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  • Energy Independence: Financial Fact Or Political Fiction?

    It has been more than a year since Citigroup Inc. published "Energy 2020: Independence Day," outlining the impacts of progress toward North American energy self-sufficiency. For this special 4th of July edition of The Energy Report, we reached out to experts in the energy investing space for an update on how recent political events and production trends in the field impact our ability to produce what we use. For Porter Stansberry, Marin Katusa, Chris Martenson, Bill Powers and Cactus Schroeder, the prospects for the future-and the associated investing opportunities-depend on the perspective.

    The Energy Report: In light of the conflict in Ukraine and Iraq, is U.S. energy independence more important than ever?

    Porter Stansberry: Energy self-sufficiency is a political issue, not an economic one. There is no particular advantage to being energy "independent." Yes, it is important to have enough production capacity to sustain our economy in the event of a global or trade war, but that's also true for many other products, such as food. What really matters for the wealth of our country and for our standard of living is that we maximize our competitive advantage in trade with other countries. If there are other places that can produce energy more efficiently [and thus, more cheaply] than we can produce it here, then we should maximize that advantage through trade.

    Going forward, I believe the U.S. will be the clear leader in producing, refining and transporting natural gas around the world. We have the world's largest natural gas pipeline system and the world's largest functional reserves of natural gas. Given this comparative advantage, we should seek to maximize gas production by gaining access to world markets. That is happening with the huge, ongoing liquefied natural gas [LNG] build-out, and that is why Targa Resources Corp. (NYSE:TRGP), a stock I pitched not too long ago, has done so incredibly well.

    Given that we consume around 18 million barrels per day [18 MMbbl/d] of crude oil in the U.S., and our domestic production is only around 8 MMbbl/d, it will be years before we will become energy independent in terms of oil. On the other hand, if you count coal exports, you could argue that we are already energy independent. In any case, even though we don't yet produce enough crude oil to meet all of our domestic consumption needs, I do think you'll soon see the U.S. begin to lift restrictions on crude oil exports. And I think that's a very important move for us to make.

    Why would I want to see us exporting crude if we're not making enough to satisfy our own demand for crude? Again, you have to understand how wealth is built through trade, and the idea of competitive advantage. We can't use all of the light sweet crude we're currently producing in Texas because we don't have the right kind of refineries. It would be far better for our country to sell oil to the highest global bidder than to consume it in less optimal ways. The higher profits could be reinvested in more production and new refineries here in the U.S.

    Crude exports would also have important benefits for our overall economy. They're the only likely way to solve our chronic current account deficits. Given that the U.S. Department of the Interior is an unwelcome partner in lots of oil production in the U.S., it's good for our government's deficit problem too.

    Marin Katusa: The best thing the U.S. can do is lift the crude export ban. That will result in lower gas prices for the average American. Refineries in the U.S. have spent billions to modify those refineries to be able to treat the heavier crudes. The fracking revolution has unlocked the light oil, but that oil is trading at a discount because the pipelines are not in place to move it to play the arbitrage. Rail has picked up some of the slack, but the North American sector still needs to invest in its infrastructure. It will happen, but it will take longer than we want it to.

    The U.S. will not be energy independent by the media tag line of 2020. It is still a major importer of oil. But the potential is there for the U.S. to become a major exporter of LNG and oil. Unfortunately, the government will not do what it needs to do during this administration to make that happen.

    Chris Martenson: First, let's define what we mean by energy independence. Since various types of energy-coal, gas, oil-perform very different functions in our economy, there's no point in lumping them together and counting their BTUs as one big pile of energy. That obscures reality, rather than illuminating anything useful. Rather, we should explore the question of independence of each type of energy individually: oil, coal, nuclear and natural gas.

    If the question is: Will the U.S. ever achieve petroleum independence?, the answer is currently no. Today, the U.S. produces a bit more than 8 MMbbl/d of crude oil, and imports an additional 7 MMbbl/d. Under even the most optimistic scenarios, shale oil peaks out in 2021 while adding another 4 MMbbl/d to current production. That still leaves a gap of 3 MMbbl/d and at that point the gap only grows wider, forever, as the shale oil fields enter terminal decline.

    Under less rosy scenarios, the shale plays peak out in 2018, while adding only 2-3 MMbbl/d, leaving a much wider gap of 4-5 MMbbl/d to be filled by foreign imports.

    For natural gas the situation is different. Fracking has a real chance to deliver natural gas independence. . .for a while. The U.S. will remain a net importer of natural gas for a few more years, and then be in a position to either meet 100% of its own needs for 20-30 years or export natural gas to the world in the form of LNG, and cut that window of independence down to 15-20 years.

    As with the shale oil plays, the shale gas plays require extremely intensive drilling to keep production growing. The minute the last well is finished, production begins to decline. Our choice with natural gas is either to use it to deliver the energy that drives the refashioning of our domestic energy infrastructure for the day that it, too, runs out, or to export the gas to drive up the current profits of energy companies.

    Our view at Peak Prosperity is that we should not export LNG for two reasons. First, it costs 25% of the embodied energy in natural gas to compress it, power that is forever lost to humanity in the service of creating a liquid out of a gas. That's just energetically stupid. Second, we desperately need that gas for domestic purposes, as we face the largest-ever build-out of our energy infrastructure, to move toward whatever combination of resources we decide will replace dwindling fossil fuels.

    Bill Powers: The U.S. is a mature oil-producing region. Some of the shale fields, like the Piceance Basin in Colorado, are already in severe decline. One of the best, the Marcellus Shale, is already slowing its rate of growth, and is within two years of peaking. Technology has increased oil and gas production in recent years, but there is a limit to what technology can do. The laws of physics and geology will always win out.

    TER: In a recent interview, T. Boone Pickens predicted an energy renaissance in the U.S.-if the government gets out of the way. What are he, and other industry experts, getting wrong about U.S. production estimates?

    BP: They don't understand the decline rates. These wells don't last multiple decades. The average is seven years, many less than that. Refracturing can work, but it is expensive. In the end, the price has to go up. That is an opportunity for juniors with a weighting toward gas and low valuations. That includes Pine Cliff Energy Ltd. (OTC:PIFYF) [PNE:TSX.V], which has substantial upside opportunity and low cost of operations.

    Advantage Oil and Gas Ltd. (NYSE:AAV) is also a low-cost operator with a great opportunity. Bellatrix Exploration Ltd. (NYSEMKT:BXE) has significant gas resources waiting to be unlocked. And Arsenal Energy Inc. (OTCPK:AEYIF) [AEI:TSX] has significant acreage coming on.

    Everyone in North America should be aware we are in a structural rising gas price environment that will result in tremendous opportunities from an investment position. This also means individuals may want to find a way to use less gas.

    TER: Based on the amount of energy required to pull a barrel of energy out of the ground today, is fracking sustainable?

    PS: It seems very clear to me, based on the economic outcomes, that fracking produces far more energy than it consumes. Most new wells produce large volumes of energy, far more than what was required to stimulate the well. Some of them, of course, don't. Others are bona fide gushers.

    One extreme example is a gas well in the Niobrara Shale that WPX Energy Inc. (NYSE:WPX) drilled in January 2013. It's already produced 2.5 billion cubic feet of natural gas. At $3 per million cubic feet, that's $7 million worth of gas. That's a lot of energy from one well.

    Another way of answering this question is to look at the financial results of the best frackers. Clearly the market leader is EOG Resources Inc. (NYSE:EOG). Over the last three years the company has spent roughly $5 billion [$5B] drilling and fracking wells. It has produced over $35B in oil and gas revenue. That's 7 to 1. Seems sustainable to me. . .

    CM: A number of costs associated with fracking are either being subsidized by current taxpayers or will be absorbed by future taxpayers. We know that the taxes collected from the fracking and production companies are insufficient to fully repair the road and bridge damage their operations cause. In Texas in 2012, the state received $3.6B in severance taxes from oil producers, but the Texas Department of Transportation estimated $4B in damage to roads. Arkansas has taken in less than half the amount of the damage to its roads by oil trucks.

    In the future, it's entirely unclear who will pay to cap all the abandoned wells-probably numbering in the millions when all is said and done. But if the recent experiences of Wyoming and Pennsylvania are any indication that cost will be handed to taxpayers.

    But the most obviously unsustainable part of the fracking story centers on the producers themselves. The largest and theoretically best positioned of them have all been turning in negative free cash flows [FCF]. Consider Chesapeake Energy Corp. (NYSE:CHK), which had negative FCFs of $8.5B in 2011, $11.9B in 2012 and $3B in 2013. This means, at current prices, the company is spending more on capital than it is making in revenue, by a very wide margin.

    The shale story is already a mature story. The best areas in the best plays have been intensively drilled for several years now. So it's worth asking, where's the positive FCF? Isn't that the point of all this, to make money?

    The bottom line is that the price of oil needs to be higher. By my estimate, it needs to be $130 a barrel [$130/bbl] or higher, with $10/bbl of that higher price flowing to public trusts to be cash-flow and social-cost neutral.

    TER: Is $150/bbl oil the likely outcome of the global problems in the Middle East and Ukraine?

    CM: The situation in Ukraine has less bearing on oil costs, because there's no production directly at risk. Indirectly, that would change if some form of overt hostility between Russia and the West caused Russian oil exports to falter. I consider that highly unlikely at this stage.

    However, the Middle East is another matter entirely. Even a slight reduction in Middle East exports will see the prompt return of $150/bbl oil. Recalling the $150/bbl oil we saw in July 2008, the correct explanation for that event lies in the observation that in five of the six preceding quarters, global demand for oil exceeded supply. Not by a lot, but it does not take much tightness in the oil market to create higher prices.

    TER: Germany is Europe's biggest consumer of gas, with 80 billion cubic meters consumed in 2012. About a third of that comes from Russia. Can fracking in Germany end that dependency?

    MK: Fracking has been occurring in Europe since the 1950s; it is not a new phenomenon, even though the media tries to make it so. Germany has been increasing its natural gas and oil imports from Russia over the last two decades. Horizontal fracking will help change that, but it is not an overnight solution. The sudden success of the U.S. shale sector took almost 15 years to mature, and it will take as long, if not longer, in Europe. However, it will happen, as Germany needs it to happen. Investors who expose themselves to the shale revolution in Germany will make a fortune.

    The Russians have been using modern technology to enhance oil and gas production, something Europe is late to the game to do. But the United Kingdom, Germany, the Netherlands and Albania are moving in the right direction. France is going the wrong way, in every way possible, when it comes to energy policy.

    To answer your question specifically, fracking, along with other technologies, will help revitalize and increase domestic production within Germany, which has one of the highest netbacks in the world. It is still very early days in the European energy renaissance, but it has started.

    TER: Will the violence in Iraq make Europe's transition away from Russia more difficult?

    MK: The disturbance in Iraq has increased Brent crude pricing, and will continue to do so. The situation in the Middle East will get worse before it gets better, so expect higher Brent crude pricing.

    TER: What role will nuclear and alternative energy play in European energy independence?

    MK: Green energy does have a role to play, but it is still not primary base load. Furthermore, without government subsidies, green energy will not be as economic as coal and natural gas. Look at Germany, for example. Electricity costs for the average person increased by 25% each year over the last two years. Expect the same this year and next. Going green has taken the green out of the economy.

    The most hated energy right now is nuclear, but it is real and is here to stay. Eventually, Japan will bring back its nukes, and so will Germany. It is too expensive for them not to. Nuclear energy is very misunderstood. But if you're a contrarian and have patience, nuclear will reward those who are exposed to the sector.

    TER: What can investors do to protect themselves?

    CM: The biggest risk is the extreme complacency that has built up in the equity and bond markets of the industrialized nations. Complacency leads to risk being mispriced, and we are at extreme levels of complacency at the moment.

    An oil price spike would be a less-than-perfect event and could lead to very large speculative losses. We advise people to invest with an understanding of the risks involved and to potentially forgo additional gains in favor of protecting wealth. In times like these, cash is always a good place to be. If an investor wants to remain in equities, then using options to protect positions is sensible at this time.

    TER: Thank you all for your time.

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

    Bill Powers is an independent analyst, private investor and author of the book Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth. Powers is the former editor of the Powers Energy Investor, Canadian Energy Viewpoint and U.S. Energy Investor. He has published investment research on the oil and gas industry since 2002 and sits on the board of directors of Calgary-based Arsenal Energy Inc. An active investor for over 25 years, Powers has devoted the last 15 years to studying and analyzing the energy sector, driven by his desire to uncover superior investment opportunities. Follow him on Twitter for ongoing updates.

    Cactus Schroeder has been drilling for oil in Texas for more than 30 years. He owns his own oil exploration company, Chisholm Exploration Inc. Chisholm focuses on the Permian Basin around Abilene, Texas, and averages 2,000 barrels of production per day. Schroeder was featured on a Discovery Channel show called "Wildcatters," which followed three people searching for oil and gas in areas other than oil fields.

    Chris Martenson is a scientist, writer and financial and economic analyst. He earned his master's degree in business administration from Cornell University, and a Ph.D. from Duke University. As one of the early econobloggers who forecast the housing market collapse and stock market correction years in advance, he launched a video seminar and later published a book entitled The Crash Course. To learn more about Martenson and to view the Accelerated Crash Course, go to chrismartenson.com.

    With a background in mathematics, Marin Katusa left teaching post-secondary mathematics to pursue portfolio management within the resource sector. He is regularly interviewed on national and local television channels in North America, including the Business News Network [BNN] and other radio and newspaper outlets. Katusa is the chief investment strategist for the energy division of Casey Research. He is the editor of the Casey Energy Report, Casey Energy Confidential and Casey Energy Dividends newsletters. A regular part of his due diligence process for Casey Research includes property tours, which has resulted in his visits to hundreds of mining and energy producing and exploration projects all around the world.

    Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry's Investment Advisory, deals with safe-value investments poised to give subscribers years of exceptional returns. Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world independent research. They've visited more than 200 companies to find the best low-risk investments. Prior to launching Stansberry & Associates Investment Research, Stansberry was the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter.

    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) 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 her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Porter Stansberry: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Bill Powers: I own, or my family owns, shares of the following companies mentioned in this interview: Arsenal Energy Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: Arsenal Energy Inc. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    5) Chris Martenson: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions.
    6) Marin Katusa: 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.
    7) Cactus Schroeder: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions.
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  • Are You Ready To Capitalize On Emerging World Growth And U.S. Oil Independence?

    With 400 million more people set to get on the grid in India alone, smart investors will profit from new demand for all kinds of energy. In this interview with The Energy Report, Frank Holmes and Brian Hicks of U.S. Global Investors share some of their favorite ways to build a diversified portfolio that takes advantage of opportunities large and small, domestic and international.

    The Energy Report: India's new prime minister, Narendra Modi, has pledged to bring electricity to the 400 million [400M] Indians currently without power. How is he going to do this, and how can investors get exposure to this massive infrastructure investment?

    Brian Hicks: One of our investing tenets is to follow government policy, because that is a precursor to change. Infrastructure investment in India is a long-term theme, and is going to require a lot of raw materials and fuel sources. The power could come from coal and nuclear. It's one thing to generate power; it's another thing to actually distribute that power and get it out to the rural areas. That means a lot of copper to build out the infrastructure grid.

    In the end, this will be a massive investment, and there will be a number of ways to play it. I would consider investing in the engineering and construction firms like Fluor Corp. (NYSE:FLR), which could win infrastructure contracts.

    TER: China is in the midst of a similar infrastructure build-out. Is that a coal and nuclear approach as well?

    BH: Absolutely, and the Chinese are further along than India. China has invested heavily in the power grid. That has resulted in a tremendous ramp-up in production of steel, cement and iron ore, as well as an upswing in copper usage. All go into generating power. Obviously, coal has been fueling much of China's power generation, and will probably continue to do so. The government is trying to pull back on the margin because of pollution concerns, but it will probably be part of the equation for many years to come.

    Frank Holmes: The global real gross domestic product [GDP] annual growth rate has declined from a peak 5.4% in 2010 to 3% last year. With the U.S. economy turning up, constructive news out of China and new leadership in India, the global GDP could rise to 3.5%. This is very positive for commodities from energy to copper to gold. Modi's goal of 400 million people having access to electricity would mean a lot of copper demand and energy consumption.

    TER: Aside from China and India, what energy resource areas are poised to do better in the second half of 2014?

    BH: We are very constructive across the spectrum for energy. Oil prices are moving above $100/barrel [$100/bbl], whether it's West Texas Intermediate [WTI] or Brent crude, and that's going to be very positive for North American energy companies. We are seeing more signs of instability in key producing areas in the Middle East, including Libya and Iraq. That is going to weigh on global supply and keep oil prices well supported. Companies with production in geopolitically safe areas should do quite well in this environment.

    We are very positive on natural gas. There has been some complacency about refilling storage after the extremely cold winter, and that should support natural gas prices for the near future. As we get into the summer months, cooling demand could strengthen gas prices again.

    TER: We recently published an interview with T. Boone Pickens, and he is very optimistic about the shale oil space and the possibility of oil independence for America. Do you share his optimism?

    BH: We sure do. I'm not quite sure about energy independence, but we are certainly making inroads in that direction. Within our portfolio, we are investing heavily in the shales through upstream oil and gas companies, oil services companies and equipment companies. Shale is transformational; it is really changing the energy landscape. Almost overnight, companies are developing resources that are long-lived and repeatable. Remember, only five years ago we were talking about peak oil. Now, we're producing roughly 8.4 million barrels per day [8.4 MMbbl/d]. That's the highest we've seen since the mid-'80s. It is a trend that is going to continue.

    At present, the Permian Basin is developing just as the Bakken and the Eagle Ford did a few years ago. The Delaware Basin, in particular, could be larger than what we've seen in the Bakken and Eagle Ford combined. It looks like we will be able to unlock millions of barrels of reserves, and increase production from that historic base. The Delaware is a very exciting example of how technology, innovation and investment have changed the conversation over the last five or six years.

    TER: With all that oil and gas coming out of the shales, do you see an opportunity for money to be made in refiners?

    BH: We have already had success investing in refiners. San Antonio is home to two of the largest independent refining companies in the country, so we follow that area closely. We also see opportunities for Gulf Coast refiners, such as Valero Energy Corp. (NYSE:VLO). If inventory levels continue to rise, you're going to see a discount between Louisiana light sweet oil, WTI and Brent. With that spread, refiners with Gulf Coast exposure are able to source lower feedstock costs for crude oil, refine it into gasoline and diesel, then sell it at competitive global prices. That is very good for margins. And it could be sustainable.

    TER: What about the majors versus the junior explorers and producers? Which has better upside?

    BH: I think there are opportunities in all of the above. Some majors have tremendous resources. Suncor Energy Inc. (NYSE:SU), in the Canadian oil sands, is going to be producing for the next 40 years or so. The company has put a lot of money into infrastructure to grow production. And it pays a nice dividend yield. It looks attractive on just about any metric.

    Juniors are investing in shales domestically and internationally. There are opportunities throughout the market cap spectrum. That is why we take a diversified approach, and look to invest within all those areas.

    FH: I love many of the royalty companies, such as San Juan Basin Royalty Trust (NYSE:SJT) and BP Prudhoe Bay Royalty Trust (NYSE:BPT), which offer attractive high yields, growth and rising oil and gas prices.

    TER: What companies in the junior oil and gas exploration and production space are poised to take advantage of these trends?

    BH: We have some junior companies that have grown so much they aren't very junior anymore. Pacific Rubiales Energy Corp. (OTCPK:PEGFF) [PRE:TSX; PREC:BVC] is now more of a small- to mid-cap company trading in the $6­-7 billion [$6-7B] range. But we still see it as extremely cheap.

    Other operators in Columbia, such as Gran Tierra Energy Inc. (NYSEMKT:GTE), look attractive to us as well.

    BH: Other areas, such as Kurdistan, have more oil and more proven reserves than Mexico. It's a huge resource space. Gulf Keystone Petroleum Ltd. (OTCPK:GUKYF) [GKP:LSE] is drilling for oil in an area with huge reserves. It has the potential to eventually produce as much as 100,000 barrels per day. We think there's tremendous opportunity there.

    TER: Are you worried about the conflict in Iraq?

    BH: That is something we factor in, but Gulf Keystone is working in the north, where it is safer. At some point the dust will settle, and we will get production out of Iraq and Kurdistan. Therein lies the opportunity. If you take a long-term view and buy assets when nobody else wants them, they are cheap. That is how you can create alpha-by investing within the context of a portfolio so you're not buying a large chunk. You only need to buy a small amount of a stock like Gulf Keystone for it to make an impact.

    TER: Any names closer to home that you like?

    BH: We used to own Raging River Exploration Inc. (OTC:RRENF) [RRX:TSX.V]. We almost doubled our money, so we took profits as we entered the second quarter, which seasonally can be a little slow for the juniors. We will look to reload on that name as we get into the fall, and in other names as well.

    TER: The Raging River stock price really went up in the last six months. What was pushing that?

    BH: We have seen a resurgence in the junior space in Canada, which has been neglected for the last two or three years as development in the U.S. shale plays have taken hold. Now we are seeing a bit of a handoff back to Canada. Horizontal drilling is developing in the Montney and Duvernay formations, and we're seeing companies operating there rise to the top. They are starting to do very well with their own unconventional drilling. We have seen value unlocked, and it's very exciting. A number of companies in the sub-$1B or $500 million market-cap range are starting to grab hold.

    TER: What other contrarian opportunities do you see out there?

    BH: Large oil equipment and services companies are an opportunity. Companies like Schlumberger Ltd. (NYSE:SLB), Halliburton Co. (NYSE:HAL) and Baker Hughes Inc. (NYSE:BHI) are bundling up smaller companies to provide a one-stop shop. That is attractive.

    Pressure pumping prices are starting to move up. On the drilling side, more rigs are being contracted into the Permian Basin. A company like Patterson Energy Inc. (NASDAQ:PTEN) should benefit from that. A smaller operator, such as the Canadian drilling company CanElson Drilling Inc. (OTC:CDLRF) [CDI:TSX.V], also has exposure to the Canadian sands and the Permian Basin. It is benefiting from those two growth areas.

    Moving down the market cap spectrum, Xtreme Coil Drilling Corp. (XDC) is doing quite a bit in the Eagle Ford. Higher-spec coil tube drilling is starting to catch on down in that area. I recently returned from a site visit with Xtreme Coil in the Eagle Ford, and it looks like the company is doing quite well. Xtreme recently announced it is going to expand its XSR coil tubing fleet in the U.S. by six additional units, costing $54M.

    TER: The Global Resources Fund [PSPFX] was up almost a percent for the first three months of 2014, after a couple of negative years. It's tilted strongly toward oil and gas. Is that part of a strategy to move toward energy stocks?

    BH: We are overweight in oil and gas. We have some conviction in that area, and we feel like there's more running room. We've shifted at the margin, but we're holding steady. We're in an environment where we might see more volatility in the summer months due to instability overseas, so we are keeping a little bit of dry powder.

    TER: Do you have any advice for readers looking to adjust their energy portfolios going into the rest of 2014?

    BH: I would focus on the shale plays; the companies in the core regions within these plays. There are opportunities in the juniors-in the small- and mid-cap spaces in North America-that should continue to do well. There are probably attractive opportunities overseas as well, so keep an eye out for those. Overall, it's going to be a very constructive environment for energy investing.

    TER: Thanks to you both.

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

    Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company's funds have earned many awards and honors during Holmes' tenure, including more than two dozen Lipper Fund Awards and certificates. He is also an adviser to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Holmes coauthored The Goldwatcher: Demystifying Gold Investing [2008]. Holmes is a former president and chairman of the Toronto Society of the Investment Dealers Association, and he served on the Toronto Stock Exchange's Listing Committee. A regular contributor to investor education websites and a much-sought-after keynote speaker at national and international investment conferences, he is also a regular commentator on the financial television networks and has been profiled by Fortune, Barron's, The Financial Times and other publications.

    Brian Hicks joined U.S. Global Investors Inc. in 2004 as a comanager of the company's Global Resources Fund [PSPFX]. He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group, Inc. as an industry research and product development analyst. Hicks holds a master's degree in finance and a bachelor's degree in business administration from the University of Colorado.

    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) 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 her family owns, 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) Frank Holmes: I own or my family owns shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I 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) Brian Hicks: I own or my family owns shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I 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.
    5) The following securities mentioned were held by the Global Resources Fund as of 6/17/14: Xtreme Coil Drilling Corp., CanElson Drilling Inc., Patterson Energy Inc., Schlumberger Ltd., Halliburton Co., Gulf Keystone Petroleum Ltd., Gran Tierra Inc., Pacific Rubiales Energy Corp., Suncor Energy Inc., Valero Energy Corp. and Baker Hughes Inc.
    6) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    7) 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.
    8) 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 © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

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

    Jun 26 4:39 PM | Link | Comment!
  • What Is Chen Selling? One Of His Tenbaggers. What Is Chen Buying? Two Others With Tenbagger Potential

    What Is Chen Selling? One of His Tenbaggers. What is Chen Buying? Two Others with Tenbagger Potential

    Chen Lin doesn't get attached to stocks, only to profits. The author of What is Chen Buying? What is Chen Selling? buys low, sells high, then tells his subscribers what he's doing and why. In this interview with The Energy Report, Lin describes a recent success and explains his high expectations for two oil and gas producers. Savvy investors: Pay attention.

    The Energy Report: Chen, recent U.S. Environmental Protection Agency [EPA] actions with regard to ethanol blending requirements have been unsettling to the ethanol space. What are you expecting from the EPA and when?

    Chen Lin: I expect an EPA ruling by the end of June. It will likely increase the mandate from last year's proposal, but will be less than the original mandate, which was established a couple of years ago. It will be in the middle because it's an election year, and the agency does not want to make anybody angry.

    TER: Will the domestic market or the export market be stronger for ethanol in the future?

    CL: The domestic market is still the largest and most important for the ethanol industry. However, export is getting more significant. Right now we export to Canada, to Brazil, to Asia-over the world. Europe's still banning the purchase of American ethanol because it wants to protect its domestic agriculture; so is Japan. That leaves China, which l see as potentially the most important up-and-coming market for American ethanol. This will benefit farmers and the renewable energy industry.

    I had a discussion about ethanol use in China in my last interview with The Energy Report. I've done a lot more research on that subject lately. Look at gasoline usage in China: China has a huge automobile market, which translates to a huge gasoline market. Unfortunately, ethanol use is only 1-2%. The Chinese are still using MTBE, which is banned in the United States, Canada and all over the developed world. We know the problem: MTBE pollutes the groundwater. However, big oil in China- PetroChina Co. Ltd. (OTCQB:PCCYF)-continues to mislead Chinese citizens, saying ethanol is bad for car engines and promoting use of MTBE, because it is heavily investing in MTBE. That's actually preventing the export of American ethanol to China.

    We should immediately start an information campaign to educate Chinese citizens about the danger of MTBE. We have a lot of evidence that it's polluting groundwater, and it costs billions of dollars to clean that up. Chinese citizens are very sensitive to pollution and to water quality. If they get that information, they will likely start protesting big oil in China. Also, the United States should have high-level talks with China-with the Premier-because big oil wouldn't listen to popular opinion. It doesn't care. It cares about profit. But big oil does listen to the Premier. That's probably the only way: Educate the people and then go to the top level to push China to gradually retire MTBE and use ethanol. That will benefit American farmers and the American renewable industry for decades to come.

    TER: Are you saying that China will be the main export buyer of ethanol?

    CL: Potentially it would. Right now China is using very little ethanol. If China begins to use more ethanol to cut pollution, the only loser would be big oil in China. China could provide a very bright future for ethanol producers and farmers, in the United States. But we need a strategy and need to push that hard.

    TER: There's been a lot of confrontation in relations between China and the U.S. recently, as the U.S. has indicted Chinese officials for cyber espionage and has resisted China's claims to areas in the East China and South China seas. In response, China is banning or limiting operations by U.S.-based companies. How will these issues affect the companies you cover?

    CL: China remains a big challenge, as well as a big opportunity, for U.S. businesses. China itself is changing because of the rise of the middle class. Believe it or not, the Chinese are very Internet-savvy. Most people I met last year when I was visiting China had Internet VPN [virtual private network] access. They bypass the firewall of the Chinese government and browse the Web freely, because nobody wants to read censored news.

    The issues right now in China are the popping of the housing bubble, pollution and corruption. Those are the top concerns of Chinese citizens. I think they're probably more interested about fixing those than they are about fixing external confrontations. I don't think citizens would support confrontation.

    But there could be some win-win situations. I think ethanol is the perfect example. It could be a win-win solution on both sides. We are living on the same Earth, so carbon emissions in China are the same as carbon emissions in the United States. The Obama administration has been very tough on reducing carbon emissions in the U.S. I think he can push China to reduce emissions as well. There's where I see the opportunities.

    TER: How is the narrowing spread between West Texas Intermediate [WTI] and Brent affecting the companies you cover?

    CL: The narrowing of WTI/Brent is very negative for the refiners; their margins are very sensitive to WTI/Brent. Fortunately, I sold all my refiners for a very nice profit. I don't own refiners at this time, even though I made very good money before. On the plus side, the spread will benefit the domestic oil producers, because the narrowing of WTI to Brent will increase what the producers sell. Also, we had a very cold winter, so the natural gas price is high. Domestic producers are in a very sweet spot right now because the oil price is higher, and the natural gas price is even higher.

    TER: Pacific Ethanol Inc. (NASDAQ:PEIX) has had an exciting year, with a sevenfold increase in its share price. What's behind that, and what's ahead for Pacific Ethanol?

    CL: Pacific Ethanol was one of my biggest winners in the past 6-12 months. It was a great turnaround story, thanks to the low corn price. At the end of last year, the corn price suddenly dropped. For a highly leveraged company like Pacific Ethanol, this was a huge opportunity, because it went from not making money to suddenly making a lot of money. I was very fortunate. I was able to load up on the shares, as well as its call options, at the end of last year. I was able to book huge profits when the share price popped to double digits with the Q4/13 earnings release. That's when I sold my call options; I sold most of my shares at around $16/share, ahead of Q1/14, because at that time I felt the market was a bit frothy. The market expectation was very high. I'd rather take a profit off the table.

    I started buying shares when the price fell close to $10/share. After the earnings, I bought back Pacific Ethanol at $11, $10.50. I told my subscribers I would buy at $11, $10.50 and $10, but $10 was never reached-maybe because my subscribers were also buying. That's life. I feel the stock has a lot of room to grow. The company raised money at $16/share. It strengthened its balance sheet. It restarted Madera, another ethanol plant, in this quarter.

    Right now the ethanol margin is very high. It dipped a couple of months ago; now it's very high again-very volatile. Pacific Ethanol is trading with no hedge. That's a great opportunity to make a lot of money in Q2/14.

    TER: Green Plains Renewable Energy Inc. (NASDAQ:GPRE) began a growth spurt in December 2013 that has continued. What was the catalyst for that?

    CL: Green Plains had a good run. I also own the stock. Again, the ethanol industry had a boom because of the low corn price. Green Plains remains the cheapest publicly traded ethanol producer in terms of capacity versus market cap. However, because of an aggressive hedging program, the upside was very limited; the company's earnings were not strong.

    If you compare the Green Plains margin versus Valero Energy Corp.'s (NYSE:VLO) ethanol division margin, though they are similarly sized, Valero's margin is almost three times higher than Green Plains. That's how bad the hedging program was. On the other hand, Green Plains is the largest independently traded ethanol producer. It could be a very good takeover target. For company refiners on the West Coast, Pacific Ethanol is a better takeover target. Both Green Plains and Pacific Ethanol are excellent targets, and I'm quite excited about both companies.

    TER: Are you expecting Green Plains' growth spurt to continue?

    CL: Yes. It's well run. The only problem is the hedge at the $0.20-0.30 margin, when the company could get $0.70-0.80 margin in the spot market. But the company still makes a lot of money at the $0.20-0.30 margin. It probably will pay off all of its debt by the end of 2015.

    TER: Were you surprised that Wells Fargo & Co. (NYSE:WFC) downgraded Swift Energy Co. (NYSE:SFY)from outperform to market perform and lowered its target price?

    CL: That's a good question. I was a little bit surprised. I would say those analysts are busy counting the trees but missing the big forest. Years ago, most analysts were pushing every oil company to take on more debt to show growth. Now it's just the opposite. They're severely punishing companies with debt. Analysts demand that companies sell their assets at whatever cost to bring their balance sheets to the level the analysts want to see. Personally I see opportunity.

    As we discussed earlier, WTI is on the rise and natural gas is on the rise. I heard liquified natural gas [LNG] export terminals will be ready by 2016. We had a very cold winter; natural gas storage is very low. It will take a few years to refill natural gas storage facilities. Before we can finish the refill, LNG exports will start. Natural gas looks brighter than oil, if you look ahead a few years. But both commodities-oil and natural gas-are looking good. A lot of businesses are looking to get into the North American oil and gas opportunities.

    In addition, there has been very active deal-making. In the last month or so, when Swift Energy farmed out its natural gas property, it sold half its assets for about $175 million [$175M], which is about $70,000 [$70K] per acre. It had estimated only $20-30K. That's a perfect example of how, in a rising commodity environment, which I believe we are in, leverage is a good thing. Swift Energy has a big acreage at Eagle Ford, and it's trading at two times cash flow when most companies are trading at five or more. Many assets recently sold for ten times cash flow. There are a lot opportunities.

    Analysts have a fancy term. They call it EBITDA [earnings before interest, taxes, depreciation and amortization]. They use that to analyze value. Basically, they add the debt to the market cap. That's only one side of the story-EBITDA versus EV [enterprise value]. How about the asset? How about acreage? How about 2P reserve? That's my experience. The analysts tend to be overly bearish when the market starts to turn, when you should buy, and be overly optimistic at the top of the market. Again, that's my opinion. Maybe the best analysts are not working for the hedge funds.

    I had a very good run last year. I bought Penn Virginia Corp. (NYSE:PVA) below $5 late last year. It more than tripled in less than a year. I also have a big run on Lightstream Resources Ltd. (OTCPK:LSTMF) [LTS:TSX]. I still hold Lightstream; I sold Penn Virginia. They're quite similar to Swift Energy. They're heavily shorted. They have a sizeable debt. They have no love on Wall Street. It's a little like the housing market: When it goes down big time, you don't want any leverage; when it goes up, leverage is good. When the energy outlook looks brighter, as I see it is, a company can sell assets at good prices. Then the funds will get in. The shorts will try to get out. The stock can have a big run, and I see similar situations to that of Swift Energy.

    TER: Do you have any other companies that you're excited about right now?

    CL: I still like international plays. I like companies with good balance sheets. I like companies with good cash flow. I like companies that can grow on their own. Also, right now, I feel the North American market has stabilized enough that companies with a reasonable amount of debt look very good. The market has been going to extremes on debt.

    I'm also very bullish on ethanol. Finally, I want to emphasize that every commodity China needs went through the roof. Oil, liquefied natural gas, copper-you name it. If the United States can open up the ethanol market in China, the ethanol boom will go on for years, if not decades.

    TER: Thank you, Chen.

    CL: Thank you.

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

    Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors Inc. While a doctoral candidate in aeronautical engineering at Princeton, Lin found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

    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: Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for its services.
    3) Chen Lin: I own, or my family owns, shares of the following companies mentioned in this interview: Pacific Ethanol Inc. and stock options, Swift Energy Co. and stock options, Green Plains Inc., and Lightstream Resources Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    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

    Tags: GPRE, PEIX, SFY, Oil, Gas, Mining, Energy
    Jun 25 5:31 PM | Link | Comment!
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