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  • Russia Invaded Crimea And These US Energy Companies Made A Killing: Stansberry Research's Matt Badiali Shares O&G Investing Strategies

    Source: JT Long of The Energy Report (4/10/14)

    www.theenergyreport.com/pub/na/russia-in...

    Matt BadialiDon't put all your investments in one stock, warns S&A Resource Report Editor Matt Badiali. In this interview with The Energy Report, he shares a basket of companies that are extracting higher margins with ever-evolving shale drilling methods. Find out about his top tenbagger opportunities at home, in the so-called new science and factory shales, as well as his favorites in the far reaches of Kurdistan, where an eventual takeover draft looks likely.

    The Energy Report: In a recent Daily Resource Update, you wrote a piece called, "Here's How Russia's Invasion of Crimea Could Benefit Some U.S. Oil Companies," and it wasn't the oil producing companies I assumed from the headline. Tell us, what companies could benefit.

    Matt Badiali: The companies that can refine crude oil here in the U.S., put it on ships and send it abroad are the ones benefitting from the spread between Brent crude and cheap domestic West Texas Intermediate prices. I was actually surprised with the results of this research, too. Giant companies like Exxon Mobil Corp. (XOM:NYSE) and Chevron Corp. (CVX:NYSE) had record years for their refining arms.

    Refining is a terrible business. It's notorious for single-digit profit margins. The price of oil fluctuates globally, but the price the refiners can sell it for in the U.S. is limited by consumers. Back in 2008, when the price of oil hit $140/barrel ($140/bbl), the price of gasoline increased, but it certainly didn't go up in the same magnitude as the price of oil.

    Since exporting raw crude from the U.S. is illegal, refined product is leaving the country at record levels. The Energy Information Administration (EIA) has tracked export data since the early 1980s. We are orders of magnitude higher today in export volume than we have ever been. It's going to Mexico, it's going to Canada, it's going to South America, it's going to Asia. We're putting it on ships in Houston and sending it everywhere. These refiners are making a ton of money.

    TER: Also, didn't the U.S., for the first time in a long time, sell crude oil from the strategic reserve as a way to punish Russia?

    MB: That was a warning shot. Russia's economy is based on energy sales. It sells natural gas and oil to Europe and it is starting to develop a bigger sales arm to China. If you can undercut Russia's oil price with higher-quality crude oil, then it really hurts Russia economically. That's what broke the U.S.S.R. in 1991. Back then it took Saudi Arabian involvement. This recent strategic reserve sale increased the supply on the market, thereby lowering the price, which threatened Russia and made refiners at home even more profitable.

    TER: Do the actions in Ukraine have an impact on European oil and gas companies?

    MB: There is a fear premium built into Brent crude, and producers like the Italian oil company, Eni S.p.A. (E:NYSE) will benefit from that. However, Europe's refineries, which are paying the significantly higher price of Brent, are losing their profit margins. That is why companies like BP Plc (BP:NYSE; BP:LSE),Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and Total S.A. (TOT:NYSE) are shedding European refineries.

    Total is in big trouble with a couple of refineries in France. Repsol-YPF S.A. (REPYY:OTCPK), the big Spanish oil company, has invested billions of dollars in retrofitting older refineries and it's making about $1/bbl. It will take a long time to pay off that investment at that rate. So it's kind of a mixed bag right now.

    TER: Back in the U.S., we're coming off one of the coldest winters most people in the Northeast can remember. Is demand for natural gas going to bring the price back up long term or is $6 per thousand cubic feet (Mcf) a temporary blip?

    MB: It is a temporary blip. The price spike is due to a transportation problem. We just don't have the right plumbing in place. There are not enough pipes to get the natural gas to the Northeast. And we did have a record drawdown of natural gas from storage. But there is too much natural gas for the prices to stay high.

    If the natural gas price held at $6/Mcf, supply would skyrocket as well. There would be a mass mobilization of drill rigs into places like the Fayetteville Shale, the Haynesville Shale, the Barnett Shale and the western part of the Eagle Ford Shale. It would be like printing money at those prices, but at $4.50/Mcf that natural gas isn't economic. There is an enormous amount of natural gas waiting to be tapped.

    TER: What is your estimate for the price of natural gas for the rest of 2014?

    MB: I've seen some pretty smart people putting their estimates around $4-4.25/Mcf for the average for this year, maybe a little higher because of that $6 hit we took early. But I suspect that you're going to see prices fall substantially into the summer.

    Natural gas and coal are competitors because of electricity. Energy breaks down to fuel energy-which is usually oil-and power plant fuel, the stuff that powers our electrical grid-that means coal and natural gas. When natural gas was really cheap, around $2/Mcf, many power plants switched to natural gas.

    The new Environmental Protection Agency (EPA) pollution controls on coal plants also sped up decommissioning of old coal power plants. That decrease in demand drove the coal price down. Then when natural gas prices rose again, the plants that could switch, went back to coal. It is a delicate dance between supply and demand for these two fuels.

    TER: The shale plays you mentioned earlier are not all producing the same thing. Some are oilier than others, some more advanced. How does an investor gain exposure to projects in the Bakken and Eagle Ford differently than the new science shales in the Tuscaloosa, Utica, New Albany or Cline?

    MB: When George Mitchell first started experimenting with cracking shale in Fort Worth Texas, the target was natural gas. At that time, natural gas prices had spiked to more than $14/Mcf. The thin layers of shale rock he was observing weren't thick enough to hold a conventional well. He started exploring methods for drilling horizontally and opening up those rocks.

    Fast-forward over 20 years and we know a whole lot more about shale and how to make it produce.

    Each shale requires a slightly different approach depending on the geology. This is the science stage of shale fracking. The Bakken Shale up in North Dakota is well past that stage. Companies like Continental Resources Inc. (CLR:NYSE) went through the science part of that shale in the mid-2000s. Today there are some really interesting new shales, including the Tuscaloosa Marine Shale in Louisiana, the Cline in West Texas and the Utica in Ohio. They are all in the science stage.

    Once operators understand how deep and in what direction to put the wells for the best yields, they go into the development stage. This stage is all about making the best well at the cheapest cost. They experiment with fracking. Back in the 1990s, they might have divided the well into two stages. Now drillers do 30 or more stages.

    As the operators figure these techniques out, production rises. This is when you see a massive increase in production. The Eagle Ford is just finishing up the development stage. It is moving into the factory stage.

    During the factory stage, companies drill three, four, five wells from the same location, going out like bird feet. Or they drill them in parallel. Shale wells can be drilled very close together (called downspacing) by this point. That's where the Bakken is now. The Bakken is an oil and gas factory. You're seeing dramatic increases year after year in oil and gas production in North Dakota.

    TER: Are the improvements in the development stage and increasing the number of frack stages helping with the decline rate problem?

    MB: Absolutely. The decline rate in an oil well is a natural progression. A conventional oil well in sandstone is like a 2-liter bottle of soda. When you shake it and poke a hole in the side of it, cola or, in this case, oil gushes out because of the natural pressure in the rock. As that pressure declines, the production of the well does too. That's decline rate.

    In shale wells, the decline rate is much steeper than in conventional oil wells. Analysts that don't understand shale use that data to predict a bad end for the shale revolution. However, that's wrong. And the reason is that the decline rate of a single well doesn't matter. . .it's the number of wells we can drill in shale that matters.

    Let me explain the difference: Conventional oil fields are geologic anomalies. That's why it was getting harder and harder to find them. A conventional oil field is made up of three things. You have to have a source, which is the shale.

    You have to have the reservoir rock. It has to have something like sand grains in it to hold the thing open with lots of space to allow the oil and gas to get in there. That is called permeability and porosity. That's what allows you to put a well in and suck the liquid out.

    Then you have to have a seal, something on top to keep the oil and gas trapped. A good example would be throwing a handful of Dixie cups in the air. The ones that land open side down are conventional oil fields. These perfect situations aren't common. Giant ones are incredibly rare.

    On the other hand, shale is like the carpet under the cups. It is the source rock, so it is full of oil and gas already. It covers an enormous area, much larger than the area of the conventional oil fields. That's what's so critical. The volume of oil and gas in shale is much larger than in the conventional fields.

    That's why individual well results don't matter. Because the amount of oil available in shale is an order of magnitude larger than what was trapped in the conventional oil fields. And we're just starting to crack these rocks.

    The Eagle Ford Shale was the source of oil for the largest oil field in the lower 48, and it still has billions of barrels of oil in it. That's what's exciting. Most investors just don't realize how gigantic shale fields are. We're just getting good at making them produce oil right now.

    When shales get to the factory stage, companies maximize the amount of oil and gas coming out of the ground and minimize the cost to do it. I'm a huge fan of this.North American Shale Plays

    TER: Is there still money to be made in the Bakken and the Eagle Ford?

    MB: There's absolutely money to be made. I like to find small companies doing something different in those established shale areas. One example is Penn Virginia Corp. (PVA:NYSE) in the Eagle Ford Shale. This is a company that is pushing the boundaries of what we considered the Eagle Ford to be. As the price of land in the heart of the shale play got more expensive, some companies moved to the periphery. That's where they can get a big position without spending a lot of money. Many of these smaller explorers do great work and take what they've learned from the heart of the play and expand it. That's what Penn Virginia did.

    By October of 2013, the Eagle Ford was an old story in the eyes of most investors, and Penn Virginia was a $6.73 stock. It saw an opportunity to move into the area, changed its business model, sold off assets and focused on the Eagle Ford. Shares are over $17 today. George Soros is an owner, and he significantly increased his position in the company. There is a Buy target on this from some analysts, up to $25/share. So, yes, there is absolutely still opportunity in the old shales.

    Companies like Continental Resources kicked off the Bakken, but you don't buy them expecting to make 150%. I want to find the next Continental. I want to buy the billion-dollar company that goes to $23B.

    TER: Where are you looking for the next Penn Virginia?

    MB: I think the next big shale plays are probably the Tuscaloosa Marine Shale, the Utica Shale or the Cline Shale. We're digging very hard into companies working on these.

    However, I like several companies that work multiple shales right now. Sanchez Energy Corp. (SN:NYSE) is a peripheral Eagle Ford player, but it's also in the Tuscaloosa Marine Shale. It's a small cap run by a really smart management team. It's a $1.3B market cap. This is a stock that I think has that potential.

    Another one I really like in the Eagle Ford, Marcellus, Utica and Niobrara in Northeastern Colorado isCarrizo Oil & Gas Inc. (CRZO:NASDAQ). It's the same thing-small cap, moving into the new shales and with a lot of upside potential.

    TER: What puts a company on your radar? Are you looking at number of wells drilling? Success rate? ROI?

    MB: I look at the rocks. I read a lot of industry reports about well production. . .who's drilling where. . .whose well produced the best. It's dry as a bone, but I love this stuff.

    These companies can make individual investors rich. I used to get excited about junior mining companies, and I still do to some extent. But small oil and gas companies are actually companies with revenue and earnings. You can evaluate the business as well as the rocks.

    Even more important, these companies have to maintain bank loans. It's very expensive to drill shale wells, but they end up with long-term cash flow worth many times the initial investment. That bank scrutiny gives investors an extra layer of due diligence because the banks want to make sure that their loans get paid back.

    TER: Are there any rocks and well-run businesses in the Cline that you like?

    MB: There are some interesting companies working not just in the Cline, but also in the Eastern Permian Basin. This is the area under Midland/Odessa, Texas.

    If you ever want to find the flattest, driest, dullest part of the world, go there. No offense to all my friends out there from Midland, but this is the place that you're most likely to be trapped by a herd of tumbleweeds. However, it is a great new shale opportunity. It's still early, in the science stage.

    There are a few companies I like in that area. Laredo Petroleum (LPI:NYSE) and Callon Petroleum (CPE:NYSE) are two little guys. These are small caps that have a lot of potential, like the ones I was talking about in the Eagle Ford. The problem with science shale is that the drillers are still figuring it out. That means expenses are high and the drilling is slow.

    Investors have to adjust their mindset. I don't think either of these companies is going to run up 150% in six months. I do see them both with tenbagger potential over a few years, and I could certainly see the potential to double our money in the next 12-24 months.

    TER: You haven't just been wandering around the beautiful scenery in Texas. You've also been traveling the world. The last time we talked, you shared some insights from your visit to Kurdistan. Have you been watching developments since you left? Are you more or less optimistic than three months ago that oil will again flow freely from the area? I understand there were some problems with pipelines.

    MB: Yes, there are still problems with pipelines and politics. I am still very excited about Kurdistan, but you can't quantify the politics. With major oil companies and the big, influential players in Turkey involved, I still think a pipeline from Northern Kurdistan in Iraq to Turkey is inevitable. There is a dispute with Baghdad about how and who gets paid.

    I warned my readers that this was not a short-term speculation. It takes a long time. Your investment horizon here is 18-24 months, but I think it's going to be worth it. Right now, several juniors have the ability to produce oil in the region, but there is no outlet to get to market. The physical pipe is there; it's a political roadblock. So all we can do is wait.

    Exxon Mobil is already in a partnership to build a second pipeline to get the oil out as soon as the political troubles are over. Once we see oil flowing out of the region, I suspect that the major oil companies are going to do an NFL-style draft on the juniors in the area. They're going to roll them up. All that oil will end up in the hands of just a couple of majors, and that will be that.

    TER: One of the companies you gave us an overview on was WesternZagros Resources Ltd. (WZR:TSX.V). Since then, it has announced it received a declaration of commerciality by the regional government. Would that make it higher up in the draft?

    "WesternZagros Resources Ltd. found oil, vetted it and now has a permit to produce it. That pushes it up into the No. 1, No. 2 draft pick area."

    MB: Absolutely. It found oil, vetted it and now has a permit to produce it. That pushes it up into the No. 1, No. 2 draft pick area. However, I warn people not to invest in just one company.

    At a recent Stansberry & Associates alliance conference in Singapore, I singled out five of these companies I felt like were good speculations and whose rewards more than offset our risk. I presented a basket to diversify risk because these kinds of companies have far more risk, be it political, technical or corporate.

    I told those folks that out of the five stocks, three things will happen. First, something bad and unexpected will happen to one of these companies. One will absolutely blow us away by exceeding our expectations. And the other three are going to do really well.

    A couple of weeks ago, one of the companies fell out of bed, and I have to tell you, I was shocked. The company was Gulf Keystone Petroleum Ltd. (GKP:LSE). It is the operator of the Shaikan field, which is just an enormous discovery. Shaikan's wells flow 10 thousand barrels per day (10 Mbpd). This is a huge field.

    However, an engineering firm audited the field and came back with a lower reserve number than Gulf Keystone had been telling people. It was at the low end of its range. The stock was killed. We hit our trailing stop and sold.

    This is not a bad company. Shaikan is a fantastic oil field. However, it was all about investor expectation. Investors expected a bigger reserve number. The company still has around 20 wells left to drill in that field, which will expand the reserves from where they are now. I still think it is a good buy. It's probably a better buy now that it's significantly cheaper.

    TER: Do you want to give us another name to fill out our basket?

    MB: Sure, Oryx Petroleum Corp. (OXC:TSE) is run by a Swiss billionaire, Jean Claude Gandur, who has been very active for years in Kurdistan. He's an interesting character. He names his companies after obscure African antelope.

    His last venture, Addax, sold to Sinopec Shanghai Petrochemical Company Ltd. (SHI:NYSE) in 2009. My readers made money on that deal, so we were very interested in this one.

    Oryx has an oil field named Demir Dagh. Its projected recoverable oil from this is about 250 million barrels (250 MMbbl), and its projected production once it gets the wells in by 2015 is about 25 Mbpd. It is definitely one of the draft choices.

    When I wrote about this company, it had plenty of cash, no debt, and it's still drilling. It's supposed to be in production sometime this summer, and it has three other targets that it will be drilling this year. We're waiting on drill results. It takes a long time to drill holes in this part of the world because the equipment is just not as good. If you break a drill rod or a bit in Kurdistan, it takes a long time to airfreight one of those suckers from Houston.

    TER: Any final advice for our readers?

    MB: You're going to hear a lot of negative information about shale. It's new. It's different. I see a lot of negative sentiment. People are trying to poke holes in the process. All you have to do to reassure yourself that you're investing in the right place is go to the oil production chart on the EIA website. Take a look at the amount of oil that we're producing today versus the amount of oil we were producing in 2005. Our ability to crack shale is the equivalent of the creation of the Internet for energy. It's that big a deal. Those folks who embrace it and get on board have the potential to make a lot of money.

    TER: Thank you for your time Matt.

    MB: Thank you.

    Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources, including silver, uranium, copper, natural gas, oil, water and gold. He is a regular contributor to Growth Stock Wire, a free pre-market briefing on the day's most profitable trading opportunities. Badiali has experience as a hydrologist, geologist and consultant to the oil industry. He holds a Master's degree in geology from Florida Atlantic University.

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  • Raymond James' Pavel Molchanov Sees Stars In The Expanding Cleantech Universe

    Source: Peter Byrne of The Energy Report (4/3/14)

    www.theenergyreport.com/pub/na/raymond-j...

    Pavel MolchanovCleantech, an outperformer in the energy space since 2012, experienced a major expansion phase in 2013 that is still unfolding. In this interview with The Energy Report, Raymond James Energy Analyst Pavel Molchanov points to companies with innovative technologies, strong balance sheets and financial flexibility as examples of low risk with high-flying rewards. Find out about his strongest Buy recommendation, as well as a special situation in big oil.

    The Energy Report: Let's talk about growth in the energy sector. How well is the cleantech investment sector positioned during the next six to eight quarters?

    Pavel Molchanov: The cleantech index has been the best performer of the energy indexes over the past two years. Since the beginning of 2012, cleantech has outperformed oil services, E&P companies and MLPs, and has dramatically outperformed coal. 2012 was a tough year for the cleantech space. But 2013 was fantastic, and year-to-date cleantech is outperforming again, despite the choppy market. I doubt that cleantech will continue to perform at this pace during the next two years, but there are many opportunities. In 2013 the cleantech index was up 58%, but there were plenty of stocks that doubled and even tripled. There were also stocks that were cut in half. This is a stock picker's market.

    TER: Do you categorize cleantech stocks as intrinsically high risk?

    PM: There are a number of cleantech companies at the low end of the risk spectrum, so we have to look at them case by case. As a matter of investor perception, the cleantech space appears to have a fair amount of volatility, and in some cases it does have a very high beta. But generally speaking, cleantech stocks, like most tech stocks, will outperform in a bull market and underperform when the Dow is under pressure.

    TER: What cleantech companies do you like right now?

    PM: EnerNOC Inc. (ENOC:NASDAQ) is currently my strongest Buy recommendation in cleantech. It is at the lower end of the risk spectrum, and it has done quite well for two years. It is still not priced for perfection, currently trading at about six times EBITDA. The company has no debt, and it has been throwing off free cash flow year after year.

    TER: What is EnerNOC's business?

    PM: EnerNOC is an energy software company that fits nicely into the cleantech category because it enables energy efficiency solutions using proprietary technology. In other words, it is not weatherizing windows, or building diesel generators. It uses advanced software to improve stability on the grid. EnerNOC connects utilities to commercial and industrial power users and enables demand-side energy efficiency solutions, particularly when the grid is in crisis. Imagine a hot summer day when the grid is overburdened. Normally, there could be rolling blackouts. EnerNOC prevents blackouts with its automated demand-response software. It is essentially a service company with regularly recurring revenue, and it earns extra revenue during times of crisis on the grid.

    It has created a nicely diversified revenue mix. In 2010, it only operated in the U.S. Last year, 20% of its revenue came from Australia and New Zealand. And in the last 90 days, it has expanded into Japan, Germany, Austria and Ireland. Demand response is an effective strategy for countries such as Germany that generate a high amount of renewable power. Renewables can be intermittent on the grid; demand response reduces this intermittency by filling in the gaps.

    TER: Is EnerNOC's software proprietary?

    PM: Absolutely proprietary. A secret sauce, so to speak.

    TER: Does it have competitors?

    PM: EnerNOC has competitors in all its markets, but it is the largest demand-response provider in the world. In the U.S., it enjoys a 30% market share. There are other demand-response companies out there, but they are either not public, or they are not pure plays. Johnson Controls Inc., for example, runs a demand-response business, but it is a small part of a very big company.

    TER: Does EnerNOC pay dividends?

    PM: No dividends, though it throws off so much free cash that it could. The firm does have a very acquisitive track record, and most recently it has been implementing a share buyback program.

    TER: Do you have a target price for EnerNOC?

    PM: EnerNOC's share price has doubled in the past year. Right now it is at $21/share and we have a $26/share target price on it.

    TER: What is new in solar power?

    PM: 2013 was a good year for the solar industry. It was a year of recovery after the tough years in 2011 and 2012. Two big swing factors in 2013 were China and Japan. China became the largest solar market in the world because the government dramatically ramped up domestic installation of solar. Japan became the second biggest market because it also prioritized solar adoption.

    There are various dynamics informing these new pro-solar policies by both of these nations. China wants to provide a backdoor bailout to its troubled solar manufacturers, but there is also an environmental element at work amid the epic pollution. Japan, on the other hand, is literally running out of power. After the Fukushima disaster and the shutdown of the country's nuclear industry, it needs every watt it can generate, and solar is a big part of that. In 2013, global solar installations totaled approximately 35 gigawatts. That may not be dramatic, but it was up 12% compared to 2012 levels.

    TER: Do you have any picks in the solar power sector?

    PM: We like a billion-dollar company called Advanced Energy Industries Inc. (AEIS:NGS; AEIS:BSX). It makes inverters, the cash registers of solar energy systems. Inverters connect the generating system to the grid. Inverter manufacturing is a competitive market; there are a lot of players, including some new entrants. But it is experiencing a more benign form of competition compared to companies that make cells and modules. The gross margin structure for inverter companies is around 25% to 30%, which is double the typical margin for module makers.

    Advanced Energy is not 100% solar, though. It has a legacy semiconductor capital equipment business that makes up half of its revenue. The solar inverter business is the other half of revenue, but the solar part of the sales mix is growing much faster than the semi. We are looking for earnings of over $2 in 2014. The stock is in the mid-twenties and trading at a relatively moderate multiple. The firm is debt-free and throwing off a lot of free cash flow. Like EnerNOC, Advanced Energy is using some of that cash to make creative acquisitions.

    TER: I take it you're not too bullish on module manufacturers.

    PM: Generally, no. Although we look at each company individually, the module assembly part of the value chain in the solar space does not excite me. Low-cost players can have slightly better-than-average margins, but it is a pure commodity market with very little technological differentiation. By contrast, a company like Advanced Energy has a lot of proprietary intellectual property.

    TER: What about residential and business delivery of solar power?

    PM: SolarCity Corp. (SCTY:NASDAQ) is the largest U.S. provider of residential solar systems. It is very well known for the success of its solar leasing model. Solar leasing is done by lots of companies, but SolarCity is the biggest. And SolarCity was one of the very best performers in cleantech in 2013. The stock has done amazingly well since its IPO in late 2012. Although it is certainly not cheap, there are many positive elements to the company, including a predictable recurring revenue model tied to its 20-year lease contracts.

    SunPower Corp. (SPWR:NASDAQ) has a footprint in module manufacturing and also in the residential solar leasing arena. I suspect that during the next 12 months there will be a slew of solar leasing firm IPOs. Given the multiples at which SolarCity trades, its competitors must be salivating to go public.

    TER: What about biofuels? Any picks there?

    PM: Biofuels have morphed into a broader arena called bioindustrials. Biofuel companies are now trying to sell high-value materials into specialty markets. Selling the higher-value products provides more profit than competing directly with petroleum fuels. For example, KiOR Inc. (KIOR:NASDAQ) is a cellulosic fuel company that was trying to compete with commodity fuels. Unfortunately, KiOR ran into operational difficulties last year. Given the current state of its operations and its rather strained balance sheet, I am not steering investors to the KIOR stock currently.

    Solazyme Inc. (SZYM:NASDAQ) is a more promising story at the moment. Solazyme is an industrial biotech company that uses algae technology to make high-value products. It is currently selling cosmetics in the skincare market. That is a very different market from the biofuel arena. These types of products have higher-value pricing and lower volumes. In the next few weeks, Solazyme will be opening the world's largest algae-based oil production plant in Brazil. Eventually the company may get into biofuels, but that is not its present priority.

    TER: What about the more traditional oil and gas arena?

    PM: Raymond James' view on oil prices is that there will be downward pressure on oil over the next 12 to 18 months. We are concerned about the possibility of an emerging global oil oversupply, particularly in the U.S., given the surge of domestic production. We are below consensus in our oil price forecast. In that context, the stocks that we generally prefer in oil and gas tend to be more defensive companies that have better capital discipline, pay dividends and buy back shares. In other words, we like companies that live within their means and have strong balance sheets and financial flexibility. These tend to be larger companies as a general rule.

    TER: Like whom?

    PM: I am a big fan of Chevron Corp. (CVX:NYSE). Its stock has been beaten down year-to-date. Not so much because of oil prices, but because the company is spending $11 billion ($11B) this year out of a total $35B dollar capital budget on two LNG megaprojects in Australia. Gorgon LNG is set to start up in 2015, and Wheatstone LNG in 2016. Because of these two megaprojects, Chevron is targeting nearly 5% annualized production growth in 2015, 2016 and 2017, which is by far the fastest in its peer group. And as production grows and capital spending flattens, the firm's free cash flow metrics should improve significantly-which is why I really like this stock.

    TER: Any others?

    PM: InterOil Corp. (IOC:NYSE) is a special situation in oil and gas that has my attention. The company resides in the higher end of the risk spectrum and it is definitely far from a dividend story. It has a $3B market cap. It is a preproduction E&P company that discovered one of the biggest gas fields in the South Pacific more than five years ago. It is now developing the gas field through a partnership with Total S.A. (TOT:NYSE), which is a major oil and gas company based in France.

    Total and InterOil announced this partnership in December of last year and recently finalized all the terms. InterOil has received a $401 million cash payment for selling a portion of its gas to Total. InterOil will also have a stake in an LNG plant slated to be built as a part of the project.

    TER: Do you have a target price on InterOil?

    PM: InterOil's stock is trading in the sixties, and we have a $100/share target price. High-risk, high-reward.

    TER: Thanks for your time today, Pavel.

    PM: Thank you.

    Pavel Molchanov joined Raymond James & Associates in 2003 and began work as part of the energy research team, becoming an analyst in 2006. He initiated coverage on the alternative energy/clean technology sector in 2006, followed by the integrated oil and gas sector in 2009. Molchanov has been recognized in the StarMine Top Analyst survey, the Forbes Blue Chip Analyst survey, and The Wall Street Journal Best on the Street survey. He graduated cum laude from Duke University in 2003 with a Bachelor of Science degree in economics, with high distinction, writing his senior honors thesis about OPEC's oil output policies.

    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 Streetwise Interviews page.

    DISCLOSURE:
    1) Peter Byrne 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) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Pavel Molchanov: I own, or my family owns, shares of the following companies mentioned in this interview: Chevron Corp. 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 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 (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.

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    101 Second St., Suite 110
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    Apr 03 4:19 PM | Link | Comment!
  • Conjuring Profits From Uranium's Resurgence: David Sadowski

    Source: Tom Armistead of The Energy Report (3/27/14)

    www.theenergyreport.com/pub/na/conjuring...

    David SadowskiIt doesn't take a Ouija board to predict a rebound in the price of uranium: Global fuel stocks are insufficient, and unmet demand for uranium is growing. In this interview withThe Energy Report, David Sadowski, a mining research analyst at Raymond James, explains the forces that will push the price of uranium, and the companies that are likely to benefit. Being selective, he says, will provide the greatest rewards.

    The Energy Report: David, the uranium price remains below the cost of production for many producers and the forecasts for uranium production are flat. Why are you optimistic about the uranium space?

    David Sadowski: In the current price environment, supply won't be able to keep up with demand growth. That's really the core to the uranium investment thesis. The cost of uranium production spans a pretty wide range, from the mid- to high-teens per pound for the cheapest in-situ leach mines in Kazakhstan, to $50-60/pound ($50-60/lb) for some of the lower-grade, conventional assets in Africa, Australia and East Asia. So we're looking at about $40 to produce your average pound of uranium. That number is climbing on cost inflation and depletion of the best mines.

    The current spot price is under $36/lb, so many operations are underwater right now. That's why we've seen numerous deferrals of projects and even shutdowns of existing mines, the most significant of which was Paladin Energy Ltd.'s (PDN:TSX; PDN:ASX) Kayelekera at the beginning of February. That's on top of operations that are at risk for other reasons. In just the last few months, we've seen four of the world's largest mines owned by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) andAREVA SA (AREVA:EPA) shut down on operational and political hiccups. Then you look at where the supposed growth is coming from over the next several years- Cameco Corp.'s (CCO:TSX; CCJ:NYSE) Cigar Lake and China's Husab. Those are technically very challenging, too. All of this is occurring in a world no longer benefitting from a steady 24 million pounds per year (24 Mlb/year) supply of uranium from downblended Russian warheads. In short, the supply side is a basket case.

    Yet demand growth keeps chugging along. European Union (EU) and North American growth perhaps isn't what it was a couple of decades ago. Pressure from competing energy sources like liquefied natural gas (LNG) in the U.S. is causing some operators to switch off their older, smaller reactors. But reactor retirements are being more than offset by new reactor construction not only in the U.S. and EU, but much more important, in Asia and in Russia. China, India, Korea and Russia are collectively constructing 70 reactors right now.

    TER: Japan and the United Arab Emirates (UAE) just announced a program to cooperate in developing nuclear technology. What's the market significance of that?

    DS: There is a push toward nuclear in many of these nations in the Middle East. Not only do they have pretty strong population growth and urbanization, thus electricity growth is strong, but some of those oil-rich nations have cited a preference to sell their petroleum into the international markets rather than domestically. The UAE is a very large potential source of demand growth. It is constructing two nuclear power plants at the moment and is imminently going to break ground on two more. There are an additional 41 new nuclear reactors on the drawing board in the Middle East. So in the context of 434 operable reactors today, that's a very meaningful amount of growth potential.

    Demand growth remains resilient, and supply is lagging behind. In just a few years, we think this will lead to a deficit that will quickly grow to crisis levels. That's why we're bullish. Uranium prices have to go higher to incentivize more supply to meet this looming supply gap.

    TER: Why hasn't that happened yet?

    DS: There are just a few forces working against the price. Since the Fukushima accident in Japan, there has been a supply glut in the marketplace. There has been a decrease in demand, with a lower level of buying by some countries, like Germany, Switzerland and, of course, Japan. Additionally, some extra supply was coming out of the U.S. government. There is an extra amount coming from enrichment underfeeding. If you add all that up, there has been essentially more supply than is required, and that puts downward pressure on prices. It's caused the utilities to take a step back from the market.

    TER: So do you think conditions in the market itself will materially improve? What will that look like?

    DS: For us, it comes down to when the utilities start getting involved again. While the utilities have been sitting on the sidelines over the last couple of years, high-fiving each other for not buying uranium in a declining price environment, their uncovered requirements in the future have actually risen quite dramatically. At some point, they have to resume long-term contracting to cover all those needs. Japan is a key catalyst.

    "Fission Uranium Corp. is one of our top picks in the space."

    Japan's reactors were slowly shut down after the Fukushima accident. Right now, none of them are operating. The country's inventories have piled up to probably around 100 Mlb. Many of these utilities have asked their suppliers to delay deliveries of fresh uranium. That material ends up in the marketplace one way or another, so it's having a price-dampening effect. In late February, however, the Japanese government announced its final-draft energy plan. Japan will restart at least some of its reactors to stop spending a ludicrous amount of money on imported fossil fuels. There are other economic and environmental benefits, but it's the country's trade balance that is really driving the restart push.

    It's these restarts that we think will spur global utilities outside Japan to resume buying. The signal will be sent that Japan won't be dumping its inventories, it won't be deferring deliveries anymore and, by the way, there is not enough supply to go around in just a few years so you better start contracting again. That's what we think is going to support prices.

    TER: That basic energy plan in Japan is a draft, but there is a lot of public opinion against it. You do think its prospects are good?

    DS: Consensus is that the plan is going to be approved by the cabinet by the end of March. The opposition is highly regionalized, and many pockets of the country are actually very pronuclear. Nuclear, obviously, provides a lot of jobs and generates a lot of tax revenue in these regions.

    TER: Raymond James has revised its uranium supply-demand balance and anticipates a growing supply deficit beginning in 2017. What is the case for investing in the industry today with a payoff so far in the future?

    DS: A shortfall beginning in 2017 doesn't mean prices don't move until 2017. In fact, in a healthy market, they should have moved already. But, again, it comes back to the utilities. They view the nuclear fuel market and their own fuel requirements as a game of risk management.

    "I'm very hopeful that UEX Corp.'s new CEO will continue the company's trend of excellent work."

    Today, many utilities are sitting on near-record piles of material, so there's not a great deal of risk to the utilities with respect to supply availability over the next couple of years. However, as these groups start to look out beyond that period to 2017, 2018 and so on, they'll realize that it could become more challenging to get the uranium they need. Given that the utilities typically contract three to four years in advance, we're very close to that window where we expect buying to ramp up again and prices to move upward. Again, critically, we expect Japanese restarts to be an important catalyst in that resumption of buying. We expect first restarts in H2/14 with a half-dozen units online by Christmas. So from an investor's point of view, we're already seeing the benefit of this outlook. That's been driving the uranium equities upward over the past couple of months.

    TER: You're forecasting spot uranium prices averaging $42/lb in 2014, but three months into the year, the price is still struggling to break $36. What will drive it over $42? When do you expect that to happen?

    DS: We think the move this year is likely to happen toward the end of this year, as Japanese restarts spark a return of normal buying levels by utilities. The uranium price should really start moving in 2015.

    TER: What indicators should investors look for in watching the uranium price trend?

    "Uranium prices have to go higher to incentivize more supply to meet the looming supply gap."

    DS: One of the best indicators is Uranium Participation Corp. (U:TSX). Since the fund's inception, this stock has been a remarkably accurate predictor of where the uranium spot price is headed. When Uranium Participation's share price is above its net asset value (NAV), the market is baking a higher uranium price into its valuation of the stock because the NAV is calculated at current uranium prices. For even more precision, you can divide the company's enterprise value by its uranium holdings for a rough dollar/pound estimate on what the market is ascribing. So right now, we calculate the fund is implying $40/lb, and that's over $4 above the current spot price. This is by no means a bulletproof measure, but absent a black swan event, history tells us that this could be the destination for the price in the near future.

    TER: You have said you see $70/lb as the price that will incentivize new mining. What should investors do while they're waiting for the price to reach that level?

    DS: Buy uranium equities. It's that simple. We think prices are going higher, so buy uranium stocks well ahead of the upswing.

    TER: Do you have a target time that you expect the price to reach that level?

    DS: We're looking for the price to reach $70/lb in 2016. We forecast prices flat forward at $70 from that year onward.

    TER: Which mining companies are the best investment prospects in this environment? Which are the weaker ones?

    DS: They say a rising tide floats all boats. We think all the uranium stocks are probably going higher, or at least the vast majority of them. But we also believe being selective will provide the greatest rewards. Most investors should be looking at names with quality assets, management teams and capital structures.

    Among producers, our preferred companies are focused on relatively high-grade projects with solid balance sheets and fixed-price contracts that can buffer them against near-term spot price weakness. After all, we think the spot price could remain weak for most of the balance of 2014.

    On the explorer and developer side, the theme is the same-companies with cash and meaningful upcoming catalysts and, again, in good jurisdictions. But if you can tolerate an increased level of risk, I'd be looking at companies with lower-grade assets in Africa. Those are probably the highest-leveraged names out there.

    TER: What other favorites can you suggest?

    DS: Our top picks at the moment in the space are Fission Uranium Corp. (FCU:TSX.V) and Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT).

    Fission has been a top pick in the space for some time. We have a $2/share target and a Strong Buy rating. We view Patterson Lake South as the world's last known, high-grade, open-pittable uranium asset. It has immense scarcity value. There are not very many projects in the world that can yield a drill intersection of 117 meters (117m) grading 8.5% uranium, as hole 129 did in February. There is only one project in the world where you would find an interval like that starting at 56m below surface, and that's Fission's Patterson Lake South. It's in the best jurisdiction, has a management team that has executed very well and has huge growth potential. We think that property probably hosts over 150 Mlb uranium. We would be very surprised if the company was not taken out at some point in the next two years.

    "The uranium price should really start moving in 2015."

    Denison is another story we like a lot. We have a $2/share target and Outperform rating on the stock. Denison has the most dominant land holding of all juniors in the world's most prolific uranium jurisdiction, the Athabasca Basin in Canada, the same region as Fission Uranium's Patterson Lake South. The company will run exploration programs at 20 projects in Canada this year, including an $8 million ($8M) campaign at Wheeler River, the world's third-highest-grading deposit, which continues to grow in size, and with a new understanding of its high-grade potential uncovered last year.

    Denison has a stake in the McClean Lake mill, which is also one of its crown jewels. It's the world's most advanced uranium processing facility, and it's located a stone's throw from hundreds of millions of pounds of high-grade Athabasca uranium deposits. It's a big part of the reason why we think Denison will get bought out at some point, particularly given that to permit and construct a new mill in the basin would be a herculean task. Denison has a very strong management team and cash position and, once again, big-time scarcity value. It's one of the only three North American uranium vehicles exceeding a $0.5B market cap. Denison has been and will continue to be a go-to name in the space.

    TER: What is another interesting name in your coverage universe?

    DS: UEX Corp. (UEX:TSX) owns 49% of the world's second-largest undeveloped, high-grade uranium asset in Shea Creek and 96 Mlb in NI-43-101-compliant resources. It's the biggest deposit with that kind of junior ownership in the Athabasca Basin. It's a strategic asset and the company's main value driver. But with the uranium price where it is, the company is also focusing on shallower assets near what is now the southern boundary of the Athabasca Basin, closer to Fission's Patterson Lake South. We're really interested to see what comes of the Laurie and Mirror projects this year.

    We have a $0.60 target price on shares of UEX.

    TER: Is any of that influenced by the fact that it has a new CEO?

    DS: The target price is not heavily influenced by the recent change in CEO. I think the outgoing CEO, Graham Thody, did an excellent job. I'm very hopeful that Roger Lemaitre will continue that trend. Under the new CEO, I would anticipate that the company may ramp back up the level of work intensity at Shea Creek, to build on the achievements of AREVA and the UEX team as well as Thody. But given Lemaitre 's background, including his experience as head of Cameco's global exploration, I wouldn't be surprised to see UEX extend its view beyond the Athabasca Basin as a potential consolidator in some other jurisdictions that may be lagging behind a bit on valuation.

    TER: You raised your target for Cameco from $25/share to $26/share. Are you expecting the rise to continue there?

    DS: Despite the recent run-up in shares, we think there's a good chance of further strength. Cameco is the industry's blue-chip stock. It's the one everyone thinks of when they think of uranium. Given its size and liquidity, it is the only stock many of the big institutional fund managers can invest in. With that backdrop, we think it's going to be the first stock for fund flows as the space continues to rerate, especially as we get more confirmatory news about Japanese restarts and as Cigar Lake passes through the riskiest part of its ramp-up. We think it should be a very good 24 months for the company.

    TER: What other companies do you like in the uranium space?

    DS: We recently upgraded Kivalliq Energy Corp. (KIV:TSX.V) to an Outperform rating. Our target price there is $0.50/share. The company has been a laggard in the last few months, but it has Angilak, a solid asset in Nunavut with established high-grade pounds and huge growth potential. Current resources stand at 43 Mlb, but we think there is well over 100 Mlb of district-scale potential. The company is derisking the asset by moving forward with engineering work, like metallurgy and beneficiation, ahead of a preliminary economic assessment potentially later this year. We're also excited to see what comes with the newly acquired Genesis claims that sit on the same structural corridor that hosts all the mines of the East Athabasca Basin.

    We also like Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT), on which we have an Outperform rating and $2.20/share target price. This stock has been on a major tear. We continue to expect great things from Lost Creek in Wyoming. Early numbers from the mine, which just started up in August, have been hugely impressive to us, a testament to the ore body and execution by management. And the financial results should be equally strong, given the company's high fixed-price contracts. In all, it's a solid, low-cost miner in a safe jurisdiction, which we think should be in a good position to grow production organically or, using cash flow, buy up cheap assets in the western U.S., a region ripe for consolidation of in-situ leach uranium assets.

    TER: Do you have any parting words for investors in the uranium space?

    DS: I would just say we think the uranium price is going higher over the next 12-24 months. So in anticipation of that upswing, we recommend investors take a hard look at high-quality uranium stocks today.

    TER: You've given us a lot to chew on. I appreciate your time.

    DS: It's my pleasure, as always.

    David Sadowski is a mining equity research analyst at Raymond James, and has been covering the uranium and junior precious metals spaces for the past seven years. Prior to joining the firm, David worked as a geologist in western Canada with multiple Vancouver-based junior exploration companies, focused on base and precious metals. David holds a Bachelor of Science in Geological Sciences from the University of British Columbia.

    Read what other experts are saying about:

    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 Streetwise Interviews page.

    DISCLOSURE:
    1) Tom Armistead 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) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium Corp. and UEX Corp. Streetwise Reports does not accept stock in exchange for its services.
    3) David Sadowski: 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 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. This interview took place on February 28, 2014. All ratings, facts and figures are reflective of the date 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 (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.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8204
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Mar 28 4:22 PM | Link | Comment!
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