens?
FC: In terms of the market, definitely focus on the stimulus package. There’s going to be a QE3. No one wants it, but from a market and political perspective, we will get more stimulus. I think we could see a rebound in the markets if this happens. We will also see a rebound in economic statistics. If GDP estimates pick up, we will see a rally behind many stocks. So, it’s something to focus on with oil, natural gas and gasoline prices off their highs. If we do see another stimulus package—it’s going to be very good for stocks in the short term.
TER: What could happen on the negative side that could blow things up?
FC: We continue to see negative data on the job market. We continue to see GDP numbers come down. Anything showing that economy is slowing will be terrible for the markets. We could see gasoline prices move considerably higher. I think that would hurt consumer spending. But, right now it’s the economy. If we see economic statistics pick up a little with some improvement in housing numbers—that will be great for the stocks. On the flip side, if we still see weak unemployment numbers, stocks will fall from these levels and it’s a big risk.
TER: But, generally, you feel reasonably confident that this is probably a pretty good buying opportunity and people should be accumulating those stocks that they think are undervalued?
FC: Yes. Accumulate the stocks that you think are undervalued. Every stock that I gave you today is a buy. Some small caps have gotten nailed 20% or 30%. Start picking away at some of the ones that insiders are buying. Buy companies that have beat estimates over the past couple of quarters and have pulled back along with the rest of the market. These are some of the areas I’m looking at for new ideas right now.
TER: That certainly sounds like good solid information. We greatly appreciate your time and insights and look forward to checking in with you again in the future.
FC: Thank you.
Frank Curzio is the editor of Penny Stock Specialist—an investment advisory that focuses on stocks trading under $10—and its exclusive Phase 1 Investor advisory. With more than 15 years of investing experience, Frank is the latest addition to the Stansberry and Associates team.
Before joining Stansberry, Frank wrote a newsletter on under-$10 stocks for The Street. He’s also been a guest on various programs, including Fox Business News and CNBC’s The Kudlow Report and The Call and is a featured guest on CNN Radio. He’s also been quoted in financial publications—both online and off—and has enjoyed numerous mentions on Jim Cramer’s Mad Money. Frank’s “S&A Investor Radio” is one of the most widely followed financial broadcasts in the country, and his investment strategies—value, growth, top-down and technical analysis—have regularly produced 200%–500% winners for his subscribers over the past 15 years.
By Simon Grey, on July 13th, 2011
An oldie but goodie from ASI:
We know that pouring out skills is not one of the key ways in which you generate growth. Look at past experiments. Did the Soviet Union become the greatest economy in the world through a combination of planned allocation of resources and making everyone do engineering and science? No, it didn’t. Take a look at some of the successful economies. Look at Switzerland. It has one of the lowest higher-education enrollment rates in the world, yet it has a fantastic economy. If the economy demands skills and you’ve got a decently responsive higher-education system you’ll end up with an equilibrium situation… You don’t generate growth through number of graduates.
I believe it was Neil Postman who once observed that there is no correlation between educational attainment and economic well-being. Quite simply, a larger number of college-educated people does not lead to fewer recessions. And spending more money on education will not make the current depression end sooner. In fact, it is really quite remarkable that otherwise normally intelligent people seemingly accept without hesitation the somewhat specious assertion that there is a correlation between education and economic growth. It’s even more remarkable that they conclude causality.
|
|
Most Popular Posts