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  • Michael Waring Has Seen The Energy Downturn Movie Before, And He's Not Worried

    With oil and gas prices down, it's time to cull the herd, sell marginal producers and double down on the strong ones in your portfolio, says Michael Waring, founder of Galileo Global Equity Advisors Inc. In this interview with The Energy Report, Waring explains that this kind of correction happens every 10 years in this space. It presents opportunities for companies to improve and investors to profit-and he names four companies he considers most likely to succeed.

    The Energy Report: Michael, you said in November that the Organization of the Petroleum Exporting Countries (OPEC) expected the U.S. to share in reducing production growth to help stabilize the oil market. Have events justified that expectation?

    Michael Waring: Events have not. But I think we need to address that statement. I don't believe that the Saudis are out to hurt Iran, to punish the Russians or to take down shale oil production in the U.S. I don't think this is some Machiavellian scheme. I think it is simply a question of market share. The Saudis are saying they have the lowest operating costs in the world, so why should they be the first guys to cut? It makes more sense that the more expensive guys cut production first. When you say it that way, you can actually understand the point the Saudis are trying to make here. It wouldn't be logical to assume that Russia or the U.S. would voluntarily take production down, but it's going to be forced on them by lower prices.

    And the Saudis have really talked the price down. When you look at the rhetoric of the last two months, they've gone out of their way to drive it down. I think the basic attitude has been that if the high-cost guys don't want to voluntarily reduce production, we'll make them reduce it by lowering the price to the point where it hurts.

    TER: Will those low prices do permanent damage to the North American industry?

    MW: I wouldn't use the word permanent, but damage is being done that will take probably more than a couple of years to recover from.

    I think that the smaller oil and gas companies on the shale oil and gas treadmill-and I refer to it as a treadmill because they have to keep drilling aggressively if they want to keep their production flat or growing-have a real problem now because the banks won't lend to them, the bond markets are closed to them and they can't issue equity because the stocks have collapsed. You'll see consolidation. And it's going to shake a lot of the marginal guys out of the business.

    "Investors want to use this as an opportunity to clean house and go high grade into the companies that will give good torque on the way up."

    This happens every 10 years in the oil and gas industry. It is a commodity business after all, and what's happened to the price isn't way out of line with what's happened in the past. This is actually a good thing about the industry: It tends to be self-correcting and cleansing. What happens at a moment like this is that the good guys, with really good plays, are solid and secure. It's the marginal guys that get squeezed out, and the marginal guys tend to drive the cost up over time because everybody is outbidding for services. If you clean all those guys out, then you have a reset back to a lower cost base, and a focus on oil and gas plays that make sense and generate a good economic return through full-cycle pricing.

    TER: What should investors do in this market?

    MW: In our own portfolio, if we have two or three names in the energy sector that we were interested in, or that we owned but didn't have a high degree of conviction in, we would use this as an opportunity to sell those names and double down on the two or three stocks that we have a high degree of conviction in-that we know will dramatically outperform coming out the other side. That's a key. Investors probably want to use this as an opportunity to clean house on the energy portion of their portfolios and go high grade into the companies that will give good torque on the way up.

    TER: Is there a silver lining for oil and gas investors in this dark cloud of falling prices?

    MW: In every previous cycle, prices 6-12 months after the bottom are up quite sharply. I don't know the exact timing this time around, but I do know that the harder and faster prices come down, the harder and faster they're going to go up. That's typically been the case, unless you want to utter those very dangerous words: "This time is different."

    The point I would make is that we have an opportunity to buy shares in companies where the stock price is down 50-60%, but the business models are not impaired and the companies have a solid asset base. We are actually being given a gift. If you can look out one year, it will be a gift to own these stocks at fabulous, attractive valuations.

    TER: The Energy Information Administration (NYSEMKT:EIA) is forecasting Brent crude averaging $58/barrel ($58/bbl) in 2015 and $75/bbl in 2016. What's your forecast?

    MW: We wouldn't be too far off that. I just had to send an estimate out to a client, and we're thinking $70-75/bbl oil in 2016, and we're depending on natural gas at $2.75-3.25 per thousand cubic feet ($2.75-3.25.Mcf).

    TER: Is that oil price Brent or West Texas Intermediate (NYSE:WTI)?

    MW: That's WTI. I wouldn't say they're trading at parity, but the gap between Brent and WTI has narrowed dramatically.

    TER: Do you expect that to remain the case? They've been running $3-4/bbl apart.

    MW: On a go-forward basis, I'm expecting it to remain narrower than it's been historically, or for the last two years, let's say.

    TER: The EIA's forecast seems to point to an extended period for lower prices. What oil and gas investments are safe in such a market?

    MW: We have to remain focused on the fundamentals behind the business. It's a moment where psychology has taken hold, and people have forgotten, overlooked or can't be bothered with the fundamentals. The fundamentals of each company on its own will tell us what we need to know. If you look at the supermajors and large-cap oil companies, from Suncor Energy Inc. (NYSE:SU) to Canadian Natural Resources Ltd. (NYSE:CNQ)-we don't own those names and those aren't part of our universe-any company of that stature is going to be just fine. Likewise, a company like PrairieSky Royalty Ltd. (OTC:PREKF) [PSK:TSX] on the royalty side is going to be fine. It's debt free with a lot of cash. There are ways to play this sector at the moment, looking at companies with very attractive valuations, solid balance sheets, and secure assets and cash flow going forward. Something like PrairieSky, in my mind, would certainly fit the bill.

    TER: Are you expecting mergers and acquisitions (M&A)?

    MW: I think there will be consolidation in the business. I think that's inevitable. Having weak players without a lot of choices in terms of flexibility going forward will lead to mergers and consolidations. But good companies with good asset bases won't have to be in the M&A game. All they need to do is focus on those assets.

    TER: You have a diverse portfolio of companies. Are the companies you're referring to in that portfolio?

    MW: Yes, they are. We have a concentrated list of holdings in oil and gas. Oil and gas currently makes up about 20% of our mutual fund holdings. We have a fairly concentrated list of four or five names that we like a lot.

    TER: Can you talk a little about some of those?

    MW: Sure. The first one would be Paramount Resources Ltd. (OTCPK:PRMRF) [POU:TSX]. I think at one point late last summer, this was a $65/share stock. It cut down to $22/share. It's currently $29/share. This is a natural gas and liquids producer. It has exposure to a play in Western Canada, along with a company called Seven Generations Energy Ltd. (OTC:SVRGF) [VII:TSX]. These two companies together probably have the most attractive rock in the Western Canadian sedimentary basin. The returns from this play are the highest we can identify out there, because of the high level of liquids and condensate produced alongside the natural gas.

    "What happens at a moment like this is that the good guys, with really good plays, are solid and secure."

    Paramount has decided to build its own infrastructure and its own gas processing plant, as opposed to using a midstream company like a Keyera Corp. (OTC:KEYUF) [KEY:TSX] or Pembina Pipeline Corp. (NYSE:PBA). What that means is that on a go-forward basis, Paramount will capture more margin and have lower operating costs and greater control over its operations than a company using a third-party midstreamer.

    We're very excited about this company. It is currently producing 37,000 barrels a day (37 Mbbl/d) from a gas plant that it brought on last June. It is adding a piece of equipment in the plant that will allow it to deal with all the condensate and liquids coming out of these wells. When that is complete in March, corporate production will increase to 70-75 Mbbl/d in 2015. The company will have a dramatic increase in production and a dramatic increase in cash flow.

    The knock against the company is that it borrowed a lot of money to build up this plant. It was a $250 million ($250M) capital expenditure, so the debt numbers look high. But we would argue that once it is up and running at 75 Mbbl/d, on an annualized basis, the cash flow is going to be $700M at $65/bbl oil. We think the debt/cash flow numbers are going to dramatically improve. In this environment, how many companies can double production in the next four to six months? Understand, the money is all spent. The company has 45 wells standing behind pipe to support this plant once the stabilizer comes onstream. There's nothing that Paramount has to do at the margins. It's a slam dunk.

    The risk is that we want to see this stabilizer come onstream smoothly. It's going to have a startup period, but the main plant itself was started up last spring, and Paramount has been able to bring that on pretty steadily, without any problems or interruptions. This is a name we like a lot. We think when prices finally bottom, this stock will recover very quickly.

    TER: What other companies do you like?

    MW: One is Secure Energy Services Inc. (OTC:SECYF) [SES:TSX]. This company deals in oil field waste and water disposal. This is a razor blade-type story, because Secure Energy provides a service to the industry, and whether prices are up or down, the industry needs to deal with waste and water. As wells mature in Western Canada, they tend to have higher water production over time, so the older a well gets, the more water it produces. This is probably the most solid of all the service businesses that we know of.

    Management at Secure Energy is great. I've known the guys for 15 years, maybe longer, and they've done an excellent job to date, since the company has come public. Secure has been beaten up along with other oil service names, but it stands apart. This company will stay busy-maybe not at the same level, but it's going to stay busy.

    "The Saudi attitude has been that if the high-cost guys don't voluntarily reduce production, we'll make them reduce it by lowering the price until it hurts."

    Then I'd mention Canadian Energy Services and Technology Corp. (OTCQX:CESDF) [CEU:TSX]. It provides drilling fluids to the oil and gas industry. Part of the business is tied to oil well drilling, because the company makes specialized fluids needed to drill complex horizontal wells. But it also produces chemicals used by the industry to stimulate production from existing wells. This is a consumable-chemistry company, not a true oil and gas service company. Again, it doesn't have to go out and invest in all kinds of steel and iron. What it invests in is research and development in a chemistry laboratory.

    We like this company. It has tremendous free cash flow because it doesn't have to buy and sit on equipment. We think, again, this is a name that will come rocketing back when the time is right. EOG Resources Inc. (NYSE:EOG), in the States, is the biggest operator in the Eagle Ford Basin-one of the best at what it does. It uses Canadian Energy Services for all of its drilling fluids, so that should tell you something about the quality of the product.

    The last company-a straight oil company-is Whitecap Resources Inc. (OTC:SPGYF) [WCP:TSX.V]. It has top management and light oil. It has a dividend yield of something like 7.25%. The all-in payout ratio is about 100% at current prices, but that compares very favorably to most other dividend-paying companies in the space. Whitecap has maintained a very steady payout ratio. It is very good on the operating cost side. Again, this one will come bouncing back when the psychology finally turns in the oil market.

    TER: A lot of energy service companies are suffering because of lower demand from their customers. Are Canadian Energy Services and Secure Energy Services having that problem?

    MW: To date, no, they are not. It's not to say that at some point. . .Come spring breakup, will activity fall off? Yes, it probably will. These companies will not be completely immune to a slowdown in the industry, but they'll be a whole lot more immune than, let's say, contract drillers and other service companies. And they'll provide really good torque on the upside. Again, when the psychology turns and people decide it's not the end of the world for the energy industry, names like this will be the first out of the box to bounce back.

    TER: What is going to give them a leg up?

    MW: I think it's the high-quality nature of what they do. Both companies provide something very specialized, as opposed to a fleet of generic drilling rigs. They are not commodity-type businesses. In the case of Canadian Energy Services, when it gets involved with a company like EOG Resources, it tailors its drilling fluids to suit the needs of EOG in that particular field. Once it gets engaged with a customer, it's very hard for that customer to go somewhere else just because somebody can shave 10% off the price. This is very specialized stuff. Once you get that relationship going, you have to really screw up to lose that relationship.

    TER: What are Paramount Resources and Whitecap Resources doing to ensure they can survive in this low-price market?

    MW: Both are watching their capex very carefully. Paramount does not pay a dividend; Whitecap does. It has a history of raising that dividend, and has done so every couple of quarters consecutively since it became public. Just before Christmas, Whitecap said it was expecting to raise the dividend in January this year, but it has decided to defer that increase until it sees how things shake out.

    "The harder and faster prices come down, the harder and faster they're going to go up."

    In both cases, it's a function of how quickly these companies want to grow, or whether they want to slow down the growth rate. They have the luxury of deciding their fates, of determining how quickly the business grows or whether they're going to throttle back on capital expenditures and slow it down.

    TER: What qualities in a company catch your attention and keep you interested?

    MW: I think in oil and gas, first and foremost, it has to be the management team. I don't know any other business where companies end up reinvesting so much capital in the business. If you're not good at what you do-if you're not good on the cost side-you can blow your brains out and destroy capital very quickly. Investors should get a read on management-look at the track record, the pedigree, etc. Operating costs and netbacks tell you a lot about the caliber and diligence of management. Those are very important metrics to look at.

    Second, investors need to assess the geology of the company's holdings. Asset quality can vary greatly between companies. To use Paramount as an example, you can't own better rock in Western Canada. Maybe somebody will find something else in the future, but at the moment, this company has some of the best acreage in the business. Understanding something about the geology is helpful.

    It's never easy going through the down times. I've been to this movie before, and quite frankly I'm tired of seeing it. Each movie plays out a little differently, but it always ends up the same. At the moment it feels like it's the end of the world, it will never come back, etc., etc. But it always feels this way. Every cycle, it always feels this way.

    TER: Thank you for your insights.

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

    Before forming Galileo Global Equity Advisors Inc. in 2000, Michael Waring served from 1985 to 1999 as a vice president, director and portfolio manager at KBSH Capital Management Inc., a private investment management firm with over $10B under management. Waring obtained his master's degree in business administration from the University of Western Ontario, is a CFA charter holder and a member of the Toronto CFA Society.

    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 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: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Michael Waring: 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: Paramount Resources Ltd., PrairieSky Royalty Ltd., Secure Energy Services Inc., Keyera Corp., Canadian Energy Services and Technology Corp., Whitecap Resources Inc. 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.
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  • Jason Wangler Throws A Lifeline To Oil And Gas Investors

    The crash in oil prices and the continued depression in gas prices have exploration and production companies and their services providers hunkered down, cutting capital expenditures and trying to bring spending into line with income, says Wunderlich Securities Analyst Jason Wangler. The likely survivors have similar traits, and in this interview with The Energy Report, Wangler shares their secrets, and names companies he expects will have an especially bright future.

    The Energy Report: Jason, last summer oil was more than $100/barrel [$100/bbl] and most analysts were forecasting long-term stability in the $80+/bbl range. What tipped the oil price into freefall in July?

    Jason Wangler: For the last five to seven years, Saudi Arabia has effectively filled the hole between supply and demand. When the oil price was high, producers were ramping up oil production, so Saudi Arabia's market share declined. In July and the months that have followed, Saudi Arabia, a low-cost producer, decided that rather than just continue to fill this hole, which was continually becoming less important, it would make a stand and show the world that it can produce oil at a lower cost than other countries. We are starting to feel the effects of what that means for oil prices.

    TER: Saudi Arabia had that much influence in the market? It could just kick out the props and let it fall?

    JW: The world market has about 93 million barrels per day [93 MMbbl/d] of production. Saudi Arabia produces about 10 MMbbl/d of that. We-meaning the U.S.-are also at about 10 MMbbl/d now, and Russia is 8-9 MMbbl/d. Those are the three biggest players in the game. But Saudi Arabia is different from the U.S. or Russia in that it has the ability to very quickly speed up or slow down production as it sees fit.

    For the last five years or so, the Saudis sped up or slowed down production according to world demand. And as the U.S. continued to grow production almost 1 million barrels/day in each of the last couple of years, the Saudis were seeing lower market share. And finally, the Saudis decided they didn't want to continue to be a less important player. They wanted to show the world that they still have a significant control over prices. And they do. This is an exporting country. It can control how much to put into the market.

    TER: Oil prices continue falling. Are you seeing any signs of a slowdown yet?

    JW: In terms of the price? I don't think any producer can really sustain at $50/bbl oil. But the price keeps falling, so in the near term there's some irrationality in the market. I'm hopeful it starts to slow down, because nobody's making money at these levels.

    TER: What's your forecast for oil this year?

    JW: Right now, for the full year, we're forecasting oil at about $70/bbl. We think the price will start to correct itself-the question is how quickly-and get back to a level that is rational from an economic perspective, whether in the U.S. or internationally. We're using $70/bbl as the price because in the U.S. everybody is cutting capital expenditures [capex] dramatically. You'll see that across the globe as well. People try to rectify cash inflows and cash outflows, and that's going to take some time to wash through the system. But soon you'll start to see hypergrowth in the U.S. In other places growth will slow down because of the lack of investment.

    TER: Natural gas has struggled to remain above $3/thousand cubic feet [$3/Mcf], and it's still under pressure. What is your forecast for gas this year?

    JW: We haven't been bullish on gas for the better part of the last five years. We have so much supply in the U.S. that you could tell me a number and probably back into how much is going to be produced. For a full year we're forecasting prices in the $4/Mcf range, which I don't think is too crazy. It's finally starting to get cold across the U.S., so we'll see if weather impacts the price. Last year, we very briefly touched $6/Mcf in the February-March timeframe.

    But outside of short-term weather impacts, we don't see any huge demand drivers increasing the health of natural gas prices. Even if you do get those drivers, we believe there's a lot of supply out there, and producers will be happy to put gas to work at any certain price.

    TER: If there is a chill in the weather coming up, is the storage high enough now to keep prices in check this winter?

    JW: We're pretty close to the five-year average, so we have plenty of gas in storage, but we don't have more or less than in the last few years.

    Assuming the weather is cold, you should see some support in natural gas pricing because we will draw down the inventory. For the most part, we believe the biggest driver of natural gas pricing is short term: weather. From a longer-term perspective, there's not anything we see that will be able to dwarf the supply that we could potentially turn on in the next few years if we needed to, because of all the great gas plays that we have.

    TER: What effect do low gas prices in North America have on the prospects for liquefied natural gas [LNG] plants that have been proposed?

    JW: The lower the price of gas in the U.S., the better the chances that those plants become economic. The headwind has not been low natural gas prices. That's been the big tailwind for the idea of LNG. The problem has been more political or regulatory, in that these are very large, very capital-intensive projects. You have to get a lot of permits to go forward, and they take a long time to build.

    We're going to see some incremental LNG work come on line later this year and into 2016. That will be very interesting because there is an arbitrage here. We have low natural gas prices, at $3-4/Mcf. You go over to Asia, or even to Europe, and you're talking about $7/Mcf, and sometimes as high as $12-13/Mcf. There is a very simple arbitrage if you can get it fully up and running. The issue is more in terms of how slow it's been to develop due to the regulatory hurdles. Right now is as good a time as any to take advantage of the arbitrage, given how low pricing is in the U.S.

    TER: Are both oil and gas responding to the same drivers?

    JW: Yes and no. They're both in an oversupplied market right now, but the reason for the oversupply is different. Natural gas is a domestic product. It's wholly contained within the U.S., and we have a lot more supply than demand. So we've seen depressed natural gas prices for the last five to six years now.

    Oil has done very well for a long time. It's more of a world commodity, though we can't yet export it from the U.S. officially. The price is a nationally driven number, but it is a world commodity. The issue has been oversupply, not just in the U.S. shale plays, which are only about 4-5 MMbbl/d of the 93 MMbbl/d produced worldwide, but from the effects of other producers deciding that they want to fight for market share as well. The oversupply of oil is market share-driven.

    TER: How are the exploration and production [E&P] companies responding?

    JW: The only thing they can do is hunker down. Across the board they are cutting capex as fast as they can, trying to right-size spending versus income. At $90-100/bbl oil they were getting better cash flows, and the capital markets were wide open for them. Nowadays, the capital markets are relatively closed, and the E&Ps are getting half as much cash flow for every barrel they're producing. So they're pulling back activity as quickly as possible.

    I think you'll see the rig count get hammered the next few months, probably going from the 1,900-rig range a few weeks ago down to at most 1,500 rigs-and maybe lower-very quickly. E&Ps are spending less on growth as they focus more on surviving and keeping a decent balance sheet.

    TER: Does the strong U.S. dollar have an effect on the upstream oil and gas companies?

    JW: It doesn't help. A weaker dollar makes it easier for other countries to buy oil. The stronger dollar makes it more expensive, in foreign currency, to buy oil. Alongside all of this discussion about Saudi Arabia and oversupply, the fact that the U.S. dollar continues to strengthen makes those barrels more expensive in foreign currencies, prompting buyers to wait and see if they can pay less. The strengthening dollar has been another headwind for oil prices.

    TER: Tell me about some of your favorite upstream companies, whether they're E&P or oil field services. How are they responding to the oil price downturn?

    JW: As I said, across the board it's pretty much the same story. These companies can cut spending, whether that's operational or capital, to keep focused on the balance sheet rather than on the income statement or on growth. And in a cyclical business, during the down part of the cycle, some companies will survive to see better days, because at some point the cycle will turn. We don't know when, so right now it's simply a matter of battening down the hatches and doing the best they can in a bad market, waiting for a better day.

    TER: What are some of your favorites?

    JW: Some of my favorites are Earthstone Energy Inc. (NYSEMKT:ESTE), Gulfport Energy Corp. (NASDAQ:GPOR), Gastar Exploration Ltd. (NYSEMKT:GST) and Chesapeake Energy Corp. (NYSE:CHK) on the E&P side. On the oil field services side, I really like Seventy Seven Energy Inc. (NYSE:SSE) and Natural Gas Services Group Inc. (NYSE:NGS).

    A lot of these companies share similar traits. I like having a decent gas content because with most commodities depressed, having diversity through two commodities is a good strategy. I don't know which commodity is going to do better going forward, but having the ability to deploy capital to either one is a strong position.

    Having a great balance sheet right now is about as important as anything, given the fact that companies have to batten down the hatches and try to survive. Having too much debt or having the issue of not being able to meet commitments, whether financial or operational, is a death knell. Gulfport Energy, Gastar Exploration, Earthstone Energy and Chesapeake Energy all have that ability. From the services side, it's the same thing. It's about being able to maintain your current position, generate some cash and wait for a better day, and that's what I think those three services companies can do.

    TER: Why did you initiate coverage of Earthstone Energy in December 2014?

    JW: Earthstone just finished a reverse merger with a private company called Oak Valley Resources LLC. I've known the management at Oak Valley for quite a few years. They used to run a company called GeoResources Inc., which was bought a few years ago by Halcón Resources Corp. [HK:NASDAQ] for about $1 billion [$1B]. The management team made these kinds of deals three or four times. The team has been very successful; members know how to not only build an oil and gas company, but also how to create the endgame of monetizing it. I think they have a great opportunity to do it again at Earthstone. The last time the management team entered into a very successful merger was 2008-2009, when most people were in a bad spot.

    I initiated on Earthstone when the Oak Valley deal closed in December. The company has $100 million [$100M] in cash and no debt on the books. While many companies have a lot of debt and have to focus on just staying alive, Earthstone can be opportunistic and maybe go out there and grow through acquisitions.

    TER: That combination with Oak Valley was interesting. What was the rationale behind that combination?

    JW: Earthstone Energy, being a small, nonoperated Bakken shale player, was a public entity. Oak Valley was a private entity that wanted at some point to become public again, so Earthstone Energy brought to the table a public vehicle that was already trading on the markets, as well as some Bakken exposure, which the Oak Valley guys have known well. Oak Valley brought some capital-that $100M in cash-and the management team.

    TER: That sounds good for the company. How did the stakeholders in each company benefit?

    JW: From the Oak Valley perspective, it's becoming public and will have an ability to monetize a position, whether today or in the future, through selling shares or something of that nature. Also, it allows Oak Valley to be in the public markets to raise money. For Earthstone Energy, the benefit is a lot more scale. It has only about 2M shares outstanding; it's a very sleepy Bakken company. Now it has the Bakken asset and some pretty nice Eagle Ford shale assets as well, brought over from Oak Valley, plus a very good management team.

    TER: Will oil prices drive more consolidation in the E&P space?

    JW: I think there will be a feeling-out period for the next few months, during which we probably won't see a lot of deals happen. The bid and ask are very far apart: The people selling the assets want $90/bbl and the people buying them want to pay $30-40/bbl. It's going to take time to get those two numbers to a rational or meaningful gap, so that people can actually sit down at a table and have a discussion about a transaction.

    That being said, I think we are going to see a lot of consolidation and a lot of asset transactions over the coming year. I don't think it will happen much in Q1/15, but after we get out a few months, hopefully we will finally know what oil and gas pricing environment we're in. Then I think we will see a rash of transactions, for both assets and companies.

    TER: Can you identify some companies that are ripe for this?

    JW: The buyers will be larger companies that have great balance sheets-that have the ability to pay for assets that are probably not priced as highly as they would have been otherwise. I think Chesapeake Energy will be very acquisitive, given its recent sales and great balance sheet. Some of the companies in the Permian Basin, like Diamondback Energy Inc. [FANG:NASDAQ] or even Pioneer Natural Resources Co. [PXD:NYSE], will look to pick off assets at good prices, and they have the balance sheets to do it.

    From a sales perspective, I think they're all for sale right now. The price is probably too high. There could be some forced selling in some weaker names, but to be honest I'm not sure who's going to be able to pull the trigger, or who wants to.

    TER: Are oil field services companies responding differently to the oil price decline than E&Ps?

    JW: Oil field services company revenues are predicated on what the E&Ps do, so they're the second derivative. First, you have oil prices coming down. Then you have E&Ps cutting spending very hard. There is some lag time for effects to flow through the system, but then the oil field services companies are going to get hit very hard as well. That's probably going to happen in Q1/15 and Q2/15.

    We haven't seen the rig count drop off dramatically yet, but it has fallen the last three weeks. I expect to see a few hundred rigs coming off in the relative near term. That's going to be very difficult for the services companies. They are doing a lot of the same things their customers are doing: cutting staff and spending to the bone just trying to stay alive.

    TER: Has Seventy Seven Energy shown the effects of this?

    JW: Not yet. None of the service companies have shown impacts, from a reported numbers standpoint. In Q4/14, these companies were working through the 2014 capex budgets of the E&Ps, so across the board I think they did okay. Going forward though, starting in Q1/15, they're all going to get hit.

    Seventy Seven Energy has contracts to do a lot of Chesapeake Energy's work, so about 80% of the company's revenues are from Chesapeake Energy. Seventy Seven has one client that it has focused on a little bit more than most, and I think that's going to serve Seventy Seven Energy very well, given that Chesapeake Energy's financials are so great that it shouldn't have to cut spending as much as the industry as a whole.

    TER: Could that reliance on Chesapeake Energy raise a red flag?

    JW: Seventy Seven was a part of Chesapeake at this time last year. It was spun off and given contracts to continue to provide services. It is focused on getting other third-party work. It has already grown: It was at 92% Chesapeake Energy work in Q1/14. Seventy Seven is focused on diversifying.

    The percentage of work with Chesapeake is a double-edged sword. It's great to have all this work from one client, but if that client does something different, Seventy Seven could be adversely affected. In this market, I think it is actually a benefit because Chesapeake Energy's going to do more work than most in the space, and that's going to provide Seventy Seven with more work than most service companies in the space.

    TER: You slashed your price target for Triangle Petroleum Corporation (NYSEMKT:TPLM) from $13/share to $6/share. Are you still positive on Triangle?

    JW: We slashed a lot of our price targets because we moved our oil deck so aggressively from the $90-95/bbl level to $70/bbl. All of our targets came down pretty hard, Triangle Petroleum being no exception.

    I still like Triangle's story, as far as having the services component of its business self-contained, because it also has its midstream business. And while the Bakken is not a great place to be right now, from weather or from a pricing standpoint, I think Triangle's ability to maintain a couple of different assets-and that being investments in companies-is going to serve it well for a longer-term investor looking at full returns. Its separate businesses are worth more than the stock is today, and I think people are missing that aspect of it.

    TER: Your 2015 earnings per share estimate for Gastar Exploration went from $0.80/share to $0.22/share. Is this company going to have adequate revenue to justify the fundraising it did at the beginning of the downturn?

    JW: The fundraising is already done, so that ship has sailed. At the same time, as I have said, our earnings estimates across the board changed pretty dramatically because of the lower commodity deck.

    I think that, overall, Gastar Exploration will do well. In fact, I think the money raised gives Gastar a lot of liquidity, at just the right time, with the market closed up. The company's going to struggle along with everyone else, but it now has a good balance sheet to get to the other side. And it has a lot of nice assets. The assets are all held by production, so the company does not have any capital commitments to worry about.

    TER: How did Gastar do that fundraising? What was the mechanism?

    JW: It was a straight common equity deal, as many companies have done in the past. Gastar just happened to do it at the end of the window so to speak. In fact, it paid down quite a bit of debt with the funds.

    TER: In closing, what's your advice for an oil and gas investor in these times?

    JW: If I'm in the chair, I am looking to nibble at high-quality names. Probably not trying to take full positions in anything, because it seems that every day any stock could be down 10%-not necessarily because the company did something wrong, but because the market is just not good right now. Prices are very, very depressed.

    These price levels don't make sense from a long-term perspective, and I think there is a lot of value in these names. If you can hold your nose and stick with some good, high-quality names, there are a lot of big returns to be made over the next 12, 24, maybe 36 months.

    TER: Thank you.

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

    Jason Wangler has over five years of equity research experience focused on the E&P and oilfield services sectors. Wangler previously worked at SunTrust Robinson Humphrey and Dahlman Rose & Co. before moving to Wunderlich Securities. He also previously worked at Netherland, Sewell & Associates Inc. as a petroleum analyst. He received his Master of Business Administration from the University of Houston, where he was also named the 2007 Finance Student of the Year. He received his Bachelor of Science degree in Business Administration with a focus on finance from the University of Nevada, where he was named the 2003 Silver Scholar award winner for the College of Business Administration. In 2010 he was highlighted as a "Best on the Street" analyst by The Wall Street Journal and he has been a guest on CNBC.

    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: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Jason Wangler: 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 all of the companies mentioned in this interview. 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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    Jan 15 2:46 PM | Link | 1 Comment
  • Charting Uranium's Gain, Brent Cook Looks For Sweet Spots In The Athabasca Basin

    As nuclear plant restarts take effect in Japan, both market sentiment and fundamentals are seeing positive boosts. Here to discuss the sea change is expert geologist and astute investor Brent Cook, author of Exploration Insights. In this interview with The Mining Report, Cook explains the forces behind uranium's recent price uptick, and describes what kinds of uranium mining projects are worth an investment in this market.

    The Mining Report: Rick Rule has called uranium the most hated commodity and, therefore, one of his favorite investments. However, we have started to hear good news about yellowcake, which is experiencing an uptick in spot price. What's causing that?

    Brent Cook: We are seeing the recommissioning of nuclear plants in Japan, a process that should accelerate into 2015. China continues to build nuclear plants; there are roughly 70 new plants being built around the world and hundreds more planned or proposed, plus some of the excess supply has dwindled. Uranium is a long-term play. When I first started working with Rick back in 1997, uranium was the most hated commodity. It was quite a few years before his contrarian thesis was proven right. But when it was, share prices of the few legitimate uranium companies increased tenfold or more. I suspect that his thesis will be proven right again. I would agree that the uranium sector is a place to intelligently deploy some money into the good deposits and the good companies.

    TMR: Are the restarts in Japan more of a psychological push, or do they significantly impact supply and demand fundamentals? Some Japanese utilities were still buying uranium even while the nuclear reactors were shut down.

    BC: I think you hit the nail on the head twice there. Restarts in Japan certainly were a boost to sentiment toward uranium, but fundamentally, the change in the Japanese government's view toward nuclear energy has also been positive. The major concern we had-that the 100 million pounds or so that the Japanese utilities held in storage would hit the market-no longer exists. In fact, they're going to have to start looking down the road to secure additional supply. So the positive is that the perceived supply overhang is gone, plus there is a good chance the utilities will be buying in 2015 and beyond.

    TMR: Thomas Drolet advised our readers to focus on long-term contracts for a more accurate picture of supply and demand. It sounds as if you are leaning toward the same thing. Are utilities getting into the buying mood again?

    BC: To some degree, yes, long-term contracts are where the majority of sales take place. Additionally, in 2014 more uranium was sold than in 2013, although there is some uncertainty between what has been reported at UxC and what Cameco estimated at its Investor Day in late November. Nonetheless, long-term contracts are up and I have every reason to think they will be up again in 2015. If-or I should say when-the long-term contract market volume reaches the pre-Fukushima levels of 2010, it will represent a doubling of demand and most certainly an increase in the uranium price.

    TMR: Much of your uranium portfolio is in the Athabasca Basin. Are some areas there better than others?

    BC: The Athabasca Basin is a premier uranium producer, second only to Kazakhstan, and one of the best places to explore for additional deposits. However, not all deposits in the basin are created equally and one has to consider all the aspects that go into turning a deposit into a mine. It's not just grade. Deep high-grade deposits, although flashy, for the most part have not panned out. The actual cost of defining and developing them is substantial, plus the permitting hurdles and timeline mean you are looking at 10 years or more before the initial shaft is even started. What works best in the Basin are modest grade and shallow deposits amenable to open-pit mining, preferably hosted in basement rocks. Additionally, one has to look at access, infrastructure and transport between the mine and nearest mill. So, as usual, it is never as easy as the initial few drill holes make it look.

    At Exploration Insights we now own Fission Uranium Corp. (OTCQX:FCUUF) [FCU:TSX]. Fission has the best new discovery we've seen in the Athabasca Basin in quite a long time-it's near surface, it's mostly open pittable and it's good grade. [Editor's Note: This interview was conducted prior to the release of the resource estimate. The following is updated from Exploration Insights.]

    "Fission just released a maiden resource estimate for the newly named Triple R deposit; it is impressive and better than most analysts (myself included) expected, 79.5 Mlb Indicated at an average grade of 1.58% U3O8 and 25.8 Mlb Inferred at an average grade of 1.3 U3O8.

    The Triple R deposit is world class and will grow. Its relatively shallow depth and favorable host lithology are positive for its eventual development, but the presence of water and lack of a nearby mill will add to the capital and operating costs. Fission's winter program consists of an ~$10M infill and exploration drill program [~63 holes] plus engineering studies directed at producing a prefeasibility study, possibly by year-end.

    In August 2011 Rio Tinto outbid Cameco for Hathor, paying US$642M or about US$11/lb U3O8 for the Roughrider deposit [MI&I 57 Mlb at 8.6% U3O8] located on the eastern Basin margin. Triple R is a considerably better deposit in a considerably worse market. Fission is being valued at ~CA$367M [US$310M]."

    TMR: What about outside the Athabasca? Anything else you'd like to mention in the U.S.?

    BC: I think the safest way to play equities in an increasing uranium price scenario is to stick to companies with legitimate and permitted deposits in relatively safe jurisdictions. Uranerz Energy Corp. (NYSEMKT:URZ) has put its Nichols Ranch project in Wyoming into production recently. Although around half of the production has been sold forward at prices between about $45 and $60 per pound, this is still a leveraged play on the uranium price. I think that's one to watch.

    Another U.S.-based company that is permitted to mine and produce uranium is Uranium Energy Corp. (NYSEMKT:UEC). It owns the Hobson processing facility in Texas and a number of nearby in-situ leach deposits that could be put into production in very short order should the uranium price rise. It also controls a number of deposits scattered across the U.S. that add to its resource base.

    I'm not interested in any uranium exploration. There are enough uranium deposits sitting out there that are ready to go if the price rises. If you really want to play the uranium market, buy companies with decent resources or reserves near good infrastructure in a known province. I'm not going to go to Peru or Niger looking for uranium; it just doesn't make sense. We have plenty in the U.S., Canada and Australia.

    TMR: Does Uranerz have the added benefit of giving that supply security to the U.S.?

    BC: Yes, most definitely. I'm not sure if that's an issue or not, but some people think so.

    TMR: Brent, you're scheduled to speak at the upcoming Cambridge Conference Jan. 18-19 in Vancouver. Could you give us a preview of some of the themes you'll be addressing?

    BC: This year's event should provide an excellent opportunity to see just how bad, or good, the junior resource sector is doing. I suspect there will be far fewer companies and attendees than in previous years but, importantly, those attending are the survivors. My investment thesis for the sector really hasn't changed much from last year at this time. Times are tough, profits slim and money for exploration nearly nonexistent. Those circumstances make it much easier for those of us willing to put in the time to identify the few real bargains out there. Ultimately mining companies need new deposits to replace what is mined. If they are not looking, they will be buying.

    TMR: One of the things that people look at in uranium, of course, is how it compares in price to natural gas, oil, coal and other sources of energy. What are you looking for in 2015? Will we have the same volatility we've had in 2014 or will things level out?

    BC: My suspicion is that 2015 will look a lot like 2014, so it's going to be volatile in general and depressing in most of the commodities actually. How is that for a happy note to start the year?

    TMR: Brent, thanks for talking with us today.

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

    Brent Cook brings more than 30 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. Cook's weekly Exploration Insights newsletter focuses on early discovery, high-reward opportunities, primarily among junior mining and exploration companies.

    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) JT Long 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 employee. She owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fission Uranium Corp. and Uranerz Energy Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Brent Cook: I own, or my family owns, shares of the following companies mentioned in this interview: Fission Uranium Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I 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

    Jan 13 3:01 PM | Link | Comment!
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