Heennnrrryyyy GGeeoooorrrgggeeee!!!!!

By Christopher Briem, on February 1st, 2012

OK..  I can’t resist this one.  It’s just floating up there.

EPR has this story on County Councilman Matt Drozd upset over the valuations of 4 vacant properties he owns in the city. Their inconsistent valuation is evidence that the whole assessment is kaput. He really seems to say that his new property valuations are evidence that the reassessment of all 580 thousand properties in the county must be wrong.

So let’s see.  Indeed Mr. Drozd owns 4 vacant properties on Perrysville Ave.  Technically one is owned by him, and 3 others by DROZD DEVELOPMENT & CONSTRUCTION CORP. Here they are in the current assessment records.

The source of anger it seems is that all 4 properties were indeed assessed similarly at ($2000, $2100, $2,200 and $2,000) respectively.  Yet the new assessments:  $6200, $1000, $8000 and $8800.   Egads.  what is up with that?  We’ll come back to the $1,000 valued parcel in a minute, but the other prices all may make a lot more sense than you think.

First off, despite what is quoted in the article, they are not identical.. at least not in the parcel record which is consistent with the maps/shapes of these parcels..  The Sq. foot of each are: 2080, 2618, 2925 and 2800 .  So for the three of them, the assessment per square foot is much more consistent with the new valuations than with the old. An error?

Then…. Are these recent purchases?  No, it seems.  One bought in 1980.  Another couple  bought in 1994.  So they have remained vacant land in the city for literally decades. What were they bought for?  $450, $2,275, $2,275 and $4,323.  So he paid very different prices on them, maybe it makes sense they have slightly different values now?

Funny thing right when you think about it.  When he bought decades ago there was a land tax in the city of Pittsburgh so he likely had to pay the split tax which really hit vacant land harder than other properties.  He did well when the reassessment came in and got rid of the split tax in the city at the time.

So the property listed as $1000?  It is the only property listed as having no utilities and no off street parking.   I don’t see how 2 of them have off street parking as it is… All seem to have some hillside issues. Maybe if the good Councilman corrects the parking data on the property cards as they have shown for the last decade on those two properties he might get a big tax break administratively… no need to go to a formal appeal even.  Though what I really think is happening is that the low valued property is one that has signed away an easement for this billboard. If I am right it is another reason the parcels are not homogenous and clearly a disamenity for one of them… if I got the spot right which is unclear.

I’d ask for a commission on that advice for the savings he will get.. but it just can be much.  The county tax bill on each property now comes to about $9.38 per year.  With the 2% for paying early, and he does pay early each year it comes down to $9.19. Works out to 76 cents per month.  So 45 cents postage on the letter back to the county represents almost 5% of his entire tax bill.  I guess since he works for the county part-time, he might just drop it off and save the postage.

But this is the entire point of Henry George’s land tax.  Property in the city undeveloped is not supposed to happen.  So sitting on 4 city parcels for decades with taxes so low that there is no incentive to either develop or sell to someone who is willing to develop is exactly what you don’t want to happen for a city parcel.  Now with the new values jumping several hundred percent he might have to pay $25 in tax annually to the county.  Granted a bit more to the city and school district, but still.

and since everything gets tied together in Pittsburgh.  The nano-tempest over what percentage of Pittsburgh property owners who will see their taxes will go down with the reassessment??  Well, I excluded properties with previous values under $3K precisely to exclude the many parcels like these that just are not the point when you see the news interviewing long time residents worried they wont be able to pay their new tax bills.  These 4 parcels showed up as 4 datapoints in the other calculation.. not mine… so implicitly weighted the same as 4 life long residents elsewhere in city.  Does that make sense?

In the end though.. what looks to me like a prime example of the new assessments doing a lot better than previous values is turned on it’s head.  In this case the old values sure seem to have been done a bit superficially and clearly didn’t reflect what was different about the parcels.  Now that has been corrected, it is deemed to be evidence of gross error???



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The Sad State of Mainstream Economic Analysis

By Simon Grey, on February 1st, 2012
I have a new post up at In Mala Fide. An excerpt:

To be honest, this sounds like a lot of pious baloney. As Michael Beckley points out in a new article in International Security, “The United States is not in decline; in fact, it is now wealthier, more innovative, and more militarily powerful compared to China than it was in 1991.”

Yep, and the Roman Empire saw continuous growth right up until it declined. A trend line is not a guarantee of future performance, as anyone with half a brain knows. Yet this clown somehow thinks that this particular trend line will continue on its path. The best way to predict the economic future is to look at fundamentals of the economy (e.g. legal system, regulatory system, tax policy, etc.) and see what effect the current policies and practices will have on the future. Of course, this is significantly more difficult than identifying a trend line and extrapolating (probably because fundamental analysis requires thinking whereas trend analysis requires Excel and rudimentary data entry skills, which many trained monkeys are capable of performing), which is why most mainstream economists never bother with it.

The rest can be found here.


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Triple-Digit Oil Investing and a Natural Gas Price Rebound: Bill Powers

By The Energy Report, on February 1st, 2012

Bill Powers Powers Energy Investor Editor Bill Powers doesn’t shy away from microcaps; he embraces them. In this exclusive interview with The Energy Report, he explains why triple-digit oil is here to stay and how the best-positioned companies will be sitting pretty when natural gas prices rise—as will investors who time the rebound right.

The Energy Report: Is it fair to say that you are a value investor?

Bill Powers: Absolutely. I’m very much a value investor focused on fundamentals and finding companies that can grow reserves, production and cash flow without taking on too much debt and/or diluting shares. Those are the companies that can have very strong long-term outperformance. That is my theme, and I think it is really powerful right now. The companies I’ve identified do not currently reflect future prices that their stocks will be receiving.

TER: Clean balance sheets, steady cash flow and a depressed market price: would that sum it up?

BP: Yes. The Canadian junior market has changed in the last 10 years markedly. It’s matured greatly. Many companies have proven management teams and very good cash flow but are trading below their net asset value.

TER: Do you try to stay away from micro-cap stocks?

BP: Absolutely not; I very much embrace micro-cap stocks. As a newsletter writer, my commentary is largely directed at investors who want information on companies that are below Wall Street or Bay Street’s radar screen. I try to find the company that I feel is best positioned in a certain play and that have the chance for the best share price appreciation. Usually, it’s not the large-cap producers who have acreage in the play.

TER: How do you define a micro-cap?

BP: I consider a micro-cap as $250 million (M) on down.

TER: You recently wrote in the Powers Energy Investor that foreign investors are paying too much for joint venture (JV) agreements with large North American companies. If foreign companies are overpaying, why is that depressing the price of gas?

BP: I’ll give an example: Chesapeake Energy Corp. (CHK:NYSE) made a deal with Total Energy Services (TOT:TSX) to farm out its Utica shale acreage in Ohio. To put this into perspective, there have only been a handful of wells drilled in Ohio into the Utica shale, primarily within one county. This is a speculative play and I am very skeptical of how productive the Utica shale could really be.

That being said, the way these deals are structured is that Total, the foreign company in this case, pays $600M up front to Chesapeake, which will be drilling wells funded completely by Total. So between now and the end of 2014, it will be spending $1.5B on drilling. There are other companies that have done similar deals totaling maybe $20B from largely foreign companies farming into U.S. acreage. This is important because the foreign company will fund drilling for usually two years irrespective of gas price, and when companies drill with somebody else’s money, they are not sensitive to the fact that gas right now is under $2.50/thousand cubic feet (Mcf). It’s a good deal for the American companies, but it’s usually a very, very poor deal for the foreign firms.

TER: Classic economic theory says that if you keep producing like this and prices get very low, people will quit producing. Then, eventually, prices will go back up. When does that happen?

BP: I think it’s going to be happening fairly soon. Right now we have a glut of gas. Part of this is due to Haynesville and Marcellus operators’ drilling acreage to keep leases from expiring. The rig count is really starting to fall, especially in the Haynesville, which is producing 6 billion cubic feet (Bcf)/day right now and is the largest-producing field in the U.S. But that rate has already flattened out, and production will probably start to fall as rigs continue to get dropped. These are very high-decline wells. Texas production is beginning to decrease because the Eagle Ford is not offsetting production declines elsewhere in Texas. Gulf of Mexico production continues to go down. Basically, with gas under $3/Mcf, virtually every field in North America is uneconomic, and we will see a big slowdown in drilling. Very few companies have attractive hedges in place because we’ve had low gas prices for a couple of years. We will see a rebound in gas prices, and it will be quite violent. The challenge is finding the right timing of it. It is not so much a function of when the economics make sense as it is about when other people’s money runs out. We’re seeing that happen right now.

TER: Have we reached the point of maximum pessimism yet?

BP: That’s hard to say. I do think there is a lot of pessimism, but that doesn’t mean a reversal is imminent. I do think that at some time in 2012 we will see that reverse itself, and when that happens we will see gas prices increase substantially.

TER: It sounds like you are playing a very bullish scenario for natural gas. One of the first things I noted in your model portfolio from your Powers Energy Investor is that you have significant personal exposure to natural gas.

BP: Yes, absolutely. From an investor’s standpoint, being a contrarian is easy when your stocks are going up or when your ideas are being recognized by other market participants. What I’m doing in my newsletter is finding gas producers that have been beaten bloody by the marketplace but are low-cost producers that will make it to the other side to see the rebound in gas prices. I’ve identified about five companies that are leaders in certain plays or that have very good leverage to what I think are some of the best North American unconventional resource plays. Those are all places that will continue to produce into the future because they have the better acreage that will become economic once gas prices go back to $4/Mcf. Right now, you’re getting a lot of upside for free because the marketplace doesn’t believe that gas prices will eventually rebound.

TER: Could you talk about those companies you just referenced?

BP: Sure. One of the companies is Ultra Petroleum Corp. (UPL:NYSE), which is a slightly bigger company than I usually cover. It is very active in Wyoming on the Pinedale Anticline, and it’s also very active in the Marcellus. It is a very low-cost producer. This company was a penny stock about a decade ago.

Another I really like, a smaller company, is Advantage Oil and Gas Ltd. (AAV:NYSE; AAV:TSX). It has a great project in the Montney in Canada. It is an extremely well-run company that I think is doing very good work up there.

There are other companies that offer a lot of value and have seen their share prices decline, such as Fairborne Energy Ltd. (FEL:TSX) in the Willrich. It’s a very exciting play in Alberta’s Deep Basin.

This is just a preview of companies that I think have good acreage and that are very leveraged to rising gas prices.

TER: Those were three of your five favored gas companies. What were the other two?

BP: One is Quicksilver Resources Inc. (KWK:NYSE). It’s a U.S.-based company that has a fair amount of debt on its balance sheet. However, for a small-cap company, it has fantastic acreage in the Horn River Basin, where it is very early stage, but this may turn out to be the best shale gas play in North America. Time will tell. This company has been around for more than 50 years, and it has a very good management team. It has been a leader in a number of shale plays. It had the Antrim shale in Michigan and the Barnett shale in Texas. It was one of the early players in those plays.

The other one I like is a bigger company that continues to produce very good results, and that is Southwestern Energy Co. (SWN:NYSE) in the Fayetteville shale as well as in the Marcellus. The company has a dominant acreage position in the Fayetteville and has really been able to grow its production quickly in the Marcellus. It is a very well-run company by Steve Mueller.

So those are just some companies that I try to find. Each is unique. Each of them has different catalysts that will help its share prices more than double once gas prices start to move up. I think these stocks could go up three- or four-fold from here without any problem.

TER: Ok, you love natural gas. What about oil?

BP: I’m very bullish on oil. I think there are some very good factors that will keep the price of oil over $100/barrel (bbl) almost irrespective of how the economy does. With the natural declines from the Gulf of Mexico and the North Sea as well as Venezuela and Mexico, a lot of countries are struggling to keep up production. I think the U.S. has been able to increase its production materially over the last five or six years due to breakthroughs in technology, but that does not change the long-term trajectory of oil production in the U.S. We will see declines from California and the Gulf of Mexico, and we will see further production declines in Alaska, which will largely offset some of the very exciting production growth in unconventional plays, such as the Bakken in North Dakota or the Permian Basin in Texas. I do think triple-digit oil prices are here to stay, and I think we could see $150/bbl before too long, especially if there is a disruption in the Middle East. I think the leverage available to investors with small-cap companies is really mindboggling when you look at what oil prices mean to these companies.

TER: What oil-based companies are we looking at?

BP: Arsenal Energy Inc. (AEI:TSX), a very exciting play in the Bakken. It also has acreage in the Willrich and a very good management team. It is growing its production, and it just did an acquisition that grew its production to around 4 thousand barrels (Mbbl)/day. It has a very strong future as far as production growth that’s high net back, high cash flow and reasonable balance sheets. That’s one company that I am very high on. It has a market cap of only about $109M. It is one of my favorites.

As far as other companies that have great leverage that will go up, I’m becoming very keen on oil sands companies. I think companies like Connacher Oil & Gas (CLL:TSX) are going to rebound and continue to rebound. PetroBakken Energy Ltd. (PBN:TSX), Petrobank Energy & Resources Ltd. (PBG:TSX) and Petrominerales Ltd. (PMG:TSE) are all very oil-weighted companies that will be able to really ramp up cash flow in 2012 as oil prices maintain the $100-level.

Then we do see some U.S.-based companies like SM Energy Co. (SM:NYSE) in the Eagle Ford. This is along my theme of trying to find companies with the best leverage to a certain play. I think SM Energy has the best acreage in the Eagle Ford.

A couple of companies are involved in secondary oil recovery are Evolution Petroleum Corporation (EPM:NYSE) and Denbury Resources Inc. (DNR:NYSE). I think both of those companies are very well-leveraged to oil prices.

So those are some ideas that I think will provide shareholders great returns in the next two years.

TER: Speaking of oil sands, the Obama Administration nixed, at least temporarily, the Keystone XL Pipeline from Canada down to the Gulf Coast. Are the concerns valid? Aside from the developer TransCanada Corp. (TRP:TSX), who does this hurt?

BP: I think this really hurts American consumers. I don’t believe the concerns over the environmental aspects of the XL Pipeline were valid whatsoever. I think this was almost entirely a political maneuver. Right now, the U.S. still imports a substantial amount of production from overseas, and I don’t think some of these overseas suppliers are nearly as reliable as Canada. We import a lot from countries such as Venezuela and Mexico, which are struggling to maintain their production levels and are increasing internal consumption. So I think it is unlikely we will see material imports from either of those countries 10 years from now. Given the growth profiles of many Canadian oil sands producers such as Imperial Oil (IMO:TSX; IMO:NYSE.A) and Cenovus Energy Inc. (CVE:TSX; CVE:NYSE), I think we will see material growth in the Canadian oil sands from about 1.2 million barrels (MMbbl)/day to maybe 4 MMbbl by 2022, obviously depending on permitting issues and the price of oil. I think the Keystone would have been a very good supply. Eventually, I think the Canadians will get fed up and build a pipeline to Port Rupert and send the oil sands production to Asia if the U.S. cannot find some solution to get the XL Pipeline moving forward.

TER: The differential in price for what Asians are paying could pay for shipping that oil to Asia.

BP: Yes, absolutely. And one of the things we’re seeing in Asia is that some of the biggest producers such as Indonesia are seeing flat to declining production. And China has really struggled to keep its production flat. There have been some very good offshore finds in Malaysia and Vietnam that will replace some of the declines from places like Indonesia, but on an overall basis, those are not keeping up with the growing regional demand. Numerous Asian countries, especially China, would love to tap into the Canadian oil sands. A pipeline will get built. It’s just a matter of whether it leads to the U.S. or to the west coast of Canada.

TER: You have reviewed Energy XXI (EXXI:NASDAQ) recently.

BP: It’s not in my model portfolio right now, but I was very impressed that it has been able to grow production and that the company has a material oil weighting. It has a very good mix of exploration prospects as well as development prospects. Right now, the market has really turned its back on the Gulf of Mexico producers such as Energy XXI, and it is trading at lower valuations than its onshore peers, but it is able to generate material cash flow. In the case of Energy XXI’s balance sheet, I think some investors were a little scared off by its debt levels, which I see as very manageable given the cash flows it will be receiving over the next two years and its significant material reserves that it can borrow against. I think Energy XXI has a pretty bright future. I’m going to continue to monitor the company and see how it continues to execute over the next six months or so. It has a very good mix of high-impact exploration and lower-risk development.

TER: Bill, you are writing a book now?

BP: I’m currently working on a book that looks at shale gas and what I consider to be the myth of a 100-year supply. While there is a significant amount of shale gas that will be recovered in the next decade, it is nowhere close to a 100-year supply. Shale gas is not the game changer that a lot of people think it is.

TER: What thought would you leave us with?

BP: I think the perceived risks in energy investing have been somewhat overblown given where oil prices are. The space is very volatile, but for investors who can take a longer-term approach and who can identify companies that are well-run and that have legitimate projects, there are fantastic returns available. The energy sector has been out of favor, but the fundamentals are very strong. I think investors who can position themselves in gas-weighted firms ahead of the coming rebound will be richly rewarded, but there are also fantastic returns in oil-weighted companies that will benefit mightily from triple-digit oil prices.

TER: Bill, I’ve enjoyed speaking with you.

BP: Thank you for having me.

Bill Powers is the editor of Powers Energy Investor and previously the editor of the Canadian Energy Viewpoint and US Energy Investor. He is a former money manager and has been an active investor for over 25 years. Powers has devoted the last 15 years to studying and analyzing the energy sector, driven by his desire to uncover unrecognized trends in the industry and identify outstanding opportunities for retail and institutional investors.



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Economic Events on February 1, 2012

By B.P.T., on February 1st, 2012

The figures for motor vehicle sales for January will be released today.  The consensus estimate is that 13.6 million autos were sold last month, which would be the same as the previous month.

The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week.

At 8:15 AM Eastern time, the monthly ADP Employment Report will be released.  Investors will be watching this number to get advance notice on the state of the job market in advance of the government’s report on Friday.

At 10:00 AM Eastern time, the Construction Spending report for December will be released, and the consensus is that there was an increase of 0.5% in spending compared to the previous month.

Also at 10:00 AM Eastern time, the ISM manufacturing index for January will be released.  The consensus estimate is that it increased 0.6 points last month to a value of 54.5, and will still signal economic growth as it stays above the mid-point of 50.

At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.



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