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  • Bill Newman: Get Over Your Fear And Go For Black Gold In Argentina

    It's been a long time since the Repsol fiasco in Argentina, and the oil-rich nation has been making steady efforts to encourage foreign investment in its energy sector. Bill Newman, vice president of international oil and gas with Mackie Research Capital, insists investors should focus less on political risk and more on the world-class Vaca Muerta shale play. In this interview with The Energy Report, Newman names oil and gas majors and junior explorers making progress, and recommends a few names that are taking advantage of Argentina's production incentives.

    The Energy Report: Let's talk about the macro-economic picture for Argentina in terms of energy. What is the story there with the country's growing deficit, the devaluation of the peso and the reliance on energy imports?

    Bill Newman: Production of both oil and natural gas in Argentina has been declining for years. At the same time, demand has been increasing. This is accelerating Argentina's energy deficit. The Argentina government understands that in order to slow production declines and eventually return to energy self sufficiency, a substantial increase in investment will be required, and a large portion of that capital will have to come from foreign investment. The bottom line is that the government knows it needs to attract capital, and that could translate into modest improvements to the energy sector in order to promote that investment.

    In January 2014, we saw a rapid devaluation of the peso. The peso has subsequently stabilized but there is still some risk of further devaluation. Oil and gas is priced in U.S. dollars, which somewhat mitigates the impact of the falling peso. Producers could have lower operational costs in the short term, as most expenses are paid in pesos. Inflation remains a problem in Argentina, and the government is actively taking measures to prevent social unrest by negotiating with unions for higher wages to compensate for the weaker peso. But the government understands that increased foreign investment is one tool that could help to resolve the issue.

    TER: Is Argentina increasingly attractive to foreign investors?

    BN: It's no surprise that the expropriation of Repsol's 51% holding in Yacimientos Petrolíferos Fiscales (NYSE:YPF) in April 2012 jolted investor confidence. But ever since then, the government has been trying to repair the damage by introducing new incentives to promote investment by energy companies. Argentina has also been working toward improving its reputation on the international stage through negotiations with the debt holdouts, and successfully negotiated a compensation settlement with Repsol (OTCQX:REPYY) for the expropriated shares. This really is a complete turnaround from the direction the government was taking in early 2012. We think these efforts have reduced the perceived investment risk of Argentina, and that is starting to be reflected by increased investment. If Argentina holds the course, investors should start to focus less on political risk and focus more on the world-class Vaca Muerta shale play.

    TER: What is the significance of the YPF $5 billion [$5B] settlement with Repsol?

    BN: A large portion of the land that is prospective in the Neuquén Basin of the Vaca Muerta is held by YPF, so major oil companies looking for a meaningful position in the play might have to complete a deal with YPF. Before the settlement, most companies that were hoping to joint venture with YPF put their plans on hold. The $5B settlement is a signal to the market that the government is serious about repairing its reputation on the world stage, and the move should open the door for new joint ventures in 2014. With the improving outlook, many companies have announced expanded plans for Argentina.

    TER: What is the story behind the $1.6B joint venture Chevron Corp. (NYSE:CVX) recently announced with YPF?

    BN: The $1.6B investment is the second stage of the joint venture between Chevron and YPF to develop the Vaca Muerta shale play on the Loma Campana block. The first phase, which was a $1.24B investment, was completed early this year, and production from the Vaca Muerta shale is now about 20,000 barrels per day [20,000 bbl/d]. The second investment includes 170 wells, and longer-term plans could include up to 1,500 wells and an increase in production up to 50,000 bbl/d and 100 million cubic feet per day [100 MMcf/d] of natural gas. We see the second Chevron/YPF investment as another vote of confidence for the Vaca Muerta shale play in Argentina.

    TER: Who is drilling in the Vaca Muerta play, and with what kind of success?

    BN: According to the U.S. Energy Information Administration, Argentina has the fourth-largest technically recoverable shale oil resource and the fourth-largest technically recoverable shale gas resource in the world, most of which is located in the Neuquén Basin. The EIA estimates that the Neuquén Basin alone holds a recoverable resource of 16 billion barrels and 308 trillion cubic feet of natural gas, so that's a massive prize. The supermajors currently appraising the shale include Chevron, Exxon Mobil Corp. (NYSE:XOM), Total S.A. (NYSE:TOT) and BP Plc (NYSE:BP) also has holds a significant interest. The three Canadian based junior oil and gas exploration companies that we cover with operations in Argentina is Americas Petrogas Inc. (OTCPK:APEOF).

    Americas Petrogas holds a very large land base in the Neuquén Basin, which the company acquired many years before the shale play took off. There has been a lot of activity by the supermajors on blocks directly offsetting its Los Toldos blocks. Chevron also plans to drill four wells targeting the Vaca Muerta shale on the El Trapial block. A lot of money is being spent on lands very near to America Petrogas' lands, which could help derisk the play. In September of last year, Americas Petrogas announced a formal strategic review process to attract new joint venture partners or buyers, and we think the $5B settlement to Repsol and the increase exploration activity can only help with the process.

    TER: Are there any other energy firms that you have your eye on in Argentina?

    BN: I've been watching a company call Apco Oil & Gas International Inc. (NASDAQ:APAGF), which is 69% owned by WPX Energy Inc. (NYSE:WPX). Apco really has a large land position in the oil window of the Vaca Muerta shale play.

    TER: Bill, thank you for joining us today with this overview.

    BN: My pleasure.

    Bill Newman is vice president of international oil and gas with Mackie Research Capital Corp. He has been an energy analyst for 16 years. Bill holds a Bachelor of Commerce from the University of Calgary and has a CFA designation.

    This interview was conducted by Peter Byrne of The Energy Report and can be read in its entirety here. [5/8/14]

    http://www.theenergyreport.com/pub/na/bill-newman-get-over-your-fear-and-go-for-black-gold-in-argentina

    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) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Bill Newman: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Within the last three years, Mackie Research Capital has managed or co-managed an offering of securities for, and received compensation for investment banking and related services from Americas Petrogas Inc. I visited the Buenos Aires offices of Americas Petrogas Inc. on January 27, 2012. All expenses were paid for by Mackie Research Capital Corporation. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

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

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

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

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

    101 Second St., Suite 110
    Petaluma, CA 94952

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

    May 08 6:46 PM | Link | Comment!
  • How To Exploit The Coming Natural Gas Export Explosion: Frank Curzio

    There's more than one way to invest in energy, and you don't have to choose between majors and juniors. Frank Curzio, editor of the Small Stock Specialist newsletter, tells us exactly why every investor needs a diversified portfolio of juniors, large-cap oil and gas producers and natural gas services. In this interview with The Energy Report, Curzio talks of a shifting political climate and why it could mean a massive boom for U.S. natural gas exports. Don't let yourself be caught out in the cold when the natural gas market catches fire.

    The Energy Report: Frank, will the ongoing crisis in Ukraine keep oil prices above $100/barrel [$100/bbl]?

    Frank Curzio: Yes, I think so. Even without the short-term effects of geopolitical risk, the fundamentals should keep oil at an average price of $95/bbl over the next few years in the U.S. I don't see it trending too much higher, but I also don't see it dropping.

    The reserve replacement ratio for some large U.S. producers remains over 100%, which is good. International oil companies, like PetroChina Company Ltd. (NYSE:PTR) have replaced less than 80% of their oil reserves annually over the past three years. That is troublesome.

    Outside the U.S., it's very difficult to find oil that's economically priced. There's plenty of oil, but in a lot of places-Russia and several spots in the Middle East, in particular-explorers and producers are having trouble finding oil that can be developed for less than $90/bbl.

    However, demand is still strong. Some reports show people are driving less, but according to a report by IHS Automotive, a record 82 million [82M] automobiles were sold last year around the world. Airbus set a sales record last year, as well, demonstrating strong aviation demand. The emerging markets have been down, but I expect to see more stimulus packages targeted at producing short-term growth over the next few years from the BRIC nations [Brazil, Russia, India, China], particularly China.

    In the U.S., manufacturing is strong; gross domestic product is expected to hit 3%. Housing starts are solid in this low-interest rate environment, which will be around for years according to the Federal Reserve Bank. All of these are fundamental changes that will result in oil prices averaging $95/bbl over the long term.

    TER: You'll be speaking at the Stansberry Society Conference with T. Boone Pickens. He takes the position that the U.S. should look to clean energy and capitalize on low domestic natural gas prices by converting heavy truck fleets from diesel to natural gas. Can that be accomplished?

    FC: Yes, I'm siding with Boone Pickens; the process has already begun. Wal-Mart, UPS, Coca-Cola, Pepsi and Waste Management are all switching their engines from diesel to natural gas-compressed [CNG] or liquefied [LNG], so they're also building CNG and LNG fueling stations.

    Fuel costs are the biggest expense for transportation companies. Using natural gas instead of diesel amounts to huge savings for companies with large fleets.

    TER: What about cars? Can infrastructure be put in place so they can use natural gas?

    FC: Some pickup trucks are already being converted to use both natural gas and gasoline. I rode in one when I visited Westport Innovations Inc. (NASDAQ:WPRT), and the only difference I noticed was that the engine made no sound at all.

    Nearly every auto manufacturer produces cars that run on natural gas-they just don't do it in the U.S. because we don't have enough fueling stations yet. When that changes, natural gas cars will be huge. Clean Energy Fuels Corp. (NASDAQ:CLNE) is building CNG and LNG fueling stations, but infrastructure has to be in place before natural gas will become a mainstream fuel for cars. It could happen as soon as five years.

    TER: When natural gas prices were low, many coal-burning power plants switched to natural gas. When the price surpassed $6, some returned to burning coal. Will that dance continue or will more utilities switch to natural gas permanently?

    FC: I think we'll see a move to natural gas. There are price spikes and volatility in every commodity. Overall, you need to look at the average price of things, like $3.50/bbl for natural gas over the course of our 100 years' worth of supply.

    We have such a huge supply of natural gas that we have to burn it because we have no place to store it. Think about that for a minute. We have so much natural gas, we are burning it. This tells me the price of natural gas will remain cheap long term, thus making it a much better alternative to coal, both economically and environmentally.

    TER: The last time we talked, you had just returned from a tour of U.S. shale plays, and you were bullish on the amount of oil and natural gas coming out of the ground. Do the decline rates and transportation challenges worry you?

    FC: Declining rates are a concern, as is depletion, but not in the short term.

    I noticed this on my visits to the Permian and Eagle Ford. Depletion rates are high. But we still have so many locations to drill in these areas. For example, the Permian has so many layers; you can drill in the Wolfcamp, the Sprayberry and the Cline. Some experts say that oil production from the Cline could be three times bigger than the Eagle Ford. Four or five years from now, declining rates will be a big concern, but not in the short term.

    Transportation challenges are more immediate. Three trains carrying oil crashed in North Dakota, which is significant, considering that 70% of the crude developed in the Bakken is shipped by rail. We also saw trouble shipping from Texas to the northeast.

    Instead of worrying, I see it as an opportunity, especially for investors. We have to figure out why there have there been 6 incidents in the last 12 month and find a solution. This is an opportunity to improve our rail system.

    We also have an opportunity to improve the infrastructure by building more pipelines. This is a great opportunity for companies like Kinder Morgan Energy Partners L.P. (NYSE:KMP) and El Paso Pipeline Partners L.P. (NYSE:EPB). These companies have high multiples because they have high yields and we're in a low-interest-rate environment. However, both will benefit from the long-term pipeline infrastructure trend.

    TER: How can these pipelines be approved and built?

    FC: Pipeline systems need to be approved, but they won't because it's all about votes, not about what's good for the country. Of course, the process needs to be regulated, and we need to be concerned about the environment, but it seems people would rather save birds and plants than lower our poverty rate. We need to open up fracking in areas all over the country. We've drilled tens of thousands of wells, and we haven't seen too many earthquakes. If it's done right and regulated correctly, we're sitting on a massive opportunity. We just need to open this system up a bit so more small towns, and the entire country, can benefit.

    TER: In your Small Stock Specialist newsletter, you named getting governmental approval to build LNG export facilities as the biggest hurdle for energy companies selling U.S. natural gas overseas. When do you see that changing? How much money is on the table due to the gap between U.S. and European natural gas prices?

    FC: Here in North America, we can produce natural gas at a much cheaper price because we have so much of it and we have the best techniques, namely fracking and horizontal drilling. Natural gas prices are 200-400% higher in the rest of the world, so there's been a mad rush to build LNG export facilities so we can sell to Europe, Asia and elsewhere.

    Getting to that point is quite a process. First, you have to get through the U.S. Department of Energy [DOE], which has been dragging its feet because of politics. Only six LNG export facilities have been approved since 2011, but there are more than 24 in the pipeline.

    The Domestic Prosperity and Global Freedom Act was recently submitted to Congress as a means of bypassing the DOE's current regulations to make it easier to build and permit all the facilities that were in the pipeline at the time of the bill's submission. The situation in Russia and the Ukraine is changing legislators' minds-even Democrats. Russia supplies most of Europe with energy; every time Russia gets mad, it threatens to shut off the natural gas. If the U.S. could export our cheaper natural gas to Europe, it would cripple Russia. If enough Democrats get on board, you could see LNG export facilities built nearly as fast as a new McDonald's opening across the street.

    Of course, we still need regulation. Companies will have to go through certain processes, but in the long run, it could represent a massive infrastructure build valued at more than $200B. That's great news for companies like KBR Inc. (NYSE:KBR) , which earns 40% of its revenue building LNG facilities. Chicago Bridge & Iron Co. N.V.'s (NYSE:CBI) revenue will soar as well. If this bill gets passed, it will be fantastic in the short and long term.

    TER: KBR was beat up in the market recently, but it's still a really large stock, as is Chicago Bridge & Iron and McDermott International Inc. (NYSE:MDR). Do you buy these stocks on dips, or do you just buy and hold them?

    FC: It all depends on where the stocks are trading. Right now, I'd wait for a pullback on Chicago Bridge & Iron, but I would definitely buy KBR right away.

    McDermott, which builds offshore oil platforms, may be one of the most hated stocks in the sector. The stock dropped from well over $20 to around $7 and is trading at book value. There is almost no downside risk here, which I rarely say. The company has a decent balance sheet, so if it can get a few orders-any positive catalyst-it will shoot up more than 25% in the short term. McDermott is a low-risk, very high-reward play.

    TER: On the topic of shales, not all are the same: some are more advanced, some are oilier than others. In your opinion, where are the sweet spots?

    FC: It's very important for an investor to focus on companies in the sweet spots. You don't want to buy a company just because it has Eagle Ford or Bakken in its profile. The specific place that the company is drilling is important. In the Bakken, production could cost as much as $80-90/bbl or little as $60-$65/bbl, depending on where the company is drilling. The Eagle Ford comprises some 27 counties, but the sweet spots I note include Gonzales, McMullen and Lavaca counties.

    TER: What companies of interest are working in these sweet spots?

    FC: I like Swift Energy Co. (NYSE:SFY). It sold its non-core assets and put the money into drilling in McMullen and La Salle counties. The company didn't raise quite the money it wanted, so management lowered production rates. The company's stock took a hit, but it will still produce a ton of oil in Eagle Ford. It's a fantastic buy.

    In the Permian Basin in Texas, I like Laredo Petroleum (NYSE:LPI). It has more than 900 drilling locations. The company has already hit a few big wells.

    Penn Virginia Corp. (NYSE:PVA) is in the Eagle Ford and its stock is up a lot. The company will report earnings soon, but I might want to wait for a pullback before buying.

    The three biggest shale plays are Pioneer Natural Resources Co. (NYSE:PXD), Continental Resources Group Inc. (NYSE:CLR) and EOG Resources Inc. (NYSE:EOG).

    These three companies have market caps between $20-50B, which makes them takeout targets. They still have 15-20% production growth, so if you can buy a Pioneer, Continental Resources or EOG for $20-50B and get at least 20% production growth for the next 3-5 years, that seems like a pretty good deal to me. After all, the major oil companies are spending record amounts of cash-and are struggling to grow production.

    These three companies own hundreds of thousands-if not millions-of acres in these sweet spots and are set to grow production quickly, potentially four or five times faster than the average major oil company.

    TER: What about oil services companies? Is there still money to be made there?

    FC: Yes, but I would stick to the international plays that I've been recommending for a couple years :Schlumberger Ltd. (NYSE:SLB), Halliburton Co. (NYSE:HAL), Baker Hughes Inc. (NYSE:BHI) and Weatherford International Ltd. (NYSE:WFT).

    The Eagle Ford extends into Mexico, where PEMEX just signed a $1.9B deal with Schlumberger to start development. Additionally, rig counts in Saudi Arabia are near record highs. These four companies get 60% of their sales from overseas. The rest of the world is just starting to frack, and while there will be political hurdles to overcome, fracking will win out. When that happens, these four companies will benefit hugely.

    These companies not only grow three to four times faster than the average S&P 500 company, but their stocks are cheaper, too. They're still trading at 20-30% discount to the average S&P 500 company; 13 times earnings compared to 16 times for the average S&P 500 company. Even at their 52-week highs, they are cheap considering their valuations, and they are in the middle of a massive long-term growth trend.

    And don't forget Barclay's estimate that oil companies plan to spend more than $700B on capex this year. A lot of that will filter down to oil service companies, but the four I mentioned are the best.

    TER: In a risk-averse environment, are larger oil companies still willing to invest in difficult megaprojects-to spend $5B+ for offshore work or in far reaches of the Arctic?

    FC: They have no choice. The only way they can produce more is by spending more. In 2000, oil companies took on seven megaprojects [defined as projects that cost $5B or more]. In 2012, the oil companies took on 37. That upward trend is another good sign for the infrastructure plays.

    Take the Gorgon gas project in Western Australia, for example. It was expected to cost $30B, but it's up to $52B, and it isn't even done yet. However, that cost isn't shouldered just by Chevron Corp. (NYSE:CVX) or Exxon-several companies split the bill.

    We're seeing this trend in the LNG export facilities, too-five or six companies building a facility together as a big joint venture. In order for them to replace their reserves, they have to spend money, which is good for infrastructure companies.

    TER: Why should investors consider the names in your Small Stock newsletter rather than sticking with blue chips?

    FC: I think they need to go with both. I try to limit risk through small-caps, while retaining massive gains, so it's important to own some large caps that pay a high dividend, like Chevron and even Exxon. You could own those companies forever.

    However, it's important to own smaller companies because of the upside potential. If you bought Continental or Pioneer seven years ago, you would be up 500-1000%.

    An investor needs a basket of companies of all sizes; the large caps are steady and the small caps are speculative. It's my job to make sure people find the good speculations that offer limited downside and huge upside.

    TER: Great advice. Thanks for your time and your insights.

    This interview was conducted by JT Long of The Energy Report and can be read in its entirety here. [5/8/14]

    http://www.theenergyreport.com/pub/na/how-to-exploit-the-coming-natural-gas-export-explosion-frank-curzio

    Frank Curzio is the editor of Small Stock Specialist, an investment advisory that focuses on stocks with market caps of less than $3 billion. He is also the editor of Stansberry & Associates' exclusive Phase 1 Investor advisory. Before joining Stansberry, Frank wrote a stocks-under-$10 newsletter for TheStreet.com. He's been a guest on various media outlets including Fox Business News, CNBC's "The Kudlow Report," and CNBC's "The Call." He has also been mentioned numerous times on Jim Cramer's "Mad Money," is a featured guest on CNN Radio, and has been quoted in financial magazines and websites. Frank's "S&A Investor Radio" is one of the most widely followed financial broadcasts in the country. Over the past 15 years, Frank's investment strategies, including value, growth, top-down and technical analysis, have regularly produced 200%, 300% and 500% winners for his subscribers.

    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) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
    3) Frank Curzio: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

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

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

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

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

    101 Second St., Suite 110
    Petaluma, CA 94952

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

    May 08 5:18 PM | Link | Comment!
  • Malcolm Shaw: Why Is The Market Ignoring These Companies?

    Malcolm Shaw is looking at a modern-day map to buried treasure. He sees a company operating a shale-oil well that has tested at a free-flow rate of 590 barrels per day, a junior producer in Argentina working naturally fractured shale, an unrecognized frack sand resource, and a company that owns one of the most exciting uranium discoveries on the planet. Yet Shaw, a partner at Hydra Capital Partners Inc., is sometimes mystified by the lack of investor interest. In this interview with The Mining Report, Shaw talks about these projects and more, explaining how a savvy investor can profit from diamond-in-the-rough opportunities.

    The Mining Report: Malcolm, uranium's spot price is at a 52-week low. What is your forecast for the uranium price moving forward?

    Malcolm Shaw: The spot price is still depressed from overhang in the spot market that stemmed from the Japanese reactor shutdown in 2011. Japan was widely expected to begin reactor restarts this summer, but it appears that may be pushed back to early fall. It should be the starting pistol for a move in the spot price. I wouldn't be surprised to see the spot price recover, maybe to the $40-45/pound [$40-45/lb] range, by the end of the year. But it's really going to depend on the pace of those Japanese reactor restarts.

    TMR: Analysts keep saying that we are looking at a uranium supply deficit and rising prices by 2018. Why isn't the market responding to these threats.

    MS: The uranium market is a little different than a market like copper or gold or oil. Spot prices are around $33/lb and term prices are around $47-50/lb right now. Spot's really only relevant if you're looking to secure supply for very near-term delivery, whereas term is what an end-user would expect to pay for guaranteed delivery in the future, some years down the road. In the near term, and maybe even the medium term, there's no shortage of uranium out there. But when you consider the new reactors coming online in the coming years, the supply deficit is staring us right in the face. The number of new reactor builds underway in Asia is significant, and when you look at the growth of electricity demand and the concurrent decline in air quality in a country like China, it's no mystery why nuclear has to become a larger part of Asia's energy mix.

    Spot prices are generally important for market sentiment, which ultimately correlates with capital inflows and investment in the sector. Cameco Corp. (NYSE:CCJ) is the best market barometer that I can think of for sentiment in the uranium sector. It's been trading fairly well, up about 50% in the last six months, though it's been a little soft lately. I can't say when the market will respond, but I really do think it's a "when" not an "if." At the current spot and term prices, new production would be very difficult to finance.

    TMR: How will the isolation of Russia and the nuclear reactor restarts in Japan affect the uranium as well as the oil and natural gas spaces?

    MS: Russia is a juggernaut in the uranium sector. It has been one of the main suppliers for the U.S. reactor fleet for about 20 years now under the Megatons to Megawatts program. That program is over now. There are transitional supply agreements in place to meet demands of U.S. reactors in the coming years. To me, that seems like a suboptimal situation from a U.S. perspective. I think it should encourage development of domestic uranium resources.

    Russia is also jockeying with Saudi Arabia for the position of largest oil producer in the world and is critical to the gas supply of Europe. To sum it up, Russia is an energy powerhouse, but there are alternatives. The U.S. is becoming increasingly less dependent on foreign oil, and I think we'll probably see the U.S. become a real exporter of natural gas in the coming years. Gas prices are much lower in North America than other markets, like Asia and Europe, where they can be twice as high or higher. It's not hard to imagine that liquefied natural gas [LNG] projects will start to take advantage of that arbitrage.

    Pretty much any time a foreign dependence on one commodity or another is highlighted as a result of geopolitics, as we're seeing with Russia right now, the market tends to react to decrease that dependence. It should have regulators in Europe looking to increase LNG import capacity and should also drive them to more aggressively pursue domestic gas sources. North Africa could also see some increased interest from energy investors as a lot of European gas comes from North Africa.

    TMR: Are you expecting to see more uranium mining in North America?

    MS: I would think so. In terms of domestic companies that are active, we're looking for producers like Ur-Energy Inc. (NYSEMKT:URG) , and Uranium Energy Corp. (NYSEMKT:UEC) to get the market behind them, maybe get their equity values a little higher so they can raise some money and advance their projects. Ur-Energy is all pretty advanced. Each of them has production and is well financed, but again, their equity prices aren't reflecting the underlying value of their assets if you believe in a higher uranium price in the long term.

    TMR: In your last interview, you were excited about the early reports from the Patterson Lake discovery. How has that panned out?

    MS: Patterson Lake has turned out to be one of the most exciting uranium discoveries on the planet. The ultimate size of the resource is still unknown, but it has all the hallmarks of a world-class deposit in terms of the holy trinity of scale, grade and depth.

    One of its holes came back recently with a grade thickness of 992. That's equivalent to almost 100 meters [100m] of 10% U308. It's hard to describe how good that hole is. For its depth, it's probably one of the best mining exploration holes ever drilled for any commodity. The true thickness of that intercept is still unknown and uranium deposits are often irregular in shape, but to be in a system that can produce a hole like that at a depth of only about 60m from surface is very impressive. Ultimately a deposit like that will almost certainly be bought by a larger player. For me the only question is when.

    TMR: Are there any other companies that are getting comparable results in the Athabasca?

    MS: It's almost an unfair question. Patterson Lake has set the bar so high that other companies really can't be expected to compare. There's a reason why Patterson Lake gathered so much attention despite a sluggish spot market in uranium: When you make a world-class discovery, the commodity price tends not to matter quite as much. It will be tough to follow up, but companies can always try.

    TMR: Changing focus, natural gas appears to have escaped the bargain basement $3 per million Btu [$3/MMBtu] price range. What was the catalyst for that?

    MS: It was definitely the cold winter that we just went through coupled with historic lows in gas rig counts. Those two things together made the 2013-2014 winter season a real outlier in terms of storage drawdowns. The Energy Information Administration reported storage levels for natural gas right now are about a trillion cubic feet [1 Tcf] below the five-year range for this time of year. That's just a huge deficit to make up for, and rig counts are only starting to pick up for natural gas.

    TMR: Is the $4/MMBtu range where gas is going to live now?

    MS: I think so. With the storage levels that we're seeing right now it's hard to see us getting into an oversupply situation any time soon, unless the summer is unusually cool and the next winter is warm. It's not like you can just crank up gas production on a dime. It takes time to move rigs and people to increase that production, and the gas delivery system itself only has so much capacity to deliver gas to storage. We should be stable in this $4 range, maybe even $5.

    TMR: So your expectation for the gas price this year is to continue some upward pressure?

    MS: Yes. I really try not to forecast gas or oil prices, but directionally I would say my price bias for gas is positive. As an investor I would generally look to be long gas producers.

    TMR: You were talking about LNG exports. Is the rising price of gas going to have any influence on that?

    MS: Basically it's transportation arbitrage. If you can buy gas cheaper in North America and make money by shipping it to Asia or Europe as an LNG company, you're going to do that. If gas prices go to $8 per thousand cubic feet [$8/Mcf] in North America, there's going to be a lot less incentive to ship that gas offshore. However, I don't see those price levels coming to North America any time soon, which is why I would be biased towards the view that LNG projects will move ahead and that will provide more stability in the North American pricing. I think we're unlikely to see those lows that we saw in the past year or so.

    TMR: What companies are having luck drilling shale internationally?

    MS: One of the themes that I see is that shale oil and shale gas are here to stay. Producers are literally going straight to the source in the hydrocarbon industry. Drilling and completion technology has given us the ability to unlock resources that were previously beyond our reach. It's a paradigm shift. North America is showing us what's possible with the right services and technology, but, geologically, the same resource potential exists elsewhere in the world as well. I've been looking for resource plays internationally where I can get low-cost exposure to companies looking to take North American know-how abroad.

    Canacol Energy Ltd. (OTCQX:CNNEF) is a Colombian producer. Colombia has a long history of hydrocarbon exploration and production. I think that over the next year or so we're going to hear a lot more about the La Luna, Tablazo and Rosa Blanca shales. These Colombian shales are proven and prolific hydrocarbon source rocks and are comparable to the names like the Bakken and the Eagle Ford in a lot of ways. One of the key differences is that they are 1,000-2,000 feet thick. That's anywhere from 3-10 times thicker than any comparable Bakken or Eagle Ford in North America. That means that the oil-in-place numbers can get very large very fast.

    Canacol has over 500,000 net acres of exposure to these plays in Colombia, which puts it second only to the state oil company, Ecopetrol S.A. (NYSE:EC). To put things in perspective, Canacol has seen Exxon Mobil Corp. (NYSE:XOM), ConocoPhillips (NYSE:COP) and Royal Dutch Shell Plc (NYSE:RDS.A)(NYSE:RDS.B) all farm into its acreage within the last year or so, all in separate blocks, but all in the same play.

    The first well, drilled by the Canacol/Exxon joint venture into a naturally fractured section of La Luna, was tested at 590 barrels/day [590 bbl/d] oil earlier this year. The test was short term, but it was under natural-flow conditions, which means that the oil is literally free-flowing to surface at that rate. I'm pretty amazed that the market appears to be completely ignoring this shale option value right now. I can make a case for the company trading at 0.6-0.7 times its net asset value on its existing conventional production alone and there's no lack of running room there either. The company's recent discovery at its Pantro-1 exploration well really firms up the Leono-Pantro development area, and I think it's reflective of the overall potential of their LLA-23 block in terms of production growth and prospectivity. I really like the risk/reward on Canacol.

    The Vaca Muerta is being pursued by Exxon, Chevron Corp. (NYSE:CVX), Royal Dutch Shell Plc and Total S.A. (NYSE:TOT), to name a few.

    TMR: There's been a long-running civil war in Colombia, and Argentina has a record of nationalizing. What is the political risk for companies operating there?

    MS: There's always political risk. I joke sometimes that there's political risk in Canada. A number of years ago we saw Alberta overhaul royalties, which caused a lot of fuss and has since been straightened out, but I see your point. The FARC, a guerilla group, is active in Colombia, typically in the border regions with Venezuela and Ecuador. Since about 2000, maybe 2002, the Colombian government has taken a pretty hard line against the FARC. It started with President Álvaro Uribe, and President Juan Manuel Santos has continued that. I see no sign of that diminishing in the future. It's simmering in the background and it's flared up a little bit lately with elections coming up. From everything I've seen, though, the FARC has really been marginalized.

    People also like to talk about nationalization in Argentina, and it has happened. The Repsol-YPF debacle was forefront on everybody's minds. That dispute has been settled. Repsol [REP:MC] was recently compensated for the assets that it did lose. There's a relatively long story and history between Argentina and Repsol that surrounds that. I would encourage people to look up some of that history. But a junior company is really too small to be on the radar of the Argentinean government for expropriation, I think.

    TMR: You're very impressed with Canacol's shale-oil flow rate in Colombia. Why aren't other investors equally impressed?

    MS: I think because it's early, for one. The Canacol/Exxon well test was literally one of the first well tests from the La Luna Shale in Colombia in recent memory. There have been historical producers out of that formation, but they were viewed more as outliers, and they were drilled back in the days before we really recognized the potential of oil shale resource plays. I also think that the market may have had unrealistically high expectations of something in the 1,000-3,000 bbl/d range. Also, Colombia is still working on regulations for unconventional resource plays. It is expected that they will follow a North American model in that regard, and when those regulations are in place, I think it might be a trigger for the market.

    Any time you get a well that's free flowing at surface at a rate of 600 bbl/d, that's a very good oil well. That means you literally have 600 bbl flowing out of the ground unassisted. There were two 24-hour tests, so some people may find that production test a bit short, but again, it's early days in the play. The well should soon be on long-term production test and all signs are positive so far. If I was paying anything for the shale option in Canacol, I might have a different opinion. Like I said, with the core assets underpinning the value of the company, I could see the stock trading at $10/share just based on the existing conventional assets. To also get that kind of leverage to the shale for free, that's what gets me excited.

    TMR: Which of the companies you cover offers the best value for an investor and why?

    MS: Advantage Oil and Gas Ltd. (NYSE:AAV) is an interesting value play. It's not the cheapest stock in terms of valuation metrics, but it is just a prime chunk of Montney gas acreage in Alberta. It has 1.7 Tcf of Proven and Probable reserves, and industry-leading finding and development costs in the $1 to $1.25/Mcf range. Its operating costs are also industry-leading at around $0.30/Mcf. Even though it's generally dry gas, the economics are great. You're talking recycle ratios in the 2-2½ times range, even at current gas prices. Advantage has really executed and it has recently been trading really well, so I think the market has started to take notice.

    One last company that I'd like to touch on is called Athabasca Minerals Inc. (OTCPK:ABCAF). I've followed this company for years and I bought it about six months ago. I think it's on the verge of a major rerate by the market. The company has been quietly working away on a frack-sand project called Firebag, which is just off a main highway about 100 km north of Fort McMurray. I would expect that project to get permitted sometime this year. Canada uses around 2.5 million tons per year of frack sand and something like 70% or 80% of that comes from places like Wisconsin in the U.S. That's a long way to ship sand. Athabasca's deposit is so much closer to the Alberta market; I can't imagine how a foreign sand resource could compete once Athabasca Minerals Firebag project is up and running. Firebag would be one of the closest frack sand sources in a business where proximity is everything and transportation is by far the largest cost in the equation. For perspective, Firebag is about 2000 km closer to the core of the Alberta Deep Basin than any competitor out of Wisconsin would be.

    The company has already secured land at the end of the Canadian National Railway Co. (NYSE:CNI) line just south of Fort McMurray for infrastructure; you need a place to load that sand onto rail. Athabasca's had its sand independently tested and it compares favorably with all the existing frack-sand industry benchmarks. I get excited about it. Frack sand is just an absolutely essential component of the energy industry now. For anyone even thinking about LNG shipping from British Columbia in the future, you have to consider that those gas molecules are going to be unlocked by frack sand at some point, and that's on top of the domestic gas market. I think Athabasca's Firebag project could be a strategic asset down the road. It's a real, "made in Alberta" solution.

    Athabasca Minerals also has a history of profitability from its core gravel operations in the Fort McMurray area, which is closely tied to development activity in the oil sands. I should point out that there is no NI 43-101 on the sand resource yet, but my back-of-the envelope math says that there are decades of supply there. I expect margins to be quite robust. I think once the market figures out what's in play here, the stock has a very good chance of being quite a bit higher.

    TMR: To wrap up, can you recap your investment advice for uranium and then for oil and gas?

    MS: For any industry, I would encourage investors to look for a backstop in value and then look for good management teams focused on giving investors exposure to good upside. I like to find companies where I know the valuation is underpinned by the existing assets. To me that's a big deal. The other thing that I look for is long-tail optionality on the upside. I highlighted some of those names today with some of the shale oil plays and this frack-sand opportunity. If people gear themselves towards thinking about the downside first and then thinking about what they're paying for the upside, it can make for much more successful investing in the long run.

    TMR: Malcolm, thank you very much for your time. This has been a good discussion.

    MS: Thanks for having me.

    This interview was conducted by Tom Armistead of The Mining Report and can be read in its entiretyhere. [5/6/14]

    http://www.theenergyreport.com/pub/na/malcolm-shaw-why-is-the-market-ignoring-these-companies

    Malcolm Shaw is a partner at Hydra Capital Partners Inc., a group of buy side and sell side industry professionals focused on underfollowed companies. Shaw holds a Master of Science in geology from the University of Toronto and has 13 years of experience spanning the resource and investment industries. He started his career as a geoscientist at PanCanadian Petroleum [now EnCana], before transitioning into the investment industry as an international energy research analyst at Wellington West Capital Markets. Before joining Hydra, Malcolm was a vice president at K2 & Associates Investment Management, where he focused on the energy and materials sectors.

    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 view recent interviews with industry analysts and commentators, visit The Mining Report homepage.

    DISCLOSURE:
    1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for its services.
    3) Malcolm Shaw: I own, or my family owns, shares of the following companies mentioned in this interview: Canacol Energy Ltd., Athabasca Minerals Inc., and Cameco Corp. I also own bonds in Advantage Oil & Gas Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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