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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.

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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
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    Tel.: (707) 981-8999
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    Jan 13 3:01 PM | Link | Comment!
  • Revolutionary Oil Prospector Richard Masterson Shares Fracking Investment Opportunities Gov. Cuomo Can't Touch

    Richard "Rich" Masterson, a Midland, Texas-based consulting geologist, has helped originate oil and gas projects with previously unseen potential. In this interview with The Energy Report, Masterson describes the significance of innovative science and new methods of prospecting to locate and liberate large amounts of energy, regardless of NIMBY politics like those playing out in New York State. He also brings projects and companies with potential upside for investors to the surface.

    The Energy Report: Rich, you're a consulting independent geologist. What do you do for your clientele?

    Rich Masterson: Basically, I find oil and gas by being a prospector. I originate ideas and come up with new ways of looking at prospects and drilling projects-and use some old-school ways as well. I review scientific data, and may go into the field to make sure the electric logging, coring and sample collection is done in the proper manner. I also perform economic reviews with risk/reward evaluations and make recommendations on how to reduce risk for drilling projects.

    TER: The drop in oil prices has been in the news a lot lately. On Dec. 17, Federal Reserve chief Janet Yellen said plunging oil prices would not have the kind of effect in the U.S. that they have had in Russia, which is experiencing a depressed ruble and economic disruption. In fact, she said the drop would be a net positive for the U.S. economy. Would you agree with that assessment?

    RM: I agree, especially with regard to goods and transportation. We have $2/gallon gas out here in Midland, so for individual consumers in the U.S., the price drop is also a positive. We won't be quite as dependent on overseas sources. The U.S. won't be hurt as badly as Russia because we're a democratic state, and we don't have all of our eggs in one basket.

    That said, I think this very low pricing is going to be rather short-lived. But overall, lower pricing is going to be a common occurrence going forward because we have so many reserves in the ground.

    TER: Interestingly, Yellen specifically singled out the service industry as being vulnerable to current low oil prices. Do you agree?

    RM: Yes, those companies will be hurt immediately. The service industry has been doing well over the last several years, so if margins are reduced, they can still stay in business through the downturn. The service industry is usually the first to adjust to the changes in pricing, and they must be more competitive because there will be a limited amount of drilling in a downturn. We saw this in 2008-2009, when service companies reacted very quickly to the bust and laid off workers. At that time, the industry had just gotten into a decent working situation, with experienced workers in all the various jobs that go into drilling a well. The price bounced back fairly quickly, and then companies had to train new personnel.

    TER: What about the exploration and production [E&P] companies?

    RM: E&Ps will take a hit. We see that in all the boom/bust situations, but we also see it with smaller drops in oil and gas prices. Companies with large debt loads are going to be in trouble, obviously. Companies holding acreage with leases with expiration dates will be hurt as well. It's going to be very difficult to allow that acreage to expire without drilling wells, because the acreage values are huge. Smaller companies, especially, are going to be under the gun to hold those very expensive leases. Also, E&Ps with large overheads, which have hired new people or that may have hired people to expand quickly for their acreage positions, are going to have a rougher time.

    TER: Will the smaller companies have to go for the low-hanging fruit-the easiest-to-reach fossil fuels? I should also ask if any low-hanging fruit is left.

    RM: There is plenty of low-hanging fruit, but it's pretty tightly held. These are held-by-production [HBP] leases, as we call them, and are hard to get a hold of.

    But when prices drop enough, companies that have HBP leases may need to let them go. Others will be able to get the service industry to work on some of the shallower low-hanging fruit. They have had to compete with the profit-making service work on big frack [hydraulic fracturing] jobs, but this situation could help small companies because they may be able to get service companies to drill the low-hanging fruit now.

    TER: Rich, what is different about the current recession in energy prices compared to past boom/bust cycles?

    RM: One thing that's different is that reserves are in the ground now. We've found them. They are proven. Using the science that's been developed and the data retrieved over the last couple of years, we are perfecting the ability to get these reserves out of the ground more efficiently. The productivity of the wells has quadrupled, and the fracking techniques are still getting better-cheaper and more environmentally friendly. There are billions of barrels of oil out here. If this drop happened a couple of years ago, it would have hammered production activity.

    TER: Since some of these wells are very expensive, and with oil prices so low that some companies just can't play, do you think the environment is perfect for consolidation?

    RM: Yes, and I think you'll see a lot of consolidation occur. Some of these small companies have huge reserves, and the larger companies looking to buy know that. Some areas have five to eight horizontal targets under one proration unit. This isn't like the Eagle Ford or Bakken formations-it's like a lot of those formations stacked on top of each other. The oil in place in the Delaware Basin is over 100 million barrels [100 MMbbl]/section oil, and in the Midland Basin, most people are estimating over 50 MMbbl/section oil. These are huge reserves, and they are identified.

    TER: Classic economic theory tells us that if the price of a commodity goes down, people will quit producing that commodity, and prices have to rise after that. How low do oil prices have to dip before production begins to decline?

    RM: At certain prices you'll see a leveling off, but I don't know exactly what that price per barrel will be. At current prices, you'll see a very marked decrease in drilling of some types of projects because people won't want to drill their good flush production at these prices. That situation will show up pretty quickly, but I can't give you exact timing.

    TER: You recently said that this is a very exciting time to be in the energy sector. I'm guessing that means investors can get in on a low-cost basis. Is that right?

    RM: It is an exciting time, but excitement isn't always positive for investors. I'm more a geologist than a businessman, so from my point of view, I see many new developments and many new ways of approaching problems and solving them. The way I've been working on geology in the last 10 years is 180 degrees different from what we were taught in school, and how we found oil and gas in the 1970s, 1980s and 1990s. I haven't seen anything like it in the last 30 years. So for me, as a geologist, this is an exciting time.

    TER: Things are always different after a disruption-usually for the better, because people are forced into new and more efficient ways of doing things. What do you see coming out of this disruption?

    RM: It's tough for young people getting into the industry. With other busts, we lost many geologists because it was so severe. The science end of the business is usually the first to go; it becomes more about engineering and accounting when times get tough. But the science is what finds the new oil and gas, not engineering and accounting. Yes, everything changes after a disruption, but it makes the companies that survive quite strong.

    TER: New York Governor Andrew Cuomo is banning hydraulic fracturing in the entire state of New York due to health concerns. Could this mindset spread? What are the ramifications of this ban?

    RM: It's politics. It has to do with what the majority of the people want in a localized area. There is a lot of information going out that's incorrect.

    With regard to fracking bans, the answer to this question will be very important: Who owns the minerals? Does the federal government own the minerals? The federal government allows fracking-and loves it because it makes a lot of money. But does the government just let companies go wild? No. There are very strict laws and regulations on how people should behave in the oil business.

    I don't know the situation in New York. But if I'm a mineral owner and they tell me I can't have my minerals tested by fracture stimulation, I'm going to be rather upset with the state of New York and with Governor Cuomo. Here in Texas, most all the minerals are owned either by trusts or by individuals, such as farmers and ranchers. They're not owned by the federal government or the state government. New Mexico allows fracturing. North Dakota allows it. A lot of the states that have a lot of federal and state land allow it.

    I can understand the sensitivity in New York. The decision is up to the people of the state, but I don't see bans coming into areas where there are large reserves-at least not yet, and not in a big way. There will be a lot of legal battles if that does occur.

    TER: You've been rather prolific in your career. You originated the Wolfbone unconventional play in the Delaware Basin in West Texas and southern New Mexico. Why is it called "unconventional?"

    RM: It's in unconventional types of rock. In the past, most producing rocks, which we refer to as "conventional reservoirs," have higher porosity and permeability. Conventional reservoirs are based on rock that was deposited in high-energy environments. What we look for in the majority of unconventional plays-the ones with the huge reserves-is what were once considered source rocks. They were too tight to produce, and were deposited in deeper, low energy environments for the most part. The study of those rocks, and how to produce from them, is unconventional.

    There are varieties of unconventional plays, which constitute the great majority of our reserves, and we have to look at them differently. Tight unconventional rock is better in a siltstone than in shale because it will hold more hydrocarbon molecules and more complex hydrocarbons, such as oil, versus just the methane gas molecule. It's a whole new world, a whole new technology, a whole new way of looking at science. We have different crucial parameters with silica-rich siltstones containing relatively low clay content. The siltstones need calcite cement to keep the rock brittle for fracking. The size of the pore throat space minus the clay content leaves us with the percentage of the porosity that can contain the hydrocarbon.

    TER: Could you talk about some companies you've been involved with? How have you worked with them?

    RM: Most of my work was in the Delaware portion of the Permian Basin. I've worked with and sold deals to quite a few companies-Energen Corp. (NYSE:EGN), Cimarex Energy Co. (NYSE:XEC), Anadarko Petroleum Corp. (NYSE:APC), Rosetta Resources Inc. (NASDAQ:ROSE), Occidental Petroleum Corp. (NYSE:OXY), J. Cleo Thompson [private],Clayton Williams Energy Inc. (NYSE:CWEI), Concho Resources Inc. (NYSE:CXO), as well as Atlantic Exploration LLC [private], which sold Wolfcamp assets to Centennial Resources Development LLC [private]. We have worked with all these companies, or sold them acreage, or performed work in a consulting manner, such as reviewing logs. I've also worked with Schlumberger Ltd. (NYSE:SLB).

    TER: You have intimate knowledge of some of these companies. Could you highlight a few involved in the Wolfbone?

    RM: Companies in the Delaware, like Concho, Cimarex and Energen, which came out in the Wolfbone, have performed very well. At first, we had certain perceived ideas and biases that proved to be wrong. As I said, you had to turn your head 180 degrees to understand these unconventional plays. At first, it was a slow process for companies, because they didn't want to leave their somewhat conventional perceptions. None of us understood how much you had to stay in conventional reservoir rocks. It was a slow learning curve.

    But eventually these companies figured out where to land the rock to get the maximum fracture stimulation, and were able to stay in the best rock to make sure stimulation worked and drained the most efficient area. A lot of other companies are following suit.

    Rosetta and Occidental are getting better at figuring out the problems and solving them. The proof is in the production. You can see the chronological change in the improvement of the wells, improvement in landing the horizontals in the correct zones and improvement in the fracks. The science matters a lot.

    In the Midland Basin, Pioneer Natural Resources Co. (NYSE:PXD) has been one of the leading companies in science, development and production. A lot of the smaller companies, like Diamondback Energy Inc. (NASDAQ:FANG), have done quite well over in the Wolfcamp play, especially. But many companies have done well in the Midland Basin; typically it's the smaller companies there. Early on, these companies used almost no science. They just drilled, like in the Spraberry Trend wells, another Permian Basin field. But they've learned by using the science.

    TER: Generally speaking, how does the Orogrande compare to the Wolfbone?

    RM: I think the company is taking a very well-thought-out risk. I had the same questions about the Wolfbone, and I had people tell me it would never work. I had less scientific data, and less was known about what made these plays work. In many ways, the Wolfbone project was quite risky, but the outcome was quite good.

    It's great to take a higher-risk situation when it's well thought out. That's the way we look at it. Many of my peers have looked at the Orogrande locally, and would like to be in it as geologists. It's been critiqued by many people, and it needs to get drilled.

    TER: You have mentioned Cimarex. Could you speak to that, please?

    RM: Cimarex is one of those companies that started off with a preconceived idea that a certain zone was the main productive zone. Like everyone else, the company was trying to apply production from that interval throughout the basin. But it didn't behave the same. The zone changed and became wet. In other words, it has water in it, and it is a more conventional play.

    Cimarex was one of the originators in the Third Bone Spring in western Ward County, Texas. The company found that the acreage west of the river was wet, but it learned how to adjust to staying out of the water with more conventional plays-the turbidites and the Second Bone Spring and Third Bone Spring formations-to target the good rock. Cimarex went deeper into the Wolfcamp and found excellent wells with its new frack designs. The company has done very well in the last year.

    Cimarex has a big acreage position where the zones are shallower, which will cost less to drill. It has fewer drilling problems because the shallower zones, which are headaches, are thinned out on the west side. The company is sitting on a very good acreage position at lower cost and high gas production.

    TER: Rich, you mentioned Energen and Concho in the same breath with Cimarex. Would you briefly address them?

    RM: Energen and Concho are in the same position. They are positioned well acreage-wise, and have the knowledge to get the drilling done at a lower price. Rosetta also is in the same position, but its resources are deeper. The company is figuring out how to do the horizontals quite successfully.

    TER: You also mentioned Diamondback. It's a mid-cap company with a market cap of about $3.4 billion. You have said the company has done a good job of learning about its rock. Would you comment?

    RM: Diamondback has done a good job of both learning about its rock and learning how to frack it. It is staffed with good people who do a good job, and you can tell. Again, here's a company that did a lot of drilling in the Midland Basin making basic assumptions on conventional rock, and tried to find tighter conventional rock and produce out of that. What it found instead was siltstones. The company performed a scientific evaluation and has been pretty successful. Diamondback did a fine job academically and practically on the Wolfcamp.

    TER: Any other companies you wanted to mention?

    RM: I would just mention Pioneer, which was a leader in learning where to land horizontals and in learning about frack sizes, the density of the fracking and the length of the horizontals. It tested the first really long laterals. Other companies that have done very fine scientific work include Laredo Petroleum Inc. (NYSE:LPI) and Reliance Petroleum Ltd. [part of Reliance Industries Ltd.]. There are some very fine geologists working in the Midland Basin.

    TER: It's been a pleasure, Rich. Thank you.

    This interview was conducted by George S. Mack of The Energy Report and can be read in its entirety here.

    Richard Masterson is a geologist in private practice with more than 40 years of experience, and has provided consulting services concerning the purchase of leases and minerals in the Permian Basin, as well as presented geological findings, drilling and completion results, and updates for investors. He originated the Wolfbone unconventional play in the Delaware Basin, and prepared prospects totaling more than 150,000 acres in the play, which are being leased, drilled and developed by a number of companies. Previously he has held positions with Southwest Royalties Inc., Grand Banks Energy, Monsanto Oil Co. and Texaco. He holds a bachelor's degree in geology from Trinity University, and is a member of the West Texas Geological 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) George S. Mack 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) Richard Masterson: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid royalties by Cimarex Energy Corp., Concho Resources Inc., Rosetta Resources Inc. and Occidental Petroleum Corp. We have sold leases to Energen Corp. and have a back-in-after-payout [BIAPO] working interest. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

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

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

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

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

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

    101 Second St., Suite 110
    Petaluma, CA 94952

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

    Jan 08 1:15 PM | Link | Comment!
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