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  • Producers That Can Pump At $60/Bbl Oil: Evan Smith

    Source: Tom Armistead of The Energy Report (12/5/13)

    www.theenergyreport.com/pub/na/producers...-smith

    Evan SmithAs impressive as shale gas and oil production has been in North America, Evan Smith, co-portfolio manager of U.S. Global Investors' Global Resources Fund, expects 2014 to break records as producers move to a pure manufacturing process and drill multiple horizontal wells from a single pad. In this interview with The Energy Report, Smith tells us why a few of the companies in his fund had a stellar 2013, and why they could go even higher in 2014.

    The Energy Report: Evan, welcome. You have achieved successes in growing portfolio value in the commodities space. What are the best ways to do that for an energy portfolio?

    Evan Smith: It depends on the investment cycle and the markets. Sometimes it's better to buy the stocks because the assets are cheaper on Wall Street than they are out on the field. Generally, we construct a portfolio of oil and gas companies that have the ability to produce above-average growth in production, reserves and cash flow on a per-share basis. If it's an early-stage company in the exploration phase, reserve growth and success with the drill bit will be very important.

    North American shale plays have become an enormous focus for many investors because you're eliminating much of the geologic risk: The resource is known to be there, it's just a matter of the application of technology to bring down costs and to extract commercial volumes from a known resource.

    The technology has really changed the game. Horizontal drilling and hydraulic fracturing have created a lot of value. It's a big shift we've seen over the last several years away from conventional exploration, whether it's in North America or overseas, and more capital has flowed into North America.

    TER: What role do the prices of oil, gas and natural gas liquids (NGLs) play in growing an energy portfolio?

    ES: They are an important piece of the puzzle, but there are other things to consider. Over the long term, selection of quality management teams and a quality asset can override a difficult or challenging commodity environment. In the short term, stocks are going to be more correlated with the relevant commodity price.

    An active manager can add value through the selection of companies with management teams and assets that can show growth, production and cash flow on a per-share basis. At high commodity prices, many people in the industry can make it look easy.

    A lower commodity price shakes out either the weaker assets or the weaker participants. Commodity price makes a difference, but it's not one of the key drivers over the long term. Management teams that are able to grow reserves, production and cash flow per share will create value for shareholders.

    TER: Natural gas has been stuck below $4/thousand cubic feet ($4/Mcf) since June. What will it take to move the price above that line?

    ES: It is going to take some kind of balancing of supply with demand. We've seen supply growing enormously over the last several years, much faster than demand has risen. That's principally due to the prolific nature of some of the shale plays here in North America. We don't have an opportunity to export. Some companies are working to export via liquefied natural gas (LNG), but that's at least a couple years away. The power market is the big growth driver for demand over the next decade. It will be slow to develop, but that will be the biggest incremental opportunity to raise demand relative to supply.

    The rig count has declined by more than 50% over the last two years, and yet we continue to see a steadily increasing supply of natural gas. It's a testament to the technology that has been developed by the industry to drill faster and more efficiently and to unlock and produce more reserves with less input. It truly is a disruptive technology, so disruptive that we've found ourselves in a glut of natural gas.

    The key is for dry gas extraction to become profitable. The focus is going to have to be on reducing costs, as an operator has to focus on drilling only the very best wells that have good rates of return in a sub-$4 natural gas environment. That excludes many conventional reservoirs in the U.S. Many of the larger, independent oil and gas companies are saying they haven't targeted a dry gas well in three years, yet the associated gas (gas co-produced with oil) from oil shale reservoirs has been enormous. We continue to see an oversupply situation, and probably will for the rest of the decade.

    TER: You referred to the prolific nature of the wells; do you think that's sustainable? There are some analysts who are seriously questioning that.

    ES: There have been some questions raised about the sustainability of certain fields, and that's a valid question. We saw that with the Haynesville field in northwestern Louisiana and east Texas several years ago. That was the fastest-growing natural gas field in the country-massively prolific wells-but they were expensive wells to drill and there's no capital being directed there. Haynesville will phase out and continue to decline unless natural gas prices are high enough to justify drilling wells there. The Marcellus and Utica shale wells have taken the spotlight; the resource is enormous in these plays. The wells are getting better. Completion methods are improving and production continues to ramp up.

    "Selection of quality management teams and a quality asset can override a difficult or challenging commodity environment."

    Most of the activity has been more oil-directed these days, for instance, in the Bakken in North Dakota and in South Texas in the Eagle Ford. Those are the biggest oily plays right now. I think in 2014, people in the field will have delineated most of their acreage and are going to turn these things into a pure manufacturing process with pad drilling. Continental Resources Inc. (CLR:NYSE) is testing 16 wells per pad in the Williston Basin in North Dakota. The company will repeat that pattern and drive costs down. We've seen a big shift to multi-well pad drilling in 2013, but I think it's going to become much more standardized in 2014. The efficiencies that we've seen, which have led to more productivity with fewer rigs, will probably remain and perhaps even accelerate in 2014.

    TER: Your Global Resources Fund (PSPFX) has several master limited partnerships (MLPs), which all need to constantly raise capital. How will the end of quantitative easing affect them if it results in rising interest rates?

    ES: The low cost of money has aided many asset classes. I don't think the S&P 500 would be at record highs if we didn't have accommodative Federal Reserve policy, but that goes for many risk assets. Since the word "taper" was mentioned by Chairman Bernanke in the April-May timeframe, we've seen the MLPs as a group trade pretty much sideways. MLPs rely on access to debt and equity financing to finance their growth. How they create value is historically through consolidation and acquisition of existing infrastructure or through organic projects, because of the need for infrastructure in many of these prolific, rapidly growing shale basins.

    MLPs have generally outperformed dividend-paying stocks like utilities and telcos. The key differentiator for MLPs is the growth in dividends that most MLPs and their business strategies provide. The MLP asset class is still a better opportunity than 10-year government bonds, with 5-7% yields on average, versus 2.8%. I think the Federal Reserve is on path to keep interest rates low for a long time, so I think midstream MLPs are still an attractive opportunity.

    TER: Your fund invests in natural resources for both energy and basic materials. What are the most exciting equities in the fund and why?

    ES: We take a diversified approach to natural resources investing: energy, food, timber, base metals, precious metals and chemicals. We're attracted to opportunities like Sanchez Energy Corp. (SN:NYSE)and Bellatrix Exploration Ltd. (BXE:TSX).

    Sanchez went public just a couple years ago. It had a decent-sized position in the Eagle Ford, which it has grown to over 125,000 acres-pretty sizeable for a small-cap. Sanchez was producing 600 barrels of oil equivalent per day (600 boe/d); now it's over 12,000 boe/d and should be around 15,000-17,000 by the end of the year. When it became public, its acreage was in the Eagle Ford, but not all the Eagle Ford acreage is the same. Sanchez was a little on the fringe, not considered as attractive as some plays. But the company has shown that it's very competitive and that the wells have performed better than expected.

    You've got a high growth opportunity here with a relatively large acreage base for which the market's only paying about 3.5 times cash flow.

    "We like growth, but if profitable growth is harder to find, we'd rather see that cash returned to shareholders."

    Bellatrix Exploration is a Canadian company with just under $1B in market cap. The stock has done very well this year, but it continues to trade at a discounted valuation versus its peers, given its level of growth. It's trading at 3.5 times cash flow. Cash flow is probably going to grow 60%-plus next year. I've been impressed with the economics of the wells. Relative to its peers, the company should be one of the faster growers over the next couple of years as far as cash flow per share. Yet its recycle ratios, which are a measure of capital efficiency, are some of the highest of the peer group. To combine high growth with high capital efficiency usually drives returns higher and creates value for shareholders. Bellatrix has done a good job of that in 2013, and I think that should continue through 2014.

    TER: For the Global Resources Fund, you rate the potential risk/reward squarely in the middle of the range. Do the energy stocks push that rating up or down compared to the other stocks in the fund?

    ES: For energy, we're more constructive on the growth opportunities. We're probably a little more constructive on oil prices than some other commodity prices. We'll see quite a few opportunities where the value creation by management teams should be achievable over the next several years in an $80-100/barrel ($80-100/bbl) crude price environment.

    It's a little more challenging on the mining side. Commodity prices have been a little weaker. You're seeing a needed pullback in the capital that's being spent on mine expansions. But there are some interesting opportunities in the mining space, some really cheap stocks that investors have walked away from and left for dead. I don't think it would take too much to change the sentiment in that space and revive some of those cheap stocks.

    TER: Diamondback Energy Inc. (FANG:NASDAQ) and Pioneer Natural Resources Co. (PXD:NYSE)have both enjoyed very strong years. Diamondback's share price has gone up triple from what it was a year ago. Pioneer has risen 85%. Should we expect that growth to continue?

    ES: It's hard to predict what the share prices are going to do for those stocks over the next year, especially considering how well they've already done. I think the key driver that unites both of those stocks has been the Permian Basin and successful tests of horizontal wells there. The unconventional resource is enormous. This year seemed to mark the official entrance of the Permian Basin into the shale space.

    I think 2014 will continue to be a big year for delineation. As you mentioned, the stock prices have reflected a lot of potential value creation in a relatively short amount of time. In some cases the resource will have to catch up with the stock prices, but in the case of Pioneer Natural Resources, the stock's trading at around $180/share after touching $220 just a few weeks ago. It's had a nice healthy pullback, but if our assumptions are correct, the estimated net asset value could be $350/share or $400/share for Pioneer Natural Resources. Theoretically, there's a double still in the stock. When will that be realized? It's hard to say. What would take it take for it to happen? It could happen any time. We remain constructive on Pioneer. That's been a holding for us for some time. Despite some sizeable gains, I think there's a good opportunity for the shares.

    The supermajors have largely missed the North American shale boom, and they've made ill-timed acquisitions in the past. The Permian seems to be getting better. Pioneer Natural Resources released some really amazing results recently from its wells in the middle of the basin. Some wells measured over 3,600 bbl/d in initial production, a record for the basin. This would be a likely target for a major or national oil company.

    TER: The price for West Texas Intermediate has been retreating for the last several months. Does that threaten the continued growth of the shale oil producers?

    ES: If there's a meaningful decline, I think you would see a reduction in capex spending. Most of these plays show favorable economics down to $60 or $50/bbl, even less than that in some cases. You just might have a pause by some players in the industry at under $80/bbl, but it would take a decline closer to $65 or $60/bbl to see any real, sustained declines in drilling budgets.

    TER: What's your parting recommendation for energy investors in oil and gas today?

    ES: We've had a good year; 2012 was kind of a tough year for energy investors, flattish at best. 2013 made up for that. Generally the oil price helped, but it was really growth in North American shales that buoyed the market. That's a trend that's going to continue. Especially as the manufacturing process becomes more widely implemented by more producers, you're going to see cash flows growing faster and companies self-funding, perhaps even with excess cash remaining.

    It's going to be important for investors to monitor what the management teams do with that cash. In an ideal environment, they will find places to deploy that capital for growth. If the rates of return don't appear to be that attractive, then they would return cash through dividends and stock buybacks. We're fans of dividends and stock buybacks in general. We like growth, but if profitable growth is hard to find, then we'd rather see that cash returned to shareholders.

    TER: Evan, thank you very much. This has been a very interesting talk.

    Evan Smith joined U.S. Global Investors in 2004 as co-portfolio manager of the Global Resources Fund (PSPFX). Previously, he was a trader with Koch Capital Markets in Houston, where he executed quantitative long-short equities strategies. He was also an equities research analyst with Sanders Morris Harris in Houston, where he followed energy companies in the oil and gas, coal mining and pipeline sectors. In addition, Smith was with the Valuation Services Group of Arthur Andersen LLP. Smith holds a Bachelor of Science in mechanical engineering from the University of Texas in Austin.

    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 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 owns shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Evan Smith: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Global Resources Fund holdings include Continental Resources, Sanchez Energy, Bellatrix Exploration, Diamondback Energy and Pioneer Natural Resources. 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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  • Why Uranium And Coal Rank High For Energy Return On Energy Invested: Thomas Drolet

    Source: Tom Armistead of The Mining Report (12/3/13)

    http://www.theenergyreport.com/pub/na/why-uranium-and-coal-rank-high-for-energy-return-on-energy-invested-thomas-drolet

    Not all energy options are equally good, says Thomas Drolet, principal of Drolet & Associates Energy Services Inc. Using an "Energy Return on Energy Invested (EROEI)" calculation to decide which energy sources yield the most for the least energy investment, Drolet sees hydroelectricity, natural gas, uranium and coal at the top of the list. Drolet adds that the need for reliable power will keep baseload power fueled by uranium and coal at the center of the world's electricity systems for many years, but he tips The Mining Report to some technologies looking for investment that can help make coal a more environment-friendly fuel.

    The Mining Report: Tom, thanks for joining us today. I'd like to start out with the concept of an "Energy Return on Energy Invested cliff," which is being debated widely these days." What is it and what does it mean for the future of mining energy resources?

    Thomas Drolet: When you invest money in a new energy system, say, hydroelectric, you may spend $2 billion building a hydroelectric dam, but the device works for hundreds of years. Energy planners and thinkers have created a ratio, an index of the energy return divided by the energy invested in putting that energy system in place. For a hydroelectric plant, the water (the fuel, if you will) is basically free and it flows for literally centuries, yielding a very high ratio. Let's call it 100 for now. But in generating coal-fired power, there are losses at the station, in the transmission from the coal plant, the distribution transformers and finally, when you use it in your light bulb at home, where there are further losses by heat radiation. All those losses yield a ratio number of somewhere in the area of 20 to 30. At the bottom of the scale is corn-based ethanol, perhaps the worst example that we have today. It takes a lot of energy to grow corn-tractor fuel, fertilizer, shipping of the corn to the ethanol production distilleries and distribution of that ethanol in tanker trucks. Then there's the loss of energy in the engines in our normal cars and trucks. That ratio may be down below 6.

    (click to enlarge)
    Source: Thomas Drolet

    The more we use of these soft energy forms that don't return as much energy for the energy invested in the facility, the weaker the energy returns to overall society will be. My fervent plea is for society to continue to look at a wide portfolio of energy fuels and energy-generating techniques that keep from going too far over that cliff edge toward the low return end. We need the hydroelectrics. We need the nuclear power that is up in the 20-30 range. We need the natural gas in the 20-25 range. Yes, we should add the solars and the winds, which are in the 10-20 index range. But, let's not go too far down. We're sitting today somewhere around 15-20 as an average ratio return for the energy invested, and society's working at that level. Let's not go down below 6. Societal regression and recession inevitably follow once you go over that cliff edge.

    TMR: How do you weight coal versus uranium?

    TD: Some people say there's a war on coal in the U.S. and to some degree in Canada and much of our world. Overall, 40% of the world's electricity is generated by coal. If that war were to start to shut down that 40% of our electricity capacity in a fast-paced, "blitzkrieg-like" fashion, the world would have trouble keeping the lights on, keeping our motors running, keeping our factories going, keeping our steel mills going. I believe coal is still a good investment because it's a necessary investment to keep our world growth rate positive. We can't have the world's power-generating sources, like coal, go down too suddenly, because we have nothing but natural gas to quickly fill the void. Like our own investment portfolios, we should never put all our eggs in one basket.

    Uranium and hydroelectricity are baseload power fuels, and these energy sources are the floor that electricity supply sits on. I believe in continuing to generate by both coal and uranium, in addition to a basket of many other fuel sources.

    I know that much of society and many of our political leaders have already decided that climate change is real and is totally caused by humankind. I believe that CO2 emissions have an effect, but climate change is not completely caused by humankind. There are several causes, and I believe that the real scientific underpinnings of climate change should remain a worldwide debate until we are sure of all causes and effects. We should not close down our coal stations as quickly as some would have us believe we should. There are so many improvements that can be made to the existing fleet.

    TMR: Germany and Japan seem to be cutting back on further development of their nuclear energy grids, and France, South Korea and China are moving ahead. What is the reason for the differential?

    TD: It's a case-by-case answer. In Japan, there's a tug of war between industry, the government and the general populace-the government and industry desperately want to bring back some or all of the nuclear power stations-and the general populace is pretty much dead set against it. That tug of war will, in my opinion, end up bringing back approximately half of those units over the next five years, but it will be a slow and agonizing process.

    In Germany, the political leadership just made a decision to shut down all 17 reactors; they've shut down 10 already, and the other seven will be shuttered over the next nine years. I've just returned from Germany. I've been talking to German business leaders and investors who don't share the belief that all those stations should be shut down. Germany is by far the leading nation in the world when it comes to renewables, but I see a fear that the grid in Germany is starting to see minor effects on frequency and voltage, which affect some of their major manufacturing businesses. I continue to wonder whether all those stations will actually be shut down in the event of a future change in the German government.

    The difference with other countries, like the U.K., France, China, India, the U.A.E. and Saudi Arabia, stems from a belief among the political leadership that there is a need for energy diversification. As the fight over coal and fracking comes and goes, some of these other nations are led by political leaders who are looking further ahead and are electing to stay with nuclear power, and in fact building on it.

    TMR: The European Union is pushing away from coal, but Poland is clinging to it. Is that going to have a meaningful effect on European energy markets?

    TD: Yes. Germany, the leading nation in the world in renewable power, is actually pushing back into coal out of necessity because of its decision on nuclear power. Poland has massive coalfields and is building new coal-fired stations. Other nations in Europe are continuing with coal. The Czech Republic, Slovakia, Romania and Bulgaria are all continuing with coal and building some new stations. It's a real mixed message out of greater Europe. They do not all speak with one central "EU voice" when it comes to real, on-the-ground decisions.

    TMR: Will that mean a bigger market for coal exports from North America?

    TD: Yes it will, but given that most of Canada's coal is in Alberta, B.C. and Saskatchewan, I think the preferential export markets for our coal will be in the Far East. While Japan debates its future nuclear restart schedule, it's importing liquefied natural gas (LNG) from the Middle East, Indonesia and Australia as fast as it can. It's also building new coal stations. Europe still has massive coal quantities in Ukraine and Poland, and much more of it in Eastern Europe, so I don't see exports of Canadian coal going to Europe.

    TMR: What do these trends mean for the business of uranium mining globally?

    TD: When you subtract the approximately 70 nuclear power reactors either shut down or in the process of being shut down, mostly in Japan and Europe, there are actually about 370 power-producing nuclear reactors in the world today, consuming approximately 160 million pounds/year (160 Mlb/year) of uranium as U3O8. Another 65 reactors are actually being built today in China, in Russia, the U.A.E., Turkey, Finland, the UK and India. Now add what they say they're planning behind that, and in 40 years there will be another approximately 370 reactors operating worldwide, the same number of reactors as is operating today.

    Where is that other 160 Mlb of U3O8 going to come from over the next 40 years? It has to come substantially from new mines in the Athabasca Basin in Canada, from Australia, from parts of Africa and from Utah, Colorado, Nevada and Wyoming in the U.S. It's going to come from Mongolia and it's going to come from other mines here and there in the Far East and in Slovakia.

    Uranium prices right now are definitely in a bottoming process, but as a result, the uranium mining industry has a chance to get its act together and invest in new exploration and production (E&P). We've got time on our side because these new uranium mines, especially in Athabasca, are long-lead items. They're 10 years from concept and exploration through to production. The in-situ recovery (ISR) projects don't take as long to get going, so they have a real advantage in filling any early voids in supply that may arise. However, they're working on much lower concentrations. Overall, I see a very good future for uranium, but we've got to use the time to get our act together.

    TMR: What are some of the technological advances in nuclear energy that will address the future need?

    TD: Standard nuclear reactors being built today are gigantic units. Over the next decade, in my opinion, we're going to see a shift to smaller units-small modular reactors (SMR)-for good and valid reasons of schedule and because the utilities want them as supply sources that fit their load growth profile better. A few examples are Babcock & Wilcox Co. (BWC:NYSE) and NuScale Power LLC (private) in the United States, which are being funded or potentially funded by the U.S. Department of Energy to bring on these smaller reactors in the early 2020s.

    (click to enlarge)
    Source: Thomas Drolet

    TMR: What about the advanced light water reactors, the third- and fourth-generation reactors? Are they going to be an equally important factor or are the SMRs going to crowd them out?

    TD: The newer large reactors are better in so many respects than the earlier generation reactors that we have in the world's nuclear fleet today. What with thermal siphoning capability, better fuel storage techniques, better cooling backup systems and passive safety features, they are a quantum step forward in safety and reliability. However, as I said before, I think they will be very gradually superseded by the SMRs over the next several decades. Some think that someday the ultimate nuclear reactor system is going to be based on a molten salt reactor (MSR) concept. MSRs are proliferation resistant, have much higher cycle efficiency and can produce copious quantities of heat for various industrial uses. It's absolutely safe and lets you just dump the mixed coolant and dissolved fuel, in the event of any emergency. It can be built in small, medium or large sizes, but is better made into the small or medium sizes. China, France, India, Norway, Russia and even one company in Canada are working on the very early stages of development for various MSR configurations.

    TMR: What will the U.K. reactor agreement do to the U.K.'s energy future, and does it contain features like a price multiplier?

    TD: The U.K. thought through a long-term energy plan a couple years ago. The North Sea gas and oil that the country was relying on was starting to diminish, and the U.K. had to consider other options. It looked around at the 19 nuclear plants it already has in use, and considered whether it should continue with nuclear power. For a variety of reasons, it decided it had to go back to some level of nuclear power. I think it was a good decision. It appears, on the surface, to be a very expensive decision in terms of the rate that has been guaranteed by the providers. The French and the Chinese are going to fund most of the investment for the first couple units. But, the rate guarantee spans the lifetime of the reactors. Think what average electricity rates may be in place for other systems in 20 years!

    TMR: What about the Canadian agreement not to require European uranium firms to partner with Canadian companies? Is that going to affect the uranium prices?

    TD: Yes. I'm glad it happened. I think we're going to have more investment in Canada, more mines being developed, especially in the Athabasca area. That investment will inevitably lead to quicker production from Athabasca and other Canadian uranium sources that are dotted across the country. I think it will eventually lead to lower prices and more Canadian uranium on the world markets. It's a long-overdue step.

    (click to enlarge)
    Source: Thomas Drolet

    TMR: What companies do you like in the uranium industry?

    TD: In Canada, we've got a series of majors working here. We've got, of course, Cameco Corp. (CCO:TSX; CCJ:NYSE) and Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT)-good, well managed companies. We've got Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), which has come into the Athabasca Basin through the acquisition of Hathor Exploration Ltd. Finally, among the majors we have AREVA SA (AREVA:EPA). I would assume these companies will all continue to expand their positions there as investors and eventual producers and operators of new Canadian mines.

    In the junior category, we have a whole slew of new juniors up in the Athabasca Basin. I'm on the advisory boards of a few of these, but I'd like to highlight one of them. Lakeland Resources Inc. (LK:TSX.V) is a very well managed company backed by solid investor groups. The company has what looks like a series of very good properties up on the north rim of the basin that have been explored before. Lakeland may have a very good resource to operate. Of note is Skyharbour Resources Ltd. (SYH:TSX.V)-part of a Syndicate called the Western Athabasca Syndicate with properties in the Patterson Lake South area.

    I do like a Canadian company that's operating outside of Canada, U3O8 Corp. (UWE:TSX; UWEFF:OTCQX). U3O8 Corp. offers a very interesting proposition with potential near-term production from Argentina, backed up by a flagship project in Colombia. The Argentine project would involve the mining of uranium from soft gravels within a couple feet of surface in a supportive jurisdiction that is currently 100% dependent on imported fuel for its growing fleet of nuclear reactors. In addition, U3O8 is negotiating a definitive joint venture-type agreement over exploration concessions owned by the provincial government, on which U3O8 believes there is additional resource potential. This agreement would see U3O8 and the provincial government as equity partners. Development of the Argentine deposit would set the stage to advance the flagship project in Colombia, for which the preliminary economic assessment shows a zero cash cost for uranium, thanks to byproduct revenues.

    In the States I do like companies that have been bought up now, like Strathmore. Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) looks like a pretty good company. Fairly high debt, but it's now producing. It seems to have its debt issue taken care of better than it was a while ago.

    TMR: Is the market stability of Lakeland Resources an issue for you?

    TD: It's down on the bottom these days. But surely the Lakelands of this world will come up as they make real progress. I believe value will be driven, as always, by real results.

    TMR: Zimtu Capital Corp. (ZC:TSX.V) has a stake in Lakeland.

    TD: Zimtu has an interesting business model in that it has a collection of companies that it has taken various positions in and nurtured, when required, with good people and marketing savvy. Zimtu scours various countries for investments and nurtures a stable of companies. I think the Zimtus of this world are a good thing for juniors to have backing them at early stages.

    TMR: What is the role of the Western Athabasca Syndicate you mentioned above, and what's the role of the companies within it?

    TD: Collectivism is a good thing, driven by necessity in the markets of today. I do know syndicate member Skyharbour Resources reasonably well, and that's a good way to survive in tough times. Not only does the Western Athabasca Syndicate bring different sources of treasury money together so you get more bang for your buck, but in this case, it also brings together different sources of expertise. One syndicate member has particularly good expertise in landholdings and ability to get land. Another is a good investment grabber. The other two are good drillers and explorers. I think each member brings something to the table that makes for a very strong, four-legged table. I like the idea.

    TMR: Are there any other uranium companies you'd like to talk about?

    TD: There's one private company I'll mention. Ualta Energy Ltd. is the best example I can think of in innovation in the uranium mining business today. It's not publicly listed, but is looking for investment now. It has uranium deposits in southern Alberta in two gigantic swaths, 40 kilometers long, several meters thick, just below Lethbridge north of the U.S. border. The uranium is associated with shells from the former inland sea that used to cover Saskatchewan and Alberta.

    Ualta has potentially discovered a source of hundreds of millions of pounds of uranium in these bone fragments through looking at old oil and gas cores that were drilled by earlier resource explorers. Ualta is drilling vertically, turning the bit and drilling horizontally, and then using ISR solutions to dissolve the uranium from the long strike lengths containing uranium-bearing bone fragments. ISR together with horizontal drilling is a very innovative combination of known technologies that can be brought together in a unique deposit like this. I think one of these days we'll see Ualta coming up the pipe as a very viable new uranium entity in Canada.

    TMR: I'd like to go back to coal for just a minute. You touched briefly on the EPA rulings. What about the new technology for combusting coal and restricting the emissions? Is there hope in the new technology for coal?

    TD: Yes, and there's a new company out there that is just getting going with its first project in Indonesia. It's called MicroCoal Technologies Inc. (MTI:CNSX). The company has developed a method that partially dries coal using microwave energy in a vertical tube. You take the coal off the coal pile, which has a variable amount of moisture in it, and filter the coal through a tube that is surrounded by microwave antenna heads that remove some of the moisture from the coal.

    That actually does three things for you: First, it means that the thermal-unit value of the coal that's actually blown into the boiler for combustion is greater because you've removed some of the water, which would take up some of the energy in the boiler if it were still there to combust. Basically, it's pretreating the coal to be a more efficient source of energy. Second, studies have shown that some of the sulfur and mercury is precipitated out in that process. Finally, the coal ash is less sticky, and adheres less to the baghouses that are the final particulate-removal step for the combusted gases coming out of the coal-fired stations. It's therefore easier to clean the surfaces of the baghouse.

    (click to enlarge)
    Source: MicroCoal Inc.

    MicroCoal Technologies has its first project underway in Indonesia. Once that is up and running, I see a very good future for that technology at coal-fired stations everywhere that have a reasonable amount of moisture in the coal. MicroCoal's technology has other potential applications with other utilities in Indonesia, once this small prototype is up and running. I think the company will likely get going on some projects in North America, both Canada and the States, I hope in the near future. It's also working on projects in Poland.

    (click to enlarge)
    Source: MicroCoal Inc.

    TMR: You cover Coalspur Mines Ltd. (CPT:TSX; CPL:ASX), which has a large property in northern Alberta. Its share price dropped dramatically about a year and a half ago. Is there a good reason to buy it today?

    TD: I like the company. Coalspur is a well managed company with a great property at Vista. Its market for thermal coal is the Far East. Japan, China and South Korea are begging for more supply. Coalspur is undergoing an ongoing series of hearings and will likely see a spike in December as it pursues mine permits. I have no doubt Coalspur will succeed. The company has a great technical team that will be augmented by a strong engineering, procurement and construction partner. The difficulties right now involve the down condition of the whole market, the need to bring in the financing and the large number of shares outstanding. I believe Coalspur will work through all the issues with the good people it has. The key is access to financing in a tough market.

    TMR: Tapping into deep geo-pressurized reservoirs of hot natural gas-saturated brine that underlies many abandoned oil and gas wells may be a significant new energy source that could result in future baseload electricity production. What firms of interest are involved in this type of venture?

    TD: Two or three companies in the United States are looking actively at this particular source of abandoned energy, and I am president and CEO of another, a private company in Canada called Greenwell Renewable Power Corp. (GRPC). There are about three million abandoned oil and gas wells in Canada and the States. About 3% are underlain at depth-12,000-14,000 feet-by gigantic fields of brine. These brines contain dissolved natural gas, and the brines are hot because of the depth-300 degrees Fahrenheit, 180 degrees Celsius.

    As oil and gas companies sealed up their wells because they had no more production, a few companies, ours included, started to look at how they could tap into that abandoned, ready-to-use energy source. We found we can take this source of energy, the natural gas and the hot brine, and create electricity using the potential energy in the flowing brine and piping it up to the surface plant. About 20,000 barrels/day (20 Mbbl/d) of brine, at 300 degrees F, containing 75 standard cubic feet of natural gas/barrel of brine can be put through a series of three machines. The first machine is called a kinetic energy engine, which captures the kinetic energy in the flowing steam and produces electricity. It's our GRPC proprietary new technology. Then we can capture the heat in the brine through a conventional Organic Rankine Cycle engine (ORC), a decades-old technology, and that also produces electricity. Finally, we can then reduce the pressure in this flowing brine stream that's had the temperature taken way down, capture the dissolved natural gas and then burn it in a standard reciprocating or rotary engine to produce electricity.

    We're working on a project in the south central part of the U.S. that will produce 6-plus MW of electricity out of 20 Mbbl/d of flowing brine. I'm truly excited about the potential because the overall business enterprise is ultimately just putting together a series of small independent power plants dotted all over in these areas of abandoned oil and gas wells. Here we thought we were finished with those abandoned wells! No, we sure aren't finished. There's more energy to come.

    We're still doing our final homework. We do have a private placement out to complete the work, but we're hopeful to have it packaged up and ready to go by the end of this year on our first project. It only takes about nine months to construct the surface power plant and prepare the abandoned wells. Once we get stable performance out of our first project, roughly by the end of next year, we can start our second project, and move on to other projects.

    TMR: How would you advise investors in the mining stocks that you deal with? Should they go all out for uranium or for coal or for some other resource?

    TD: Easy to say, but do a little bit of a lot of things that make sense, assuming growth in the world will ramp up again. Don't concentrate all your dollars in one area. Spread it around into areas that you believe your due diligence shows have a good shot looking forward, because we are at a bottom in so many of these resource materials.

    I believe coal has a future. I think some of the coal technologies-I've just mentioned one-is a particularly good place to look. I think that coal mining companies that operate in the Powder River Basin and the western part of Canada have the best shot. I think copper, tin and zinc will inevitably come back.

    On the precious metals side, I will say that as the central banks of the world continue to print money, I have convinced myself that gold and silver and platinum/palladium have a real place in our future. Quantitative easing, as practiced by some many of the major Central Banks, is inevitable. If anything, we're in a bit of a deflationary situation at the moment, but if the world is to survive, then we're going to have to somehow inflate and grow out of this, probably by both growth and inflation. Therefore, the precious metals do have a place in your portfolio.

    TMR: Thanks. You've given us a terrific amount to think about. I appreciate your time.

    Thomas Drolet is the principal of Drolet & Associates Energy Services Inc. He has had a 43-year career in many phases of energy-nuclear fission and fusion, coal, natural gas, geothermal and distributed generation, with the attendant necessary expertise in commercial aspects, research and development, engineering, operations and consulting. He earned a bachelor's degree in chemical engineering from Royal Military College of Canada, a Master of Science in nuclear technology/chemical engineering and a DIC from Imperial College, University of London, England. He spent 26 years with North America's largest nuclear utility, Ontario Hydro, in various nuclear engineering, research and operations functions.

    Want to read more Mining 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 The Mining Report.

    DISCLOSURE:
    1) Tom Armistead conducted this interview for The Mining Report and provides services to The Mining Report as an independent contractor. He 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 The Mining Report: Coalspur Mines Ltd., Skyharbour Resources Ltd. and Zimtu Capital Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Thomas Drolet: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) 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 Mining 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.

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    Dec 03 5:09 PM | Link | Comment!
  • Xavier Grunauer: Small Oil And Gas Companies Are Rising Stars In Latin America
    Source: Peter Byrne of The Energy Report (11/26/13)

    http://www.theenergyreport.com/pub/na/xavier-grunauer-small-oil-and-gas-companies-are-rising-stars-in-latin-america

    Xavier GrunauerIndependent oil and gas companies with technical skills, local know-how and bottom-up knowledge are playing a larger role in Latin American oil and gas, according to Xavier Grunauer, analyst with Edison Investment Research. Rather than looking to national oil companies and global oil majors, the "fallen stars" operating in the region, Grunauer tells The Energy Report that investors would be wise to get up to speed now on some of the smaller independent oil and gas companies that are poised to unlock value in Colombia, Argentina and Brazil.

    The Energy Report: Xavier, Edison Investment Research recently published an investment report titled, "Fallen Angels, Rising Stars: Old Latin American Basin Creating Fresh Opportunities," in response to demand from investors for a better understanding of the Latin American oil and gas space. Can you get our readers up to speed on what's happening in Latin America?

    Xavier Grunauer: We realized that over the last five years, global investors have mostly associated the Latin American oil and gas space with Colombia and Brazil. They think of Petrobras (PBR:NYSE; PETR3:BOVESPA) and gigantic oil fields that have attracted global oil companies to Brazil's offshore basins.

    When we took a fresh look at investment opportunities in the region, we found smaller, independent oil and gas companies that have outperformed Petrobras, Ecopetrol S.A. (EC:NYSE; ECP:TSX) and OGX Petróleo e Gás Participações S.A. (OGXP3:BZ). Most of these smaller companies are traded on Toronto, New York and U.K. exchanges, and are bringing North American oil and gas experience and technology not only to Colombia, but also to Argentina, Peru, Brazil and Chile. This technology transfer has been successfully implemented in Colombia, and we think that success could be repeated in Argentina, Chile, Peru, Trinidad, Paraguay and onshore Brazil.

    Our investment report outlines 18 independent oil and gas companies that operate in Latin America and are listed in New York, Toronto and the U.K., and breaks them down by risk level, current operations, opportunities and where we see them going forward.

    TER: Does the report focus solely on South America?

    XG: Also included in this report is Trinidad, which has a long history of oil and gas production. We find Trinidad has been encouraging smaller companies to come to its mature onshore basins that were previously drilled using older technology. Several independent oil companies are already operating in Trinidad using modern methods to increase production. Recently, Trinidad has announced a move to lower taxes, which is quite encouraging, given that taxation can be a significant hurdle in Trinidad.

    TER: How do you compare what's happening in South America with what has happened in North America? I'm thinking, for example, of the use of hydraulic fracturing (fracking).

    XG: We're all learning as we go, but it is worth noting that the more successful companies in the North American shale boom have been smaller companies with technical knowledge and local know-how, first-movers who picked off the choicest acreage. We expect similar outcomes in Latin America.

    TER: Is the political risk worth the reward in Latin America?

    XG: I think so. Risk is always part of the equation when it comes to oil and gas production, regardless of where operations are based, and it can come in unexpected forms, such as environmental issues, the shutdown of fracking activities or a proposed key infrastructure asset not getting government approval. But there are also big rewards. The risks we see in Latin America as a whole are not new. Companies will continue to prosper in this part of the world. Those who choose to participate will reap bigger rewards than those that never participated at all.

    TER: Argentina nationalized some oil and gas a couple years ago. Should investors be weary of wading back into those waters?

    XG: Argentina devalued its currency in 2002 and has been involved in legal battles with investors since then. The point here echoes what I said earlier: Smaller independent oil companies do not attempt to have a monopoly hold on a national asset. Instead, we see independent oil companies operating in Argentina, companies that are keen on technology transfer and the development of conventional and unconventional assets-while realizing fair market value for their oil and gas production. We remain of the opinion that over the next two years, as President Cristina Fernández de Kirchner enters her last term, there will be change in Argentina.

    TER: In mid-October, the U.S. was producing 7.9 million barrels of oil per day (7.9 MMbbl/d)-the most since 1989. Record-high crude oil supplies and weak U.S. economic data point toward even lower oil prices. Do oil and gas prices influence your investment thesis for Latin American oil and gas equities?

    XG: First off, I would point out that Edison doesn't publish buy, hold, sell recommendations. We find net asset value (NAV), which we realize making use of discounted cash flow models. We use an $80/bbl oil price, which we think is quite neutral, if not conservative. This removes the overlay of a top-down call on oil, and allows us look at the rocks, drilling programs and the proposed sequence of events, which then leads us to our published NAVs.

    TER: You make a distinction between bottom-up and top-down knowledge. Can you tell our readers more about that concept?

    XG: Largely over the last 10-15 years, equity investments in Latin America have been top-down driven. By that I mean choosing an investment was largely influenced by local economies and top-down metrics. What investors need to look for now is more bottom-up metrics: Who operates in these basins? What is management's experience? Who are their partners? What have their results been to date? Where does the experience come from? I am of the opinion that all 18 companies highlighted in our report are worth taking a look at.

    TER: Tell us about some of the companies in your report that have compelling stories.

    XG: The main story thus far has taken place in Colombia. The Pacific Rubiales Energy Corp. (PRE:TSX; PREC:BVC) merger with Petrominerales Ltd. (PMG:TSX) could be a sign of more consolidation to come. The big story though, and what most people are looking to medium term, is the southern cone, and in particular the unconventional oil and gas potential of Argentina. I would point to three companies in our report: Madalena Energy Inc. (MVN:TSX.V), Americas Petrogas Inc. (BOE:TSX.V) and Crown Point Ventures Ltd. (CWV:TSX.V).

    American Petrogas recently hired a large investment bank to look at its operations with an eye toward joint ventures or merger and acquisition. Americas Petrogas' story has risks, and a lot of potential, should it be able to monetize its below-ground potential.

    Madalena Energy is in a similar situation in Argentina, and has an added advantage of producing assets in Alberta. The Alberta assets can help support the company's day-to-day cash flow and operations while Madalena continues to develop its large asset base in the southern cone.

    TER: Crown Point also has some assets in the Neuquén Basin and Tierra del Fuego. Where is the company-maker asset in that mix?

    XG: Crown Point's production is currently focused on low-risk conventional oil and gas in Tierra del Fuego. The company is looking to increase netbacks and drill more conventional wells in 2014, and in the process will get a "free look" at the unconventional potential.

    TER: Do you have other stories you'd like to discuss?

    XG: Edison covers President Energy Plc (PPC:LSE), which operates in Paraguay. Some of the same basins that run in Argentina stretch into Paraguay. President Energy has recently signed a contract with Schlumberger Ltd. (SLB:NYSE) to drill exploration wells. The International Monetary Fund is also quite interested in these developments and is helping companies like President grow a sustainable business in Paraguay.

    TER: You mentioned the opportunity for investors to position themselves in select equities now, in anticipation of a potential breakout. How far off is that?

    XG: It's always difficult to time these events. You have to be realistic about catalysts.

    The North American shale gas boom wasn't built overnight. In Latin America, especially in Argentina, there are political uncertainties, at least until the outcome of presidential elections are known in 2015. But if you wait until 2015 to invest, it will be a little late.

    TER: Can you leave us with one more thought about investing in the explorer and producer space in Latin America?

    XG: Independent oil companies are expected to continue playing a larger role in Latin America's next wave of oil and gas production. The days of bringing financing to the table as your main contribution are behind us in Latin America. Increasingly, we will see national oil companies reaching out to smaller companies for joint ventures, technical expertise and know-how. Knowing more about these independent oil companies is a must, and could prove quite profitable for investors.

    TER: Xavier, thank you for your time and insights.

    Xavier Grunauer has more than 15 years of experience as an oil and gas analyst. He has spent the last six years working for Nomura, and prior to this worked for Dresdner Kleinwort Benson and ING Barings. His oil and gas coverage has focused on emerging markets and has included companies operating in Latin America, Eastern Europe, South Africa, China and Australia. Grunauer is a chartered financial analyst and has an engineering degree from the University of Toronto.

    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 Interviews page.

    DISCLOSURE:
    1) Peter Byrne 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: Madalena Energy Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Xavier Grunauer: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: President Energy Plc. 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

    Nov 29 5:00 PM | Link | Comment!
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