Seeking Alpha

The Energy Report's  Instablog

The Energy Report
Send Message
The Energy Report features leading investment coverage of fossil, nuclear, renewable and alternative energies. A Streetwise Reports publication. www.TheEnergyReport.com
My company:
The Energy Report
My blog:
The Energy Report
My book:
The Energy Report Newsletter
View The Energy Report's Instablogs on:
  • Where To Look In This Volatile Oil Market: Tim Murray
    Where to Look in This Volatile Oil Market: Tim Murray

    Source: Zig Lambo of The Energy Report (8/2/12)

    http://www.theenergyreport.com/pub/na/14034

    It hasn't been a very exciting year for most energy stocks, but therein lies the opportunity for selective buyers with a longer-term view. In this exclusive interview with The Energy Report, Tim Murray, oil and gas analyst at Desjardins Securities, explains why he prefers small-cap producers in this market environment and discusses a few favorites he expects will outperform.

    The Energy Report: The last time you spoke with us in January, you were expecting oil prices to stay in the $80-100/barrel (bbl) range, which they pretty much have. Where do you think they are headed now?

    Tim Murray: We still believe this range is realistic for the remainder of this year and into 2013. The last downturn in crude seemed to stem more from negative sentiment than a change in the supply-demand balance. West Texas Intermediate (NYSE:WTI) bounced off ~$76/bbl recently, which was the low back in October, so this is a level we will be watching very closely if it were to be breached.

    TER: What effect is the move back down into $80/bbl going to have for oil companies' exploration and development plans?

    TM: Companies are definitely going to have to reassess their exploration and development budgets, if they are budgeting anything close to $100/bbl WTI. Most juniors in the Canadian space use cash flow plus debt to manage their future drill programs. We've already seen several companies in my space cut their capital programs. Whitecap Resources Inc. (WCP:TSX.V) trimmed its capital program, as did Bellatrix Exploration Ltd. (BXE:TSX), Second Wave Petroleum Inc. (SCS:TSX.V), Raging River Exploration Inc. (RRX:TSX) and Longview Oil Corp. (LNV:TSX). We expect others will probably have to do the same and we don't see any junior or small-cap companies expanding programs at this time. Most midcaps have a lot more balance sheet flexibility and we don't envision midcaps in general needing to cut budgets unless we see a sustained oil price closer to $75/bbl.

    TER: Do you think a lot of companies were beginning to think that $100/bbl was the new base and planning around that or were they skeptical as to how long that was going to last?

    TM: Most were still using around $95/bbl oil, and hadn't been putting $100/bbl in their internal budgets. I don't think anybody was saying that it's the new base, as most are accustomed to the large swings in commodity prices.

    TER: Natural gas, on the other side, has been the sick sister. After peaking in 2008 over $10/bbl, it's been hanging around the $2-2.50/bbl level, about as low as it's been for the last 13 years. Is anything on the horizon to cause much of an improvement or is it stuck in that range?

    TM: For the summer, we feel an average Henry Hub price of $2.50-3 is realistic and natural gas has been trading higher than that recently. We need to see storage levels come off before price levels appreciate materially into the fours. Storage levels are running at all-time highs in Canada, and in the U.S. as well. Drilling has eased in Canada and the U.S., which will help reduce the supply equation; however, a lot of the oil resource plays have gas associated with them. Natural gas is really a landlocked commodity in North America and until the means are available to reach other markets such as Asia, prices will remain relatively depressed. Looking longer term in Canada, we may see the first LNG facility at Kitimat, which would give producers access to the international market. But this isn't expected until 2017.

    TER: Other than the ongoing financial problems in Europe and whatever the crisis du jour is in the Middle East, do you see anything on the horizon which could cause oil or gas prices to move much in either direction?

    TM: Middle East tension is always the biggest wild card, and the ongoing debt situation in Europe will continue to grab headlines. The one other wild card that people are aware of but have a difficulty putting a time frame on is the duration of the European embargo on buying Iranian crude that started July 1. We're also watching crude supply levels, which are quite high. From a North American standpoint, in the last two to three years, the spread between Brent and WTI has favored the Brent markets. Long term, we do think that spread will close, but it could take anywhere from three to five years.

    TER: Companies in the oil and gas services business have to be affected by what is going on in this market. Are there some interesting opportunities out there or do you think that the impact is too negative on them at this point?

    TM: Definitely, the service sector traded down as oil moved lower, which is not a big surprise. Our oil and gas services analyst here has been recommending Precision Drilling Corp. (PD:TSX) between the $6-7 range. The stock has been fairly volatile the last month and is currently north of $8.

    TER: So, generally, the service business is not a hot market opportunity these days.

    TM: It's not as hot as it was before. The good thing in this cycle is that the balance sheets of the Canadian service companies are generally good, giving them the ability to ride out a lower pricing environment. Many are paying small dividends that can easily be increased if activity levels ramp up. It may not be the hottest space, but there are definitely a lot of good valuations on many of the stocks.

    TER: So what's your outlook at this point for oil stocks in general?

    TM: Our theme really hasn't changed. We still continue to look for good management teams, good balance sheets and asset bases that can show per-share growth for the next three to five years. The other key is liquidity, as investors and larger institutions don't want to be stuck with a stock that they cannot unload. For my coverage universe, I prefer my small-cap names over the juniors as they have bigger production profiles, generally better balance sheets and liquidity.

    TER: Back in January, you talked about a number of midcap and small-cap companies. Can you give us a little update on what's happened with them since then?

    TM: My two favorite names then were Whitecap Resources and Spartan Exploration Ltd. (SPE:TSX). Spartan is up this year, about 10% compared to the GMP Junior Oil & Gas Index, which is down ~17%. Whitecap is down ~15%.

    Strategic Oil & Gas Ltd. (SOG:TSX) is down almost 35%. Torquay Oil Corp. (TOC.A:TSX.V; TOC.B:TSX.V) is down almost 50%. The junior names have underperformed because capital tends to move to the larger, more liquid equities in volatile times. If I were to benchmark Strategic to its junior oil group, it has outperformed-the group on average is down ~45%.

    TER: Do you think that these are all decent buying opportunities at this level?

    TM: We continue to favor the small-cap space over the junior space. I still like Spartan and I prefer Whitecap at these levels. A new name that I cover that looks very interesting at these levels is Pinecrest Energy Inc. (PRY:TSX.V). It has one dominant asset in the greater Red Earth area targeting the Slave Point resource play. It is one of the most active operators in the play, and with 250 net sections, it could have over 10 years of drilling in front of it, if well results continue to come in positive. It plans on drilling 30 wells this year and if it can demonstrate similar production adds in the back half of this year, as it accomplished last year, we should see the stock react very positively.

    TER: You also cover Equal Energy Ltd. (EQU:TSX; EQU:NYSE)? Do you have any thoughts on that one?

    TM: Equal is in strategic review right now. The stock is really going to be pretty quiet for the time being until we get some news on how that strategic review process is going. I don't foresee one buyer for the entire company, as it has assets in the U.S. and Canada. If anything, I could see it selling its Canadian assets or its U.S. assets, potentially both, but probably not to the same parties. It definitely will get interest on its Viking and Cardium light oil resource-focused assets in Canada.

    We expect to see some news by the end of the summer, at least some guidance on what's going on with the strategic review process. Equal has definitely been hurt by the liquids pricing at Conway, which is trading at very depressed levels. The pricing discount could stay in place for another 9-18 months until there is some de-bottlenecking to get more takeaway capacity.

    TER: Among the companies you've talked about today, which one or ones would be your personal favorites, if you had to pick?

    TM: If you're bullish on oil and you think it is going to stay at these levels, I don't think you can go wrong with Whitecap. It has a big production base for a small cap and probably a dividend coming by year-end. It has a strong management team, good light oil-focused assets and it's an active acquirer. In addition, it has some good hedges in place for the remainder of this year and into 2013, which gives us more certainty on completing its capital program. At these levels, Whitecap makes really good sense.

    I also like Pinecrest sub-$2 and become much more aggressive as it approaches $1.50. The stock is a little more volatile and has recently moved 8-10% in a day. This stock is also very liquid, which I have mentioned earlier as being important for institutional investors.

    I also continue to like Spartan, which is more range-bound with less volatility. If people are a little concerned about oil drifting south, then I think Spartan is the way to play the space right now. I don't think it will be hit as hard as the other two in a falling commodity environment due to its very strong balance sheet and net asset value, which we valued at ~$3.75/share.

    TER: To summarize, what do you suggest for people to be doing strategically and tactically to play these current markets and hopefully benefit from them? When do you think we're going to see some higher commodity prices that will take everything up?

    TM: We think a good group to be in is the small-cap space as it is trading at a discount to the longer-term averages on cash-flow multiples. Most names in this group have good liquidity, which is important in volatile markets. We don't believe that ~$90 WTI is a bad number and if pricing remains around those levels, we believe the valuation gap should close. Higher commodity prices will most likely return if the market is reassured that the European debt crisis has run its course and if developing countries look to be expanding, as they provide the biggest increase in demand for crude and refined products.

    TER: Thanks for your thoughts.

    TM: Thank you.

    Tim Murray joined Desjardins Securities in July 2011. Prior to this, he was an oil and gas analyst for almost six years at several investment boutiques covering junior and mid-cap companies. He also spent over a year at AltaGas Income Trust performing risk and credit analysis on natural gas and power assets for the company's midstream business and served as an investment advisor for three years. Tim was awarded the CFA designation in 2003.

    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: Equal Energy. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
    3) Tim Murray: I personally and/or my family own shares of the following companies mentioned in this interview: None. 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 interview.

    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

    Aug 08 5:19 PM | Link | 2 Comments
  • Catalysts Give Energy Stocks A Jolt: Jocelyn August
    Catalysts Give Energy Stocks a Jolt: Jocelyn August

    Source: George S. Mack of The Energy Report (8/2/12)

    http://www.theenergyreport.com/pub/na/14023

    Small- and mid-cap energy stocks respond to big news in big ways. Senior Analyst Jocelyn August of Sagient Research keeps track of events and related share price movements that can shed light on how stocks will perform when new triggers are pulled. In this exclusive interview with The Energy Report, August discusses some of her favorite and not-so-favorite names that could make profits (or losses) for attentive investors.

    The Energy Report: In the current environment, do catalysts matter?

    Jocelyn August: They do matter. At first glance, last quarter was negative for a lot of stocks. I recently got my 401(k), and it didn't look so good. But we did see a lot of stock movement in Q2/12 in the natural resources realm. We actually recorded 14 double-digit stock price moves, including eight in the energy sector. Some are positive and some of them are negative, obviously.

    TER: What trends are you seeing in catalysts versus share price movement?

    JA: For the most part, the catalysts that move energy stocks the most are those that can show how well a prospect is going to perform for a company. Drilling announcements, especially if they are for test or exploratory wells, have an effect. A start or a completion of drilling is also important.

    TER: What are some examples?

    JA: The largest one-day move we saw recently was a 22% negative move for Samson Oil & Gas Ltd. (SSN:ASX) following its announcement of the start of production at its Gretel II 12 KA 3 well at its Roosevelt oil project in Montana. You would think that a production start announcement would yield a positive stock price, but if you actually look at the announcement, we noted that the well yielded much lower oil production than expected. That's why the move was downward.

    But we did also see some very large, positive, one-day moves. GMX Resources Inc. (GMXR:NYSE) announced the completion of fracture stimulation at one of its wells in the Williston Basin of North Dakota. With this announcement, we saw a one-day upward move of 18%.

    TER: GMX is up 6% over the past four weeks, but down 39% over the past 12 weeks. What is your take on this? Are you positive on this company?

    JA: I am pretty positive on GMX. It has had some very large, event-driven moves recently. It has a really small market cap of $62 million (NYSE:M), and it has a lot of projects that it's working on right now. The Williston Basin is really hot right now. I think that in terms of volatility and market movement, GMX is a good stock to go with.

    TER: What's the next catalyst for GMX?

    JA: The company has several coming up in the next quarter. It has multiple wells in the Williston Basin. It has Joliet 1-18H. It has Wilson 31-6H. It has fracture stimulation at Fairfield State.

    TER: Is it your investment theory here that GMX is a small-cap company for which really good news would yield a good lift in share prices? Is that it?

    JA: Yes, absolutely. I think when you're looking at small-cap companies that have a smaller list of projects that they are working on, announcements from the company with regard to the success or failure of certain projects are obviously going to have a much bigger effect on their stock prices than, say, a larger company that has a lot of projects going on.

    TER: Another one you wanted to talk about?

    JA: Last time we spoke, we talked a little bit about ATP Oil and Gas Corp. (ATPG:NASDAQ) and the Shimshon project it's working on in Israel. Recently, it announced that it had started drilling there, and it gave some preliminary results. After this announcement, its stock jumped 25% but if you look at it now, it has pretty much come back to the level it was at before. I think investors realized this company has a lot of other problems, like a pretty high debt load. While Shimshon may be a really great thing for it, even if it can be shown to be as successful as the Noble Energy Inc. (NBL:NYSE) project that's in Israel, it's still not going to be a complete solution to all of ATP's problems. After the stock jumped 25%, everybody said, wait, let's really look at what's going on with this company.

    ATP is expecting to announce further results on the Shimshon well in this quarter, which we highlighted in our CatalystTracker Natural Resources Q3 Outlook report. This announcement could have a pretty good effect on the stock if it announces positive results, or it could be negative if it were to announce that it actually didn't yield as much as the company expected.

    TER: The market has really punished ATP. It is down 84% over the past 12 months, down 62% over the past three months and down 35% over the past four weeks. The Shimshon project is a gas well, but margins on natural gas can be very good in Southwest Asia.

    JA: I think in that part of the world, the margins would actually be pretty good, so the prospect for that well and for the exploration in general in that area is very good. I think that the punishment of ATP's stock is probably more related to the high debt load. The fear is that it has $1.5 billion (NYSE:B) of debt coming due in a couple of years with the potential that its cash flows aren't going to be able to cover that.

    TER: Does this low stock price represent value? Is your opinion favorable on ATP?

    JA: I would say I'm neutral. If ATP can get something going at Shimshon and if it can achieve more success in the Gulf of Mexico, it could turn out to be a very undervalued company. But I think we need to wait for more results from Shimshon.

    TER: Go ahead with your next one.

    JA: Uranium Energy Corp. (UEC:NYSE.A) is a U.S.-based producer. I have seen a lot of downward moves over the past year despite the fact that it has had a lot of good announcements. It is moving its projects along. It started producing more from its Palangana project in Texas, and again, that was met with more downward moves. I think that the political environment for uranium has been pretty negative since March 2011 with the Fukushima Daiichi nuclear disaster in Japan. I also think the political environment in the U.S. has something to do with it. Given that Japan has made some announcements that it will be starting up some more reactors, I'm hopeful the environment for uranium is going to become a little bit more positive. Also, given that, the stock price of Uranium Energy is fairly low, if the political environment becomes more positive, and if it keeps making positive announcements about exploration and about what it's working on in Texas, I think that those announcements and the company are going to get noticed.

    TER: What catalysts should investors know about?

    JA: The biggest one that it has upcoming is for Goliad. Goliad's measured and indicated resource estimate is 5.4 million pounds (Mlb) uranium, which is four times larger than that of Palangana. We are projecting that Palangana is currently producing around $10M worth of annual revenues with approximately 175,000-200,000 pounds annually. Uranium Energy is expecting Goliad to be on-line and producing by March 2013. At that point, that's going to mean a much larger revenue stream for the company.

    TER: It is my understanding that total U.S. uranium production is only 4 Mlb/year and that we import more than 90% of our needs. Next year or the year after Uranium Energy could be producing 2 Mlb by itself. Are there a lot of catalysts coming up?

    JA: There are.

    TER: Would Japan starting up reactors lift all boats?

    JA: I think that would definitely lift all boats but, again, I think Goliad is going to be something that will be very positive. It also is waiting for an exploration permit for its new project, the Channen project, which is near Goliad.

    TER: Are you positive on Uranium Energy?

    JA: Yes.

    TER: Another one?

    JA: We had previously talked about McMoRan Exploration Co. (MMR:NYSE), and we're still waiting on Davy Jones. I wanted to highlight it again because it consistently has news coming out for this project. It has experienced significant delays, but I think it's on the road to near-term production. We're probably looking at August, but again, we're waiting for an announcement from McMoRan on the flow rates.

    TER: Why has McMoRan been such a fantastic performer? Over the past 12 weeks, it's up 62%. That looks like an inverse image of others in the industry. Over the past four weeks, it's up 18%.

    JA: Despite the fact that it continues to have these delays, which at face value would seem not to be a good thing for the company, McMoRan is revolutionizing the industry and it is working on several other ultra-deep wells as well as Davy Jones. The reason it has experienced so many delays is because it has had to innovate all of this on its own. It has had to come up with the equipment. It has had to figure out how to engineer these wells for this very deepwater drilling. That's something that nobody has done before. So if it is successful with Davy Jones and some of its other ultra-deep wells, then it will become a leader. It will be the company that everyone else looks to for this type of drilling, and it will be able to capitalize on the fact that it has the experience to be able to get to this gas, which previously has been unavailable.

    TER: This is such a tough project considering the depth, the necessary engineering and the associated risk. Could the performance here portend good performance for other gas-well drillers?

    JA: I would think so. The political environment for gas right now is pretty good; it's seen as a more environmentally friendly form of energy. If companies are able to get more of it from places where it was previously unavailable, then obviously that's going to be a positive for a lot of other gas companies.

    Speaking of gas in other areas besides the U.S., we are also looking at FX Energy Inc. (FXEN:NASDAQ). It is doing a lot of gas drilling in Poland.

    TER: FX Energy is up 19% over the past four weeks and up 23% over the past six months.

    JA: It's definitely interesting, and it's one that we highlighted in our Outlook report. Poland is an attractive market because it has significant hydrocarbon potential, which is very largely unexplored, and right now current domestic production in Poland is not enough to meet demand in that area. So, if these projects are economically viable, FX Energy would be in a very favorable position. It is drilling multiple wells in that area that are targeting the Rotliegend formation.

    We are looking at a lot of different catalysts that are approaching this quarter, particularly in the Fences area where FX has been drilling multiple wells. It has made several announcements recently regarding these wells, including the conclusion of casing at the Kutno well in July when it also announced results from one of its Komorze wells. It is expecting results from multiple wells this quarter. These could mean some very positive moves for the company.

    TER: Which would be the major catalyst?

    JA: Kutno is a new area that it is working on and it has not been proven yet, so positive results from this area could be very favorable.

    TER: Jocelyn, you follow Liberty Star Uranium & Metals Corp. (LBSR:OTCBB). It has an $18.75M market cap. What's going on there?

    JA: It is working on some projects in Alaska, Mexico and Arizona. It has a couple of catalysts that we're looking at for this quarter for Tombstone, including a permit approval and potentially a surveying start. We saw some other catalysts from this project in May when it had an announcement of some sample test results. It actually moved the stock price up by 11%. Yes, it has a very small market cap/share price. Again, I think the small market cap and low price may have to do with the uranium situation overall.

    TER: Are you positive on Liberty Star?

    JA: I'd say neutral.

    TER: Are its best prospects in uranium or in metals?

    JA: It seems like it has mostly metals. It does have a uranium property in Arizona, but it doesn't look like it has a lot of catalysts for that right now.

    TER: We talked about Ivanhoe Energy Inc. (IE:TSX; IVAN:NASDAQ) the last time we spoke. Can you update me on it?

    JA: We're looking at some drilling results that are expected this quarter for the Hollin IP-17 well in the Pungarayacu field in Ecuador. It is in the business of heavy oil and uses heavy-to-light technology to improve and convert heavy oil to lighter oil, which is more valuable and can be more easily transported via pipeline. So we're expecting that it is going to continue drilling through Q3/12 and announce results before the quarter ends for this Hollin field. It actually announced on July 12 that it had drilled Hollin to approximately 10,500 feet and it had some evidence of hydrocarbon. So we're looking at some more detailed results as this drilling continues this quarter.

    TER: And you still bullish on Ivanhoe?

    JA: Yes.

    TER: What about Apco Oil & Gas International Inc. (APAGF:NASDAQ)? Do you follow that one?

    JA: Yes, we do follow Apco. We had a big catalyst for it last quarter. It was a negative catalyst. It is doing a lot of drilling in Colombia where it's hard to figure out what is going to happen because of the political environment. It seems to be doing pretty well, but it can be hard when you have natural resources in Colombia.

    TER: What about catalysts affecting Gran Tierra Energy Inc. (GTE:NYSE; GTE:TSX)?

    JA: That is another one that we expect will have a lot of drilling catalysts in Brazil and Argentina this quarter. We have one for Azar, which is actually expected to reach total depth in early August, and then we'll have some results.

    TER: You follow Endeavour International (END:NYSE.A).Tell us about that company.

    JA: That one actually saw a large move last quarter as well. It is interesting because it has a lot of projects in the United Kingdom's North Sea. It has been in that area for a long time, but its large-mover catalyst last quarter was actually in the Heath shale in Montana. It had a 19% upward move with well results for that one. Endeavour seems to be diversifying and getting into other areas besides the North Sea.

    TER: What's the next catalyst for Endeavour?

    JA: We have several catalysts this quarter. We have catalysts for Bacchus, where we will see a second well begin production this quarter. We're also waiting on a project sanctioning for Columbus.

    TER: What about Noble Energy?

    JA: It also has a large project in the North Sea called the Bream project. We're waiting on the project sanction for that by year-end.

    TER: Are you positive on Noble?

    JA: Yes, we are. It has a much larger market cap.

    TER: Thank you, Jocelyn.

    Learn more about Sagient's CatalystTracker here.

    Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new natural resource industry product within the CatalystTracker product line with the publication of the Catalyst Impact Study: Natural Resources Sector. Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a Master of Business Administration from the Rady School of Management at the University of California, San Diego and graduated cum laude from UC San Diego with a Bachelor of Arts degree in sociology.

    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.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: Uranium Energy Corp. and FX Energy Inc. Interviews are edited for clarity.
    3) Jocelyn August: I personally and/or my family own shares of the following companies mentioned in this interview: None. 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 interview.

    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

    Aug 08 5:18 PM | Link | Comment!
  • These Oil And Gas Technologies Lower Costs, Boost Upside: James West

    Source: Zig Lambo of The Energy Report (8/7/12)

    http://www.theenergyreport.com/pub/na/14065

    There's more to the oil and gas business than drilling holes and distributing what comes out of the ground. Technological advancements in other details of exploration and production are creating major opportunities. In this exclusive interview with The Energy Report, EnerTech Advisor publisher James West fills us in on new cost-cutting technologies and the relatively unknown companies behind them, as well as some major companies that are already benefiting from them.

    The Energy Report: In your last interview with The Energy Report, "The Who, What and Where of Energy Investing," you touched on a range of energy subsectors. Why are you placing more emphasis on energy rather than mining investments?

    James West: Generally, I think the risk-averse sentiment in the global equities market is going to continue, which is largely because of government debt. This means there's a real inclination toward disinvestment in highly speculative ventures, such as mining projects. Meanwhile, the world continues to consume about 88 million barrels of oil and about 20 million tons of coal every day. Even if economic weakness continues and energy demand decreases, these commodities will continue to be consumed in substantial quantities. That's why I prefer energy investments over mining at this point. Until there's some resolution to the global debt crisis, it's not possible to have a healthy, risk-tolerant speculative market in mining commodities.

    There's no point in either buying or selling right now. I certainly don't think we've seen the bottom in the market and that now is the time to accumulate. Nor do I see any point in selling the beaten-up assets below where I paid for them. You may as well just sit on everything in the mining space. I do believe you will be able to buy choice assets quite a bit cheaper than where they are today.

    TER: You've launched the EnerTech Advisor newsletter as well as a related fund, the EnerTech Fund. Are energy technologies the land of opportunity in this market?

    JW: Yes. I'm now focusing more on energy technologies. Public companies with technologies that remove substantial cost components for energy production, transportation, use and consumption will perform better than standard exploration and production companies. Plus, now is the time for energy technologies to see support from subsidies, soft loans and government loans that will help them penetrate the commercial market space.

    TER: What's going on in the energy services field as a result of the recent pullback in oil prices? Are there some interesting opportunities?

    JW: Yes there are. There is one company I'm heavily invested in and two others that look very promising. The first, NXT Energy Solutions (SFD:TSX.V; NSFDF:OTCBB), is involved in the earliest stage of exploration and production. The company has developed a prospecting tool focused on stress field detection-that's why its ticker is "SFD." NXT Energy Solutions has some patented technology. Its sensors measure the effects of stress in hydrocarbon reservoirs on gravity, and by interpreting that data it claims to be able to deliver an accuracy success rate of 70% in pinpointing trapped hydrocarbons underground. Several rather large companies have used it and have actually allowed NXT to use written testimony to support the soundness of the technology. At this point, it's credited with finding at least 160 million barrels of oil. There are some major contracts coming with some of the larger producers who are finally starting to wrap their heads around this technology. It sounds too good to be true, but it looks very promising.

    TER: How much better is the success ratio or performance of this technology versus what's been used up to this point?

    JW: First-pass geophysical exploration in the oil and gas space typically involves 2-D seismic data after preliminary geophysics have identified likely geology. On an average 10,000 square kilometer (sq km) concession, it would take four to five years and probably $30-40 million to generate thorough 2-D seismic reconnaissance. The degree of accuracy at that point is probably no more than 20%. NXT Energy Solutions' stress field detection can reduce the time to a period of months and cover the same area for probably less than $5 million with an accuracy of 70%, which is quite dramatic.

    TER: Is this somewhat similar to airborne geophysics that are used for mineral deposits?

    JW: It's also airborne but that's where the similarity ends. There is no technology that makes any claim toward registering the effects of stresses on gravity. It's really black-box rocket science. And that's why it's been having such a hard time penetrating the market. It's just so revolutionary that most oil and gas analysts looking at it say it's just too crazy. "We've never heard of it. Nobody's done it," is the standard response. But the fact is that companies like Ecopetrol S.A. (EC:NYSE; ECP:TSX) and Pacific Rubiales Energy Corp. (PRE:TSX; PREC:BVC) have used it and are returning to use it again and again. NXT Energy is in its fifth contract with Pacific Rubiales, which demonstrates that it seems to be working.

    The pattern of announcements over the past five years indicates gradual industry acceptance of the technology. A lot of physicists have come forth and said, "Yes this is possible, but there's no way to tell unless you actually do it." The company is now running these contracts and delivering the data, and companies are finding hydrocarbon reserves based on this technology and drilling wells successfully. So it looks very promising.

    TER: What's the second company you were going to talk about?

    JW: Going up the life cycle of oil and gas, we started off with prospecting. The next thing involves drilling both natural gas and oil wells, where a lot of water is required and also produced in the course of drilling. A lot of this water is highly contaminated with hydrocarbons as well as other substances, not the least of which most recently in the news are fracking fluids. The actual fracking chemicals represent less than 1% of the fluid that is returned and has to be treated. So, fracking fluid itself is not the issue. It's more of an issue of chlorides. When chlorides are brought to the surface, you can't just let them flow out onto the ground because they raise the salinity levels in soils to the point where they're no longer arable.

    The major problem in all of these drill locations throughout the U.S. that are now producing like crazy from shales is that they are generating a lot of water and they also need to use a lot of water in the fracking process. Many of these companies are trucking in water. If the nearest water source is more than 40 miles away, it becomes prohibitively expensive.

    A company called Ridgeline Energy Services Inc. (RLE:TSX.V) has a water treatment technology that essentially takes water apart molecularly, removes the impurities and puts it back together in such a way that oil and gas drillers are now able to reuse it rather than to have to dispose of it and get fresh water. Ridgeline is at a similar stage as NXT Energy in that it's just gaining industry acceptance of the technology and becoming widespread. In fact, it is projecting that it will roughly double revenues each year for the next five years. I recently had a conversation with Ridgeline's CEO, Tony Ker, and he expects about $50 million in revenue in 2012. That is expected to double every year for at least five years, based on the growing acceptance of this technology.

    TER: And your third company?

    JW: The third one is tackling one of the biggest problems in the petroleum industry. According to The American Petroleum Institute, about 70% of the world's remaining oil and gas reserves are high in sulfur, and therefore highly corrosive. This raises the costs of producing and transporting the fluids dramatically because it increases the wear on pipes, joints, pumps and drill bits to the point where many fields are no longer economic to produce. A great example is the Canadian oil sands, which suffers from both high chemical corrosivity and high wearability due to the presence of sand in the bitumen. This company, called Abakan Inc. (ABKI:OTCQB), has a subsidiary called MesoCoat Inc., which produces nano-composite metallic coatings for interior pipe walls, among other things, and essentially extends the life of a pipe by anywhere up to 15 times.

    A typical pipeline that once had a design life of 30 years, which was optimistic in the case of Prudhoe Bay in Alaska, could now be coated to last up to 180-200 years and beyond. Again, this is one of those things that sound too good to be true. But the technology originates from Oak Ridge National Laboratory and is currently being deployed by Petrobras (PBR:NYSE; PETR3:BOVESPA), whose deep Brazilian offshore fields are extremely high in sulfur, very corrosive and high temperature. Abakan is also going to be announcing the establishment of a plant in Alberta at some point this year and has negotiations and discussions underway with essentially all of the major oil and gas producers. This is, again, a technology that is just on the cusp of widespread industry acceptance and penetration. That's why I own it.

    TER: It would seem that there would be multibillion-dollar market potential, considering all the pipelines all over the world.

    JW: MesoCoat actually has two technologies. One's called CermaClad, which is the pipe coating, and the other one's called PComP, which is a sprayable powder coating. MesoCoat also has a joint development agreement with the U.S. Army and U.S. Air Force to coat critical components in the aerospace defense industry because it gives them much higher wearability and longer life. The company is also in discussions with steel plate coaters. This material can be applied to ships, extending their design life from 30-50 years to over 200 years. It can be applied to critical infrastructure components like bridges to extend their lives from 30-50 to 100-200 years. So there are many more applications beyond the oil and gas space. MesoCoat is going after the oil and gas space first because it's the low-hanging fruit.

    TER: How has this extension of life expectancy been proven?

    JW: Abakan recently received an independent third party report from a company called Det Norske Veritas, in Norway, which is one of the premier technological risk assessment companies out there. They came up with the report basically giving the technology carte blanche approval of their representation. That six-fold extension was very conservative. It was trending more toward fifteen-fold in all the data that we looked at. I think it's going to be huge.

    TER: Switching to the more traditional oil and gas plays, do you have any interesting names for people to consider at this point?

    JW: Aroway Energy Inc. (ARW:TSX.V; ARWJF:OTCQX) is one of our portfolio holdings that I really think is a great opportunity. It's been somewhat brutalized by the market in general, which has treated great companies just as poorly as lesser companies. Aroway is primarily in condensates and oil. It just started another drill program after exiting 2011 with just over 1,200 bpd of production, which was quite substantially above what it had predicted.

    The current drill program is for eight wells planned in two stages of four wells, focusing on oil. This is in a zone surrounded by mid-tiers. There's Crescent Point Energy Corp. (CPG:TSX) to the north, Birchcliff Energy Ltd. (BIR:TSX) to the west and Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) to the south. These are large operations. Aroway Energy is one that I really like here.

    TER: Where do you think the oil markets in general are headed from here?

    JW: The commodity volatility we're seeing now is certainly to be expected in this kind of market. The debt crisis and economic weakness have prices fluctuating all over the place. If the G20 governments decide to inject several trillion dollars worth of money into the market, that will induce a bit of an economic rally, as well as a commodity spike. Some people are bullish on the idea of a stimulus-led rally. Other groups are convinced that there's nothing but long-term economic contraction ahead and, therefore, are disinvesting from commodities. That's why we have this volatility and you can't really be sure which is going to prevail.

    If the G8 governments suddenly coordinated a global stimulus, which could cost trillions of dollars, then you'd see prices take off to the north. If, on the other hand, the debt situation continues to worsen, along with worsening recessions in southern Europe and the United States, then you're going to see stockpiles of energy, both gas and oil, increase and usage go down, which would obviously have a bearish effect on prices. Either outcome is possible.

    TER: Do you have any opinion as to how the U.S. election might influence market performance?

    JW: Personally, I don't see any significantly different outcome between a Republican or Democrat victory. Looking at the political landscape from the outside, the financial and systemic problems in the United States are so profound that Mickey Mouse could be elected president and he'd have no choice but to be immersed in those problems.

    TER: Can you summarize for us what you think the best energy investment opportunities are at this point from your perspective and what our readers might consider doing under the circumstances?

    JW: Well, as Mark Twain famously said, if you want to double your money take it out of your pocket, fold it in half and put it back. That really applies to the current market. However, if you have a long time horizon and you have the ability to place an investment very carefully, you can certainly pick up assets that are going to be worth a lot more down the road. If you're working according to some kind of schedule, then there's really not much point in investing in commodities, especially in explorers and producers. Right now, I want to invest in things that are going to dramatically reduce costs and have a high impact on the markets on which they're entering. That pretty much exists only in new energy technologies.

    TER: You've given us some very interesting ideas to consider. Thanks for speaking with us today and we'll look forward to seeing how these ideas perform.

    JW: My pleasure.

    James West is publisher and editor of The Midas Letter and is an independent capital markets entrepreneur and investor. He has spent more than 20 years working as a corporate finance advisor, corporate development officer, investor relations officer and media relations and business development officer for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction.

    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: Aroway Energy Inc. and Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
    3) James West: I personally and/or my family own shares of the following companies mentioned in this interview: Abakan Inc., Aroway Energy Inc., Birchcliff Energy Ltd., Crescent Point Energy Corp., Ecopetrol S.A., NXT Energy Solutions, Pacific Rubiales Energy Corp., Petrobras, Ridgeline Energy Services Inc. and Royal Dutch Shell Plc. 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 interview.

    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

    Aug 07 4:44 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.