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  • MLPs = Good Returns In All Markets: Darren Schuringa
    MLPs = Good Returns in All Markets: Darren Schuringa

    Source: Zig Lambo of The Energy Report (5/22/12)

    http://www.theenergyreport.com/pub/na/13429

    With interest rate yields so low, it's not surprising that more investors are flocking to the excellent income and relative downside stability afforded by Master Limited Partnerships and related ETFs. In this exclusive interview with The Energy Report, Darren Schuringa, portfolio manager at Yorkville Capital Management, tells us about MLP sector performance and explains why this arena provides an excellent balance of income and upside potential in a variety of market environments.

    The Energy Report: Master Limited Partnerships (MLPs) have really grown in the past few years. Why is that?

    Darren Schuringa: MLPs' growth is really two fold. First, the sheer number of partnerships doing initial public offerings has accelerated. In 2000 there were 27 MLPs, and today there are 85 listed. The second half of the growth story is simply strong performance. The total returns of MLPs over the past five years have averaged 14.2% relative to the S&P 500, which has been flat to slightly down over that same period. MLPs also have an appealing structure: They are pass-through vehicles that don't pay corporate income taxes. They offer a tremendous cost of capital advantage in that you're saving 35% on taxes.

    Since the Tax Reform Act of 1986, when MLPs were created by an act of Congress, there has been a compounded annual growth rate in the overall market capitalization of the asset class by 13%. Over the past decade, this growth accelerated to 25% per annum. So, the MLP growth is certainly not plateauing; it's accelerating. The Marcellus and the Bakken shale play infrastructure needs will only accelerate, which bodes well for MLPs.

    TER: Didn't these start out as tax shelters that weren't tradable and then evolved into tradable partnerships?

    DS: Correct. That has been the evolution of the asset class. You can still find private partnerships to invest in, but we are just focusing on the partnerships that trade like regular equities.

    TER: Yorkville Capital Management is a member of The National Association of Publicly Traded Partnerships (NAPTP), which is holding an investor conference for MLPs. What is the audience like for this conference?

    DS: It is open to the public. A lot of retail MLP investors, including individuals, registered investment advisors, financial advisors, financial consultants and registered reps attend. For anyone who is actively involved in MLPs, this conference is really a must-attend event. The NAPTP is a tremendous resource for the MLP asset class. The conference gives investors an opportunity to see and listen to the managements of most of the publicly traded partnerships presenting over a two-day period, May 23rd and 24th. There are three panel discussions; I'll actually be on one of the panels discussing recent trends in the fund industry as it relates to MLP-centric offerings.

    TER: On that note, what strategies does Yorkville Capital Management use, and how exactly is it involved with MLPs?

    DS: We currently offer two primary strategies. One is in the form of separately managed accounts, called our MLP Core Income Strategy. The other one is an ETF just launched in March called the Yorkville High Income MLP ETF (YMLP:NYSE). Our Core Income Strategy celebrated its 10th anniversary in December of last year. Yorkville has been investing in MLPs since the early '90s, which is important because the asset class was only formed in the mid-'80s. Our strategy was recognized by Barron's and Morningstar as one of the top-performing strategies last year, with 10-year annualized returns of 13.2% relative to 2.8% for the S&P 500. So on an annual basis, we were delivering over 10% above the S&P 500, which is one of the reasons why the MLP asset class is so attractive.

    Our newly launched ETF was the second MLP ETF to market. It has become the fourth most successful ETF fund launched out of 90 ETFs launched in 2012, based on average daily trading volume. Yorkville seeks to capitalize on its core competency and to be recognized as thought leaders in the MLP space by educating investors on the asset class.

    We recently undertook the most comprehensive study ever done on publicly traded partnerships and MLPs to create an index that analyzed every delisted partnership to better understand how risk and return distributions have evolved over time. We identified two publicly traded partnership sectors and 15 different indexes to track the MLP PTP universe. The study is unique because it's based on the entire universe of MLPs versus a benchmark sampling. That makes it a more objective representation of the asset class and more accurately reflects the dynamic nature of MLPs showing true performance and true yield. MLPs are rapidly evolving with new sectors created within the past decade. There has even been talk about including alternative energy sources into a partnership structure. The Yorkville universe indexes would evolve with these new initiatives.

    We publish our indexes on Bloomberg and Reuters and also on our website. We also publish reports on a monthly and quarterly basis to keep investors up to speed. Most investors today are solely focused on infrastructure MLPs, often called "toll roads." Generally, they're thinking of pipelines and energy infrastructure.

    The commodity segment was very interesting to us because it was the highest-yielding segment of the asset class with the fastest distribution growth rates over time. Investors think of higher yield equaling greater risk. So we analyzed that and found that the price volatility of commodities MLPs was similar to that in the infrastructure-space MLPs. Then we looked at the volatility of distributions relative to oil, natural gas, baskets of commodities or more cyclically driven macroeconomic events, and found that the distributions are no more volatile. Therefore, we believe the commodity MLPs are a mispriced segment of the overall asset class and focused the Yorkville High Income MLP ETF exclusively in the commodity portion. This includes four sectors: exploration and production, natural resources, propane and marine transportation. The fund did its first distribution two weeks ago, yielding 8.9%, almost 50% greater than you would get from comparable infrastructure products in the market right now.

    TER: Is that what you're doing to take advantage of market volatility at this point?

    DS: That is partially what we're doing, yes. When we look at volatile markets, one of the ways to protect yourself is to take in current income, which is what MLPs do. By focusing on the commodity side of the asset class through this ETF, we're able to maximize the income an investor receives. One of the primary benefits of MLPs is as pass-through vehicles for maximizing income, thereby mitigating some of the market price volatility. We believe investors in commodity MLPs are picking up a relatively inexpensive part of the asset class, getting higher current income and not meaningfully increasing their risk profiles. That makes a lot of sense under current market conditions. Number two, if you want to take a position in oil or natural gas or broader commodities, you have to pay to do so through futures or options. In our case, you have commodity exposure without having to be correct on the short-term price direction, and you're paid to wait. The reason you don't have to be right on the direction of commodities is because all MLPs are toll roads.

    TER: What would you expect to happen with MLP market performance if we were to enter into a highly inflationary period, as some analysts predict, or if economic growth slows down?

    DS: MLP management teams recognize that to command a premium valuation, you need to deliver consistent distributions and distribution growth. Commodity MLPs have either long-term hedging programs or long-term contracts. When oil went from $140/barrel (bbl) to $40/bbl, commodity MLPs actually increased their distributions over that period of time. Similarly, when we looked at the great recession to see if they were more exposed to macroeconomic events, again, they increased their distributions over this period.

    So, you had two events to stress test the portfolio. One is the worst market that most of us have experienced in our investment careers, the great recession. The second was oil dropping to $40/bbl. In both cases, commodity-based MLP distributions maintained and actually increased. We absolutely think it's a great place to be in the market and I think the trend, given global demand, will put a floor under pricing. Unconventional production also creates a lot more infrastructure needed to bring new sources online, whether it's deep sea drilling off the coast of Brazil or in unconventional shale plays here in the U.S. and Canada, and bodes well for the continued growth in MLPs.

    TER: What have been the best-performing industry groups and how have Yorkville's portfolios performed relative to these groups?

    DS: Our MLP Core Income Portfolio ETF was just launched a couple of months ago, so we really don't have history on it. But our MLP/PTP beat the market on both a monthly and quarterly basis. Commodity and infrastructure MLPs are really running neck and neck so far this year. April saw a tremendous uptick, where commodities were actually up 3.5% for the month versus 2% for the infrastructure index. Commodity has had a couple of years of underperformance relative to infrastructure. Given higher yields, faster growth and a similar risk profile right now, commodities are an attractive entry point for gaining MLP exposure.

    TER: Is this a good time for investors to be looking at MLPs or are MLPs good any time?

    DS: As an MLP investor, I think they are good anytime. Investors are looking for yield in a low-yielding environment. So, it's a great way to augment income in your portfolio. Investors should consider MLPs not as a tactical decision, but as a strategic asset allocation decision similar to what you make in equities and fixed income.

    We view MLPs as the third asset class and suggest 20% allocation in a diversified portfolio because of high current fixed income and consistency of income, with capital appreciation over time providing an equity characteristic. If you have a 50/50 weighting, take half from your fixed income and half from your equity and put it into an MLP exposure and stay with it. You can get the benefits of portfolio diversification by putting MLPs into it and reducing the risk profile while increasing the overall return.

    TER: You have talked about these MLPs in general terms. Are there any you find particularly attractive that our readers might want to consider as individual investments?

    DS: One of our top holdings and favorite MLP prospects is Atlas Energy L.P. (ATLS:NYSE). Although Atlas has already seen a significant run-up of roughly 39% (excluding the Atlas Resource Partners (ARP:NYSE) spinoff) in its price year-to-date, we remain bullish on the firm's growth prospects and our position. Atlas Energy Inc. (ATLS:NYSE) is the general partner of Atlas Resource Partners (ARP:NYSE), a developer of oil and gas reserves in which it holds approximately 64% LP interest, and Atlas Pipeline Partners (APL:NYSE), a natural gas gatherer-processor in which it holds roughly 10.5% of outstanding units. We see Atlas as a leveraged way to play the two limited partnerships, both of which we believe will grow rapidly. In our opinion, Atlas will continue to be one of the fastest-growing MLPs in terms of distributions and seems poised for further growth.

    Growth should be driven by Atlas Resource Partners' opportunistic acquisitions of natural gas reserves through purchases from Carrizo Oil & Gas Inc. (CRZO:NASDAQ) and Titan Operating LLC (private). These new reserves provide a runway for Atlas Resource Partners' distribution growth and ultimately Atlas Energy L.P.'s equity value. Atlas Pipeline Partners recently reported strong year-over-year volume increases (ranging from +22%-+44%) at its major processing plants, WestOK, WestTX and Velma. Increased drilling activity and capital projects coming online to boost processing capacity will drive distributable cash flow growth at Atlas Pipeline Partners.

    TER: Thank you for joining us today, Darren.

    Darren Schuringa's Top Ten Index Constituents

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:

    1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

    2) The following companies mentioned in the interview are sponsors of The Energy Report: None. This interview was edited for clarity.

    3) Darren Schuringa: I personally and/or my family own shares of the following companies mentioned in this interview: Yorkville High Income MLP ETF , Atlas Pipeline Partners, Atlas Resource Partners and ATLS. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story. View Yorkville disclosures here.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles 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 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

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    Email: jluther@streetwisereports.com

    May 24 5:07 PM | Link | Comment!
  • Lithium Demand Will Rise Significantly: Mansur Khan
    Lithium Demand Will Rise Significantly: Mansur Khan

    Source: George S. Mack of The Energy Report (5/16/12)

    http://www.theenergyreport.com/pub/na/13395

    Lithium is lightest of all metallic elements, with low density and high electrochemical potential. These are essential characteristics that make the element especially suitable for use in various power-storage applications, including electric vehicles (EVs). In this exclusive interview with The Energy Report, Equity Research Analyst Mansur Khan of Dundee Capital Markets talks about his favorite junior lithium stocks that he expects to be major beneficiaries of dramatic growth in lithium-ion battery demand over the coming decade.

    The Energy Report: EVs don't burn gas, but power must come from some source of fuel, such as nuclear, coal, hydro, gas, solar, geo or wind. So, what is the value of an electric vehicle (NYSE:EV)? How does it help?

    Mansur Khan: From a societal and governmental point of view, there are a number of benefits. EVs can really help reduce carbon emissions. Their energy efficiency is very high, sometimes over three times that of conventional combustion engines. I think it can be argued that, even assuming an EV uses a power-generating mix that includes carbon-emitting sources such as coal- or gas-fired power plants, its life-cycle net carbon-emission production is significantly less-anywhere from half to one-third of that from comparable combustion vehicles. Reducing our dependence on oil is another concern, although it's more geopolitical. I think there is a top-down push to essentially steer the automotive industry into adopting electric vehicles.

    Finally, from the end-consumer point of view, the operating cost of an EV is expected to be significantly less than an internal combustion vehicle. On average, they are about one-third the cost on a per-mile basis.

    TER: In January, General Motors Inc. (GM:NYSE) announced that it would be producing 60,000 (60K) Chevrolet Volts per year, beginning this year. Does this signal a new wave of EV or hybrid development? How positive is this for lithium consumption?

    MK: GM's commitment to the EV model is reflective of what you're seeing across the board with major auto manufacturers rolling out some form of an EV model in their lineup.

    Aside from GM and Toyota Motor Corp. (TM:NYSE), Hyundai Motor Co. Ltd. (HYMLF:OTCPK), Nissan Motor Co. Ltd. (NSANY:OTCPK;7201:TYO), Volkswagen AG (VLKPY:OTCPK)-all the majors have announced their own models. And when you look on the battery side, you're seeing considerable research and development (R&D) investment going into battery manufacturing and technology development. Majors like Chinese battery and car manufacturer BYD Co. Ltd. (BYDDF:OTCBB), of which Warren Buffett owns approximately 10%, and BASF Corp. (EUR53.17:XETRA) are making inroads into the technology's development.

    To answer your question, this is of course positive for lithium demand and consumption. Industry consultancy SignumBOX put out an estimate that electric and hybrid electric vehicles made up about 5% of total lithium carbonate equivalent (LCE) consumption in 2011, and that's expected to grow to about 25% by 2020. So there's quite a bit of room for growth there. The industry still has a long way to go, but in general, it's absolutely positive.

    TER: Mansur, what is the lithium-ion battery industry's biggest challenge right now?

    MK: The industry's main challenge is really to scale up in size, from the small consumer electronics to the larger batteries required for EVs, and to be able to do this without compromising on cost, safety and longevity. Technological development may not be happening as quickly as people had expected a few years ago, but it is certainly happening, and I think you will see these growing pains addressed over the coming years as other derivative applications are opened up.

    As manufacturing capacity continues to expand, the cost of these lithium-ion batteries will come down, and that is already happening. A few weeks ago a Bloomberg report said the cost of lithium-ion batteries fell 14% year over year, and has fallen about 30% since 2009.

    TER: Your February 2012 report cited a third-party consultancy firm, Roskill, which found that lithium consumption has outperformed both industrial production and GDP trends since 2002. But I don't see that reflected in equities. An index of small-cap lithium stocks shows a 40% decline over the last 10 years. A mix of larger- and small-cap companies is down 30% during the same period. Can you talk about the disconnect here?

    MK: Without knowing the specifics of this particular index, I think I can make some general comments. Our view on this is that there are two aspects at play here, and both stem from the global recessionary environment that we are in.

    Against this backdrop and coupled with slower technology development, we have seen a slower-than-expected uptake of lithium-ion batteries and EVs. The consensus view still holds that you're likely to see a mass adoption of EVs by about 2015 and thereafter. We argue that the equities are taking a bit of a wait-and-see approach to this, and so that would probably be one aspect of why they have not done so well. EVs currently make up only a small part of the overall lithium market, as just mentioned, but they are expected to really drive the majority of the growth over the coming decade.

    The second aspect is more directly linked to equity markets in general. As you know, stock markets dislike uncertainty and volatility, and unfortunately we have plenty of both right now. In this kind of risk-averse environment, small-cap stocks can face the additional challenge of financing their exploration and development projects without causing a lot of dilution. So there's a bit of an added risk that is reflected in small-cap performance. We think these factors explain why the equity markets have not really kept pace with the underlying growth and demand for lithium that we are seeing.

    TER: You've written that the lithium market is currently in a tight supply-demand balance, and that this has prompted capacity expansions by three of the four major lithium producers. You also wrote that prices have stabilized in the $5,500-6,500 per ton (/t) LCE. I realize there are different lithium compounds, but do you foresee a futures market for lithium?

    MK: I think it's too early for that. You would need a market sizeable enough to maintain a spot supply inventory. Right now, what we are seeing is that most of the supply and demand is on a contract-by-contract basis, and these are typically one-year contracts. There isn't much of a spot market to speak of, and until you have a secondary market open up, you are unlikely to see a futures derivatives market develop.

    TER: Looking at the lithium equities market today, do you see it as a deep-value market? Or do you see it as a growth market? Are we at the foot of a growth curve?

    MK: Going to the question of growth, I think that's definitely there in our view. The majors have been reflecting that, not just in what they've reported, but also in their outlooks. If you peruse through some of the recent commentary by the majors, they are all reporting strong growth in volume and prices, and in general they expect real growth in lithium demand to continue-anywhere from 6-11% by 2020. So that's a fairly healthy growth in demand. If you look at Talison Lithium Ltd. (TLH:TSX; Not Rated), for example, it is saying that the lithium market will almost double by 2020, and that's even excluding the EV component that you hear so much about. So that's definitely positive, and there's growth absolutely happening there.

    TER: What lithium equities are you recommending to investors?

    MK: When you're looking at the juniors, we believe that only companies with quality assets that are in advanced stages or have strategic backing will have a reasonable chance of making it to production.

    I would highlight Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). We have it rated Buy, Speculative Risk with a $1 target price. Unlike the brine developers in Argentina and Chile, this is a hard-rock developer based in Québec. Its Whabouchi property project has a Measured and Indicated resource estimate of 25 million (NYSE:M) tonnes (metric ton or mt) grading at 1.54% lithium oxide. It also has an Inferred resource of 4.4Mmt grading at 1.51% lithium oxide.

    The company is envisioning a two-phase strategy. Phase one will see production of 200K tonnes per year (tpa) of lithium concentrate. This is concentrate, not carbonate, at about a 6% Li2O grade. The operating cost is about $138/t of concentrate. And the preliminary economic assessment (PEA) from last year had an initial capex of $86M for the project.

    Phase two essentially envisions a chemical conversion plant that would produce higher-value downstream chemicals, and in particular they're looking at lithium hydroxide. The PEA on this option was just commissioned. It has also done some pilot-level testing that shows some innovative departures from the conventional process used to produce lithium hydroxide, and the company is going to be filing for a patent on this pretty soon. This could be an interesting development.

    Both the definitive feasibility study (NYSE:DFS) of the concentrate production and the PEA are expected to be out in Q3/12. The company has a strategic partner behind it, Chengdu Tianqi Industry Group Co., the largest lithium battery material supplier in China, which owns 20% of Nemaska. Tianqi recently entered into an agreement with Targray Technology for international distribution of lithium compounds in North America and Europe. We see Nemaska fitting in quite well with this strategy.

    Another thing we like about Nemaska is that it's located in a mining-friendly jurisdiction of Québec, which is trying to build a world-class EV industry by supporting R&D and bringing mining companies and strategic partners together. And of course you could argue that the open-pit conventional mining process has less mining and processing risk. Also, there are a couple of upcoming milestones, the DFS and the PEA. So we like that name.

    TER: Another company?

    MK: Going over to the brine-developer world, I would highlight Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX). We have it rated Buy, Speculative Risk, with a target price of $0.80. This is a lithium brine developer with its flagship 100%-owned Diablillos project in the province of Salta in Argentina, which hosts resources of about 5 Mmt of LCE and is adjacent to one of the largest lithium producers in the world, FMC Lithium Corp.'s (FMC:NYSE; Not Rated) Hombre Muerto project, which has been producing for decades.

    Diablillos is also adjacent to Lithium One Inc.'s (LI:TSX.V) Sal de Vida project. As you know, Lithium One is currently in the process of being acquired by Galaxy Resources Ltd. (GXY:ASX; Not Rated), which has a wholly owned lithium carbonate plant in China. So that's definitely an interesting development in the area. Diablillos has high lithium and potassium grades and low impurities that could enable economic extraction, and the PEA put out last year suggests robust economics. With cash costs coming in at a bit over $1,500/t of LCE, along with a strong potash byproduct credit potential, the company is envisioning production of 15K tpa of LCE. Aside from the flagship project, Rodinia also has a brine project in Nevada adjacent to Chemetall Foote's [subsidiary of Rockwood Holdings Inc. (ROC:NYSE)] existing project there.

    But despite all this, the company trades at a large discount to its brine-base developer peers. We estimate an enterprise value of about $3/t, compared to the average of about $10/t. We would say that part of this has to do with Rodinia's relatively early-stage project and tight cash position. That's a risk, given the nature of current markets. Management is being prudent with cash, but it is steadily moving the project forward. Also, it does have the Chinese company Ningbo Shanshan Co. at its side.

    TER: You said your target on Rodinia was $0.80. You have just taken that down from $0.90, is that right?

    MK: That's correct. We put out a commodity update at the end of every quarter where we go back to the drawing board and look at foreign exchange (NYSE:FX) rates and commodity assumptions. So part of the discount was about the FX, and the other part is that we are applying a slightly higher discount to the brine developers in Argentina due to the investment climate resulting from expropriation of Argentina's largest energy company, YPF from Spain's Reposol.

    TER: You mentioned Rodinia's neighbor producers. You must be implying potential M&A.

    MK: Yes, and overall, what we like about this story is that the company has a salar that it is not sharing with anyone else, and it will potentially have two large lithium producers right in its backyard, FMC and potentially Galaxy, both of which have talked about expansion. The company has a strong management team, and both CEO Will Randall and head of exploration Ray Spanjers have extensive experience in managing projects. And Ray actually was previously with FMC's lithium division.

    TER: Another company?

    MK: The second brine company that I would highlight is Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX). We are rating it a Buy, High Risk with a target price of $2.60. Now this is a more advanced brine developer, located in the province of Jujuy. Its Cauchari project hosts a high-grade resource of 8Mmt LCE. It's had extensive pump tests, pond- and pilot-level tests, as well as hydrological work done, and the company is currently on the verge of putting out a DFS on the project. It's also interesting to note that the DFS will trigger a decision by its strategic partners, Mitsubishi Corp (8058:TYO) and Magna International Inc. (MG:TSX, Not Rated), who have the option to secure 37.5% of lithium production in exchange for financing up to 37.5% of capital costs. So that's definitely a good arrangement to have in this kind of market.

    Lithium America's PEA from last year had estimated low cash costs of about $1,434 per ton, based on 20K tpa of phase one production. And of course one common theme with these brine projects is that, given their low impurities, there's strong byproduct credit potential. There's good infrastructure in place. And as I said they're currently working through the final project approval from the province of Jujuy, which should be another catalyst for the stock. By the way, the province of Jujuy had essentially designated lithium as a strategic metal last year, and both Lithium Americas and Orocobre Ltd. (ORL:TSX; ORE:ASX) are currently working out approvals here.

    Orocobre will be the last one I'll mention today. We have it rated Buy, High Risk with a target price of $2.80. This is the most advanced brine development project in our universe of coverage. Immediately north of Lithium Americas' Cauchari project is Orocobre's flagship Olaroz project, which also hosts a high-grade lithium resource of 6.4 Mmt of LCE. The company already has a DFS out on the project, and the cash costs are estimated at $1,512/t of LCE, and once again, given the low impurities, there is potential for byproduct credit.

    A production rate of about 16K tpa is expected by the second half of 2013, and at the end of last year Orocobre finalized terms with its strategic partner, Toyota Tsusho Group (TYHOF:OTCPK). This will essentially enable Toyota to take an equity stake of up to 25% based on the project's net present value (NYSE:NPV) estimated from the DFS. This also includes debt financing by a Japanese consortium for 60% of the project capex, which is a bit over $200M. So the final sign-off on these financing agreements would occur once the Jujuy provincial approval comes through.

    TER: I've enjoyed meeting you very much, Mansur.

    MK: Thank you very much, George, I really enjoyed the interview as well.

    Mining Analyst Mansur Khan joined Dundee Capital Markets in 2007 as an associate covering the industrial, aerospace and special situation sectors. In late 2010, he switched into Dundee's mining group, where he covers a range of exploration and production companies in the uranium and lithium sectors. Since 2012, he has been providing lead coverage on the lithium sector. Prior to Dundee, Mansur worked for a number of years at a private design engineering company on various information systems and operations projects. He holds an MBA from the Rotman School of Management, University of Toronto and a Bachelor of Commerce in systems development from Ryerson University.

    Want to read more exclusive 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 Exclusive Interviews page.

    DISCLOSURE:

    1) George S. Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

    2) The following companies mentioned in the interview are sponsors of The Energy Report: Lithium Americas Corp., Lithium One Inc., Nemaska Lithium Inc., Rodinia Lithium Inc. and Talison Lithium Ltd.

    3) Mansur Khan: I personally and/or my family own shares of the following companies I mentioned in this interview: None. I personally and/or my family am paid by the following companies I mentioned in this interview: None.

    4) Dundee Securities Ltd. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by companies under coverage: None.

    5) Dundee Securities Ltd. has provided investment banking services to companies under coverage in the past 12 months: Nemaska Exploration Inc.

    6) All disclosures and disclaimers are available on the Internet at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Securities Ltd. The policy of Dundee Securities Ltd. with respect to research reports is available on the Internet at www.dundeecapitalmarkets.com.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles 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 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 21 6:22 PM | Link | Comment!
  • What Lies Ahead For Junior E&Ps: Bruce Edgelow

    What Lies Ahead for Junior E&Ps: Bruce Edgelow

    Source: The Energy Report Editors (5/15/12)

    http://www.theenergyreport.com/pub/na/13369

    The landscape of the junior oil and gas industry has changed significantly over the last five years. What will the playing field look like five years from now? These are the questions that ATB Financial's Bruce Edgelow will discuss at his upcoming SEPAC Oil & Gas Investor Showcase keynote address, but in this exclusive interview with The Energy Report, Edgelow gives us a sneak preview. Read on as Edgelow examines which industry trends are likely to continue, and what it will take for juniors to attract investment capital in an increasingly competitive market. The only constant investors can expect, Edgelow argues, is change.

    The Energy Report: Bruce, what major changes do you see under way for junior explorers and producers (E&Ps)?

    Bruce Edgelow: Juniors have begun to transition from drilling moderately priced individual vertical wells to drilling much more capital-intensive resource plays. For example, in 2000 the cost to drill and complete one well in Pembina was ~$330,000. By 2010, the cost had ballooned to ~$2.75 million (NYSE:M) due to horizontal drilling and more complex completion techniques. This trend is expected to continue as resource plays become increasingly dominant and as larger budgets, bigger capital bases and higher production become more commonplace. As such, access to capital will be more vital for juniors than it has been in the past.

    We expect consolidation to occur as a result of the critical mass needed to meet these increased capital requirements. Liquidity-challenged small producers may be attractive targets for larger, well capitalized companies looking to expand their asset bases. In this landscape, juniors will need to be nimble early movers. Those that can jump on a niche emerging resource play and pioneer economic extraction techniques will have an advantage.

    TER: Which resource plays will remain hot spots for junior E&Ps?

    BE: Development plays such as the Cardium, Viking and Bakken shales should continue to dominate the oil and gas landscape. These repeatable development-style plays require ample land inventory to provide sufficient drilling opportunities. Given increasing operating prices, juniors will need enough capital to fund full-cycle economics. Moreover, drilling and completion costs are likely to further increase as even more advanced technology will be required to unlock the full resource potential.

    On the other hand, demand for conventional plays with smaller pools bearing exploration risk is reducing. The appetite to fund natural gas activity is virtually non existent unless the producer is in a niche play that can still be economic at current depressed prices. Investors and capital providers will need to develop an increasingly keen eye toward overall corporate economics in order to determine if a company has the scale, talent and asset profile to exploit the opportunities available.

    TER: You've addressed the higher costs associated with horizontal drilling. How are revolutionized extraction techniques benefiting juniors?

    BE: The industry is reporting fewer dry holes. Technological innovation has made previously uneconomic plays much more viable. Five years from now, one can expect significant advances in fracturing technology to have further increased economies of scale. It is expected that there will be a significant uptick in the number of plays that are not even on the radar screen at this time. Going forward, the industry will likely find that larger pools are repeatable and that the technology being deployed is increasingly efficient.

    TER: Can you tell us more about full-cycle economics and why they matter?

    BE: The full cycle growth story will be the preeminent method whereby juniors thrive in a changing marketplace. This includes organic growth, acquisitions, farm-ins and joint ventures. As in the past, juniors will continue to drill using cash flow, available debt and equity to grow with the end goal being a corporate sale to a larger company with excess capital looking to diversify. Full-cycle economics refers to this entire trajectory from small- to mid- or large-cap companies. Investors will have to assess a junior's ability to progress to the next few stages.

    TER: What kinds of business strategies will boost a junior's odds of making the leap to the next market-cap level?

    BE: A land accumulation strategy could be a viable and successful method for a junior company over the coming years. For instance, with the Duvernay in its infancy and largely unproven at this time, a junior might choose to assemble a strong land base and sit on it without expending the large capital requirements to drill. It may be able to wait for better-capitalized players to prove up the regional play with the exit strategy to sell their land at higher values.

    TER: You've placed a lot of emphasis on organic growth and scalability. Are the days numbered for small companies out there?

    BE: Junior oil and gas companies will still be very active in this space in five years. However, there will likely be fewer of them as a result of consolidation and incrementally higher entry costs. We expect that the overall environment for juniors will be made more difficult as significant equity support will be imperative for juniors. We expect a $10M starter kit will not meet the capital needs of a junior going forward. To have a greater probability of success, a junior may require $100M or more to sustain an adequate capital program for one to two years. To receive this backing from investors, juniors will need to deliver top-quartile reserves, production and cash flow growth on a per share basis. If they don't perform at these levels, investors will be much more likely to deploy their capital to more stable mid-cap companies that yield a higher risk-adjusted return, including dividend income.

    The number of juniors in the defined universe has increased nominally in recent years in comparison to significant growth in revenue and capital spending [see table below]. As I alluded to earlier, we expect this number to reduce due to consolidation and further increased capital requirements.

    TER: So what will it take for an undercapitalized junior E&P to attract investment?

    BE: For a junior oil and gas company to thrive in an increasingly competitive market, numerous attributes will be critical. A quality, experienced management team will be more important than ever before. It is crucial that management maintains a strong balance sheet and keeps capital spending within board-approved budgets. Furthermore, maintaining an optimal capital structure with reasonable and serviceable debt levels will be of the utmost importance. We expect to see a greater number of juniors succumb to high debt, while others will risk the company on the success of a few high-risk wells. Executives will need to manage risk appropriately in terms of effective deployment of capital as well as hedging commodity price fluctuations. They will also need to plan for potential higher-interest costs on debt and manage those costs through a stand-alone interest-rate hedging program.

    TER: Currently, natural gas prices are lagging far behind oil prices. Do you think this trend will continue?

    BE: The commodity pricing environment will likely dictate that plays be oil focused with strong netbacks. Notwithstanding, juniors will likely require multiple core areas of strong assets that each add economic value and the ability to increase reserves, production and cash flow on a per share basis. Finally, a company must not fall in love with their assets, but be willing to adapt quickly to changing market conditions. But who knows? With all the conversion to oil activity and some recent positive signs for natural gas demand, it may not be too soon before there is a swing back into the currently abandoned natural gas space. Time will tell.

    TER: Thank you for sharing your thoughts on what's to come in this space.

    BE: Thank you for having me.

    Bruce Edgelow is responsible for helping to build ATB Financial's energy business and capabilities. His team consists of industry specialists in all aspects of the energy industry, including drilling and service, pipelines, utilities, midstream, exploration and production. Before joining ATB, Edgelow was a senior Royal banker and has more than 39 years of experience with a focus on the oil and gas industry. He is a Fellow of the Institute of Canadian Bankers, has attained the ICD.D designation, and is a very active participant in community and church activities. He also serves as a director for the Calgary Counselling Centre and sits on SAIT's Board Advisory Council. Edgelow has also been a speaker at numerous oil and gas industry seminars on finance.

    Upcoming SEPAC Presenters:

    For more information on the SEPAC Oil & Gas Investor Showcase, click here.

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