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  • Turbulent Times Call For Insulated Investments: Steven Salz

    Turbulence and volatility are in Steven Salz's forecast for the energy market. The special situations analyst at M Partners tells The Energy Report that falling oil prices are hurting oil field services companies in different measures depending on their specialties, but that all are taking hits. A sign of the times: He thinks the Halliburton/Baker Hughes merger may be the first of a series of consolidations in the space.

    The Energy Report: Steven, is the price of oil nearing the point where North American exploration and production companies [E&Ps] will have to curtail production?

    Steven Salz: Yes. We're already starting to see hints of a pullback in drilling activity, with the Baker Hughes Inc. (NYSE:BHI) rig count showing a slight decline on a forward basis. In the Q3/14 earnings of major E&Ps, we saw language suggesting more modest plans for 2015 than previously anticipated. We're expecting around a 10%-20% drop off previous expectations in capex for 2015. That translates into a near equivalent drop in the well count year over year [YOY], which has a direct impact on the energy service space.

    If oil prices continue to decline, or even hold steady at $65-70 per barrel [$65-70/bbl], it's going to be important for investors to position themselves with companies exposed to basins that have low breakeven oil prices per barrel.

    TER: Do you think the Baker Hughes/Halliburton Co. (NYSE:HAL) deal is partially a result of this fall in price?

    SS: I do. Thoughts on that deal originally fell into two polarized camps. Some thought maybe this was a bottom, and we were going to see a recovery. That's the immediate reaction when investors see deals with such large majors. But I thought-and we now see-the deal was more about Baker Hughes thinking that tougher times were ahead, and Halliburton wanting to be opportunistic. That's consistent with the recent moves in oil prices. When you have a massive drop in the commodity price, it's expected that companies with a comfortable balance sheet are going to be opportunistic.

    TER: Are unconventional and conventional E&Ps equally affected by this price situation?

    SS: You would get hurt more on the unconventional side. Both have their advantages, with conventional arguably being lower beta in a falling oil price environment because there's typically a lower cost of production, thus a lower breakeven price per barrel. It's going to depend on which plays you're exposed to. Generally though, unconventional, on average, would need more capital to sustain production given higher costs and quicker declines.

    TER: Natural gas prices have been stable and are actually rising again. Is this causing E&Ps to shift their focus to gas production now?

    SS: Not at a level that has become apparent. These things have a lagging effect. Oil's really only come off the past few months, so you wouldn't see any material shift in the production profile over less than a quarter's time of decline. We're not seeing a shift yet, but it's possible.

    TER: Has the price of natural gas liquids [NGLs] tracked the fall in oil prices?

    SS: We are seeing some price compression in NGLs. Crude oil prices impact the price ceilings for propane and butane because they compete with oil-based products, like heating oil and gas oil. That being said, the move has not been as volatile or significant, and that's due to the fact that NGLs don't have the same export restrictions in the U.S. as crude oil exports.

    TER: Does that mean dry gas is becoming more highly valued now than it was?

    SS: It does. Dry gas wells have a lower cost of production than wet gas. In an environment where the oil price is low, there is compression in NGLs, which reduces the wet gas well netbacks because it can be sold at lower prices. The cost of production is the same, so you get a compressed netback. With stable natural gas prices, or an increase in natural gas prices, you get deeper value in a dry gas play.

    TER: How are oil field services companies responding to the price situation in oil and gas?

    SS: Many have sold off. Energy service companies are impacted by E&P capex. When the oil price falls and capital programs are at risk to be cut or moderated, the pie gets smaller for service companies to fight over. Declines vary by subsector within the energy service space: Drillers and pumpers get hit a bit harder. Those are down 35-45% year-to-date. Field service and infrastructure companies are down 15-25% year-to-date. I'd say the latter would be considered more maintenance and sustaining services versus exploration spend for the drillers and pumpers.

    If you're an energy company facing lower oil prices, you're going to cut new production; you're going to cut your capex programs on new exploration and new projects. You'd rather deploy capital into maximizing existing resources and existing wells. That results in more pain for the exploration service companies, versus companies working in maintenance and sustaining.

    TER: How is the situation affecting the companies you cover?

    SS: Among the companies we cover, there's Xtreme Coil Drilling Corp. (OTC:XTMCF) [XDC:TSX], a drilling and coil operator. This company has been hit quite hard. It was up 30-40% year-to-date in August, and once oil rolled over, Xtreme sold off, now down about 60% year-to-date. The impact and effect was almost immediate on that side.

    TER: Your $6/share target for Xtreme Drilling looks like a moon shot given its decline since the summer. How do you justify your Buy rating?

    SS: In July, the stock was well above $5. Now we're talking about $2/share, with the only fundamental change at the company level being higher day rates on its coil units and an up-and-running, two-rig Indian program, both of which are positive events. I think this shows just how levered driller names are to the oil price.

    Our Buy rating is still justified by a few things. The company has just over 7,000 contracted days on its XDR rigs, representing revenue of about CA$225-235M. That's 75% of 2015 contracted days already locked in, which provides a lot of cash flow certainty-much more than Canadian drillers can say for themselves. In Canada, Xtreme is going to get hit a little harder simply as a function of the fact that the seasonality is very different, with spring break-up, and the fact that the company operates on a well-to-well contract versus long-term contracts, which Xtreme can achieve in the U.S.

    Also, a foundational component of Xtreme is its coil unit business. It's seeing day rates actually increase as oil prices decline. Producers are increasingly cognizant that they need to optimize well productivity and achieve the netbacks to stay profitable in a declining oil price. Xtreme has consistently demonstrated that its coil is the most efficient, and its rates are competitive. Recent rig data shows that Xtreme's U.S. fleet drilled the most footage per month per rig in the U.S. It was at almost two times the average. That substantial efficiency increases profitability for the producer. Should there be long-term concern on rigs the company has in more exposed basins, Xtreme has noted it has optionality to move rigs to India and other international markets, where the company garners more premium day rates.

    When oil comes off, usually the shallow-depth rigs get hit first. That class of rigs has been more commoditized, and they're more replaceable. Xtreme has only a couple of shallow-depth rigs in its fleet, which we expect will get hit as oil prices come off. Those are the ones that it can easily move internationally.

    TER: What effect will the Halliburton/Baker Hughes deal have on these companies, if it goes through?

    SS: Baker Hughes and Halliburton have minimal presence in Canada. Xtreme, which primarily operates in the U.S., could feel the impact of their operations. It's important to say at the outset that Xtreme already works for both Baker Hughes and Halliburton. The company recently deployed two rigs to India; those are actually working through Halliburton.

    Xtreme has a stronger relationship with Halliburton's groups than with Baker Hughes. In the event of an acquisition closing between those two parties, should the project management groups consolidate and the right people from Halliburton step into the roles of the combined entity-which we see as highly likely given that Halliburton's group is substantially larger, is more effective, and has a much greater scope, not to mention that Halliburton is acquiring Baker-that would bode well for Xtreme in terms of the amount of work that it is awarded. Either way, Xtreme's work through Baker and Halliburton is not substantial. Any material change would be incremental.

    TER: Let's move on to something entirely different. Can you tell us about another company you have under coverage in a different sector?

    SS: Yes. We cover Input Capital Corp. (OTC:INPCF) [INP:TSX.V], the first and currently only agricultural streaming company in the world.

    TER: Your target price of $5 per share for Input sets the bar pretty high for a stock that has been nowhere near that for the last year. But your Buy rating indicates your faith in the company. Can you explain your thinking on that?

    SS: For the investor community and analyst, it's the first time we've ever had to determine the potential of a company like this. We see Input as a classic take on textbook compounding of capital. The company deploys capital into canola contracts at a 20% internal rate of return [IRR]. It receives cash on the sale of canola on those contracts as early as a few months later, then redeploys that cash into new contracts, and so on. Input has already demonstrated its ability to deploy capital and sell canola. Should it continue at pace, we think the compounding potential-just the organic cash deployment, let alone further equity raises-should catalyze the stock and justify our $5 target price and Buy rating.

    TER: The company was exposed to falling canola prices. Are you concerned about that?

    SS: I'm not concerned that the canola price has come off. Our valuation is slightly different from other analysts. We value the company not just on a forward cash flow basis, but also on a net asset value [NAV]. The reason is the company contracts on a six-year basis, and just has to achieve an average $400-425 per metric ton canola price to get the IRRs it's looking for. On top of that, Input, on average, has been selling its canola at an 11.2% premium to spot. That's a function of its effective marketing program.

    The company also has significant cash on the balance sheet, which allows it to shift the sale of canola in and out of quarters to more favorably approach the market. Additionally, in a weaker canola price environment, the company can actually lock in lower all-in costs per metric ton on its contracts. It can then have an IRR of 20% at, say, $380/metric ton canola versus the $425/metric ton that it was locking into at a higher canola price. There's a lot of flexibility.

    The model is fluid. The company is very insulated, and the market needs to be thinking about this over a six-year timeline, not in terms of a two- to three-month move in the canola price. We're not concerned.

    TER: Are you anticipating a new wave of mergers and acquisitions in energy?

    SS: I can only speak to what we can see in services. Again, when a sector collapses under commodity price pressure, it's expected that companies with comfortable balance sheets will be opportunistic, and that's what we saw with Halliburton. You could start to see a ripple as Halliburton, because of antitrust concerns, may have to shed and divest up to 7.5% in revenue. We're looking to see what happens with Halliburton, what the divested shares are going to look like, and who will target those. People are going to look for opportunities there. Buyers with cash are seeing the cheapest valuations in years.

    The entire services sector has massively sold off. People are going to get squeezed. The million-dollar question right now is: Who's next? You do get industry consolidation when oil prices come off and the survival-of-the-fittest mentality comes in.

    Everyone's speculating, from the top down, about which majors will consolidate next, who's looking to pick up tuck-ins, which companies are most exposed to the downswing, and who's going to need to sell themselves or divest noncore assets. We already saw that with Precision Drilling Corp., which divested its coil tubing assets earlier this month.

    It's only been a few months of weak oil prices, but we're already seeing some companies looking for an exit opportunity. I think Halliburton sets a precedent, and now we must wait to see what the windfall is.

    TER: What are you anticipating for the oil price next year?

    SS: The Organization of the Petroleum Exporting Countries [OPEC] decision on Nov. 27 should not have surprised anyone. There was no political incentive for OPEC to cut its own production to support the U.S. I think we're going to see $55-65/bbl for a little while as a result. The market seems pretty comfortable with that level.

    TER: Any final thoughts? Is this a good time to get into the services?

    SS: What investors want to do now is have the right names on their radars. In these selloffs, it becomes extremely important to position in the right basins. That's the only way to survive a turbulent energy market. For us there are core areas-the Bakken, the Eagle Ford, Niobrara-that are consistently rated best for returns in capital spend.

    Beyond basin positioning, it's a matter of holding companies with right technology and efficiency. That's going to come increasingly into focus as operators need to put great emphasis on cost per barrel. We look to Xtreme Drilling as a name that fits that criteria-a defensive driller you could say-and that's why we picked up coverage on it in the first place.

    Generally, in the services space, I think there's going to be significant near-term volatility. Services are high-beta names and highly correlated to the oil price. Stepping in now could be like catching a falling knife until the dust settles in oil prices. We are cautious until a base builds.

    TER: Steven, thank you very much for your time today.

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

    Steven Salz is an event-driven and special situations analyst at M Partners. Before joining M Partners he worked in a generalist equity research role at a major Canadian bank, in its internal retail asset management group. Prior to that Salz worked as a private Canadian defense contractor, and has held a variety of roles at major Canadian banks since 2010. Salz has a bachelor's degree from the University of Western Ontario.

    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: Input Capital Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Steven Salz: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The 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
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    Tel.: (707) 981-8204
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    Dec 18 3:22 PM | Link | Comment!
  • Rob Chang Spins Yellowcake Into Gold And Gold Into Green

    The long winter of falling uranium prices is about to give way to a Japanese spring. In an interview with The Mining Report, Cantor Fitzgerald's Rob Chang discusses the return of the small producers as an increasingly hungry market looks to eat up all of the available uranium. Plus, Chang likes gold and enlightens us on how gold miners are shaking profits out of slag.

    The Mining Report: After the governor of Japan's Kagoshima Prefecture approved the restart of two reactors at the Sendai Nuclear Power Plant, the daily spot price of uranium jumped $1.40/pound [$1.40/lb] to $39.25/lb. How do you assess this change going forward?

    Rob Chang: The restart news is very positive, although it is happening at a slower pace than we had originally expected. The Japanese utilities are well organized. They are asking to restart the two reactors that are most likely to gain approval. That said, the jump in the spot price reflects the news out of Japan. However, we think that the price change is more a matter of what is going on behind the scenes. Two sellers have stopped selling. A number of utilities have increased their buying. One large utility recently purchased 10 million pounds [10 Mlb].

    TMR: Who stopped selling and who's buying?

    RC: Uranium spot prices are not traded on the public market. These types of transactions are contracted between producers and utilities with the occasional investor or trading house in between. The uranium spot price is not actively speculated upon like gold or copper, nor can the general public get in on the action. The movement in uranium spot pricing is generally based on transactions by entities that are well versed in the intricacies of that market. They probably would not be trading based on just the Japanese news, especially because most of us were already expecting the reactors to restart.

    TMR: Do you think the uranium equities will echo the spot price move?

    RC: Absolutely. Uranium prices have been going up since June, even as uranium equities recently hit a 52-week low. As the uranium spot price moves higher, the dichotomy between the two will increase and we believe uranium equities will need to play catch up.

    TMR: Are the utilities buying long-term uranium contracts?

    RC: I have not heard about many long-term transactions. But the long-term price made a notable upward move of $4/lb to $49/lb. With the uranium spot price nudging the long-term price along, we expect term prices to be pushed higher as the spot price increases.

    TMR: What juniors do you like in the uranium space now?

    RC: Uranerz Energy Corp. (NYSEMKT:URZ) just started production and sales. We look forward to seeing its cost performance. But as we have been pointing out for quite a long time, there is an unavoidable supply deficit approaching. Uranium producers stand to benefit most. Uranerz is well positioned for earning long-term profits.

    TMR: Uranerz's shares were steady at $1.50 during 2013 and spiked to over $2 last March. They then fell to almost $1, and shot up to $1.50 in the last couple of weeks. What was the cause of that spike about a year ago up above $2? Are we looking to pass the newest upsurge?

    RC: Last March, there was a lot of positive sentiment behind uranium. The prevailing analysis was that uranium was set to move this year because of Japanese restarts. Unfortunately, that did not come to pass. There were a lot of delays with the Japanese restarts, and the uranium sentiment turned sour. At that time, Uranerz was receiving final approval and moving to go into production. Passing through that gateway, plus the positive sentiment toward uranium, contributed to the big rise in March. And in early November Uranerz jumped again, due to the re-emergence of positive sentiment on uranium and the fact that Uranerz is now selling yellowcake. Basically, the same thing is happening with the other producers I mentioned.

    We also really like Energy Fuels Inc. (OTC:UUUU). Energy Fuels is holding several mines on standby. It can start two or three of the mines within six months to a year, and within two or three years of a production decision, it can launch an additional half dozen mines. Production scalability is very high. Energy Fuels owns the only conventional mill for processing uranium in the U.S., and that gives the firm a great strategic advantage. Right now, the mill is on standby because of the previous low-price environment. But as the uranium spot price blasts through $44/lb, a nicely leveraged Energy Fuels will soon be able to pump out profits.

    TMR: How important is it for a company to control a mill?

    RC: Ore extracted by open-pit or underground mining needs to be processed by a mill. A mill is a strategic asset-it is very important because any miner that does not have a mill will have to pay Energy Fuels to use its mill. At current uranium prices, conventional mining is not very economic. But at higher prices, there will be a large demand for milling. There are "mom-and-pop" uranium operations throughout the U.S. that will have to pay Energy Fuels to process their yellowcake.

    TRM: What other companies do you like in the U.S. for uranium?

    RC: Uranium Energy Corp. (NYSEMKT:UEC) is similar to Energy Fuels because it's 100% unhedged and fully exposed to the spot market. Once its sales are up and running again, its share prices will sweeten. We are big on the U.S. producers primarily because the U.S. is the No. 1 consumer of uranium at around 55 Mlb/year. But the country only produces around 3-5 Mlb annually. All of these producers stand to benefit from premiums.

    TMR: How did the stocks of the companies that you have mentioned weather the downturn in uranium?

    RC: For most of the past year, they were beaten up. Relative to the recent movement in the price of uranium, many stocks have traveled in a different direction, which does not make sense, but it does make them cheap. That said, the firms I am interested in are starting to recover; some are showing notable strength.

    TMR: Is now a good time to buy uranium stocks at bargain basement prices?

    RC: The bargain basement pricing may have passed. When the uranium spot price was $28/lb and leading the uranium equities downward, we saw a lot of 52-week lows. I doubt that we will see uranium down to $28/lb again. I doubt that it will fall below $35/lb as demand increases.

    TMR: Thanks for the conversation, Rob.

    RC: A pleasure talking to you, Peter.

    This interview was conducted by Peter Byrne of The Mining Report and can be read in its entirety here.

    Cantor Fitzgerald Canada's Senior Analyst and Head of Metals and Mining Rob Chang has covered the metals and mining space for over eight years for the sellside and the buyside. Prior to Cantor, Chang served on the equity research teams at Versant Partners, Octagon Capital and BMO Capital Markets. His buyside experience includes managing $3 billion in assets as a director of research/portfolio manager at Middlefield Capital, where his primary resource portfolio outperformed its direct peer and benchmark by over 28% and 18%, respectively. He was also on a five-person multistrategy hedge fund team, where he specialized in equity and derivative investments. He completed his Master of Business Administration from the University of Toronto's Rotman School of Management.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home 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: Uranerz Energy Corp., Energy Fuels Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Rob Chang: 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: Uranium Energy Corp., Energy Fuels Inc. and Uranerz Energy Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.Streetwise - The Mining Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (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 Mining Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Dec 09 2:45 PM | Link | Comment!
  • Micro-Cap E&Ps With Less Risky Businesses: Casimir's Philip Juskowicz
    Many small-cap exploration and production companies have had a good run in recent years, but are now getting whacked given their strong connections to oil prices. But the news is not all bad: Philip Juskowicz of Casimir Capital makes a good case for certain micro-cap names. In this exclusive interview with The Energy Report, Juskowicz discusses four companies with strong narratives, two with defensive assets, and notes that natural gas names could see market love as margins widen.

    [Editor's note: This article was updated Dec. 8, 2014.]

    The Energy Report: Your expertise is in the exploration and production [E&P] space. Please give our readers some key investable ideas among those names.

    Philip Juskowicz: We've seen a divergence between the micro-cap space and the small-cap space within the oil and gas E&P companies. The micro caps have underperformed substantially versus the small caps over the past couple of years. I attribute that to enthusiasm for shale plays, yet only small-cap companies have the financing necessary to develop those expensive plays. Micro caps missed out on that investor appetite; that's probably why they had underperformed.

    Given the current oil price environment-uncertainty, downward pressure-the first companies to get hit were the ones with strong exposure to oil prices, even if it was just headline exposure. In fact, my research shows a 58% correlation between the small-cap universe and oil prices, whereas the micro-cap space only vaguely correlates to oil prices. Most small caps are going to be hit regardless of what hedges those companies have in place, whereas many micro-cap companies are one-off value plays, and those value plays are still intact. There is a good case for micro-cap stocks here.

    TER: The predominant oil price theory making the rounds is that surging U.S. oil production from old basins and shale plays has reduced America's dependence on imported oil and will keep downward pressure on the oil price for the foreseeable future. Is that how you see it?

    PJ: I do. Research we published last week showed that the rig count in areas providing the recent U.S. production surge have to drop ~30% to offset higher rig/well productivity and result in lower production that will, in turn, raise pricing.

    Given the substantial cash flow industry generated this year and its penchant for overspending, we do not foresee the rig count declining to that extent. To date, we've actually seen such companies announce major increases in both rigs and capex for the Eagle Ford Shale; we have seen moderate to significant declines for the Permian and Marcellus, but not to the 30% area.

    Moreover, rig count reductions take months to implement given existing contracts. As a result, we do not expect any impact from rig count reductions-and resultant increase in pricing-until 2016.

    A much more significant decline in prices would be necessary to result in curtailing existing production, given that front-end capex has already been spent. For example, Cabot Oil & Gas Corp.'s (NYSE:COG) unit cash costs in the Marcellus are ~$0.75 per 1,000 cubic feet equivalent [~$0.75/Mcfe]; current gas prices are $3-4/Mcfe.

    TER: What are your near- and mid-term crude forecasts?

    PJ: I'm significantly below the consensus on The Street. The consensus was $86/bbl for 2015 and $92/bbl for 2016. I'm at $69/bbl in 2015 and $75/bbl in 2016. Drilling curtailments should help lower production by 2016.

    TER: In mid-November, JPMorgan Chase & Co. downgraded its 2015 Brent price by $33 to $82/bbl, citing pressures in the Atlantic basin and the inability of the Organization of the Petroleum Exporting Countries [OPEC] members to curtail production. It also lowered its 2016 forecast to $87.80 from $120. What are your thoughts on those moves?

    PJ: The consensus figures out there are too bullish. It feels good that there's a major bank that has lowered its pricing forecasts. JPMorgan Chase is not saying it's going to be an all-out blowout, but that its 2016 price of $120/bbl may have been too high. The company has a lot of quantitative people behind those numbers.

    TER: JPMorgan Chase also warned us that if there is not a new OPEC agreement in place, crude could slip as low as $65/bbl in January. Is that likely?

    PJ: Over the last three years or so, OPEC has become less relevant, less cohesive and, therefore, less able to dictate world oil prices. If the market thinks that OPEC is falling apart, there could be a psychological impact, but not an actual fundamental impact. I don't think OPEC is acting on the basis of supply/demand fundamentals.

    TER: Do you expect the spread between West Texas Intermediate [WTI] and Brent to continue to contract?

    PJ: I definitely don't see it widening. If anything, it should narrow or remain status quo. The main factor is that the petroleum industry has become more global. You see that with Saudi Arabia dillydallying to U.S. pricing; you see that with the U.S. moving toward exporting oil; and you see that with more infrastructure being built in the U.S., which is lessening the gap between WTI, Cook and other benchmark prices.

    TER: It was recently reported that Halliburton Co. (NYSE:HAL) has made a takeover bid for Baker Hughes Inc. (NYSE:BHI) How will this merger impact the energy services sector? Do you project any other major M&A news in the coming months?

    PJ: The consolidation of two major oilfield service companies can only result in stronger pricing power, notwithstanding any Hart-Scott-Rodino-mandated divestitures. This would hurt explorers and producers [E&Ps].

    I expect further consolidation in the oilfield services sector in an effort to compete with the new Halliburton. Any decrease in activity by the E&P space would put even more pressure on the space to engage in mergers and acquisitions [M&A]. A lower pricing environment, which in some cases will constrain E&P balance sheets, should result in M&A activity within the E&P sector, as well.

    TER: What themes do you expect to be dominant in the E&P space in 2015?

    PJ: Number one is that there are value plays in the micro-cap space. These companies have been overlooked in the shale play revolution happening over the past couple of years.

    Another item for investors to consider is good old natural gas, because lower oil prices have reduced the oil-and-gas spread. On an energy-equivalent basis, not that long ago oil was five times as valuable as gas. That number is now three times. And natural gas generally costs less to drill for and produce. The margins for natural gas companies are going to widen.

    Moreover, natural gas has some good demand momentum behind it given that several petrochemical plants and liquefied natural gas facilities [some of the biggest end users of natural gas] are slated to begin production over the next couple of years, while coal-fueled electric generation facilities are being phased out.

    TER: What are your 2015 and 2016 price forecasts for gas?

    PJ: They're $4.16 per thousand cubic feet [$4.16/Mcf] for 2015 and $4.50/Mcf for 2016.

    TER: If investors are doing their due diligence on micro-cap equities and come across companies with working capital issues, should they consider that a red flag?

    PJ: It is a red flag, and I would put those companies down as speculative buys. I had one company modeled as having a negative cash position within a couple of months; my speculative buy assumed the company received a capital infusion. I think that is normal for micro-cap companies. The company doesn't have accounts receivable per se, yet has general and administrative expenses. It's not uncommon to have a working capital deficit.

    TER: You recently upgraded your rating on an oil services name. Please tell us about that.

    PJ: ENSERVCO Corp. (OTC:ENSV) is a relatively small company that provides frack water heating, hot oiling and acidizing services to the E&P universe. I like that the company is increasing its exposure to these defensive types of services. We're in a questionable environment for oil prices. Drillers are being squeezed and rig counts are going down, but even in a down market drillers need someone to pump hot oil down a well to dislodge paraffin buildup or to acidize a well to stimulate production. ENSERVCO has done a good job gaining market share in its existing markets, as well as with making small acquisitions and growing organically into new markets.

    TER: It recently made a small purchase of 12 hot oiling trucks. How is that material to its top line, if not its bottom line?

    PJ: ENSERVCO pointed to about $6M of revenue potential related to that purchase, and that's what triggered my upgrade. The stock recently went down to levels where an upgrade made sense. This is an example of a company being able to develop relationships with much smaller companies so that it can make acquisitions to grow its business.

    TER: What is your rating?

    PJ: It's a Buy-rated company. I have a $2.85/share price target.

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

    PJ: Despite hedges covering 90% of its current oil production at almost $100/bbl, and the majority of its gas contracted at $7/Mcf, Miller Energy Resources (NYSE:MILL) has seen its stock killed, down 75% since July 1. Yet its production has come up and the company has made significant management changes, which should satisfy frustrated investors.

    Miller hired Carl Geisler, former managing director of investments for Harbinger Group Inc., as CEO. At the same time, it's retained former CEO Scott Boruff's deal-making expertise. Miller has done a great job of consolidating assets, acquiring assets, finding new reserves and developing resources. Production should continue to climb. In the latest quarter, Miller produced 3,300 barrels of oil equivalent a day [3,300 boe/d]. We calculate its net asset value per share at more than $7.50. Its midstream and rig assets alone have been appraised at $175M, and that does not include the value of its reserves. This company has the defensiveness of having real midstream assets that are strategic in nature, meaning that they're the only production facility in the regions where Miller operates, and it doesn't have to rely on the oil price to maintain the entire net asset value.

    TER: Miller recently sold its assets in Tennessee, and now is exclusively an Alaskan play. What did you make of that move?

    PJ: It's another example of Miller saving some money on selling, general and administrative expense, and consolidating its focus. It started as a Tennessee company, but production there was about 1% of the company's total production. Shareholders are interested in its Alaskan assets, not Tennessee.

    TER: Thank you for talking with us today, Philip.

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

    Philip Juskowicz, CFA, is a managing director in the research department at Casimir Capital, a boutique investment bank specializing in the natural resource industry. Juskowicz began his career at Standard & Poor's in 1998, where he was one of the first analysts to recommend Mitchell Energy, credited with discovering the Barnett Shale. From 2001-2005, he worked with a former geologist in equity research at both First Albany Corp. and Buckingham Research. At Buckingham, Juskowicz was promoted to a senior oilfield service analyst position, leveraging his extensive knowledge of the E&P space. From 2006-2010, he was an insider to the oil and gas industry, serving as a credit analyst at WestLB, a German investment bank. In this capacity, Juskowicz was responsible for $500M of loans to energy companies and projects. He earned a master's degree in finance from the University of Baltimore.

    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) Brian Sylvester 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: ENSERVCO Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Philip Juskowicz: 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. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Miller Energy Resources is currently a client of an affiliate of Casimir Capital L.P. and has been a client during the 12-month period preceding the date of distribution of this interview. During aforementioned period, an affiliate provided non-investment banking-related services and has received non-investment banking-related compensation from the subject company.
    Casimir Capital L.P. intends to seek compensation for investment banking services from the subject companies during the next three months.
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