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Michael Filloon
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Michael Filloon is the head energy analyst at Split Rock Private Trading and wealth management. He is an accomplished and well respected energy analyst covering cyclical sectors including Energy & Commodities. His focus are North American shale plays including the Bakken, Permian Basin and... More
My company:
Split Rock Trading and Wealth Management
My blog:
The Bakken Update
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  • Intrepid Potash: Only Pure Potash Play in the Western World

    Agricultural commodities like corn, wheat and soybeans have seen big increases in price since July. Fertilizer price increases have also been realized. Phosphorous, nitrogen, and potash have show good demand fundamentals. Since a farmer can get more for what he is selling (if he isn't hedged), he will pay more for tractors, fertilizer, and other items that will increase yield. Of the three nutrients in fertilizer I think potassium could be the winner. It is my guess in the intermediate to long time frames potassium will outperform both nitrogen and phosphorous.

    Potassium is mined in the form of potash. Since increasing production of potash requires large capital expenditures, either through opening a new or expanding a current mine’s production, they generally have better ability to increase prices when inventories decrease. Generally, materials that are difficult to increase production will see faster price increases. The last time potash prices increased, it was very fast. There are several companies that deal in potash. Potash (NYSE:POT), Agrium (NYSE:AGU), and Intrepid Potash (NYSE:IPI) just to name a few. I like all three of these companies, but like Intrepid more.

    Intrepid Potash(IPI) is a potash only company. They are the largest United States producer of potassium fertilizer. They currently provide 1.5% of world demand and 9.4% of United States demand. Their five production facilities currently produce .9 million tons of potash and .2 million tons of sulfate of potash magnesia. They can increase production easily as their mines are operating at 85% to 90% efficiency. Their capital expenditures should provide an increase in production in the short term also. This coupled with their ability to increase price in the short term lead me to believe that they will be increasing company estimates. As of September 30th they had $126 million in cash and investments with zero debt. In 2010, Intrepid made $.52 per share. The estimate for this year is $1.52. Their last quarter they reported $.16 per share versus the street's estimate of $.10.

    Intrepid has a large backlog of orders. Companies are stocking up on supplies of potassium for a couple of reasons. It is estimated there will be a very large application season this year. Since demand is high, Intrepid was able to delay booking of anymore rail deliveries, and sell all excess on the spot market. Potassium prices have increased. In the 3rd quarter of last year potash sold for $343/ton. The November 1st price was increased to $485/ton. The last time inventories were tight potash went to almost $900/ton in November of 2008. I expect going forward we will continue to see price spikes in potash. Since their are very few producers, and few deposits, any decreased production can cause a shortage. Potash production will need to be increased over the long term. Population growth creates more mouths to feed. Since there are very few countries that can increase farmland, many will be forced to apply more fertilizer to increase yield. With the world's middle class getting larger, there will be an increase in the world's need of crops. Historically, the middle class consumes more meat. For every pound of meat a person eats, ten pounds of grain are needed to feed the animal before it goes to slaughter. The ratio of farm land to the number of people has also steadily decreased since 1970. Since 1980, world grain production has increased 50%. The stock to use ratio has decreased almost 20% from 1984.

    The fundamentals for fertilizer are strong this year. Potash application was low 2008-2009 planting season. The lower application and a very large crop depleted the stored nutrients in the soil for both 2009 and 2010 planting seasons. Application should be high on the base acres. Since supplies of many crops are low, farmers will bring out additional acres to farm. All of this could lead to a very large application rate for this year. Ethanol could also increase corn usage. When an economy comes out of recession they tend to use more gas. Going on trips, eating out more, or just shopping, families generally drive. The USDA states that ethanol will grow to 35% of all corn use. The CAGR of ethanol usage from 1999-2010 is 22.2%. If current ethanol mandates are met solely by the United States, an extra 200 to 400 million bushels of corn will be needed each year. By 2015, it is estimated total corn production will be 5.3 billion bushels.

    There are several variables the distinguish Intepid Potash (IPI) from other players in the space. They are a pure play on potash and the only one in the western world. Intrepid also has attractive growth possibilities with better margins, with respect to their type of potash. Their location places them very close to states that use large amounts. When compared to their North American competitors, Intrepid averaged $151 more per ton in 2009. Their gross margin advantage over their competitors was $114. Every year since 2007, they have increased their gross sales price advantage. They serve three markets. The first is agricultural. The second is animal feed. Potash for animal feed is much cheaper to produce. The last is industrial uses for delivery to oil and gas companies. This part of their business constitutes 30% of sales. Almost all of this sector is done on the spot market and is needed right away. Spot prices are usually higher and sales are done quickly without contract. Intrepid is also decreasing costs and increasing productivity through capital spending . They have reinvested $300 million since 2000. Last year they invested in the company to decrease bottle necking. Their new compaction system will granulate 100% of the Moab mine as opposed to 40%. Intrepid is also in the process of expanding into the langbeinite fertilizer business. They are also expect increased utilization of their Trio brand fertilizer. Trio incorporates potassium, magnesium and sulfur. They believe they will have premium pricing power with respect to the Trio brand. Trio mine recoveries are expected to increase from 30%-35% to 50% this year. They are already working to decrease water usage. Their HB solar solution mine was done at half the price of current greenfield projects. Their production costs per ton are estimated to be $65 to $75. This mine will produce 150000 to 200000 tons per year. Fertilizer stocks are one of the three sectors I am bullish. I think this entire sector should outperform, but I like the fundamentals of potash much better.



    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IPI, SQM, CMP over the next 72 hours.
    Tags: IPI, agriculture
    Jan 20 12:53 AM | Link | Comment!
  • 17 Stocks to Gain Exposure to Bakken Oil
    The Bakken Formation has become a significant source of oil.  It was first analyzed in 1951 by the USGS.  They found the oil in the source rock would not be recoverable, but oil reserves below were.  New techniques opened up formations that have been historically difficult to drill.  In 2008, a USGS report stated recoverable oil in the Bakken ranged from 3 billion to 4.3 billion barrels.  In 1999 they wrote total oil content was from 271 to 503 billion barrels.  This formation covers 200000 square miles.  Elm Coulee Oil Field in Montana is estimated to one day produce 270 million barrels.  EOG Resourses reported a single well they drilled in Parshall, North Dakota is estimated to produce 700000 barrels.  Although most investors know oil producers like Exxon Mobil (NYSE:XOM), some can find it difficult separating which oil exploration and production companies by locale.  The reasoning for this list is to identify what oil drillers are levered to the Bakken Shale.  For convenience sake, I will identify the company by their market cap, and operated rigs running.  Companies are listed in order of acreage owned in the Williston Basin.1. Continental Resources Inc. (NYSE:CLR)-Market cap 10.66B, 21 Rigs2. Hess Corp. (NYSE:HES)-Market cap 26.98B, 15 Rigs3. EOG Resources(NYSE:EOG)-Market cap 25.55B, 12 Rigs4. Exxon Mobile(XOM)-Market Cap 392.51B, 7 Rigs5. Whiting Petroleum(NYSE:WLL)-Market Cap 6.68B, 14 Rigs6. Newfield Exploration(NYSE:NFX)-Market Cap 9.51B, 4 Rigs7. Brigham Exploration(BEXP)-Market Cap 3.31B, 6 rigs8. Marathon Oil(NYSE:MRO)-Market Cap 30.24B, 6 Rigs9. Denbury Resources(NYSE:DNR)-Market Cap 7.66B,  N/A10. Oasis Petroleum(NYSE:OAS)-Market Cap 2.67B, 5 Rigs11. ConocoPhillips(NYSE:COP)-Market Cap 99.5B, N/A12. Baytex Energy(NYSE:BTE)-Market Cap 5.36B, 3 Rigs13. Northern Oil and Gas(NYSEMKT:NOG)-Market Cap 1.41B, Minority Partner14. QEP Resources(NYSE:QEP)-Market Cap 6.72B, 2 Rigs15. Kodiac Oil and Gas(NYSE:KOG)-Market Cap 933M, 2 Rigs16. SM Energy(NYSE:SM)-Market Cap 3.69B, 2 Rigs17. Samson(NYSEMKT:SSN)- Market Cap 140M, 3 RigThere is considerable difference in acres owned by these companies.  Continental Resources owns almost 870000 acres, while Samson (SSN) only owns about 3000.   I did place an N/A by each company that I did not find a rig operating with that company's business listed.  This does not mean that they don't have rigs operating, as they could have a subsidiary corporation that owns the wells.  I also place minority interest by Northern Oil and Gas (NOG).  Northern Oil and Gas(NOG) operates only as a minority partner.  This means the wells they have interest in, another company will operate the rig lowering Northern Oil and Gas' risk. It also is less work intensive and why they can operate a 1.4 billion dollar company with just 8 employees.  In summary, I think most of these companies on the list would be good to own.  There should be plenty of catalysts in the near term to raise stock prices.  Keep an eye on CLR and WLL as Mid-cap picks, and BEXP, OAS, and NOG as Small-cap picks.  SSN is a very small company that is a personal favorite.  I added it to the list even though they are a much larger play on the Niobrara. 

    Disclosure: I am long BEXP, NOG, SSN.Additional disclosure: I will take positions in the names OAS and KOG at any given time
    Tags: CLR, HES, EOG, XOM, WLL, NFX, STO, MRO, DNR, OAS, COP, BTE, NOG, QEP, KOG, SM, SSN, energy, oil, bakken
    Jan 17 11:43 PM | Link | 2 Comments
  • Uranium Participation Corp: A Way to Trade the Price of Uranium
    There has been quite a bit of excitement with respect to the price of uranium.  There are many fundamental reasons for this, and all of them point to an issue of demand as many of the countries that had been impoverished, are now beginning to grow a middle class.  This new middle class in emerging markets will do several things with their newfound wealth.  This middle class works, and where they work will need electricity to run machinery, produce heat, and provide a cool atmosphere.  Also, when the middle class go to their apartment or home they will turn on a television or lights and also want to heat and cool their home.  In many of the emerging markets, there is a problem with getting enough power to these facilities to produce so they can continue to provide service.  Countries are starting to build grids to get electricity to cities, an built plants/reactors to provide energy to make electricity.  Countries like China have found that their coal/natural gas supplies will not last forever, so they are beginning to get into nuclear.  All of this is happening just at a time where a large source of uranium is being pulled from the market.  Playing the uranium exploration and production companies is a good way to invest in this sector, but a more exact way to invest in uranium price appreciation, is to invest in uranium itself.  This poses a large problem, as uranium needs to be handled in a safe way, so storing a few hundred pounds in your garage is definitely out.  Although uranium in its most basic form does not give off alot of radiation, it can still make people sick, and should be treated like lead is.

    So finding a suitable way to invest in uranium for the average person is difficult.  Uranium miners DNN, CCJ, URRE, URZ, URG, UEC, FRG, CXZ, PALAF.PK, and SXRZF.PK will all work, but has more to do with how cheaply it is mined and how much can be produced then what uranium oxide is selling for.  When looking at the current ETF's that are available none directly track the physical price of the metal.  NUCL tracks the S&P Global Nuclear Energy Index which has its largest weighting in utilities at 42%.  Rising uranium prices would actually hurt utilities as it would cost more to produce the electricity.  The URA is much better as their largest holding is CCJ at 17%.  The second largest holding is Uranium One, then Paladin Energy, UEC, and DNN.  PKN has a large weighting in utilities 23.9%.  About half of this ETF is in materials.  NLR has about a 25% holding in utilities and 65% in materials.  I was unable to find an ETF that buys and holds the metal to provide the same price appreciation as would be seen as uranium increases in value, but I did find one stock.  Uranium Participation Corporation U.TO invests in uranium oxide and uranium hexafluoride with the goal of realizing price appreciation.  UPC was formed in 2005, and now has a market cap of 915 million.  Uranium Participation Corp. acts as a uranium holding company.  They will have at the least 85% of their assets in the commodity of uranium.  UPC at this time has no want of selling any of its uranium, but up to 15% of the commodity can be loaned to other organizations to garner interest until the company pays uranium plus interest to UPC.  Denison Mines (NYSEMKT:DNN) currently manages UPC and in return is paid commision, fees and a lump sum per year.  This acts as another revenue stream for DNN.  UPC states that although uranium prices can fluctuate much more than other commodities, they believe that the price of uranium is going higher.  Reasons for price appreciations are:1.  UXCO estimates that uranium demand will increase from 180 million pounds in 2007 to 212 million pounds by 2015 which is based on a conservative 2% growth rate.  2.  International Energy Outlook of 2007 stated they believe energy consumption will increase by 85% by 2030.3.  85% of world production of uranium is from seven total producers.  This can create large disrupsions in uranium supplies.  A good example of this is the water problems at Cameco's Cigar Lake facility.  4.  On average new production takes about 10-20 years to get to market.  This from inherent difficulties in mining associated with environmental problems.  Also, some of the newer production is coming countries in political strife.  5.  Some secondary sources are being removed from market.  Most importantly is teh 500 tonnes of HEU from dismantled Russian warheads over the past 20 years will be discontinued.  Some believe the Russians have decided not to renew because they currently use twice as much uranium in their country than the mine.  This source will help them meet the need of their  aggressive nuclear reactor program.  Also, Russia has been vocal about the pricing being paid for its high grade uranium due to the marked increase of uranium prices over the past two decades.  6. The Uranium Market Outlook in the 3rd quarter of 2010 states that by 2030 uranium demand could be as high as 425 million pounds of uranium oxide.  Median estimates are approximately 325 million pounds per year and low estimates of 250 million pounds.UPC currently has 7.25 million pounds of U3O8 at an average cost of $43.23/lb.  They also have 2.374 million pounds of uranium hexafluoride at an average cost of $152.06/KgU.  These stores of uranium could prove to be quite useful for miners like Cameco that often buy off of the spot market to cover obligations to customers.  When looking over the prices that UPC has paid for it uranium, much of it is worth a considerable amount more now then just a few months ago.  On May 21st of this year, U.TO was trading for $5.21/share.  They are now trading for $8.61.  They have earnings on Monday it will be interesting to see what they have to say.  We may find uranium stores are tighter than we previously thought. 

    Disclosure: I am long DNN, URG.
    Jan 17 1:04 AM | Link | 2 Comments
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