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  • The Three Principles That Guide Randall Abramson's Oil & Gas Investment Strategy

    The market analysis tools used by Randall Abramson of Trapeze Asset Management Inc., suggest that the broad market has been fairly valued for about a year. But by applying apples-to-apples metrics to companies in the energy sector, Abramson has found specific equities trading well below their estimated appraised values. By the end of 2015, Abramson predicts oil prices will rise back to $70 per barrel or more, and undervalued energy equities should propel toward fair value. In this interview with The Energy Report, Abramson pinpoints some unloved energy companies poised for the rebound.

    The Energy Report: In a recent research report, you looked at the macroeconomic picture through the lens of value investing. You call the macro view "complex" and "historically unusual." In the context of certain uncertainty, could you please provide us with three principles that guide your investment decisions in today's market?

    Randall Abramson: The reality of the day is that we have historically low interest rates and a number of crosscurrents moving through the economy. At Trapeze Asset Management we've developed tools, some of which we have systematized since the big downturn in 2008-2009, to cope with periods like this. We use our valuation model from a bottom-up perspective to tell us where the individual bargains are, and from a top-down perspective to tell us, in general, whether the markets or sectors are overvalued, undervalued or fairly valued. Today, our work tells us that the market has been hugging fair value pretty closely for about a year, which is unusual. That one tool helps us establish where the markets are and where they ought to be heading.

    The second thing that guides us is the macroeconomic overlay. We have an economic composite and a momentum indicator, both of which are designed to predict whether there is a recession coming and/or a market debacle-not a typical correction but one of those 20% or more doozies. At the moment, our economic composite is showing smooth sailing, not just in the U.S. but also in other global economies. Our momentum indicators show relatively smooth sailing too, though a few countries, including Russia, Brazil and Peru, have negatively triggered.

    And, finally, we try to determine which way the world is going. Disinflationary pressures and the ascent of the U.S. dollar have pushed down the resource sector, and most commodity prices have been badly hurt. The stagnation in many economies around the world has resulted in highly accommodative monetary policies. That's a reason we like the resource sector: We think that reflation is around the corner.

    TER: Fair value would suggest that we're not in a bear market for energy stocks, but clearly we are.

    RA: There's no question that the sector has been in a bear market because we define, like most people, any drop greater than 20% as a bear market. Yet it's the most unusual energy bear market I've witnessed in my 25 years in the business. It's rare to get a selloff like this that is not precipitated by a recession. The demand for oil is ever growing. It normally rises even in a recession.

    The decline started after Brent crude went to $120/barrel [$120/bbl]. It was too far above the marginal cost of production, which is usually what holds the price in check. Then you had the serious rise in the U.S. dollar, which started bringing down most commodity prices because they're priced in U.S. dollars. At the same time you had excess supply driven by the U.S. shale boom. Then, in November 2014, OPEC said that it would not curtail oil production, knowing that would drive oil prices even lower to force production cutbacks around the world. That was probably the right thing to do, but I don't think even OPEC expected to see oil at $40/bbl.

    TER: What are your near-term and medium-term forecasts for oil and gas?

    RA: It's always hard to tell where things are going in the near term. But when you look out, say, six to nine months, you're likely to see a substantially higher oil price. That's because it's unbelievably rare to be trading below the average all-in cost of production. The all-in cost of production is in the $55-60/bbl range. While Brent has gone back above those levels, WTI [West Texas Intermediate] is still below. It's not sustainable.

    Case in point: We have seen the number of U.S. drilling rigs collapse from more than 1,900 to just over 1,000 since last fall. That hasn't translated to lower U.S. oil production yet, but it's coming. If you're not out there finding more oil, and you have abnormally high decline rates-U.S. shale oil wells tend to decline much faster than conventional oil wells-you're setting up for a decent production decline in the next 12-18 months. And, even if U.S. production were to merely flatline, the global supply/demand equation is tight enough that the ever-growing demand should quickly create a supply deficit.

    TER: You still like some energy names, even with oil at around $50/bbl. Is it about finding specific narratives with catalysts in a bear market?

    RA: First of all, you have to have a forecast that the bear market is going to end, which we do. As I said, the price for oil has overshot to the downside, below the average all-in cost of production. There's an adage in economics: Gluts beget shortages and shortages beget gluts. Clearly, we had a "mini-glut" because of the U.S. shale overhang, but we can end up in a shortage position rather quickly.

    Globally, supply amounts to 94 million barrels per day [94 MMbbl/d] versus demand of about 93.5 MMbbl/d. Demand has been growing smartly, thanks to countries like China and India. But the problem for the oil market is that U.S. supplies went from 6 MMbbl/d of supply to 9 MMbbl/d in three years. That has now flatlined just above the 9 MMbbl/day mark and I suspect it will drop. In Q1/15, global oil demand rose by 2 MMbbl/d year-over-year. So U.S. production doesn't have to drop far before overall demand outstrips supply again. That will, at the margin, quickly bring prices back up.

    TER: So even though U.S. oil inventories are at their highest point since 2001, you see that changing quickly?

    RA: Yes, because global inventories are relatively normal. It's only U.S. inventories that are bloated. Some people believe refineries are intentionally building supply because they see problems ahead. Refiners are known for being pretty adept. There has been commentary about the amount of heavy oil that is needed to import for refining. Heavy oil imports have been jacking up and leading to some strange inventory levels in the U.S.

    TER: In the report I referenced earlier, you aptly noted that investors are often giving up returns in the rush to safe investments, like government bonds or slow-growth blue-chip equities. How do you and your team balance risk versus reward?

    RA: A number of ways. I'll divide it between bottom up and top down. From a bottom-up perspective, we look for a margin of safety. That means if the price is trading at or above our appraisal, using our discounted cash flow models as fair value, we're not interested. A stock needs to be trading at a discount to fair value, because if something goes wrong we want to make sure there's a margin of safety. To make a sufficient return that beats your hurdle rate, you want something to go from at least $0.80 on the dollar back up to a dollar, and collect the dividends and growth in the company on top of that. We screen more than 1,200 large-cap stocks-the largest in the world, and a number of medium- and small-size companies, too-looking for those that are trading at less than $0.80 on the dollar. That's one piece of the puzzle.

    Then you want to do your due diligence, to make sure that you understand the businesses you're buying. They shouldn't be subject to regulatory issues that could alter the entire business, or leveraged to a point where the business could be in peril. At the same time, you want to avoid what we call "value traps," where the stock might be cheap, but it's cheap for a reason. Therefore, you want to focus on earnings revisions and near-term happenings in the business.

    From a top-down perspective, you want to monitor not for your typical 3-6% corrections, but for those 20% or more drawdowns in the market. Those usually arrive when recessions come.

    TER: What are some other names that you have positions in?

    RA: One that is farther afield is Orca Exploration Group Inc. (OTCPK:ORXGF)[ORC-A:TSX.V; ORC-B:TSX.V]. The company produces more than 90% of Tanzania's natural gas, about half of which is used to produce power. The stock has been stuck in the CA$3/share range for the longest time as Tanzania struggles with corruption issues. And the national utility, TANESCO [Tanzania Electric Supply Co. Ltd.], has not been meeting its obligations to Orca and other companies on a timely basis, even though things have improved since the World Bank got involved more than a year ago.

    Orca is also not producing at the levels the market expected by now, but a pipeline slated for completion years ago is finally going to be commissioned in a few months. Hopefully, that pipeline will deliver enough Orca natural gas to help alleviate the severe brownouts Tanzania has experienced for many years. In the meantime, Orca is remarkably cheap. The company has more than US$60M cash and is owed more than US$60M by TANESCO and has no debt-there's about CA$2.50/share of net working capital, including amounts we expect Orca to ultimately collect from TANESCO. You're nearly getting all the reserves for free. And the 2P reserves are worth in excess of CA$11/share according to the company's third-party engineers.

    TER: Is the company's move into Italy an attempt to mitigate risk in the stock?

    RA: It's an attempt to diversify, and management liked what it saw there.

    TER: Tell us about Orca management and some of its key people.

    RA: Chairman and CEO David Lyons has had a large ownership stake for many years. He spun out Orca from PanOcean Energy Corp., a successful company that ran for many years. Its primary investment was in Gabon, so he knows what it takes to operate in Africa. Lyons ultimately sold PanOcean to Addax Petroleum [AXC:TSX] in 2006. I think that Orca will get sold, too. In November 2014, the company announced that there were unsolicited expressions of interest, either in the entire company or its assets. Something may already be afoot.

    TER: Why hasn't that created more of a run on the stock?

    RA: People are simply scared of Tanzania. A country that does not pay its bills on a timely basis does not sit well with most investors. People pay a premium for safety, and they discount things that they're concerned about. Our job is to determine whether those risks are real. While we don't believe there are material risks here, resolving Orca's issues has taken way longer than we'd thought.

    TER: Are there any other equity stories you'd like to tell us about?

    RA: We like the oil and gas service space as well. One name in that space is Paris-based Technip S.A. (OTCPK:TNHPF) [TEC:EP; TKPPY:OTC]. Technip is one of the leading oil and gas service companies, offering both subsea and onshore/offshore services, everything from soup to nuts in the business. The stock has been knocked down, along with the whole energy space, to the point where it's trading at about 4.7 times EV:EBITDA versus about 7 times for the group and 10 times for names like Halliburton Co. [HAL:NYS]. We think it's a serious bargain. It's just a lesser-known name.

    TER: What's the next catalyst for Technip?

    RA: It's just about the oil price recovering. The service sector tends to be higher beta, and moves more dramatically. We need to see higher oil prices. When we wake up toward the end of the year, you should see a significant recovery of most players in energy services.

    TER: Are there any other stories you'd like to share with us?

    RA: I'll give you one more: Weatherford International Ltd. (NYSE:WFT), which is also in the oil and gas service space. Weatherford has been in turnaround mode after it added too much debt. But it sold divisions, cut costs and de-levered. Like Technip, once the price of oil and gas recovers, you could see a material recovery in the price of Weatherford.

    TER: What has the macro picture of the last five or six years taught you as an investor on a micro level?

    RA: In general, we've learned from our macro tools that when they are not giving us red flags to remain fully invested, the market will continue to climb the wall of worry. While it's doing that, until there is something to actually worry about, you need to be fully invested, assuming you can find bargains. Otherwise, cash becomes a significant drag to your portfolio.

    TER: Thank you for talking with us, Randall.

    This interview was conducted by Brian Sylvester of The Energy Report and can be read in its entirety here.

    Randall Abramson, CFA, is CEO and portfolio manager of Trapeze Asset Management Inc., a firm he cofounded in 1999 shortly after founding its affiliate broker dealer, Trapeze Capital Corp. Abramson was named one of Canada's 'Stock Market Superstars' in Bob Thompson's Stock Market Superstars: Secrets of Canada's Top Stock Pickers (Insomniac Press, 2008). Trapeze's separately managed accounts are long/short or long only, and have either an all-cap orientation or large cap-only mandate via the company's Global Insight model. Abramson graduated with a bachelor's degree in commerce from the University of Toronto in 1989, and his career has spanned investment banking, investment analysis and portfolio management.

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

    Bottom of Form

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher ofThe Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Randall Abramson: I own, or my family owns, shares of the following companies mentioned in this interview: Orca Exploration Group Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

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  • Joe Reagor: Four Uranium Companies Poised To Profit From The Growth Of Nuclear Power

    Nuclear power is enjoying a renaissance, and the world will soon need more uranium. Up to 50% more within a decade, says Joe Reagor of ROTH Capital. In this interview with The Mining Report, he explains that the share prices of uranium juniors remain low because the uranium spot price has not yet risen to reflect the increased demand just around the corner. This provides a great opportunity for canny, long-term investors, and Reagor identifies four companies that have the means to profit from the inevitable need for their product.

    The Mining Report: The 27th annual ROTH conference was held in California last month. What's the purpose of this conference?

    Joe Reagor: We provide management access to our client base and provide exposure for the smaller-cap companies that are somewhat under-covered by the Street.

    TMR: How would you sum up the sentiments of the participants?

    JR: In the mining sector, I heard a bit of cautious optimism. Conditions seem to be improving, but the strength of the U.S. dollar is not helping most commodity prices. However, if you operate outside of the U.S., margins are improving.

    TMR: With all the concern about a possible stock-market bubble, was there perhaps a feeling that miners may be due for a revaluation because they produce things of tangible worth?

    JR: There has been more generalist interest in mining recently because of the fear that the broader market is getting a bit frothy in certain sectors. This lends support for diversification and investment in mining companies because, as you said, they do produce hard assets and can benefit should the overall market underperform.

    TMR: Since we last spoke, the spot price of uranium topped $40/pound [$40/lb], and is now just above $39/lb. What are the fundamentals that have undergirded this rise?

    JR: There was a significant supply overhang after the Fukushima disaster of 2011. Then there were two large sales that occurred after that, probably inventory liquidation, perhaps from Japan. We reached the bottom last summer.

    The supply overhang peaked again due to increased production from Kazakhstan. But that is no longer a problem. Kazakh production is no longer growing, and some of the larger uranium projects globally have been put on hold. That has allowed the inventory level to return to normal levels and has enabled a more sustainable pricing point.

    TMR: Where do you see uranium going for the duration of 2015?

    JR: There will be additional demand as nuclear reactors come back on-line in Japan, and as China completes new ones. So, I think the price will continue to trend upward, perhaps to $50/lb by year-end, although we might continue to see small pullbacks.

    TMR: China's demand for new reactors is dependent on burgeoning economic growth. Will China continue to expand as it has in the recent past?

    JR: I'm not a macro expert on that subject, but my opinion is that China will continue to grow at a rate that will inspire envy in Europe and the U.S., but it will not be the double-digit growth we became accustomed to. China needs to produce more power for a growing and more affluent population, so it will need reactors. For that reason, I think China's uranium needs may grow faster than its economy overall.

    TMR: According to a report by Cameco Corp. [CCO:TSX; CCJ:NYSE], the amount of uranium required to service the growing number of nuclear reactors will increase from 155 million pounds [155 Mlb] annually today to 230 Mlb annually within a decade. Can this need be met?

    JR: There is some apprehension about whether uranium production can grow to that level. One source will be uranium as a mining byproduct. In the past, uranium produced by certain mines was treated as waste, but, if needed, this could enter the market.

    Multimillion-pound uranium projects in Canada and in the U.S. would likely see increased investment should uranium rise above $55/lb. And Kazakhstan can increase production significantly, even though it already produces one-third of world supply.

    TMR: Assuming that uranium demand does indeed rise to 230 Mlb annually, how would that affect the price?

    JR: In the short term, price spikes of up to $100/lb are possible. In the long term, we're looking at a price in the $60-70/lb range. The problem of price spikes could be solved with offtake agreements, whereby utilities help fund the development of uranium projects in return for contracts to buy uranium at fixed prices.

    TMR: Given the recent success of uranium exploration in Saskatchewan, will there be a rush to develop these projects should the uranium price top $55/lb?

    JR: Not necessarily. The uranium industry is now well aware of its supply-and-demand dynamics. A price above $55/lb will encourage additional development, but not of any projects that would result in significant oversupply. Most of the world's active uranium mines are very profitable at $55/lb.

    TMR: How finely can uranium demand be calibrated?

    JR: Current uranium demand is 155 Mlb, plus or minus 5%, assuming no additional reactors. Reactor lead time is up to five years, and that is more than enough time to source new supply.

    TMR: Can you explain how the price of uranium is determined by long-term contracts signed by utilities and what the current state of this process is?

    JR: Contract-price uranium has enjoyed a premium over spot price. This has trended down to only a couple of dollars a pound, but historically it has been closer to $10/lb. Utilities generally seek to sign contracts to buy uranium two years into the future. But they will sometimes take delivery 6 to 12 months early and have it sent to their concentrators. The ultimate purpose of these contracts for utilities is to provide price stability for energy consumers. And to the miners, these contracts guarantee financing.

    The great majority of uranium is sourced via contracts, with only 5-15% provided by the spot market.

    TMR: It has been suggested that the price of uranium is likely to increase soon because several large 7 to 10 year contracts are coming to an end. Do you agree?

    JR: Some larger producers, such as Cameco or AREVA SA [AREVA:EPA], have contracts with utilities coming up for renewal. There is a essentially a quoted contract price out there that's well known and then an assumed inflationary rate beyond that. I think the utilities are likely to simply renew these contacts with their existing producers. The bigger concern is that the Japanese utilities have not renewed contracts and don't have offtake agreements, so they might be forced into the spot market.

    TMR: We often hear the uranium market compared to a game of chicken between suppliers and utilities. Is this a useful metaphor?

    JR: It's a bit overstated. Suppliers use this comparison in order to suggest that the price of uranium is going to increase, but when we compare in importance the overall cost of running a nuclear power plant versus the cost of 500,000 lb [500 Klb] to 1 Mlb of uranium, the latter is not all that crucial.

    Utilities are not that incentivized to haggle over a few dollars a pound, as the suppliers would have you believe. Utilities can now make up any supply shortfalls from their contracts in the open market, and that could lead to a tighter spot market.

    TMR: Would you talk about mergers in the industry?

    JR: It's been three months since the merger of Energy Fuels Inc. (OTC:UUUU) and Uranerz Energy Corp. (NYSEMKT:URZ) was announced. The deal is transformational in that it creates multiple avenues of producing returns for shareholders. Energy Fuels had been a conventional uranium miner and producer. Adding Uranerz will give it an in-situ recovery [ISR] method of production and therefore the flexibility to fluctuate between the two methods as needed. ISR also provides a low-cost option should the uranium price flatten or trend downward. And the merger also provides the new company with additional cash flow to reinvest into larger uranium conventional projects should the uranium price reach the $55-60/lb range.

    TMR: You recently noted that revised growth plans for the new company will not be available until the merger is complete. Are there any clues as to what those plans might be?

    JR: U.S. companies are prohibited from providing such guidance. I'm sure Energy Fuels would prefer to provide it to shareholders and analysts, but it can't.

    TMR: In your March 23 research report, you wrote, "Q4/14 was a poor quarter for [Energy Fuels], as the company made no significant uranium sales. . .we anticipate a similar sales schedule in 2015 to that of 2014, with [the company] producing only 70 Klb of uranium and drawing down inventories to meet contract sales volumes of 800 Klb." Is this model sustainable?

    JR: Well, Energy Fuels has contracts beyond this year. I believe the contracts do get a little smaller as we go out, but Energy Fuel's goal is to produce only from its conventional mining methods what it needs to deliver into those contracts. Should the uranium spot price rise above $50/lb, Energy Fuels would be able to increase production.

    On the other hand, should the spot price remain flat, we'd expect the company to produce just enough to meet contracts, with perhaps a slight amount beyond that to provide a cushion. The 75 Klb is just it finishing up the Pinenut mine in Arizona. Next year, Energy Fuels will switch to its Canyon mine in Arizona, which is expected to produce the 700 Klb it will need for next year's deliveries.

    TMR: How does Canyon compare to Pinenut with regard to costs? And are there significant costs associated with switching production from Pinenut to Canyon?

    JR: We won't know the cost metrics until Canyon actually begins production, but I expect them to be similar. There's going to be a development cost for Canyon, probably $10-20 million [$10-20M], but the good news is that the Pinenut workforce is being transferred to Canyon, so there will be no significant severance costs.

    TMR: Around the middle of February, Energy Fuels' shares were trading around $6.50 but then fell to $5.03 by the beginning of April. They've since recovered to $5.26/share. Did the share-price fall surprise you?

    JR: I've been a bit surprised in general by the underperformance of the small-cap uranium producers in the face of the steady flow of positive news regarding the uranium price. This provides an opportunity to investors, in my opinion.

    We're maintaining a Buy rating and an $11 target price for Energy Fuels until we get further guidance. My overall view is that the Uranerz acquisition will result in a stronger, better company. Its current valuation is based solely on Energy Fuels, so there is upside for the combined company, even though reworking the numbers may or may not result in a higher valuation after the fact.

    TMR: How does Uranerz make the new company better?

    JR: By providing a lower-cost production footprint. Nichols Ranch will be an ISR producer and is expected to have significantly lower operating costs than those of conventional mines such as Canyon. Uranerz is also bringing some contracts that Energy Fuels can deliver into. Plus, Uranerz's additional ISR projects give Energy Fuels additional future production flexibility.

    TMR: How important is flexibility in today's uranium market?

    JR: Given the potential for price shocks, up or down, having flexibility in its production schedule and investment decisions is a significant differentiator for Energy Fuels. It stands apart from the other uranium juniors that have solely conventional or ISR production.

    TMR: So ISR capability allows the new company to move more quickly based on possible spikes?

    JR: ISR can reach production faster but cannot reach the same magnitude. ISR also allows fluctuation of production flow rates without significantly altering production costs. With conventional mines, production fluctuations can significantly alter operating-cost metrics.

    The advantage of conventional mines is that they are more scalable. So one would expect a shift to conventional mining should we see a big increase in the uranium price.

    TMR: What other junior you follow has seen a significant drop in its share price?

    JR: Uranium Resources Inc. (NASDAQ:URRE) fell from above $1.80 in March to $1.27.

    TMR: Why did that happen?

    JR: First, the company raised additional capital necessary to continue to fund development of its assets, and the additional dilution forced the valuation down. That offset the uptick in the uranium spot price.

    Second, Uranium Resources provided an update on its pounds in the ground resources and reserves, which showed some larger than expected reductions at certain properties. When the company made a land swap agreement on Roca Honda, it didn't provide the exact details of how many pounds were leaving the resource. This turned out to be more than we previously thought.

    This company is more of a long-term call option on uranium. It has no production today, and a uranium price of $48/lb would be necessary for it to move forward on its assets. On March 23, we reduced our target price from $3.50 to $2.25. This company's assets are vast, so investors who believe that the uranium price will spike will be interested in it.

    TMR: What's the best strategy for investors seeking to benefit from the expected growth of nuclear power?

    JR: There are two strategies I like. The first is targeting companies that are not getting full credit for assets that are expected to go into production in the next few years. The second is targeting companies, like Energy Fuels, whose portfolios are diversified enough such that they can wait out flat uranium prices.

    TMR: So you see uranium miners as a long-term investment?

    JR: Yes. The lead time of new uranium mines is long. So the ability to change the stories of these companies does not usually happen overnight, unless there is an acquisition, such as Energy Fuels buying Uranerz.

    As I said earlier, we expect higher uranium prices, but we haven't seen these companies move because most lack financial flexibility. Should the price of uranium reach the $60-70/lb range, these companies will show the cash flow level needed to justify higher valuation, in our opinion.

    TMR: Joe, thank you for your time and your insights.

    This interview was conducted by Kevin Michael Grace of The Mining Report and can be read in its entirety here.

    Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals [steel and aluminum], mining [gold, silver and base metals] and forest products [containerboard, OCC, UFS and pulp]. Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.

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

    DISCLOSURE:

    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Energy Fuels Inc. and Uranerz Energy Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Joe Reagor: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Mining Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

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  • With Expertise And A Little Luck, East West Petroleum Reels In Profits Despite Oil Price Plunge

    Many oil companies have been devastated by the oil price debacle. East West Petroleum, on the other hand, is making money, pumping more oil and strengthening its cash balance. CEO David Sidoo tells The Energy Report how shrewd joint ventures and a firm commitment to low costs have led to highly profitable wells in New Zealand and significant upside in Romania.

    The Energy Report: When was East West Petroleum Corp. (OTCPK:EWPMF) [EW:TSX.V] founded, and where do you operate?

    David Sidoo: East West was formed in 2010 on the back of the award of four exploration blocks in Romania's prolific Pannonian Basin. Following the award, we raised $30 million [$30M] to fund a work program and future business development. We then entered into joint ventures on these blocks with NIS (Naftna Industrija Srbije), the Serbian subsidiary of Gazprom. NIS is committed to funding Phase 1 exploration of €60 million (€60M) in exchange for 85%; we retain an interest of 15% carried through to commerciality.

    In 2012, East West entered New Zealand's Taranaki Basin with the award of three blocks held jointly with TAG Oil Ltd. Ten wells were drilled initially, and production and cash flow from New Zealand began in 2013.

    TER: What was your experience before you started East West?

    DS: I studied at the University of British Columbia [UBC] in Vancouver and played on its Thunderbirds football team. In 1982 we took home, for the first time, the Vanier Cup, the Canadian interuniversity championship. I then played professionally for six years in the Canadian Football League. After retiring from football in 1988, I entered the brokerage business and worked at Canaccord and Yorkton Securities for 11 years.

    TER: What did you learn from football that is applicable to business?

    DS: I learned that you can't build companies and achieve success on your own. You've got to have a good team around you. That's what we've assembled at East West. Most important, members of the team have to have strong technical knowledge. Next comes a good management squad that knows how to run a company, and has the expertise and connections to raise capital.

    TER: What was your experience in oil before East West?

    DS: More than a decade ago, I became involved in a company in the Pannonian Basin called Gasco Energy Inc. We secured acreage and raised over $150M. Gasco has some very good reserves and is doing well.

    We then formed a company called American Oil & Gas Inc. in 2013. We worked in the prolific Bakken fields in North and South Dakota, and sold the company to Hess Corp. for $630 million ($630M) in 2010.

    TER: What is your philosophy of building an oil company?

    DS: Our model has been to enter highly prospective areas early to build a material position, and then find companies with operational capabilities that complement our technical expertise. Our goal is to complete successful partnerships and maximize value to shareholders.

    As far as exploration goes, we're not interested in moose pasture. We want decent acreage in proven areas with infrastructure.

    TER: How does your management team give East West a competitive advantage?

    DS: We have the experience and the technical expertise. Aside from my own track record, Dr. Marc Bustin, a director who's our technical advisor, is a professor of petroleum and coal geology at UBC. He was awarded the Canadian Society of Petroleum Geologists' Stanley Slipper Gold Medal in 2013. He is world-renowned and has examined source rocks all over the world. He can quickly evaluate assets when we look for new opportunities. We're agile and nimble, and we can pull the trigger quickly.

    TER: What are the advantages of working in Romania and New Zealand?

    DS: Both have proven histories of oil production, which significantly derisks exploration. And both offer stable political environments with attractive fiscal terms. The netbacks in Romania and New Zealand are quite high, unlike many other places in the world. Working in these countries is quite similar to working in the United States or Canada.

    TER: What are the advantages of the joint venture [JV] model?

    DS: It allows explorers and producers like East West to diversify and hold a larger portfolio. JVs make our money go further. By partnering with professionals in the areas we operate, we benefit from their local expertise, while they gain access to our technical team's track record and history of reviewing many different projects around the world. You can never get enough trained eyes to evaluate projects.

    We have a substantial and successful history with this model. American Oil & Gas worked with Halliburton Co. This allowed us to monetize assets that were sold for $45M, which gave us the capital to develop our Bakken play.

    TER: What do your partners in Romania and New Zealand bring to the table?

    DS: In Romania, our partner NIS has extensive success operating in the Pannonian Basin. The company has been the leading oil producer for many decades in Serbia, which is just across the border from our southern two blocks.

    In New Zealand, TAG Oil is one of the leading operators and most active drillers in the Taranaki Basin. The company has a well-earned reputation in New Zealand for great community relations. We had long-term relationships with senior members of their team, which greatly facilitated our deal there.

    TER: How soon after you began exploration in New Zealand did you begin production?

    DS: We were awarded three concessions in New Zealand in December 2012, and began drilling our first well, E1, in August 2013, nine months later. We achieved our first production by year-end 2013. This was our first JV well, and it is still flowing naturally today, with little decline to date. I'll tell you something my wife always says I shouldn't say-you need to be a bit lucky. Some guys have a lot of luck and do well in business, and some don't.

    We're now producing about 330 barrels of oil equivalent per day [330 boe/d] at a cost of about $22 per boe, and that includes all royalties. With the Brent price at about $56 per barrel [$56/bbl], that makes our operations profitable, and allows us to fund the rest of this year's capital expenditure [capex)] from cash flow without using any of our $8.1M cash balance. Our rapid progress in New Zealand is a testament to TAG and to the country, which is very supportive of oil and gas development.

    TER: How much of your production is oil, and how much is gas?

    DS: Oil is 73%; 27% is gas. Right now we're only selling the oil; we're flaring the gas. But in about three months, a gas pipeline will be completed. That should reduce our cost per barrel to about $18.

    TER: What do you anticipate East West's year-end daily production to be?

    DS: We have one commitment well to drill later in 2015. Production should remain fairly steady, but we hope to raise it to perhaps 400 boe/d.

    TER: You announced the successful recompletion of your Cheal-E2 well in mid-March. How significant is that?

    DS: When E2 was drilled initially, in 2013, it did not produce. So its recompletion demonstrates the technical abilities of both TAG and East West. It provides the JV with an additional 100 boe/d for relatively low cost, and greatly improves our bottom line.

    TER: What's the status of your Romanian operation?

    DS: We are fully approved by the National Agency of Mineral Resources. Our JV has four blocks in Romania, and NIS has done seismic work to identify two drill locations on block number 7. NIS is permitting for one location as we speak, and we're hoping to drill by the end of the year.

    TER: You mentioned that East West is profitable, even with Brent at $56/bbl. How low would Brent have to fall before that profitability is threatened?

    DS: Breakeven for our operations is $35/bbl. That includes opex, salaries and all expenses. Today, many petroleum companies are shutting in oil wells or not completing them. They're waiting until oil rises to over $60/bbl, which is their breakeven cost. We're safe and sound now, selling at a Brent crude price even as we benefit from the weakness of the New Zealand and Canadian dollars. But when the price does rise above $60/bbl, we can start taking risks again.

    We've had people approach us for financing, but this would create dilution, so we're not interested. We're making money in New Zealand and we're carried in Romania, but the market isn't giving us any credit for the latter. We are discussing some other locations at the E site in New Zealand, but right now we're determined to focus on our bottom line and keep our general and administrative expenses low. When the market turns around-and this tends to happen fast in our space-we are poised to respond quickly.

    TER: As you said, your cash balance is $8.1M. How much of a cash cushion would you like to maintain?

    DS: I think a double-digit cushion never hurts. When you've got $0.10/share in cash in the bank, and you're building reserves, you start to look quite attractive to the market.

    TER: Despite your rapid advance to production and high margins, East West trades at only $0.15/share. What are you doing to persuade the market of the value of East West?

    DS: We are continuing to spread the word that we're a well-capitalized company, with profitable operations at current prices and meeting our financial obligations. It is our strong belief that when you build a good company, the stock price will follow.

    We were at $0.50/share with no production; now we're at $0.15/share with stable production. We'll be doing $3-4M this year at current oil prices, and we'll start selling our gas shortly. We have a strong shareholder base, and 15% of East West is owned by management. We are all shareholders here. I think there has never been a better time to buy this stock. We're derisked in New Zealand, and our cards are on the table.

    TER: Where do you see your company in three years' time?

    DS: We believe oil prices will likely stabilize in the next few years at $70-75/bbl. In three years, we would like to see production rise above 1,000 boe/d with no further dilution. We'd like to have $15-20M in the bank. We are already looking at increasing our acreage in New Zealand. Our operations in Romania should be well advanced by then. And then we'll look at acquiring a couple of other companies, bringing in partners and getting carried.

    Our shareholders have been really patient in Romania, which is great because we see real upside potential there. This is where we expect to get a big win in terms of developing toward that 1,000 boe/d.

    TER: David, thank you for your time and your insights.

    This interview was conducted by Kevin Michael Grace of The Energy Report and can be read in its entirety here.

    David Sidoo is president, CEO and a director of East West Petroleum Corp. Mr. Sidoo is a successful businessman based in Vancouver, where he oversees a successful private investment banking and financial management firm. Upon graduating from the University of British Columbia in 1982, where he held a four-year football scholarship with the UBC Thunderbirds, he was drafted to play professional football with the Canadian Football League. Mr. Sidoo retired from football in 1988 and was introduced to the brokerage business. From there he became a broker with Yorkton Securities, where he quickly became one of the company's top revenue generators. He went on to become partner and advisory board member at Yorkton Securities, consistently generating commissions that ranked in the top five nationally. In 1999, he left Yorkton to pursue private investment banking. He was founding shareholder of American Oil & Gas Inc. (AEZ), which was sold to Hess Corporation in 2010 for over US$630M in an all-stock transaction. In 2008, The Vancouver Sun voted Mr. Sidoo one of the top 100 South Asians making a difference in British Columbia. In 2014, Mr. Sidoo was appointed by the British Columbia government to the board of governors for the University of British Columbia.

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

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) East West Petroleum Corp. paid Streetwise Reports to conduct, produce and distribute the interview.
    3) David Sidoo had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of David Sidoo and not of Streetwise Reports or its officers.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Tags: EWPMF
    Mar 26 7:50 PM | Link | Comment!
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