The Energy Report's  Instablog

Source: JT Long of The Energy Report (4/30/13)

http://www.theenergyreport.com/pub/na/15210

What the "tree huggers" don't realize, says 321energy.com founder Bob Moriarty, is that "the BMWs they drive to anti-Keystone protests need fuel." But the pipeline supporters who expect that fuel to come from American sources are just as delusional, Moriarty asserts in his scathing interview with The Energy Report. That's why he's looking beyond North America for lucrative oil plays. Find out which international producers may be ideally positioned to supply an energy-hungry U.S., and why Moriarty believes oil should be taxed "to the limit.

The Energy Report: In September 2012, you described $100/barrel (bbl) as the new normal. What market factors are behind today's price of $93/bbl?

Bob Moriarty: If the new normal is $100/bbl in any given market, the price should be as high as $115/bbl and as low as $85/bbl. The price will continue to swing around that. Even with the Bakken coming on-line and other domestic U.S. production occurring in the U.S., cheap oil is gone.

TER: So when you look at oil consumption, do you look just at the U.S. or do you look globally? For example, what role does China play?

BM: I am concerned with U.S. consumption as a measure of how the economy is doing. Oil use in the U.S. has been declining since 2008 because economic activity has been declining since then. I think oil consumption in the U.S. is the best indicator of economic activity because there is direct correlation between the two. [See first chart below]

China is an indicator of global consumption. I am not concerned with global consumption. But if you want to measure what is happening in China, look at the spot price of copper, which is hitting new lows. China is slowing down. [See second chart below]

TER: Are you saying the U.S. is not in a recovery?

BM: It absolutely is not in a recovery. All of the numbers being issued by the government are lies: unemployment, inflation, GDP. Now, the government is attacking austerity. Austerity means living within your means. Sequestration is nothing more than some minor and meaningless changes to how the government is spending money in ways that are most visible to the public. One example is furlough days for air traffic controllers, creating airline flight delays. The government is trying to be as big a pain in the ass as possible, so the public will say, "Oh, we want the government to keep spending money." The government is a toboggan going downhill at a 75-degree slope. When it hits bottom, it will blow up. We need real austerity because we cannot afford the level of the government we have today.

TER: You really are upset about the White House tours being cancelled, aren't you?

BM: I think that is very funny. My buddy Donald Trump has volunteered to reimburse the government for the tours. I think that is a wonderful offer.

TER: Many of the experts we interview and the Energy Information Administration say that the U.S. is on its way to being a net oil exporter by 2030. Do you agree?

BM: The idea that the U.S. is on the way to energy self-sufficiency is nothing but feel-good B.S.

TER: Is the biggest problem supply or production costs?

BM: If it costs $5 million ($5M) to drill a well, you have to sell the gas for more than $5M. Some wells in Canada have gone for 20 or 30 years and some wells in Texas go for five to 10 years. But the wells drilled in the Bakken are depleting far faster than anybody expected; they last only one to three years. When you multiply the production of a well by the number of years you expect it to produce, the numbers do not work out.

TER: In your last interview with The Energy Report, you said it would take a revolution to get the Keystone Pipeline built. Are you any more optimistic now?

BM: No. Americans are getting dumber. They need to wake up and smell the B.S. We need the Keystone pipeline; it's good for the U.S. All these feel-good tree huggers need to realize that the BMWs they drive to the anti-Keystone rallies need fuel. All wealth is created by growing something, manufacturing something or mining something. Everything else is just a transfer of wealth. We need to do something that creates wealth, real wealth. The Keystone would create wealth.

TER: Marin Katusa said in an interview with The Energy Report that the Keystone Pipeline will be built, but that a "maple leaf tax" will be added on in the name of the environment. That tax will increase the price of the Canadian gas. Do you agree?

BM: The price of the gas does not matter. When you run out, you need more. I think Canada should charge a price that makes sense, and oil should be taxed to the limit of its ability. I would rather see taxes on oil two or three times higher than they are now. The U.S. has cheaper oil than any country that is not a big oil producer. It is foolish because we are encouraging overconsumption of a very valuable resource.

TER: If not from the U.S. or Canada, where will the energy come from?

BM: I have been following two developments in Indonesia and New Zealand closely. The first is coal-bed methane in Indonesia. Indonesia has encouraged the production of oil and natural gas, but discouraged production of coal-bed methane. Now, Indonesia no longer exports oil and it ships enormous amounts of coal to China. As a result, in the last three to four years, Indonesia has started realizing it needs to encourage production of its coal-bed methane. There are a lot of companies working over there. Coal-bed methane is not on the radar screens of most energy investors, but Indonesia is one of the new frontiers for it.

TER: How can investors get involved in coal-bed methane?

BM: I have owned shares in CBM Asia Development Corp. (TCF:TSX.V) for four years. It has about 160M shares outstanding; 250M shares fully diluted. It has already found 1 trillion cubic feet (1 Tcf) gas. In Canada or the U.S., that 1 Tcf gas would be worth $200-500M. The company has a market cap of about $27M. It is in the middle of raising money to drill, which has driven the stock price down to $0.16. If it were operating in Canada, it would be a $500M company.

TER: What about oil? Where will our oil come from?

BM: The frontier is in the North Island of New Zealand, where TAG Oil Ltd. (TAO:TSX.V) has been enormously successful. Just last week, TAG announced spudding a 1,800 meter (1,800m) hole into shale on the east side of the North Island. That could be bigger than the Bakken.

TER: Is most of the action in New Zealand in the East Coast basin or in the Cardiff deep condensate?

BM: It has been on the west side, and that is fairly traditional oil. TAG Oil just spudded the very first hole in the East Coast basin. The results should follow in two to three weeks. If this turns into another Bakken, TAG Oil will go through the roof, along with Marauder Resources East Coast Inc. (MES:TSX.V).

TER: Marauder just closed a $1M private placement, and is exploring in that same area, correct?

BM: Correct. TAG plans to drill two wells about 200 kilometers (200km) apart. Marauder is exactly halfway between those two wells. The results at TAG's two wells will give investors a real good idea of Marauder's potential. When you are exploring for oil in a shale basin, you do not give a darn about drilling, as long as your next-door neighbor is drilling. Marauder is next door to TAG. [See map of TAG properties below]

(click to enlarge)
 

Marauder is one of those companies that will either go to $0 or $5/share. It is selling for $0.09 now. TAG is at $5.48/share today.

TER: Anything you like closer to home?

BM: If you are in Canada, you are in great shape. Canada has a lot of oil. I like a company called Aroway Energy Inc. (ARW:TSX.V; ARWJF:OTCQX). It is cheaper now than it has been in the last three years-$0.30/share. It is producing over 1,000 barrels of oil equivalent per day.

TER: It just came out with a new reserve estimate on West Hazel. Was it what you expected?

BM: It's a really good number. The problem is trying to figure out what it is worth. Aroway has made money. It is cash flow positive. It has good management that does what it says it will do. With the market and the juniors getting creamed so badly over the past two weeks, Aroway stock has lost about one-third of its value. I expect Aroway to be $0.60-1.00 in three to six months. The current price is simply irrational.

Canada remains one of the best environments for investment. The Canadian banks are a lot saner than banks elsewhere. Taxation is not totally out of control.

TER: What is another way investors can get exposure to energy plays?

BM: One resource-related company I really like is called Synodon Inc. (SYD:TSX.V) and I do own shares in it. The company has a proprietary process that examines fumes from a gas or an oil pipeline. This is a critical issue. The infrastructure in the U.S. needs a lot of work. Oil and gas spills kill people and harm the environment every year. These guys have a process that is simply fabulous, probably ten times more cost effective than anybody else. It is a $3B a year industry. The stock price should be a lot higher than it is.

TER: Do you like energy services or producers better as a way to make money in oil and gas?

BM: Both of them are great investments. The bottom line is that it is time to be investing in something you can put your hands on. We have got this enormous $648 trillion dollars in derivatives, paper assets. They are bets and they are blowing sky high. You want to be in something real. A lot of people own bonds that they are going to end up putting on their wall as wallpaper. It is time to invest in something real.

TER: Is the current market a good entry point for getting into something real or is it too early to call a bottom?

BM: The junior market for energy is more attractive today than it has ever been. The goldbugs realize gold shares have been knocked down, but what they do not understand is that energy stocks have been knocked down, too. The juniors across the board have taken enormous hits, and it is irrational. It will go back up just as fast as it went down.

TER: Bob, thank you. It is always a pleasure talking with you.

Bob and Barb Moriarty brought 321gold.com to the Internet almost 10 years ago. They later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Bob was a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam. He holds 14 international aviation records.

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) JT Long conducted this interview for The Energy Report and provides services to The Energy Reportas an employee or as an independent contractor. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Aroway Energy Inc. and CBM Asia Development Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Bob Moriarty: I or my family own shares of the following companies mentioned in this interview: CBM Asia, Marauder, Synodon and Aroway. 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: CBM Asia, Marauder, Synodon and Aroway. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Energy Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8204
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Source: Tom Armistead of The Energy Report (4/25/13)

http://www.theenergyreport.com/pub/na/15193

Whether the topic is peak oil, climate change or commodity bull markets, Jim Letourneau tends to take the contrarian position. He's an unapologetic advocate of oil sands development and a shrewd analyst of the companies large and small that are active both in the Alberta oil sands and in the U.S. oil patch. In this interview with The Energy Report, he shares his insights into one of Alberta's largest oil sands players and one of its newest and smallest, as well as a well-positioned startup in the Texas Midland basin and northwestern Montana's Williston basin.

The Energy Report: How was your presentation, "Is Peak Oil Dead?" received at the Calgary Energy and Resource Investment Conference on April 5?

Jim Letourneau: It went really well. There are a lot of professional engineers and geologists there who work in the oil business, and most of them were agreeing that technology is a big factor that pushes out when peak oil is going to occur. For each pool or technology, there is going to be a peak, so peak oil is really the average of hundreds of different peaks, but I think my big-picture point was well received.

TER: Your point is that the theory behind peak oil fails to factor in technological breakthroughs that produce new drilling and stimulation technologies and tame hostile environments, thus leading to increases in production. If an oil shortage doesn't end the oil age, could climate change alone threaten oil's dominance?

JL: My take is that oil is going to be replaced by something better at some point. It can't be something like ethanol, where we end up using more water and increasing food costs. Ultimately, maybe we can shift to natural gas. From there we'll have to look at some of the alternatives that right now are expensive, but in 20 years won't be nearly as expensive. Politics always plays a role in energy policy. We just went through a renewable energy stock bubble created by government loan guarantees. Meanwhile, oil companies have lost the PR battle. This gives governments the option to punitively tax and regulate the industry as they see fit.

TER: If the future solution is natural gas, what companies do you see well positioned to meet that need?

JL: Right now, because we've found so much natural gas, the companies that produce it are in a pickle. I think the range of prices is going to be lower for a long time. We're not going to have an extended bull market. But the companies that use natural gas are pretty interesting. There are companies likeWestport Innovations Inc. (WPT:TSX; WPRT:NASDAQ) that build natural gas engines for big trucks and transport units. Another company is called Clean Energy Fuels Corp. (CLNE:NASDAQ). But the actual producers are in a tough spot. If the price does get a little higher, a lot of supply can come onstream very quickly.

TER: You recently explained your new interest in biotech to The Life Sciences Report by saying, "The mining and energy sectors have reached a state of dysfunctional excess." What do you mean by that expression?

JL: What I mean is that there are just too many exploration companies out there and not enough expertise. When I started writing my newsletter 10 years ago, it was near the beginning of a commodity bull market, so there weren't excesses in anything. The first bull market was in uranium, and only a handful of companies were trying to find uranium. Then the price started to move up and pretty soon there were well over 500 uranium companies worldwide. What could possibly be gained by having 500 companies instead of maybe 50?

I like to use the concept of a hype cycle, where a big wave of money coming into a sector builds up to a peak of inflated expectations before we move down to a trough of disillusionment. Another recent hype cycle was graphite. Look at the TSX Venture chart and you'll see what I'm talking about. There's going to be a hangover as a lot of those companies disappear.

TER: Let's shift gears and discuss some oil companies. Big Sky Petroleum Corp. (BSP:TSX.V) just retained an investor relations consultant, and part of the consultant's fee is in options exercisable at $0.25. What does that say about that corporation's expectations for growth in share value?

JL: I think everyone is expecting the share value to grow, but today the share price is $0.13. Something has to change to get the share price higher, and maybe the investor relations consultant can help them with that.

TER: A map of Big Sky's West Texas assets shows that large- and mid-cap companies surround Big Sky's new acreage. If the first well drilled is successful, do you think the larger companies are potential joint venture or takeover partners?

JL: Definitely. The challenge for Big Sky is that it doesn't have enough cash to pay for a single horizontal well. Almost all juniors right now have a big issue just keeping their production up. Big Sky doesn't really have any production yet and it has just under $4 million ($4M) in cash. A horizontal well in the Wolfcamp is at least $5M and can be as high as $8M, and it's in the same in the Bakken. If Big Sky drills one well each in the Bakken and the Wolfcamp, that's $10M, so the company has to be pretty strategic about how it manages its opportunity. But the first step in any resource play is acreage capture, and Big Sky has done that. Hopefully, the company can find a partner and work out some kind of deal.

TER: Sunshine Oilsands Ltd. (SUO:TSX; 2012:HKEX) is new and small. How much does its success depend on the permitting of the Keystone Pipeline?

JL: Sunshine Oilsands has heavy oil production that averaged 625 barrels per day for the first nine months of 2012. Its first 10-thousand barrels-per-day West Ells project is close to being turned on, but it's not built yet. If the Keystone Pipeline was approved, people would probably put a higher value on Sunshine, but its ultimate success is going to be based more on its leases and production.

TER: Is Sunshine threatened by the rapid rise in domestic U.S. oil production?

JL: To a degree. The rise in U.S. oil production has changed the level of supply urgency and it's affecting policy. If there were a real shortage of oil in the U.S. and nothing on the horizon, that would be different. The amount of Canadian oil that's been imported into the U.S. has doubled over the last decade or so. Now that the U.S. has more domestic sources, that urgency seems to have diminished. That is a threat. Canadians are aware of it. That's why we're working hard in Canada to get pipelines built to the west coast so we have two potential markets instead of just the United States.

TER: Athabasca Oil Sands Corp. (ATH:TSX; ATI:FSE) set a goal to increase its oil production to between 200 and 260 thousand barrels of oil equivalent per day by 2020. Half of that would be in thermal production-in-situ production-and half from light oil, which it has no production at all in right now. It expects the first oil from thermal by 2014, so what is the key to that plan's success?

JL: Athabasca Oil has a very large land position in a light-oil play called the Duvernay, which is in central Alberta. The Duvernay was the source rock for the big Leduc fields that were found in Alberta and really kicked off Alberta's oil industry. It's a great source rock, but the wells are very deep and expensive. Athabasca had raised enough money that it can play around in that play. It's an exciting new play. It could be very big for them.

TER: The company is gearing up for thermal-assisted gravity drainage production. Has it achieved proof of concept for that?

JL: Most companies are using some version of steam-assisted gravity drainage. There have been a few notable failures and there's always some technical risk. The thing about resource plays has always been that the geological risk of the resource being there is very low. We know the oil sands there. We know where they are, but the technology to extract them requires specialized knowledge.

We've had a few examples where things haven't worked out as planned. It's always a bit nerve-racking until the projects are up and running and successful. Statistically, a company that's got lots of land and lots of money can spread out that risk. I think Athabasca will be up and running pretty close to plan. Athabasca Oil has raised enough money to weather a lot of storms. It's got lots of other projects that are ready to go.

TER: Historically, the company was an open-pit oil sands miner. Is it prepared to succeed in light oil development?

JL: Oh, definitely. Most people working in oil sands have a background in light oil. When it comes to shale oil, very few companies have tons of expertise because that's only been around for maybe five years, but it's to Athabasca's credit that it's diversified and captured a big opportunity.

TER: As you intimated earlier, oil sands production gets bad press and protests both in Canada and in the U.S. for its alleged environmental damage. How much does that threaten Athabasca's prospects, or Sunshine's?

JL: These projects are going to go ahead and they will get built and the oil will find a market. The environmental press has been negative, but in some ways, it's a positive in that we will have the world's best environmental monitoring because we keep measuring contamination with better and better equipment.

TER: You had spoken in the past about the opportunities and challenges for uranium producers. Are any of them viable at a $40.75 uranium price or do you think that is going up?

JL: The ones that are going into production are trying to lock in some longer-term pricing so that they have stability. For example, Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) just closed a $5.1 million transaction that provides them with upfront cash in return for the sale of future uranium deliveries. Smaller producers don't want to be at the mercy of the spot price; $40/lb doesn't leave them a ton of room, but they're going to keep producing because if you produce, at least you'll have some money coming in. I don't think any of these projects are going to be shuttered. Right now it's a tough game, but there are a lot of things on the table that will lead to higher uranium prices.

I think Japan may turn on some of their reactors again. Meanwhile, some of the biggest uranium producers are cutting back on production. All of the factors that kicked off the uranium bull market 10 years ago are still in play. Uranium producers based in the United States have an advantage because the U.S. wants energy security. These producers have come too far to stop. If the price moves up even $10 or $20, then they'll be in an amazing position.

TER: I really appreciate your time this morning.

JL: Well, thank you.

Jim Letourneau is the founder and editor of the Big Picture Speculator and is a geologist living in Calgary, Alberta. He is an early-stage investor in energy, metals, biotech and technology companies. He speaks at investment conferences across North America.

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 The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Big Sky Petroleum Corp., Ur-Energy Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jim Letourneau: I or my family own shares of the following companies mentioned in this interview: Sunshine Oilsands. I personally am or my family is paid by the following companies mentioned in this interview: Sunshine Oilsands. 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 and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise - The Energy Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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

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

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

101 Second St., Suite 110
Petaluma, CA 94952

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

Source: Tom Armistead of The Energy Report (4/18/13)

http://www.theenergyreport.com/pub/na/15156

Atticus Lowe was among those who saw more smoke than fire in the fevered puffery of the shale industry's promoters. With an established track record now, the industry has proved its potential for him, and he is bullish on gas over the long term. He shares his assessment of some of the promising oil and gas players in this interview with The Energy Report.

The Energy Report: A couple of years ago, you were skeptical of the long-term prospects of the U.S. shale-gas plays being touted by producers. Has anything happened to give you more confidence in the forecasts?

Atticus Lowe: Commercial production has been established in a number of shale plays, although most require a significantly higher natural gas price to justify the economics. As these shale plays have developed, a number of sweet spots have been established that provide higher-than-average returns. This is the old 80/20 rule, where 80% of the production may come from 20% of the acreage. The sweet spots in some of these plays are economically viable in the current price environment, but the vast majority of the acreage in most of these plays will require at least $5 per thousand cubic feet ($5/Mcf) in order to make them work.

I'm surprised by how well natural gas production has held up in the face of very low prices over the past few years. Early on in the history of shale development, prices were multiples of where they currently are, so the economics worked and people were excited about it, paying high prices for the acreage. A lot of producers curtailed production when prices dropped, and a lot of that production has come back onto the market, now that prices have recovered a bit. Probably the biggest factor, though, is the natural gas byproduct that is associated with the liquids-rich shale plays.

In the Marcellus shale play, for example, the producers make their money on the liquids, and they can practically give away the gas and still make money on their drill programs. That has resulted in a lot of extra natural gas supply, which has really kept prices tempered. But natural gas liquids prices are getting pressured pretty hard, so some of that drilling is slowing down. Over the last few weeks, domestic production has actually started to decline. Winter weather has been cold, compared to last year especially, so we're actually slightly below the five-year average in terms of natural gas storage. When you combine that with the recent declines in production and rig counts, it sets up a pretty bullish case for natural gas. The natural gas drilling rig count just reached a new 14-year low. If another cold blast hits this year and production continues to decline, we could see easily another $1-2/Mcf increase in price for gas.

TER: Can a dry gas well justify the exploration and production (E&P) cost or does it have to have liquids?

AL: The vast majority of dry gas plays are not economic in this price environment. Operators have largely already switched their drilling plans in favor of oil and liquids-rich targets. Even if gas prices increase another $1/Mcf or even $2/Mcf, I don't know if it's enough to swing the pendulum back toward natural gas drilling. The economics of the liquids plays, especially the oil-prone plays, are just much better. Producers are also pushing for the exportation of liquid natural gas outside of the U.S., which I think will happen in the next few years. That will create a new market for the gas and new demand for it, while reducing the supply here and increasing the price. I'm definitely bullish on gas over the long term, but in the short term we could still have some bumps. The energy equivalent price for natural gas right now is approximately $25 per barrel ($25/bbl) compared to crude oil, and that disparity just won't last over the long term.

TER: What are the prospects for natural gas as a transportation fuel?

AL: The future is big. It's being used now for dump trucks and city transportation. There's a push toward utilizing natural gas for long-haul trucking fleets, but I'm disappointed that more hasn't been done to realize the potential for consumer auto fuel. It would save consumers a lot of money and, create a lot of jobs and provide a big boost for the economy. It would also reduce our dependence on foreign oil while creating a positive impact on carbon dioxide emissions, people's health and the environment. It's one case where I think the government could actually help get the ball rolling, with a tax incentive or some sort of stimulus. I'm really surprised that this hasn't gained more traction.

TER: Your three-pronged investment strategy focuses on management, assets and catalysts for growth. Which companies excel in all three of these areas?

AL: Apache Corp. (APA:NYSE), ConocoPhillips (COP:NYSE), EnerJex Resources Inc. (ENRJ:OTCBB),GreenHunter Energy Inc. (GRH:NYSE.MKT) and Sonde Resources Corp. (SOQ:NYSE) all offer a compelling value proposition at the current prices and are catalyst rich.

TER: How has Sonde's offshore Tunisia oil development performed?

AL: Its exploration program has been very successful. The company has established a huge oil and gas reserve base, and there is a strong market for the gas in that area as well. The gas there is nearly as valuable as the oil. On top of what it has already discovered, there is tremendous potential to discover new reserves. The exploration prospects that remain on Sonde's acreage block have a much more favorable risk-reward profile compared to most international offshore prospects. Sonde has established a large reserve base that can be economically developed on a standalone basis, and it is being developed now.

TER: Have the revolutions in Tunisia and Libya affected that project at all?

AL: Yes, and I'd say more so Tunisia, where there has recently been a shakeup in the government. Sonde recently secured an attractive farm-out arrangement for its North African assets. The arrangement is a good deal for the company, and it's also a great deal for the government because the proposed partner is large and can bring great resources to the project. The partner is Viking Energy North Africa, Ltd., a private company backed by the Thome Group, based out of Singapore. That group is one of the largest shipping companies in the world, and it also manufactures the offshore production facilities for developments like Sonde's.

Under the agreement that Sonde struck, all of the development costs associated with its established reserves, known as the Zarat discovery, will be carried by Viking, and Sonde will retain a 33% carried interest. On top of that, Sonde will essentially be carried for three exploration wells, which have the potential to multiply the resources that have already been discovered there. This deal was struck at the end of 2012, and it was expected to be completed around the end of Q1/13, but it appears that Sonde has not been able to get the Tunisian government to sign off on the transaction. That is really puzzling to me given the merits of the deal, but I assume that the recent government shakeup in Tunisia has delayed the process. It's really a win-win for both the company and Tunisia, and making it successful will also help Tunisia attract additional foreign investment as opposed to discouraging it if the deal is rejected. If the transaction doesn't get approved for some reason, then I expect that Sonde will simply finance the development through a different type of deal structure, which should provide it with the same economic benefit.

TER: How does the farm-out benefit Sonde?

AL: It gives it exposure to a very large amount of cash flow, which is slated to begin in 2015 at virtually no cost to Sonde. In fact, Sonde should easily generate more cash from this project in its first year of production than its entire enterprise value right now. Its partner will contribute hundreds of millions of dollars to develop the project and bring it online, and Sonde will reap 33% of the benefits at virtually no further cost. Each of the exploration wells that it will be carried on is estimated to cost approximately $25 million ($25M). So it has substantial benefits, especially for a company the size of Sonde.

TER: Sonde's Western Canadian Strategic Alternatives Process is preventing the company from committing to a capital program in 2013, according to its recent annual report. How will that affect its ability to grow shareholder value this year?

AL: Sonde is a very small company that's extremely asset rich, and I think it is flying totally under the radar of investors. Right now, the company is trying to close the Tunisia deal and figure out where and how to allocate capital and whether it should sell assets. The stock is absurdly cheap regardless of how these processes play out, and I think the company could fetch a multiple of its current price if it wanted to sell. Outside the North African assets, the company has the potential to unlock a substantial amount of value this year via a number of different catalysts, including from its Western Canada asset portfolio. The company has hired FirstEnergy Capital out of Calgary, which is a premier investment bank, to run a strategic review process for its Western Canada assets. Basically, the company put all of its assets into a data room, and numerous companies are getting an opportunity review and bid on the properties.

That includes approximately 100 thousand (100K) acres in the Duvernay play and 50K acres in the Montney play, both of which are red hot right now. This acreage can fetch up to $10K/acre or more if it is successfully proven up. There is a lot of activity in the area, and a lot of acreage has been proven up in areas surrounding Sonde's position. In addition, Sonde owns 100K acres in two other emerging oil resource plays. The company also produces more than 2 thousand barrels oil equivalent per day (2 Mboe/d) from more conventional properties.

Sonde currently has a market capitalization of only $70M. In addition to its producing assets, Sonde has nearly $20M of net cash on its balance sheet, plus all of the undeveloped assets that I mentioned, both the resource play assets and the North African assets. The stock is around $1.15/share right now. I think the shares can fetch $5 once the company figures out its path in Tunisia and completes its strategic review process in Canada. If just a portion of the Western Canada resource play acreage turns out to be productive, we could see a ten-bagger in this stock. I believe a lot of this will play out over the next 12 months. As Warren Buffet says, "Be greedy when others are fearful and fearful when others are greedy." I think it's time to be greedy with Sonde.

TER: EnerJex's price recently jumped from around $0.50 to the $0.65 neighborhood after declining for the last year. It's now at $0.57. Is that a portent?

AL: I will say first that I am a director of EnerJex, so I am biased. I was involved in the transformation of the company at the end of 2010. At that time, EnerJex completed a comprehensive transaction that included multiple acquisitions and a significant infusion of equity capital. The board is very focused on per-share value creation.

The stock was over $1/share a couple of years ago, so it really hasn't made up much ground, but the company's performance has been outstanding. It has rapidly increased production, cash flow and proven reserves. I believe there has been a lot of selling pressure over the past two years from vintage shareholders. The supply of shares appears to be starting to dry up, so the supply and demand dynamic is changing. EnerJex is attractive because it has a large inventory of shallow conventional oil drilling opportunities. Unconventional shale plays are desirable due to their repeatability, and EnerJex has a lot of repeatability in its Eastern Kansas asset base, which is rare. Most conventional plays have been largely tapped out or are on their third legs, so this is unique.

I also think the economics associated with EnerJex's drilling portfolio are better than most, if not all, of the big shale plays. The company has a market capitalization of only $45M. It has approximately $10M of very low-interest rate debt and yet it has nearly 3 million barrels (3 MMbbl) of proved oil reserves and a large undeveloped asset base. In addition, the company has nearly $10M of additional liquidity through its senior credit facility, which bears interest at 3.75% per annum. The company just reported that it has identified 400 drilling opportunities in one of its oil plays. Those opportunities are not factored into its current reserve report. It expects to earn into 1K additional acres in its Mississippian play next month, which will provide a significant amount of additional reserve exposure.

EnerJex actually repurchased 2M shares of its common stock at the end of 2012. It's very rare for a microcap E&P company to repurchase such a significant amount of stock. It speaks volumes about the board's conviction for the equity and also its confidence in management's ability to execute the business plan. The company's CEO, Robert Watson Jr., works as hard as anybody I know. His father runs Abraxas Petroleum Corp. (AXAS:NASDAQ), which is also a publicly traded oil and gas company. Robert has gained a lot of experience being a third-generation oilman. He also has a significant amount of private equity experience and knows how to build a company. He personally owns a large stake in EnerJex and is determined to be successful.

TER: GreenHunter started in 2005 as a renewable-energy company. In 2009, it changed its business strategy to focus on water-resource management related to the oil and gas industry, and its stock plummeted. How have investors responded to that?

AL: I don't think the stock went down as a result of the change in its business plan. I think it was a number of other factors that were all occurring around the same time, including a major hurricane that wiped out its largest asset. It was a difficult time a few years ago for the market in general, and especially for small companies focused on renewable energy. The company went through a tough period and had to reinvent itself, but the new business plan is fantastic. Investors have definitely started to respond favorably. The stock climbed from $0.85 per share in 2012 to nearly $3.50 at one point. The shares have fallen back since that time to about $1.50 where they appear to have stabilized.

TER: That $3.50 was a momentary peak. It lingered at levels lower than that, but it is back down now. Water-resource management for the oil and gas industry is an utterly different business from renewable energy development. Is the management equally knowledgeable about both missions?

AL: The company has completely shifted its focus away from renewable energy. It's only focused on the water-resource management business right now. Most companies that were in GreenHunter's position a few years ago have gone out of business. The fact that GreenHunter has stayed alive and is actually flourishing now is a testament to management's experience and tenacity. Management is much more experienced in the water-resource management business due to its deep experience and relationships in the oil and gas industry.

TER: Has the asset base been converted to serve the new strategy?

AL: Absolutely. The company has been innovative in the products that it's brought to market, and it's been on the forefront in the very early stages of this emerging industry. It's growing rapidly as a result. The company recently reported a 1,400% increase in revenue for 2012. It also reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of more than $5M for the year. The company is now positioned in a number of the big shale plays or resource plays in the U.S., including the Eagle Ford shale, the Mississippian Lime, the Marcellus shale, the Utica shale and the Bakken shale. The company is only scratching the surface, but it has established early positions in these major plays that it should really be able to leverage over time.

GreenHunter provides soup-to-nuts water-management services for the oil and gas industry related to drilling, completing and producing hydrocarbons from the shale plays. These plays are developed through horizontal drilling, and they're completed utilizing fracture stimulation technology, which requires a tremendous amount of water through the whole cycle of drilling, completing and producing, including disposal. The industry is still in its infancy, and the growth opportunities are staggering when you consider the size and scope of these shale plays in the U.S. and how much water is involved in that process.

Based on management's track record, Gary Evans' in particular, I expect the company to build and sell. I think this will be a takeout at some point in the future, and I do think there's quite a bit of runway before the company sells out. GreenHunter has been able to access a lot of capital and favorable terms through the issuance of perpetual preferred stock, which is yielding over 13% now, and this security is listed on a major exchange. GreenHunter is forecasting revenue growth of more than 100% in 2013. I think as it continues to grow, it will get on a lot more radar screens than it is on now and have a lot more exposure to institutional investors that are looking for these types of growth opportunities.

TER: Apache and ConocoPhillips are two others you mentioned. They're in a different league entirely from these three. What are your thoughts that you wanted to share on them?

AL: We look at the whole spectrum of E&P companies, from microcap to super major. These are two stocks that really stand out to me as being attractive investment opportunities. Conoco recently spun off all of its midstream and downstream businesses, so it's no longer an integrated company. It's now the largest independent oil and gas company in the country. The spinoff has proven to be successful for shareholders, and I think it may be the start of a trend for the bigger players. Conoco is attractive because it is very cheap and it has an outstanding undeveloped asset base. It trades at about 4.5 times EBITDA and $12/bbl of proved reserves. It has an incredible land position, in the middle of the sweet spots in a number of the big resource plays like the Eagle Ford, the Bakken and the Duvernay up in Canada. It has a tremendous amount of drilling to do in those plays, which should have very strong economic returns. The stock yields 4.5%, which is very attractive in this low-interest-rate environment.

Apache is probably even cheaper than Conoco. It also has a very strong margin of safety as a result of the valuation. The stock is near a five-year low despite continued growth and also despite an asset portfolio that would be very attractive to a larger player. Apache is a big company. It has a $30 billion ($30B) market capitalization, but it's trading at only 3.5 times EBITDA and around $15/bbl proved reserves. It could definitely attract a suitor. Conoco could as well, even though Conoco is a much bigger company than Apache, with a market cap north of $70B. These companies both have big acreage positions in big plays that would be really attractive to a larger company, especially at their current valuations. They could be accretive for larger companies and offer a lot of drilling opportunities. Apache is the number-one driller in the Permian basin, where it has a huge footprint.

TER: Is consolidation coming to the gas industry?

AL: For gas in particular, there have been a lot of willing buyers, who are contrarian and want to buy at the low, but I don't think there have been as many sellers as people expected because the sellers are also expecting gas prices to increase. I do think, though, in this business, in general, you either buy or get bought eventually. So the industry will always be prone to consolidation.

Right now is a particularly interesting time because of the low interest rate and the emergence of new domestic resource plays. A lot of these plays are evolving and some smaller companies have gotten into these plays and built acreage positions. One in particular, Osage Exploration and Development Inc. (OEDV:OTCBB), has developed a significant position right in a very attractive area of the Mississippian Lime play. This is an area that is dominated by much larger companies that are flush with cash. Companies like Osage that are small and have really attractive acreage positions in plays that are being dominated by the big boys are logical takeout candidates at some point. That will continue to be a trend in the future as smaller companies acquire acreage in the emerging resource plays.

TER: I appreciate your time today.

Atticus Lowe is the chief investment officer of West Coast Asset Management, Inc., a founder and principal of Montecito Venture Partners, LLC, and a director of Black Raven Energy, Inc. He has been a featured speaker at the Value Investing Congress as well as the Value Investing Seminar in Molfetta, Italy. He is a CFA charterholder and holds a Bachelor of Arts in economics and business from Westmont College.

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DISCLOSURE:

1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Atticus Lowe: I or my family own shares of the following companies mentioned in this interview: EnerJex Resources Inc., GreenHunter Energy Inc. and Sonde Resources Corp. I personally am or my family is paid by the following companies mentioned in this interview: EnerJex Resources Inc. The stocks identified above do not represent all of the securities purchased, sold or recommended by West Coast Asset Management. If you would like a complete listing of previous and current recommendations made in the previous 12 months, please contact West Coast Asset Management. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities that were discussed in this article. Past performance does not guarantee future results. 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.
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