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An interview with Marin Katusa, Casey Research

In the past three years, Marin Katusa, senior energy analyst at Casey Research, has become one of the most respected and listened-to authorities in the investment advisory business. He spends the bulk of his time on airplanes and in far-off places studying the future of energy... and the best ways to make money from it.

Brian Hunt, editor in chief of Stansberry’s free online investment digest, The Daily Crux, interviewed Marin to get his take on where oil prices are headed for the long-term... the regions where investors and traders should focus their dollars... and some of his favorite energy companies with massive upside.

The Daily Crux: Marin... we noticed you guys at Casey Research are bullish on energy. Can you explain to us why?

Marin Katusa: Well, as we've mentioned in our Casey Energy letters, we're short-term bears but long-term bulls.

I think there's a very good chance oil will be knocked back down along with other markets in the short term, but I'd consider that a rare opportunity to buy the best companies at a steep discount. Long term, I'm very bullish on oil because I think the supply of cheap oil is running out.

The days of cheap and easy oil are over. Oil is getting harder and harder to extract because most of the easy-to-find deposits have already been found and extracted.

The best remaining deposits are deep underwater like in the Gulf of Mexico or offshore of Brazil, in state-controlled or politically unstable areas like Iran and Venezuela, or experiencing dramatically falling production like Mexico. There are also huge oil-sands deposits in Canada, but these are more expensive to extract – anywhere from $35-$40 per barrel for existing production, up to $65 or more for new production.

The simple fact is oil prices will eventually rise due to the increased costs involved in meeting existing demand.

On top of that, you've got developing countries beginning to significantly increase their own demand. Right now, you've got just 30 or so of the world's most developed countries, known as the OECD, that consume about half of all the oil produced.

As emerging countries like China and India begin to increase their standard of living, they'll start using a lot more oil. As you guys know, oil consumption per capita is tied very closely to GDP per capita of the country. So this means these emerging countries could be using multiples of the oil that they use now.

Today, China uses just under six barrels of oil per day for every thousand people. In India, it's about two and a half barrels for every thousand. In the U.S., it's just under 70 barrels for every thousand. Even if you figure just a 20% increase in China and India per person – those are huge, huge numbers. China alone has over a billion people. This is going to add tremendous upward pressure on prices.

And of course, I'm sure your readers are aware of the long-term threats to the U.S. dollar. Dollar depreciation will only make the problems I just mentioned that much worse.

That said, in the short term, I think oil is very vulnerable to pullbacks in the general stock market. So we've been telling our subscribers to be very cautious. In fact, a year ago, I decided to use $40 oil as the basis for all of our analyses for our newsletter. If a company we were looking at wouldn't be profitable at $40 oil, then we wouldn't go any further. The logic behind $40 was to provide a real margin of safety should we get the correction in oil I'm expecting.

But it also pushed me to look a lot deeper and be more selective, and it's really paid off in our results – over 90% of my recommendations over the last year have delivered significant profits for our subscribers.

The funny thing is that by not using $70 or $80 oil, I started getting hate mail from people, saying, "Don't you know oil's at $73 and you're using $40?" It was hilarious, but that's exactly my point. If a company cannot be profitable at $40 per barrel of oil, it will underperform its peers even when oil is higher. When I use $40 oil and I like the financials – it's gold.

A good example of this is what we did with Nexen. When I first wrote it up, it was trading at C$23 per share. After doing my analysis, I thought its intrinsic value was less. I said, "Buy under C$16 per share." Of course, I got people writing in saying I was out of my mind for setting the buy price so low. Just over a month later, it was trading down below C$16 per share, and my subscribers ended up making about 50% within four months on a low-risk company.

So by using $40 oil, I get my true value, rather than the market value. There's a difference between intrinsic value and the market value, and I go with intrinsic value. I don't care what people are paying in the market right now. You might not get it today, you might not get it next week. You have to be patient. It's what I call "stink bid investing."

Crux: What else do you look for?

Katusa: Another factor I like to look at is what I call game changers. An example of a game changer is what has recently happened to the natural gas sector in the United States. Companies were victims of their own success, because they were so successful in using new technologies to retrieve gas from the shales, they drove the natural gas price down.

Using advanced technologies to discover big offshore deposits is an example of a game changer in oil. But what you're going to see is a lot of the big finds are going to be drilled by the major oil companies – what I call the super majors – because it's just so expensive to drill these targets.

Crux: Nobody else has the money.

Katusa: That's right. So the only frontiers left for conventional oil production that can be extracted easily and cheaply, like I mentioned before, are in politically unstable countries like Iran, Iraq, Libya.

These countries are fully aware of the potential of their resources locked within their borders. They're increasing the royalties they charge, including the gradual increase in the use of service fee contracts.

We spent a whole issue talking about this in our Casey Energy Report, in the October issue. In countries where the governments hold the ownership of the oil – such as south central Iraq, Kuwait, even potentially Mexico – these are places that you want to watch out for, because they are constitutionally barred from giving foreign oil companies ownership of the oil in the ground. They're not as positive as people think they are.

A reliable and friendly oil source to the United States, such as the Alberta oil sands, is not cheap to produce. The oil sands require at least $35-$40 per barrel at the very minimum to extract, compared to less than $5 per barrel in places like Saudi Arabia, Iraq, and Kuwait.

Proven reserves in politically stable parts of the world unfortunately will cost the U.S. consumer a lot more money per barrel. We spent a lot of time in our latest issue of Casey's Energy Opportunities looking at all of the national oil companies. Of those, you've really only got three you can possibly invest in, if you dare.

Crux: How about your take on the likelihood of big takeovers and buyouts? Do you see oil-hungry nations like China coming in to buy up a lot of reserves?

Katusa: Absolutely, but it's not just going to be the Chinese, it's also going to be big oil companies who want to replace their production with proven reserves in the ground.

An advantage the Chinese companies will have over the Western oil companies is the Chinese ability to leverage their political and economic muscle in places such as Africa, Venezuela, and Bolivia.

These countries potentially hold world-class oil deposits, but it's much riskier for a Western company to explore these regions than the powerful Chinese oil companies.

Crux: China is already in a bidding war with ExxonMobil for African oil...

Katusa: Right. What our angle is, if you're looking to invest in Africa, you're looking for elephant-size deposits – what they call "world class deposits."

The company needs to go in with a crew able to maneuver in politically unstable parts of the world. We had a big and fast win on a company called Tanganyika Oil, using just that concept. They went in, they built up production, then sold the company to the Chinese.

We're doing it again right now on a company called Africa Oil – ticker symbol is AOI on the Toronto Venture Exchange – that's partnering with the Chinese.

The man behind AOI is the same person behind Tanganyika Oil, Lukas Lundin.

Lukas Lundin, like his father before him, has a long record of going into politically unstable parts of the world and succeeding in developing world-class deposits and selling them at huge gains for the investors. So you're going to see a lot of this type of partnering going on where the Chinese want the North American expertise, and in return, the Chinese add value by political clout and financial clout, helping to pay the costs of development.

We wrote up Africa Oil as a buy under C$1, and when it popped up to about C$1.50, we told our subscribers to take a Casey Free Ride [a profit-taking strategy] when the stock was trading above C$1.30, and it subsequently went as high as C$1.70. Currently we have AOI as a buy under C$1, and it's trading at C$0.87, which we view as a very cheap cost for this stock.

Crux: Are there any other countries you're interested in right now? Are you interested in Iraq?

Katusa: In northern Iraq in the Kurdistan region, there are some good onshore blocks with decent royalty rates.

A company called ShaMaran (ticker symbol is SNM on the Venture Exchange) we think has huge potential. It's totally cashed up. I wrote it up as a buy under C$0.20 and put two buy signals on it. It's trading at C$0.57 now. It went as high as C$0.80.

And they've got about C$0.25 in cash per share. This was a company that was trading less than cash – they had more cash than the market cap. Our shareholders bought millions of shares, because we were the only ones writing it up. And it had zero interest – there was nothing going on with it. And they're now in northern Iraq in the area of Kurdistan, which has huge, huge potential.

I've also been looking at Colombia. I think that's a country that people have to pay attention to. In the last month, a lot of the smart money, the big, big players in Vancouver – Frank Giustra and Sam Magid – have been putting huge money, their own personal money, into a bunch of oil plays in Colombia. I would recommend your readers take a look at some Colombia plays. One that I really like is Petroamerica, symbol PTA on the Venture Exchange.

Crux: Great. Any parting thoughts?

Katusa: I think what you have to emphasize to people is to buy at a discount to intrinsic value when it's unpopular, and sell at market value when it's popular.

That's not just being a contrarian. A contrarian is just buying something that's unpopular. Buy something unpopular that has a great discount to its intrinsic value, and when you sell, sell when it's popular and trading at the market value, not at its intrinsic value. So those are the two rules that I have.

Crux: Thanks for your time.

Katusa: My pleasure.

As mentioned above, Marin's track record for profiting in resources like crude oil, natural gas, and uranium is unmatched in the industry.

If you're interested in reading a monthly analysis on the trends and stocks Marin likes, you can get on board as a Casey Energy Opportunities subscriber for only $39 per year. It's an incredible deal and completely risk-free, with our 3-month, 100% money-back guarantee. You can learn more about a subscription here.

By Marin Katusa, Chief Investment Strategist, Casey’s Energy Report

This summer, there's been a flurry of new green announcements from the world's major oil firms.  ExxonMobil, Chevron, Valero, Statoil, Marathon, and Sunoco have all thrown their hats into the green ring.

U.S. government subsidies into renewable energy are forming a green bubble. One that's steadily inflating. But the catch is, only one alternative energy is currently economically viable before subsidies... and that's geothermal.

That would explain the interest Big Business has in the sector.

• Another member of the oil community, Statoil, has formed StatoilHydro, to focus on advanced geothermal development.


• Google.org — the charitable wing of the search engine giant — has become the largest funder of enhanced geothermal research in the country, outspending the U.S. government.


• Alcoa, the world's largest producer of aluminum, is actively participating in the geothermal Iceland Deep Drilling Project (IDDP).

And then there's the mining industry.

• Lihir Gold has already used geothermal resources to build a power plant, which today provides green electricity for the company’s mining operation in Papua New Guinea.


• BHP Billiton is currently investigating the potential for using geothermal heat in the Olympic Dam region of Southern Australia.

The smart money likes geothermal. 

Investing in the growing green bubble could earn you very handsome returns, if you know which companies to choose. Marin Katusa, Casey’s energy strategist, does. Every single one of his 22 latest picks has been a winner, with gains from 44% to 860% – that’s a 100% success rate. To find out how you can profit from winner #23, click here.

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

As the U.S. strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher.

The team at Casey’s Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves.

So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy:

	Consumption Million Barrels/Day
U.S.	19.4
China (Including Hong Kong SAR)	8.3
Japan	4.8
India	2.8
Russian Federation	2.7
Germany	2.5
Brazil	2.4
South Korea	2.3
Canada	2.3
Saudi Arabia	2.2

Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every year, and it should become an exporter before it requires a reserve. That leaves six countries to examine.

The United States

Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days' worth of imports, which would make the reserves equivalent to those of Japan and Korea.

The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter.

In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports.

Still, the 108 or so days' reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.

Scenarios that could force a sustained drawdown of reserves:

China

China's strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government-controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.

China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days' consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels.

The government has also announced plans to increase the country's reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret.

In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.

Scenarios that could force a sustained drawdown of reserves in China: Japan/South Korea

We have placed Japan and South Korea's reserves together, as the two countries have a treaty that allows them to share their strategic reserves.

Resource-poor Japan has one of the world's largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan's island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect.

South Korea is in one of the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels.

Scenarios that could force a drawdown of reserves: India

India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008.

Germany

Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days' worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency.

So How Much Do the Reserves Matter?

According to the U.S. Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days' worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial.

For illustration's sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time).

Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States' inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country's strategic reserves, the impact is even smaller. Since China's 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil.

Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal.

Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits.

In short, if everything goes according to “plan” by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil.

Marin Katusa is a math prodigy and the chief investment strategist of Casey Research’s Energy Division. At the age of 31, he is one of the youngest self-made multimillionaires in Canada… thanks to an algorithmic system he developed that alerts him when a company with sound fundamentals has become so undervalued that it’s a screaming buy.

For years, Marin has been advising Casey subscribers on the best energy picks, generating extraordinary returns. Learn how you, too, can profit from his “secret system” – click here to read more.