The Energy Report's  Instablog

Source: The Energy Report (5/24/13)

http://www.theenergyreport.com/pub/na/15309

Casey Research's Chief Energy Investment Strategist, Marin Katusa, whose portfolio profited nicely the last time the uranium bull broke loose a decade ago, recently interviewed a group of world-renowned energy experts to discuss the prospects for the sector that some considered doomed by the Fukushima disaster. Anti-nuclear power sentiment has by no means evaporated, but Katusa sees clear signals that the bulls are ready to run, not least of which is the recent attack on the Somair uranium mine in Niger.

Why? First, the 20-year Highly Enriched Uranium (HEU) Program agreement between the U.S. and Russia, aka "Megatons to Megawatts," expires this year.

Second, the end of that program will allow Russia to sell its coveted uranium, which currently powers one of every 10 homes in the U.S., to the highest bidder. With 200 nuclear power plants under construction or on the drawing boards, China is likely to be first in line, with India and even oil-rich Saudi Arabia on its heels.

Third, the increase in nuclear plants being built around the world will stimulate huge demand while supply inevitably dwindles. Because it can take a decade to bring a uranium mine on-line, new mining production can't grow fast enough to meet the demand.

Fourth, like it or not, nuclear energy is clean-while the average coal-fired power plant in the U.S. emits nearly 4 million metric tons of CO2 each year, nuclear power plants emit no carbon dioxide, sulfur dioxide, nitrogen oxides, mercury or other toxic gases.

Finally, last Thursday, an Al-Qaeda splinter group attacked the Somair uranium mine in Niger-owned by French uranium giant Areva. This will further disrupt global uranium supplies and emphasizes what the energy experts have been saying: Uranium is prime for price increases.

Casey Research agreed to share Katusa's segment with Sprott U.S. Holdings Chairman Rick Rule withThe Energy Report readers and invites you to listen to the rest.

Marin Katusa: We first met 10 years ago, when you were begging people to buy uranium companies, and the market boomed. Those of us who followed your advice made a lot of money. Are you expecting a replay in that market?

Rick Rule: I think so. The similarities are interesting. At that time, the price of uranium on the market was less than what it cost to produce it, which meant that one of two things would happen: Either the uranium price would go up, or the lights would go out. Those were the only two choices. We're in a situation now where the uranium price on world markets is lower than what's required to bring online the supplies needed to keep the lights on around the world. So once again, either the uranium price goes up, or the lights go out. I think the price will go up.

MK: What can you tell investors who are nervous about uranium? Nuclear power is unpopular. Why should investors expect its feedstock to have this massive bull market?

RR: You make money in financial markets by buying low and selling high, and you can't buy low when something is universally loved and every investor is competing with you. You have to buy things when they are unloved. In natural resources, you can be a contrarian or a victim. You had the good sense of getting into the market when uranium was cheap, and you also had the good sense to get out when everybody else was flocking in. You did what you were supposed to-buy it when it was out of favor and sell it when it came into favor. It's out of favor again. You will make money buying it now and selling again when it returns to favor, because it will.

MK: Are you currently investing in companies that are exploring for and producing uranium in the junior resource sector?

RR: We are. We are investing in the broader junior resource sector because it is universally unloved, and we are specifically investing in the uranium sector. We invest in any commodity where the selling price on global markets is less than the cost of production and where we see ongoing demand. The price has to rise to meet demand.

MK: Considering that China is on its way to building twice as many nuclear reactors as America, India is building theirs and Saudi Arabia-which is so rich in oil and gas-is planning on building 16 nuclear reactors, does that make the argument for uranium better today than it was 10 years ago?

RR: I wouldn't argue that it's better, because the situation 10 years ago was superb. But it doesn't have to be better. A lot of people added a zero to their net worth as a consequence of that market. If they increase their net worth only five times, would that be sufficient?

MK: I think it would. Like uranium, the junior resource sector is not popular. How would you advise people to invest in that sector today?

RR: They have to invest in themselves before they invest in the sector. They have to get educated about natural resources and you don't get educated about natural resources in The Wall Street Journal. These businesses differ from other businesses. You need the courage and the common sense to invest in contrarian fashion. You need to buy out-of-favor sectors and once your thesis has been vindicated and you're feeling smart, you need to sell those sectors. It's very important that you both buy low and sell high. Industry cycles in natural resources are very predictable, and after you discipline yourself, find information sources you can trust and figure out how to use those information sources, you will find the sector extremely generous.

MK: What is the most important factor when you look at a company? When Rick Rule and Sprott write a check with their own money into a company, what's the most important element of that investment decision?

RR: If it's a speculative, junior company, the three most important factors are people, people and people. In the uranium sector for example, when the resource became popular in the middle part of the last decade, there were 500 junior uranium companies but only 20 competent teams.

MK: And of those 500 companies, about 480 disappeared.

RR: Another thing that argues in your favor today is that you're now able to come in and buy companies with $50M market caps that spent $250-300M they raised cheaply during the boom. Those are very attractive propositions.

MK: Can anything derail this nuclear renaissance?

RR: If there's a black swan on the nuclear side, it would be another event like Fukushima, Chernobyl or Three Mile Island. On the financial side, it would be another 2008-style psychotic break. But if that happened, your uranium portfolio would be probably the least of your concerns.

MK: As always, Rick, it was a pleasure. Thank you.

Uranium prices have nowhere to go but up. Rick confirmed that, as do the other experts in the videocast.Listen for the insights from:

• Spencer Abraham, who served as the 10th U.S. Secretary of Energy (2001-2005) during the George W. Bush Administration.
• Lady Barbara Thomas Judge, chairman emeritus of the U.K. Atomic Energy Authority, chairman of the Pension Protection Fund, and U.K. business ambassador on behalf of U.K. Trade and Investment, and is an appointed member of the TEPCO Nuclear Reform Monitoring Committee.
• Herb Dhaliwal, former Canadian minister of natural resources and senior regional minister for British Columbia.
• Amir Adnani, co-founder and CEO of Uranium Energy Corp. (UEC:NYSE.MKT), which operates North America's newest uranium mine; located in South Texas, it's the first new uranium production in the U.S. in seven years.

Casey Research has identified the top three undervalued uranium stocks that you should invest in right now to be well positioned for the coming uranium bull market. Compiled into a special report, Three Must-Own Uranium Stocks, Casey is making this time-sensitive special report available exclusively for viewers of this webinar.

Marin Katusa, an accomplished investment analyst, is the chief energy investment strategist for Casey Research and the senior editor of the Casey Energy Report. He's considered one of the world's foremost energy experts, and regularly offers commentary on energy issues on BNN and other major media outlets.

Rick Rule, chairman of Sprott U.S. Holdings, is part of the team responsible for managing more than $8 billion in resource and commodity assets around the world. Active in natural resource investing for 35 years, he's a recognized expert in mining, energy, water, forest products, infrastructure and agriculture. The Global Resource Investments group of companies he founded became part of the Sprott Group last year.

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) Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
2) Marin Katusa: I was not paid by Streetwise Reports for 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.
3) Rick Rule: 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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Energy Report is Copyright © 2013 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

Source: JT Long of The Energy Report (5/23/13)

http://www.theenergyreport.com/pub/na/15302

Is this a great time to be an energy investor? It definitely is, according to Matt Badiali, editor of the S&A Resource Report. "You can make a lot of money, unless you're Bill Powers," he says in this interview with The Energy Report. Badiali discusses the true potential for U.S. natural gas, as well as what type of energy really gets him excited.

The Energy Report: Are we truly facing peak cheap oil with all the easy stuff already out of the ground? Why is oil still at $95 per barrel ($95/bbl)?

Matt Badiali: The main reason we're still at $95/bbl, with demand falling and production rising is exports. It's been illegal to export crude oil from the U.S. since the '70s. However, refiners have gotten around this rule by exporting "finished products" like gasoline diesel fuel, for example.

Remember, Europe and Asia are paying a lot more per barrel than we are. Our refined goods can be economically put on a ship and sold competitively in those markets for a lot more money than they can get here. One of the reasons that this is big business is that we've dramatically increased the amount of oil that we're producing at home. The secret is about half of that oil isn't what we consider crude oil-it's natural gas liquids. It can legally be sent out to other markets because it's not crude oil.

Let me give you an example. Mexico has consistently been one of the U.S.' major sources of oil and gas imports. In 2005, we were getting about 1.4 million barrels per day (1.4MMb/d). However, as our demand has fallen off, exports have been growing. Now the U.S. only takes about 400,000 b/d from Mexico. Imports fell off 41%, but our exports to Mexico grew by 200%. The U.S. is now the world leader in exporting finished product, which I don't think many people understand. That, in a nutshell, is why we're still paying $90-100/bbl.

TER: Does exporting these resources help or hinder our energy independence? Do you think that unconventional drilling will turn us into "Saudi America" or are we overestimating well lives and underestimating the cost of fracking?

MB: On the one hand, there are the "Saudi America" folks who are really optimistic about both the technology and the ultimate supply of oil and gas in the U.S. On the other hand, you have energy investorBill Powers, who has got his arms folded across his chest and his chin out, just saying "No." That's his answer to everything.

I don't know if we'll ever be energy independent. Honestly, to me, that's a non-argument. It's going to be market forces that drive whether we're importing oil from somewhere else or if we're using our own and exporting. That's not as big a concern to me as the argument that Powers made, which is we don't have enough. I think he's wrong. I don't think that he understands the context of our success.

The peak oil theory never ever considered the idea that we would ignore the conventional rocks and just go straight to the source. Our oil field went from the size of a group of oil tankers in the Gulf of Mexico to the Gulf of Mexico. That's the size of these systems. They're enormous. I'm sure Bill is a nice guy, but he's dead wrong.

TER: What about the theory that these new sources are expensive to access?

MB: That was going to be my next point. Bill has said even Chesapeake Energy Corp. (CHK:NYSE)was forced to write-down 20% of its reserves in 2012. That was 4.6 trillion cubic feet of natural gas reserves gone, right? Clearly this is unsustainable. Well, the reason that they wrote those reserves down isn't because the gas disappeared. It's because we found so much that the gas price went to $1.80 per thousand cubic feet ($1.80/Mcf) in 2012. A company can't produce natural gas for $1.80/Mcf in these unconventional fields. We have shut down drilling in huge shale plays because of the economiccomponent.

TER: What price does it have to be in order to make these fields economical?

MB: It's not a point; it's a continuum. Some stuff works really well at $3/Mcf. The Marcellus in Pennsylvania works great at $3/Mcf. The Barnett Shale in Texas, on the other hand, wouldn't be economic at that level. And the enormous Bakken Shale in North Dakota doesn't work if oil prices fall too low. They have to put oil on trains, which is at least twice as expensive as what it would cost to put it in a pipeline.

TER: Do you think that will be the impetus to get pipelines built?

MB: I hope so, but that's a slow process. As we develop these fields, natural gas prices are going to have to inch higher if we run out of cheap plays. The industry has been remarkably flexible at finding cheap sources or making things cheaper to meet the price of natural gas.

"Bill Powers doesn't understand the context of our success."

Low prices are going to stimulate demand. I've seen it happening in my own town. We have a couple of pulp mills on the island where I live. Several months ago, one of the mills switched from fuel oil to natural gas. They're saving millions of dollars per month on fuel costs. The company that owns the mill is doing this at all its mills. We've seen a lot of power plants that have switched to natural gas because it's cheap.

TER: Of course, it would be a game-changer if truck fleets switch to natural gas. But is that practical?

MB: I do think it's practical. Americans are ingenious at ways of making use of cheap things. I see enormous demand for natural gas. Demand will increase, pushing the price of natural gas incrementally higher and driving down the price of oil.

TER: What about Bill Powers' theory that the decline rates in fracked wells are much higher than anticipated? What are you seeing out at these wells?

MB: You finally found something that Bill and I agree on. The decline rates are enormous. But Bill is applying conventional oil field metrics to unconventional fields. In a normal field, these kinds of decline rates would mean that the field stinks. We're drilling so many more wells in the shale that the decline rates don't matter. Think about the scale. They're so big people can't get their heads around it. They simply refuse to understand it. Every day, every month, every year, we get better at using our technology and improving our ability to get at this stuff. The only barrier I see right now is political.

TER: How long will the price deferential between Brent and WTI stay as wide as it is now and what's keeping it there? Is that political?

MB: That's structural. Refineries in Europe were built and geared toward one kind of oil that comes out of the North Sea: Brent. It's very hard and it's expensive to change around the system to accommodate new oil. All these refineries are geared to Brent-the amount of Brent fell, the volume fell, the demand rose and prices soared.

It created a market for our finished fuels. We were sending ship after ship to Europe with diesel fuel. Our refiners made a huge profit because, at $90/bbl, we could stick it on a ship, send it to Europe and stay below $120/bbl to convert into diesel.

I'm sure there are some savvy entrepreneurs over there who will invest the money in changing around their refineries to accommodate different crude stocks.

TER: Where are you investing in to take advantage of this?

MB: The problem with these unsettled periods is that they're hard to figure out. I invested in Italian oil company Eni S.p.A. (E:NYSE) because I want to take advantage of high prices. I'm still mildly concerned about the domestic oil price falling or being subject to down pressure. Why not buy a company with oil that is sold on the Brent crude price? It's a major oil company that's been around forever. It operates in all the places that U.S. companies won't go. It pays a nice dividend.

I also have to give credit to Porter Stansberry. He's done a remarkable job at seeing the big picture and knowing where the plays are. Stansberry recommended Burlington Northern Santa Fe LLC (BNI:NYSE), the railroad that was getting a lot of the oil from the Bakken out to the market. That was a great oil and gas play. He also recommended Chicago Bridge & Iron Co. N.V. (CBI:NYSE) to take advantage of the expanding pipelines.

I think that there are some fantastic opportunities in the pipeline space, but I'm late. They've gotten expensive.

TER: Do you like MLPs?

"It's a good time to be an energy investor. It's exciting, it's fun and you can make a lot of money."

MB: I like MLPs, but I'm afraid that they're a little expensive right now. You want exposure to that climbing price, but right now you have a 50/50 chance of the oil price going up or going down. I want more certainty. I'm looking for yield that might be mispriced. I'm looking for yield with hedges. There are some opportunities out there, however.

The thing you don't want to do right now is buy natural gas royalty trusts that are pure natural gas. There's one in particular that I've really liked for years called San Juan Basin Royalty Trust (SJT:NYSE). In a good market, San Juan Basin just prints money because it's a royalty trust on a chunk of land in New Mexico and Colorado. The wells are being drilled and operated by ConocoPhillips (COP:NYSE). San Juan just shows up and gets a check and distributes the check to shareholders. It's a great business-except ConocoPhillips recently said that gas prices are too low to economically drill any more wells in the San Juan Basin. That was that.

TER: Another form of energy that's been in the headlines lately is uranium. When we talked in January, you pointed to a pushback on the nuclear moratorium in Japan because of increasing energy prices and brownouts. Japan's working on new safety guidelines that could lead to reopening reactors. China has 29 reactors under construction and another 51 planned. What impact could that have on uranium prices?

MB: Oh, man. I'm so excited about uranium. There's all this uncertainty in oil and gas, but there's very little uncertainty in uranium. It's just a matter of time. If you can be patient, you're going to make a lot of money in the uranium space. Right now, uranium is priced as if we will never produce electricity from nuclear power again and that's not true.

The Fukushima Daiichi event was such a horrible disaster and it just scared the heck out of all of us-nobody wanted to own uranium. There was a lot of overreaction. The fact is Fukushima was a dangerous plant to begin with. It was built in a colossally, geologically unstable location on a subduction zone. In comparison, the San Andreas Fault is a fender bender. The earthquakes that happen on subduction zones are 15-car pileups. That was exactly what happened at Fukushima.

There has been a timeline set out for the Japanese reactors to come back online. As Japan gets back to normal, it will be a catalyst. We still have construction happening in China. We have construction happening in India. We have construction happening in Saudi Arabia. There is new demand coming on in the next 12-18 months.

If you're a conservative investor, try Cameco Corp. (CCO:TSX; CCJ:NYSE), the ExxonMobil of uranium. It has major supply agreements with all of the major nuclear power producers.

Then you go down from there to some other little producers. Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) is a great one. Energy Fuels Inc. (EFR:TSX) has production. These companies are producing at $40 a pound ($40/lb) and breaking even, but once the price of the uranium goes up, their profits are going to grow because they've already covered their costs. These companies are going to start popping up on people's radar screens, and investors are going to wonder why they're trading at 3x earnings.

The uranium sector right now is a textbook opportunity. It was a hated commodity that was left for dead and we see the uptrend coming. If you're willing to wait 18-24 months, you can very easily double your money here.

TER: If it's going to take a little while for Japan and some of these facilities in China to come online, are you looking at companies that are producing now or companies that will be producing once that demand kicks in?

MB: The conservative bet is to go with companies that are in production and making money at the current price. That's Cameco. That's Uranium Energy Corp. (UEC:NYSE.MKT) in Texas. Then you have the explorers that are developing new stuff. That's UEX Corp. (UEX:TSX) in Athabasca in Canada. That'sKivalliq Energy Corp. (KIV:TSX.V) up in Nunavut. That's Fission Uranium Corp. (FCU:TSX.V) in Athabasca.

The explorers are the companies where you're going to take on more risk because they're not in production. However, I do think there's a lot of upside. I would buy them when the uptrend starts to take hold. Right now, I'm more conservative.

TER: Energy Fuels has four producing mines and a number of others that are still in development. Do you like that mixture?

MB: Absolutely. Mines are finite producers. A mine is like a loaf of bread. You get so many sandwiches out of it and then you've got to get another loaf of bread. I love to see companies that have mines in production, mines about to go into production and several exploration projects. That's the ideal mining company.

TER: Is this a good time to be an energy investor?

MB: Yes, without question. It's exciting, it's fun and you can make a lot of money, unless you're Bill Powers-then you're going to stand in the sidelines with your arms crossed and your chin up.

TER: Thank you for taking the time to talk to me.

MB: You're welcome.

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.

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) JT Long conducted this interview for The Energy Report and provides services to The Energy Reportas an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Energy Fuels Inc. and Fission Uranium Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Matt Badiali: I or my family own 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.
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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Energy Report is Copyright © 2013 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

Source: Zig Lambo of The Energy Report (5/21/13)

http://www.theenergyreport.com/pub/na/15298

The worst may be over for companies and investors who have weathered the depressed gas prices of the past few years, but that doesn't mean it's clear sailing from here. In this interview with The Energy Report, Robert Cooper, senior energy analyst with Haywood Securities, talks about the need for selectivity and patience for catalysts that can crystallize underlying stock values. It's a battle of long-term investors versus short-term traders.

The Energy Report: Looking back to your lastinterview with The Energy Report in November, you seem to have called the bottom in gas prices correctly. What's your view of where things are headed now?

Robert Cooper: We expect a reasonably robust pricing scenario ahead. Here's why: In 2013, we will likely see flat natural gas supply growth; this will be the first year in the last several that this will be the case. The natural gas rig count is at 350, the lowest since 1995. The declining rig count has taken its toll on almost every U.S. shale basin; the only basin that's growing is the Marcellus, and it is growing partly because infrastructure constraints are being alleviated. Unless productivity undergoes another massive step higher, or drilling time is cut in half again, rig count matters as a predictor of natural gas production levels. Natural gas liquids (NGL) prices are weak, and this impacts the ability of explorers and producers (E&Ps) to reinvest at the same level as even a year ago. This further reduces the probability that capital will be redeployed to dry gas plays.

TER: Your May 9 report shows gas storage 28% lower year over year and 5% below the five-year average. What are the implications of that?

RC: It means the gas market is in deficit. If I were an end user who was short gas, I'd be worried-the conditions are in place for a gas price rally that could catch me unaware.

TER: What do you think the chances are of that happening?

RC: I wrote in March that we're looking at CA$4 per thousand cubic feet (CA$4/Mcf) gas in Canada. We got to around CA$3.89 on the spot market, and the strip in the winter was very close to CA$4. If it's a normal summer, I think there's a better than 50% chance of hitting that CA$4 level in Q4/13 or Q1/14. I also said in our last interview that if you give me normal weather, I can give you CA$4/Mcf gas, which was the case.

TER: How low do you think gas could go again, in the next year or so?

RC: I never say "never," but I wouldn't bet on a return to last year's $1.90 price low or anything close to that. Right now, we have a favorable storage situation and we have long-term beneficial factors working in the gas market bull's favor.

TER: What do you see on the horizon for oil? Do you expect oil to be range-bound up to $105 per barrel ($105/bbl)?

RC: The economy isn't strong enough to support $100+/bbl oil for very long, nor will supply costs support prices below $80/bbl for very long. Unless there's a big change in the economy toward much stronger or much weaker growth, that range is probably what you can look for in oil prices.

TER: Storage and distribution capacities are key factors in determining North American oil prices. How are you reading those indicators?

RC: In Canada, the bulk of our oil supply growth is slated to come from the oil sands. We need pipelines to transport that. But in the short term, midcontinent refineries are scheduled to complete turnarounds this summer, and that should firm up heavy oil prices relative to West Texas Intermediate (WTI). Infrastructure, or lack thereof, has certainly been a dominant theme in the Canadian oil market, certainly for the past year or so. Oil by rail has been an important bridge, as it has allowed product to move from where it's produced to where there's demand while bypassing infrastructure constraints. The development of oil by rail has been a textbook case of the invisible hand of the market at work.

TER: What's your view on the Keystone Pipeline? Will it be built?

RC: That's the million-dollar question. President Obama is under considerable pressure from environmentalists who believe oil sands development is the main bogeyman contributing to global warming. But the U.S. has had a goal of achieving energy security since Nixon, and Keystone would move the U.S. a lot closer to this goal-that would be an important legacy for any president. In addition, Keystone is important for the U.S./Canada relationship. Rejection of the pipeline could be problematic for bilateral relations and would likely push Canada to increase its energy involvement with the U.S.' strategic competitors in Asia. If I had to guess, I'd say Keystone will ultimately be approved, but likely with some quid pro quo that will be an attempt to pacify the president's environmentalist support base.

TER: How has price action for oil and gas impacted the companies you cover?

RC: The volatility has, at times, removed the incremental and marginal buyer from the equation. In particular, foreign investors have looked at Canada and said, "I'm just going to buy Brent exposure or pure WTI exposure and avoid all of this price differential and pipeline risk." And they have. So access to capital for Canadian producers has been limited, especially for the small- and mid-cap companies, thereby limiting their strategic options. Ultimately, if this volatility continues, it will result in further culling of the investable universe.

TER: So it's going to be survival of the fittest?

RC: More or less, yes.

TER: What companies have been your best performers over the past six months?

RC: Because the market has been so bleak, the best performers have been ones we're trying not to lose money on, unfortunately. In my last interview, we talked about Crocotta Energy Inc. (CTA:TSX),Tamarack Valley Energy Ltd. (TVE:TSX.V) and Novus Energy Inc. (NVS:TSX.V). Crocotta and Tamarack are in roughly the same spot as when we last talked. Both have executed well on their business plans, and both have advanced the ball in developing new plays and properties. Each has performed quite well in a miserable market. Consequently, we still recommend both. They both have very strong management teams that are heavily invested and are motivated to do the right thing for shareholders.

Novus is a little bit of a different story. The consolidation we discussed in west central Saskatchewan's Viking area was fast coming and, indeed, has accelerated as expected. Novus has decided to participate in that. In late November and early December, it announced that it was considering methods for optimizing shareholder value, including a corporate sale. That process has been ongoing, admittedly at a slower pace than anticipated. But investors will see an answer one way or another. The Board of Directors is expected to decide which direction the company will be heading, potentially as soon as the end of the month.

TER: Another company you talked about is Yoho Resources Inc. (YO:TSX.V). Can you give us an update?

RC: Yes. Yoho's stock price has basically remained flat since the last time we talked. However, all of the underlying fundamentals continue to improve. Its core position is in the Duvernay play, in the Kaybob region of Alberta. The Duvernay, in our view, is fast becoming a world-class shale play as it continues to mature. Exxon Mobil Corp. (XOM:NYSE) recently purchased Yoho's partner. Since we last talked,PetroChina Co. Ltd. (PTR:NYSE; 857:HKSE) bought a 50% interest in Encana's Duvernay acreage, the best part of which is proximal to Yoho. This was a multibillion-dollar transaction. Yoho has continued to drill good wells that have been on cost and at expected rates. It's taken a little bit of time to gestate, but ultimately the Duvernay is going to become the domain of much larger companies. Immediately proximal to Yoho is Chevron, Exxon, Encana Corp. (ECA:TSX; ECA:NYSE), Talisman Energy Inc. (TLM:TSX) and Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). Yoho is a prime takeout candidate. It has a sustainable business plan with well over $1 billion ($1B) of future capex to drill in the Duvernay alone, so this company could be around for a long time. But in our view, it will ultimately be purchased by a larger player. We expect Yoho will be a winner for investors who have a slightly longer time horizon than tomorrow.

TER: How about some new names that you're covering that look interesting?

RC: We're very big fans of a new company called Condor Petroleum Inc. (CPI:TSX) run by a very experienced group of managers who came out of the supermajors, Chevron Corp. (CVX:NYSE) in particular. The President and CEO, Don Streu, is a serious individual who managed very large projects for Chevron in Angola, Indonesia and Nigeria. Condor has taken a very different approach to exploration in Kazakhstan by gathering an immense amount of three-dimensional (3D) seismic data to derisk drilling. This is something that hadn't been done there before and it has paid off. Condor recently announced a large discovery well and is appraising it as we speak.

Condor represents one of the best risk-reward tradeoffs we can find. Well costs are very low-appropriate for a company its size, and yet the targeted prospect size is very large. So there is a whole lot of torque for shareholders. Condor has a fully funded balance sheet. It sold a noncore gas property for $88 million ($88M), has an active exploration program and is pursuing joint ventures with much larger companies for its largest and most expensive prospects. The main caution is that in Kazakhstan, business proceeds at a slower pace than in North America because of the large government bureaucracy and lack of developed infrastructure, especially in the rural parts of the country where Condor operates. So this is a true investment rather than just a trade.

TER: Where is the stock trading now, and where do you think it's going?

RC: It's a $0.50 stock today. We have a $1.10 target on it.

TER: What's the level of political risk in Kazakhstan?

RC: Any place outside of North America is not going to have the same sort of risk profile as we do at home. What I can say about Kazakhstan is that there is a very large and onerous bureaucracy in place because it is a deliberate attempt to stymie corruption. Kazakhstan is rapidly growing and has broader ambitions than to just be a regional player, such as joining the World Trade Organization. It's certainly not for the faint of heart, but on the other hand, we think that the risk-reward tradeoff for Condor is well in your favor right now. Condor's management team is full of individuals who have operated in the country's oil and gas sector before, which is an essential consideration. Kazakhstan has immense potential for oil and gas development and Condor knows how to operate effectively in that environment. So we recommend the stock.

TER: What's your general advice at this time for investors looking for potential profits in the oil and gas sectors?

RC: I'd recommend that you do your homework and that when you buy, ensure you have a margin of error with respect to valuation. And have patience, because this is a very jittery market. Ultimately, good companies with good assets-purchased at good prices-tend to pay off over time. But if you have a very short time horizon, you might not get that opportunity to see the value creation. There is some very good value in the oil and gas sector in Canada right now, but it also takes time for catalysts to emerge to crystallize that value. That takes an investor as opposed to a pure trader.

TER: Good advice, Rob. We appreciate the opportunity to talk with you again.

RC: Thank you for having me.

Robert Cooper, CFA, is a senior energy analyst based in Calgary with a focus on Canadian oil and gas exploration and production companies with domestic and international operations. Robert has more than 10 years experience in the investment industry and has been covering the Canadian oil and gas sector since 2006. Robert is a past president of the Calgary CFA Society.

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DISCLOSURE:
1) Zig Lambo conducted this interview for The Energy Report and provides services to The Energy Report 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 The Energy Report: Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Robert Cooper: I or my family own shares of the following companies mentioned in this interview: Crocotta Energy 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: Crocotta Energy Ltd., Yoho Resources Inc. and Condor Petroleum Inc. 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.
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