The Energy Report's  Instablog

Source: Tom Armistead of The Energy Report (5/28/13)

http://www.theenergyreport.com/pub/na/15312

Price differentials emerged last year as a major hurdle in oil and gas markets, but not every company is equally vulnerable to the swings and dips of different crude grades. In this interview with The Energy Report, Chad Ellison, oil and gas analyst at Dundee Capital Markets, explains how producers are protecting themselves against price downside-or increasing upside exposure. Find out which names are dancing with differentials.

The Energy Report: Chad, your Q1/13 Earnings Preview forecasts higher natural gas prices, but says that the AECO Hub/NYMEX gas price differential, which is about $0.50 through all fluctuations, will remain unchanged for both the short and long terms. Why do you expect so?

Chad Ellison: The U.S. remains the key export market for Canadian natural gas, and the U.S. has seen tremendous growth in its own domestic production; to keep imports from Canada competitive, we expect to see AECO continue to trade at a discount that is in line with historical norms. Longer term, once Canada is able to export its liquefied natural gas, that potential diversification of customer base could increase demand for Canadian natural gas. But there's still a lot of work to be done on that front. For now, we expect to see some seasonal volatility within the differentials between the $0.25-0.75 range, hence our ~$0.50 estimate.

TER: You're also forecasting a reduction for West Texas Intermediate (WTI) and improvement in light and heavy Canadian oil differentials. What is behind these forecast revisions?

CE: When we put out our revised commodity deck in the middle of April, WTI had come under pressure. There was disappointing economic news from China, uncertainty on economic recoveries in both the U.S. and Europe and growing domestic crude oil inventories, specifically at Cushing, where WTI is priced. As a result, we trimmed our WTI forecast, but we still remain constructive on the longer-term WTI price recovery due to a number of proposed pipeline projects that will help alleviate that storage glut. The WTI recovery has come much quicker than we anticipated, and it's currently trading about $7.50 higher per barrel (bbl) than our Q2/13 forecast.

As far as Canadian differentials go, we expect them to narrow in the longer term back to the historical norm due to the vast number of proposed pipeline projects and expansions that I mentioned. But in the interim, the expanded use of rail to transport crude has allowed producers to bypass Cushing, go directly to refiners on the coast and get better realized prices, thus mitigating the effects of pipeline bottlenecks.

TER: What will differentials changes mean for the companies you cover?

CE: My coverage universe is largely light oil based. Although tightening differentials have been more noticeable on the heavy side, we did see a benefit across the board. I would say the biggest beneficiary would be Long Run Exploration Ltd. (LRE:TSX, BUY rated, $6.75 target price). It does have a small amount of heavy oil production, but is also a fairly balanced producer, which benefits from our increased natural-gas price forecast as well.

TER: According to your analysis, the cash flow for some companies in your coverage universe could suffer badly from a $10 drawback in WTI. On the other hand, it would not benefit equally from a $10 increase, while others would benefit greatly from an increase but would remain stable in a drop. [See chart below.] Why is that?

CE: Largely it has to do with hedging. Different producers who enter into hedges will use a combination of swaps, collars and put options to help insulate them from shifts in commodity prices. Companies that only locked in a floor price will have more to gain on the upside, but be protected on the downside. On the other hand, companies that lock in a fixed price will see a relatively balanced impact on cash flow either way when we stress test our commodity assumptions.

(click to enlarge)

TER: You commented that in the absence of strong capital markets, companies you cover are increasingly dependent on their own cash-generating capabilities. What are their basic options for generating cash?

CE: The typical means include reinvested cash flow from a revenue-generating project, such as a producing well. Other options on the debt side include traditional reserve-based lending, and larger companies can layer in structured term debt or issue senior notes. Selling non-core assets has been another way to generate cash, but with so many companies pursuing asset sales on the market, we've seen the prices that these companies have been able to get come down. There is a short list of companies that have a market premium to exercise on these asset packages, and we are seeing them being selective in their acquisitions.

Establishing joint ventures or having private equity backing are additional innovative ways companies are exploring to increase access to capital. We haven't seen much of that to date, but given the lack of availability of traditional equity funding, it is something a number of companies are looking into at this time.

TER: DeeThree Exploration Ltd. (DTX:TSX; DTHRF:OTCQX, BUY rated, $11.75 target price) has trended mostly up since June 2012. What's behind that growth?

CE: DeeThree was one of the best-performing stocks in the sector in 2012. That was largely based on the success of its Alberta Bakken play. The company has now drilled 20 consecutive successful wells since its initial discovery well. The Alberta Bakken where DeeThree operates is a much shallower area than where some of its competitors have been drilling up to the northwest, and the company can drill two-mile horizontal wells for a total cost of $4 million ($4M). That's less than half of what companies are paying to drill wells in other areas. These wells have also exhibited a very shallow decline profile with excellent economics. Type curve well analysis shows net present value over $7M and rates of returns in excess of 150%. That was what was responsible for the growth last year.

This year, the company's Belly River play has taken the stock to the next level. A change in completion techniques has opened up a lot more potential. The Belly River play is very thick, between 250-500 meters, with at least six potential productive intervals within the play. DeeThree is only beginning to scratch the surface of the Belly River and has engaged a reserve evaluator to conduct a resource study to help evaluate the play's full potential. I believe the study will show much larger resource upside than is currently being priced in. My $11.75 target price assumes only about 100 locations. The company has identified over 330 and believes it could ultimately have over 500, which could add another potential unrisked $4-5 per share.

TER: DeeThree's price currently is around $8/share and you bumped its target up from $9.75 to $11.75 even though it's never reached $9.75. Was this change prompted by something in the operations or in its prospects?

CE: I would say both. Our target price is based on a 12-month expectation. When I initiated coverage on the company, I was cautious on the Belly River play given the relative lack of drilling history, but during the company's first quarter drilling program it drilled five successful wells, including two of the best to date. Given the success, I was comfortable giving the play some credit. I'm still only assuming 100 unbooked locations in my valuation and a type curve that at least these latest results seem poised to beat.

TER: In the wake of the management shakeup and noncore asset sale, your latest report on Surge Energy Inc. (SGY:TSX, BUY rated, $6.75 target price) notes its transition to a lower-growth company as it reaches a certain level of corporate maturity. How will these changes affect the company's operating strategy and its stock?

CE: Paul Colborne, who is coming in as President/CEO, has an excellent track record of running successful companies: He is the former President/CEO of Starpoint Energy Trust (private), Crescent Point Energy Corp. (CPG:TSX, BUY rated, $49.25 target price) and StarTech Energy Inc. (private). The management team is out on the road now marketing to over 100 investors over the next two weeks to lay out the plan and the shift in strategy. The new plan will likely involve a slowdown in capex to ensure the company has a more stable, low-decline production base. Once management and the board have confidence in the low-risk, low-decline production base, we would expect to see a dividend put on with a strong emphasis on sustainability. This should open up the stock to a new yield-focused investor base.

TER: A stumble by Surge in H2/12 undermined its credibility and share value, but the stock began what looks like an upward trend in early May even before the shakeup. What's driving that?

CE: The stock began trading at a steep discount to any valuation metric after its H2/12 miss, and was oversold, in my opinion. The company had an excellent Q1/13 drilling program, hitting or beating its type curve estimates and expanding its inventory in its three key oil plays at Valhalla, Nipisi and in southeast Alberta. It was in need of a catalyst and it managed to get three with the management shakeup, the sale of its North Dakota assets to clean up the balance sheet and a successful Q1/13. I think this was just investors looking to get ahead of the potential catalyst and it ended up being better than anyone had anticipated.

"There's a deep discount in the Canadian junior oil and gas space right now. It is a good time to consider getting back into some of these names."

TER: Manitok Energy Inc.'s (MEI:TSX.V, BUY rated $5.25 target price) marketing boasts that it is a "once-in-a-generation," "contrarian" opportunity. Does the performance justify the language?

CE: I believe it does. The operations team is composed of former Talisman Energy Inc. (TLM:TSX, not rated) technical players that have firsthand knowledge of the complex drilling involved in the foothills area, in the disturbed belt of Western Alberta. Manitok has been able to use this technical expertise to assemble a land base of over 280 thousand (280K) acres relatively cheaply, as few others have the knowledge or capability to drill in the area. Results to date at Stolberg in the foothills have been some of the best drilled in the basin in decades, coming on at over 800 barrels per day (800 bbl/d) and exhibiting a shallow decline profile as the wells are not fracked. The shallow decline allows the company to generate free cash flow, which it can reinvest into drilling and exploration.

TER: Manitok's target price is at $5.25, but it's only $2.60 now and it's never broken $3.50. What will it take to bring it up to $5.25?

CE: I think the stock has stalled at this level due to market perception of a lack of inventory, but the company has a large land base that spans the foothills. Although it's had tremendous success at Stolberg to date, there hasn't been a lot of activity outside of that. However, there is an upcoming catalyst-Manitok has recently commenced drilling a new area at Cabin Creek. It's an area that the technical team has worked on in prior careers. They like what they saw there and managed to farm in and increase the land base. Success at this well should get some of those skeptics back into the stock, in my opinion, once they're able to evidence repeatability.

We fully expect to see exploration results that vary. Given the nature of the drilling, I don't expect the company to drill at a 100% success rate, but if the company can find another Stolberg-type oil pool every one to two years, it will build the inventory enough to keep this thing as one of the fastest-growing stocks in our coverage universe.

TER: What prompted you to bring Long Run Exploration's target from $6.50 to $6.75? Did its Q1/13 production meet your forecast of 23,800 bbl?

CE: Production was pretty much in line with our estimates, as was cash flow. The quarter was exactly in line with oil and liquids production, and that's what generates most of the economics. This is the first full quarter the company had since its merger and disposition. I think hitting its guidance will help build credibility. The target bump had more to do with the revised commodity price deck, which I discussed earlier.

TER: Any closing thoughts that you'd like to share?

CE: There's a deep discount in the Canadian junior oil and gas space right now. The crude oil differential problem that we saw last year hit stocks hard, and a lot of U.S. investors exited the space. Through rail, producers have managed to mitigate the differential financial impact and there is a plethora of planned pipeline projects, but we haven't seen a big return in equity prices, so there's still deep value in a lot of the Canadian E&Ps. Now is a good time to consider getting back into some of these names.

TER: I appreciate your time this morning. Thank you for your thoughts.

CE: Thank you, Tom.

Chad Ellison joined Dundee as an energy analyst in November 2012. Prior to Dundee, he was with Canaccord Genuity's research team with a focus on Canadian domestic junior and intermediate companies. Ellison gained experience providing financing for E&P and oilfield service companies from 2005 to 2010 with GE's financial services arm. He holds a Bachelor of Commerce degree in finance from the Haskayne School of Business at the University of Calgary.

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DISCLOSURE:
1) Tom Armistead 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: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Chad Ellison: I or my family own shares of the following companies mentioned in this interview: Surge Energy and Manitok Energy. 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: DeeThree Exploration, Surge Energy, Manitok Energy, Long Run Exploration. 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.
Chad Ellison beneficially owns, has a financial interest in, or exercises investment discretion or control over, companies under his coverage: Surge Energy Inc., Manitok Energy Inc.
Dundee Capital Markets and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by, companies under coverage: Renegade Petroleum Ltd.
Dundee Capital Markets and/or its affiliates, in the aggregate, own and/or exercise control and direction over greater than 10% of a class of equity securities issued by, companies under coverage: Marquee Energy Ltd. and Tamarack Valley Energy Ltd.
Dundee Capital Markets has provided investment banking services to the following companies under coverage in the past 12 months: DeeThree Exploration Ltd., Kelt Exploration Ltd., Manitok Energy Inc., Pinecrest Energy Inc., Raging River Exploration Inc., Renegade Petroleum Ltd., Tamarack Valley Energy Ltd., TORC Oil & Gas Ltd., TriOil Resources Ltd. and Whitecap Resources Inc.
All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets. The policy of Dundee Capital Markets with respect to Research reports is available on the Internet at www.dundeecapitalmarkets.com.
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.

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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.

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