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  • Canadian Oil Explorers Pump Profits Abroad: Frederick Kozak

    Canadian Oil Explorers Pump Profits Abroad: Frederick Kozak

    Source: Zig Lambo of The Energy Report (5/29/12)

    http://www.theenergyreport.com/pub/na/13476

    Smaller Canadian-based companies are exploring and producing in countries all over the globe, in areas that may present even greater returns in the coming years. Frederick Kozak, oil and gas research analyst at Canaccord Genuity, draws on nearly 30 years of experience in the field to focus on investment opportunities in locations ranging from New Zealand to Colombia and Egypt. In this exclusive interview with The Energy Report, he discusses hospitable jurisdictions (it's not what you think) and which companies are flourishing in them.

    The Energy Report: It seems the oil market has defied the expectations of all of those who were predicting $5/gallon ($5/gal) gasoline this summer. What happened to the $130/barrel ($130/bbl) oil that people were talking about?

    Frederick Kozak: When oil gets into triple digits, $100+, $110, $120/bbl, it really starts impacting the North American economy, particularly the U.S. As gas approaches $5/gal, people start cutting back, which impacts worldwide demand. Combined with issues in Europe, China and other world political and economic events, the markets get nervous. The price of oil has turned around to reflect, perhaps, a less rosy economy for the next 12-18 months. The number of contracts that are traded on a daily basis on the NYMEX certainly outnumber real physical daily oil production by a larger multiple. Any way the wind blows influences the paper trade and it's not blowing in their favor right now.

    TER: What are your oil price expectations for the foreseeable future?

    FK: Our long-term view is for $100/bbl Brent with West Texas Intermediate (NYSE:WTI) at around $92.50/bbl through at least next year. That translates to $100/bbl Brent with a permanent differential reflective of the increasing demand from undeveloped parts of the world. Over the last 10 years, the Chinese have doubled their per capita consumption of crude. There's still a huge amount of consumption growth potential there. So, is $40/bbl oil ever feasible again? Certainly on a spike down, but the latest numbers out of the oil sands show that $65/bbl is the break-even number. That might be the floor. However it trades, it's probably going to be higher than that.

    TER: How do the prospects look for oil exploration and production companies (E&Ps)?

    FK: North America has seen a wonderful resurgence in oil production due to newer technologies. The shales and tight oil sands that were previously uneconomic at $30, $40 or $50/bbl are exceptionally economic now. Canadian oil production has also increased. Roughly 75% of the world's crude oil reserves are in the hands of national oil companies, some of which are not friendly to the Western world. That really limits where people can go. My analysis indicated that one of the best places in the last five years for oil exploration has been in South America, in Colombia.

    TER: You cover a pretty broad range of companies. Most of these are Canadian companies looking in a lot of places outside of Canada. What are your criteria for companies you want to cover?

    FK: I mentioned Colombia, but there are other countries I'm covering, including New Zealand as well as Egypt. I like countries with favorable business climates that are friendly to Western business practices, good fiscal terms and the ability to take money in and out of the country without onerous currency controls.

    TER: Besides Colombia, several countries in South America are getting a lot of attention from oil explorers. What is the big appeal?

    FK: Let's start at the bottom end of the spectrum with Venezuela, which has huge natural resources of heavy oil in the Orinoco belt and a government that is extremely unfavorable to Western interests. As a result, Petróleos de Venezuela S.A. (PDVSA), the national oil company, was once producing in excess of 3 MMb/d. About 10 years ago, Hugo Chavez started firing the competent oil and gas people and started replacing them with ones you might call political appointees. As a result, the country's oil production has gone down. The government also nationalized a number of projects and took away the commercial viability of foreign oil and gas companies to do business there. As long as he and people of his ideology are running that country, as rich as it is in resources, it's not a place you can do business.

    Argentina now appears to be turning in that direction with the nationalization of Repsol-YPF S.A. (REPYY:OTCPK). I cover three small oil and gas companies in Argentina, and I downgraded my outlook for them. As rich as the country is in natural resources, the current government is still influenced by the policies of Peron and is doing some very odd things. Although it's not a stay-away-from country, it's much less attractive and that is reflected in the share prices of other public companies involved there.

    At the other extreme is Colombia, where I first got involved in 2007. My catalyst at that point was the second election of President Uribe. In many South American countries, you get one president who makes a bunch of changes and then he's gone after one term. Being around for a second term basically allowed Uribe to institutionalize the first four years of changes. That's when I thought it was the time to be investing in Colombia.

    For many years, people thought about Colombia in terms of Miami Vice and the Colombian drug cartels and missed the fact that the country had been at civil war for nearly 50 years. It has great oil and gas potential with a number of very significant oil discoveries, including Cano Limon, Cusiana-Cupiagua and others. Most of the country was unexplorable because of the problems with the various guerilla groups.

    Once Uribe started getting that under control, it became attractive from a security perspective. Also, he recognized that the Ecopetrol contracts of the 1990s had become so onerous that nobody was investing there, so he had the Colombian fiscal regime completely revamped for new exploration blocks. As a result, Colombia has gone from 525 Mb/d in mid-2007 to nearly 1 MMb/d today. That's nothing short of remarkable given that the government is also looking at potentially 1.5 MMb/d total production in the next five years.

    That's one of the reasons the oil and gas community has focused on it. Many of the oil and gas companies involved in Colombia are Canadian-listed or with Canadian senior management teams. We're entrepreneurs and we're all over the world, exploring for oil and gas. Surprisingly, you can count the number of public American oil and gas companies operating in Colombia on one hand. There have been and are a lot more private enterprises still operating in Colombia that are U.S. based, but surprisingly few public ones.

    TER: How about Brazil?

    FK: Brazil has huge offshore potential. I'm less of a fan of Brazil, and I put it somewhere in the middle of the list because I'm wondering which direction it's going to head. Brazil dwarfs the rest of the South American economies and is less inclined to have foreign capital come in. There are foreign oil and gas companies operating there, but it has not opened up like Colombia. Because it has so much work to do in the offshore sector, there is some discussion as to whether or not Petrobras (PBR:NYSE; PETR3:BOVESPA) will open onshore production to foreign capital exploitation. I have been watching with great interest what HRT Participacoes em Petroleo SA (HRTPY:OTCBB) has been doing up in the Solimoes Basin. It's a Brazilian company that went public in Brazil with a number of North American private shareholders.

    TER: So what's higher on your list?

    FK: I would rank Peru after Colombia, ahead of Brazil.

    TER: Even though there are potential political problems there?

    FK: I think that perception has yet to be established. The president has well-documented past socialist leanings but he has kept a number of the key pro-business advisers and government ministers, even civil service people in those positions under a previously more business-oriented government. We are seeing examples out of Peru where things are working just fine.

    Gran Tierra Energy Inc. (GTE:NYSE; GTE:TSX) has a working interest in Block 95 in the Marañon basin, which was assigned to it without any timing issues or onerous changes to its oil and gas contract terms. Similarly, Pacific Rubiales Energy Corp. (PRE:TSX; PREC:BVC) is going into Peru now, on a joint venture deal with BPZ Energy Inc. (BPZ:NYSE). While that deal has just been announced and hasn't proceeded through the regulatory process, indications are there shouldn't be any issues related to that.

    Peru has a very robust mining industry and there have been a bunch of changes to that. It does have a very robust natural gas industry, but on the crude oil side, it is very under explored. Peru appears to be a very good business environment for oil and gas companies. Some people have compared it to Colombia 10 years ago.

    Pacific Rubiales remains my top pick and has been for a couple of years. When I first met the management team in Bogota in 2007, they presented the plan for the Rubiales oil field. I've seen many business plans come and go and not work out. That is why I'm usually skeptical. My technical background and experience in oil and gas engineering indicated that Pacific Rubiales' plan could work. Of all of the companies I've ever looked at in my career as an analyst, going back more than a decade, this is the only company with a management team that has delivered exactly what it said it would five years ago, virtually on time and on budget from an oil field that is probably going to exceed production expectations as the year progresses.

    It has a very strategic thinking team that ran Petróleos de Venezuela S.A. back in the good old days. It also has an enviable inventory of exploration lands in Colombia, and it has been very good or very lucky in finding heavy oil, which it continues to do best.

    The joint venture in Peru with BPZ Energy is another very logical example of taking advantage of great technical expertise it gained in Lake Maracaibo in Venezuela, that's similar to the shallow, offshore water off northern Peru where BPZ's assets are. I very much like what Pacific Rubiales is doing and can see how 100 Mboe/d today, in five years could be developed into 170 Mboe/d.

    TER: What else do you like in that area?

    FK: In Colombia, I like Petrominerales Ltd.'s (PMG:TSX) exploration inventory. The company struggled for the last half of 2011 with its exploration program in the Colombian foothills, but over the last couple of months, it seems to be having success. We just need the news on the testing of its more recent wells in the Corcel trend to see if it's back on track. I like its exploration inventory in the Colombian foothills, where it just finished drilling on a potential high-impact well called Bromelia. It will be testing that over the next two to three months to see if it's made an interesting discovery there.

    TER: You also cover New Zealand, which is an area most people don't associate with oil and gas production.

    FK: I have followed New Zealand's oil and gas industry for more than 10 years. It has to import the majority of its crude oil because only one-third of its domestic consumption comes from within in the country.

    I cover a company called New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX), whose president was the president of the very first company I wrote a research report on as an analyst when I first started. Fortunately, for me, he was successful. Otherwise, I might not be here today. So, when I look at oil and gas companies, regardless of where they are, I always look at the people first. As president, he's successfully run a number of public and then private oil and gas companies in the last 10 to 15 years. I know that the company management, with him at the helm plus its technical people on the ground in New Zealand, is quite viable.

    The company has an enviable position in the Taranaki Basin in New Zealand, the only currently producing basin in the country. I like its land base. I rank it up there with the best of the companies that are operating in New Zealand right now. It has been lucky on its first two wells. It's producing around 1,000 boe/d, but those wells are limited until it ties in its gas production. It has great conventional exploration potential, and like its next-door neighbor, Tag Oil Ltd. (TAO:TSX.V), which I do not cover, it has a very large land base on the east coast of New Zealand's North Island, which is potentially oil-shale prone. That could become a very interesting catalyst for both of the companies in the future. Right now, I'm more interested in what New Zealand Energy is doing on its conventional stuff.

    TER: What do you see for upside on its stock?

    FK: My target price is $4.50, but it's a highly risked target price based on its exploration inventory. The company has over 20 exploration locations that it could be drilling in the next 18-24 months. Where could the stock go? I have an official target and another number in my mind that might be a double of that. It's going to depend on its exploration success in the basin in a very underexplored mostly 100% working interest land base. I've looked in detail at all the prospects and I have to say it is extremely impressive. Time will tell.

    TER: Another couple of areas that haven't had much publicity or visibility are Egypt and Yemen. You cover a company that's pretty active in those two countries. What's going on there?

    FK: TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ) is one of my favorite names right now. I've followed the company for 12 years, so I am extremely familiar with it and its management. I just came back from Egypt where the company ran an analyst trip field trip to update everybody on its properties and operations. Yemen is where TransGlobe got started. TransGlobe situated itself right beside Nexen Inc.'s (NXY:TSX; NXY:NYSE) producing Masilla field in eastern Yemen. It was directly offsetting that with a small amount of production net to it, and then on the western side of the country, right beside existing infrastructure and existing oil and gas. That production net to them, if it was all onstream, which it's not right now because of pipeline disruptions due to the tribal issues that are ongoing in Yemen, would be about 2,500 bbl/d. The company's total production today is 17 Mbbl/d roughly. So it's become much less material to it. At some point in time, it's going to divest itself of Yemen, but not at this point and, certainly, not when production is shut in. When it's producing, it spins off really good cash flow. So that's valuable for it to finance other activities.

    TransGlobe got into Egypt about four years ago when it acquired a 2,800 bbl/d field that had been undercapitalized for a number of years, doubling that field's production to about 6,000 bbl/d over time. It has also made a very significant discovery in a formation that nobody had paid any attention to, which appears to be pervasive throughout the land. Its current production is all on the Gulf of Suez within 10-20 kilometers (km) of the ocean and a very short distance to get the oil to port for export. This has been the focus of its operations, growing that production to about 17 Mbbl/d today.

    Egypt just had a bid round, which closed at the end of March. The successful bidders should be announced sometime this summer. The company has bid on all the lands around its current production, which if successful, will really set it up for a lot of future exploration and production potential. Its management team has been very conservative in running the business and it presented its roadmap to 40 Mbbl/d to the analyst and investor community in the trip to Egypt. The company's current assets are probably good enough to get it to 30 Mbbl/d. With success in the upcoming bid rounds, it's not a far cry to get to 40 Mbbl/d.

    The bid round was mostly focused in the Gulf of Suez region, but the company also acquired a number of blocks in the western desert of Egypt, which is where the big companies are operating-Apache Corp. (APA:NYSE) et al. TransGlobe has two discoveries that are going to be brought onstream-one in the middle of this year and one at the end of the year. And it's about to spud a very material exploration well in a block that it's just acquiring that is a 200 MMbbl prospect size. If that's successful, it changes the game for it all over again. I like TransGlobe because of the management, the prospect inventory and the production potential. I can't say enough good things about the company and its potential. The stock had been an absolute champ this year since mid-December, until it put out a really good first quarter and the market decided that it didn't like the company anymore and sold the stock off. I think it's a very attractive company at this valuation.

    TER: Are there any other attractive opportunities that you'd like to talk about?

    FK: One company that is an interesting one from an exploration perspective is also operating in South America, but it's offshore. That's CGX Energy Inc. (OYL:TSX.V), which I cover and have a $1.85 target price on. It just drilled a dry hole offshore Guyana that cost it $71M. It drilled that 100%. It also partners with Tullow Oil Plc (TLW:LSE) and Repsol in an adjacent block on a well that's costing $160M, of which it has 25%. It could be one well away from either being a hero or not. CGX has been around for a long time, but it's drilling in a basin where very few wells have been drilled. Tullow and Repsol are known explorationists, particularly Tullow, which has had great success around the world, offshore in this very same play type. Tullow just drilled a successful well off French Guiana. Now, it's moved into offshore Guyana in a similar basin with the same play type. Everybody has their fingers crossed, and if this well doesn't work for CGX, the share price is probably going to be reflective of very expensive wallpaper.

    TER: That's a pretty expensive bet, isn't it? Even 25% of a $160M well is a lot of money.

    FK: Yes, it is.

    TER: But on the other hand, the upside is that if it hits, the payback can be pretty quick.

    FK: Exactly right.

    TER: Based upon what you're expecting for the oil markets in the coming months and years, what investment strategies would you suggest for playing this market?

    FK: It's been a challenging market, no question. Investors should be looking at oil companies as opposed to natural gas companies, in friendly jurisdictions. I have what I call the five Ps, and I alluded to three of them: first and foremost, people; secondly, exploration prospects; thirdly, production; a very important one is profitability; and lastly, the politics, and how well they're politically connected.

    You can trade Argentinean stocks, but I'm not a fan of actually owning them for a long term. Colombia, I would own long term. It has proven itself to be a very good environment for investment.

    Similarly, Egypt is going through real political change. A lot of the things you see on the evening news and the headlines are just that, headline risk. Through the entire Arab Spring last year, TransGlobe did not lose a single day of production. It is being paid on time by the Egyptian government. Egypt relies on three things for its income. Two of those are tourism and oil and gas. So I wouldn't hesitate, despite the headline risk and the fear, to invest in quality companies in Egypt, particularly TransGlobe.

    TER: Thanks for joining us today and for some very interesting ideas.

    Frederick Kozak joined Canaccord in early 2007 and has nearly 30 years of oil and gas industry experience in his role as an oil and gas research analyst at Canaccord Genuity. Kozak previously worked as a research analyst at a Canadian boutique investment firm, where he was ranked the #3 Stock Picker for Oil and Gas in Canada for 2005 in the annual StarMine Analyst Awards. Since being at Canaccord, he has added to that award with the #3 Earnings Estimator award for 2009 and the #2 Stock Picker for 2010 for Oil and Gas in Canada, as recognized by StarMine, as well as being recognized by Zack's Investment Research as being #1 Stock Picker, North America E&P companies. Kozak started his career as a petroleum engineer and has also worked in the oil and gas industry in financial analysis and corporate planning. Kozak holds a Bachelor of Applied Science in geological engineering from the University of British Columbia and a Master of Business Administration from the Ivey School of Business at the University of Western Ontario. He is a registered professional engineer in the province of Alberta.

    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: New Zealand Energy Corp. and TransGlobe Energy Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

    3) Frederick Kozak: I personally and/or my family own shares of the following companies I mentioned in this interview: Pacific Rubiales Energy Corp., Petrominerales Ltd. and TransGlobe Energy Corp. I personally and/or my family am paid by the following companies I mentioned in this interview: None.

    4) Canaccord Genuity has in the past done business with or seeks to do business with the following companies mentioned in this report: BPZ Energy Inc., CGX Energy Inc., Gran Tierra Energy Inc., Pacific Rubiales Energy Corp., Petrominerales Ltd., New Zealand Energy Corp. and TransGlobe Energy Corp.

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  • Uranium Is A Deep-Value Sector: Alka Singh

    Uranium Is a Deep-Value Sector: Alka Singh

    Source: George S. Mack of The Energy Report (5/24/12) http://www.theenergyreport.com/pub/na/13456

    Having just founded her own research company, Mine2Capital, Alka Singh has her sights set on the uranium sector, where she sees deep values in a beaten-down industry. With two major catalysts likely to boost spot prices, M&A activity afoot, new mines coming into production and new companies coming to market, well-positioned investors stand to benefit from what just may be a coming boom. In this exclusive interview with The Energy Report, Singh shares what she sees on the horizon.

    The Energy Report: Alka, after years at Rodman and Renshaw and then at Jennings Capital and Dahlman Rose, you started your own shop, Mine2Capital. What made you decide to set out on your own, and what investing philosophy will you use?

    Alka Singh: The reason we founded Mine2Capital was to provide trusted information for reliable investments. That was the theme with which we started this company. In the financial markets around the world, it is not always clear to investors which information can be trusted, because some data are massaged to look different from the reality. It is our vision to provide the buyside with carefully researched data and due diligence backed by our expertise in our specific sectors, and we are very careful to disassociate ourselves from any direct or indirect financial benefits from the mining firms themselves. However, we do nurture access to all the top CEOs in our industries. Another aspect of our company is that we endeavor to connect good companies around the world with capital from the financial markets-connecting mines and capital. That is the philosophy behind the company name, Mine2Capital. That's what our goal is.

    TER: Will you provide exclusive proprietary research reports to individual buyside clients, or are you preparing reports that you disseminate generally to the buyside?

    AS: Yes, all of that. We do provide exclusive valuation and reports for the buyside. If a client wants us to take a look at a company or at an asset, we do the due-diligence for the assets, build financial models and write research reports. Also, there are some companies that we like and we independently cover them and disseminate information in our reports to the buyside as well.

    TER: Along that line, will you be doing any buyside activities yourself? Will you be operating any funds?

    AS: That will be phase 2 of Mine2Capital. We definitely want to do that as well, but not right this minute. Right now we will be doing due diligence and completing company valuations for buyside clients. In six months to a year, we will be looking at investing as well.

    TER: Alka, your own sector expertise is uranium mining. What is your current theme?

    AS: Well, the uranium sector had just started to show some life in late 2010 and early 2011 when the unprecedented tsunami and earthquake hit Japan and brought the sector back to low levels in March 2011. Many countries started reducing their nuclear power generation. Japan has since shut down all of its 54 nuclear power plants, some only for maintenance. And Germany has announced a phaseout of all nine of its nuclear plants by 2022. This has had a negative impact on the uranium price, and of course on uranium equities. Ultimately, given its long-term safety record, low-carbon emission profile and its ability to produce low-cost baseload power, we continue to believe that nuclear power generation will play a key role in the electricity supply chain.

    TER: If Japanese reactors begin to come back online, what would it mean for uranium consumption and demand?

    AS: We anticipate that Japan will begin to restart its nuclear power plants by year-end. The return of these reactors to the global fleet would increase uranium demand by approximately 12%. Another thing that will push prices higher is the end of the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement in 2013. Right now, Russia supplies the world with an equivalent of 24 million pounds (Mlb) of uranium on an annual basis through the down-blending of its nuclear warheads. Globally, there are 435 nuclear reactors that consume about 180-190 Mlb/year of uranium, and world production is currently only 150 Mlb. Through the HEU agreement, Russia currently supplies 13% of global uranium consumption and 45% of U.S. uranium needs.

    So the end of the HEU agreement will force us to seek other sources of material at the end of 2013, and that's why we are very positive on the uranium sector, even now. Russia, China and South Korea continue to propose and plan new reactors. Those new nuclear power plants that are supposed to come online in the next 20 years are not being canceled-at least not yet.

    Nuclear power remains the only carbon-free baseload source of electricity, and it is producing far more clean power than even wind or solar. In light of this, we are very positive on uranium prices and equities.

    TER: So, you are saying the major catalysts for the uranium mining industry would be Japan restarting some of its reactors and the end of the HEU pact in 2013.

    AS: That is correct, George. Those are the two biggest catalysts. Equities are always valuing events 12 months in advance. So, if the HEU agreement expires in late 2013, we should see an increase in uranium prices later this year. We also expect uranium equities to react positively in response to that increase in uranium prices.

    TER: From what you have just said, I would surmise that you believe the uranium mining equities market is at value levels currently.

    AS: It is. You are absolutely right. The uranium sector right now is definitely a value sector.

    TER: Alka, I am looking at some of these sub-$200 million ($200M) market cap juniors, and some of them have mid-double-digit negative returns over the last three months. It seems that investors should be discounting these important catalysts now. What is the issue here? Is it fear?

    AS: Investors tend to hate stocks when they are going down and love them when they are going up, and uranium equities react in the same way as other sectors. But logic should tell you otherwise. When everybody is against the uranium sector and staying away, that is the time to actually get into the sector-not when everybody is buying it.

    The whole junior mining space is under scrutiny right now, and a lot of the portfolio managers are in cash-preservation mode and are trying to understand what direction the market is going before forking over their money in any commodity equities, whether it's junior gold equities, junior base metals equities or junior uranium equities. Investors are going toward more liquid names, and uranium juniors have all been getting killed in this kind of a market.

    TER: We are seeing consolidation in the market right now. Does this normally signal a bottom in the markets?

    AS: Sometimes it does. When you see a period of consolidation, it's either the bottom and stocks take off, or it's just consolidating before taking another leg down. But I think in the uranium equities market this consolidation will see the next leg up rather than down. Uranium prices have been beaten down a lot, and if you look at some of the conventional uranium producers, the cash costs are above $70/lb if you include capex and exploration costs. So uranium prices cannot stay where they are right now. It's only the in-situ recovery (NYSEMKT:ISR) production projects, which are cheaper than conventional mining projects, that can actually survive this kind of a market. There are exceptions, like Cameco Corp. (CCO:TSX; CCJ:NYSE), which has a high-grade mine with low costs. But if you look at Denison Mines Corp.'s (DML:TSX; DNN:NYSE.A) costs, they are lower than the company's $50/lb projection in Q1/11, and are now estimated at $32.50/lb as of Q1/12. But it is still difficult to be profitable when the uranium spot price is $52/lb.

    TER: Would you expect that we will continue to see consolidation?

    AS: Yes. It is an M&A market. Rio Tinto (RIO:NYSE; RIO:ASX) recently purchased Hathor Exploration. Cameco purchased AREVA's (AREVA:EPA) interest in the Millennium project. We've also seen Uranium Resources Inc. (URRE:NASDAQ), which is a junior, purchasing Neutron Energy. Given the low uranium price environment, companies with good assets and relatively cheaper valuations will be on the radar screen for majors, and they could get taken out.

    TER: What are some of your recommendations to investors?

    AS: Let me start off with GoviEx Uranium, which is a private company, and has over 100 Mlb of uranium at its Madaouela Project in Niger, which is one of the highest-grade undeveloped uranium projects in Africa. The company is looking to create value for its shareholders and advance the project to production. For advancing the project, GoviEx could be looking at some financing options. In our view, the company should be looking at the public markets as it can create a lot of value for shareholders if it can time it right. GoviEx had its preliminary economic assessment (PEA) completed in March, 2011 by SRK Consulting. SRK estimates a 15-year mine life with an internal rate of return (NYSE:IRR) of 22% and a net present value (NYSE:NPV) of about $240M and had used less than 70% of the total resources at Madaouela I. A prefeasibility study is ongoing to be completed by the end of the year. Also, the company recently received $40M in strategic investment from Toshiba Corp. in an offtake agreement to advance GoviEx's Madaouela project in north central Niger.

    Moving on to currently publicly traded companies, I like the ISR names in the U.S. because they have a much lower cost of production than some of the conventional mining names. I like Uranium Energy Corp. (UEC:NYSE.A), Ur-Energy Inc. (URE:TSX; URG:NYSE.A), Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) and Uranium Resources. I am also positive about Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX).

    With Uranium Energy Corp., I like the management team and I like the fact it is already in production in Texas, where you only need state approvals for permits. The company is already in production at the Palangana mine. It has five other projects lined up, and Goliad will be the next mine in production. Uranium Energy Corp. recently made an acquisition in Peru, where it will also be producing uranium by ISR methods in the next four to five years. The company's production run rate is ramping up toward approximately 1 Mlb/year of yellow cake (uranium) and will continue to increase to 2 Mlb/year from Texas operations. Uranium Energy Corp. is the first one to bring an ISR mine into production in the U.S. after six years. Its operations in Peru are not going to start for another four or five years, however.

    TER: Moving on, what's the appeal of Ur-Energy?

    AS: Ur-Energy has one regulatory hurdle remaining, which is approval for the plan of operations from the Bureau of Land Management (BLM) for its Lost Creek project in Wyoming. This one catalyst will be very beneficial for the company. Between Lost Creek and Lost Soldier, Ur-Energy has about 24 Mlb of uranium, $36M in cash, with the remaining capex on the project at about $31M. The recent PEA was completed in the end of April of this year, and cash costs have actually come down to an average of around $16/lb. So, even if the company sells uranium at a spot price of $52/lb, that low cash cost is what I like. I also like that production is coming soon, beginning in Q2/13.

    TER: You mentioned Uranerz. Can you elaborate on that?

    AS: Uranerz is targeting production for H2/12 at its Nichols Ranch processing facility from its five deposits, located in Wyoming's Powder River basin in Wyoming, which is the second-largest uranium-producing state after New Mexico in the U.S. The company is waiting for one last major permit, which is the deep disposal well permit. Uranerz has about 18 Mlb of uranium, and it is already licensed for a maximum production of about 2 Mlb/year of yellow cake. The one thing that is different about Uranerz is that its operating costs are slightly higher than the others, at about $35/lb.

    I also like Uranium Resources because it has a large resource with about 101 Mlb of uranium, out of which 50% is ISR amenable.

    Strathmore Minerals is another one I like in pre-production stage. Korea Electric Power Corp. (KEP:NYSE) owns about 14% of it. It is active in Wyoming and New Mexico. Strathmore is in the permitting process for production at Roca Honda, which is in New Mexico, and a feasibility study is now being completed with a Q3/12 release target. It is also permitting production at Gas Hills, which is in Wyoming. Strathmore would be in production in 2016. I actually expect Strathmore and Uranium Resources to come together in some sort of a merger or asset swap arrangement. The Nose Rock, Roca Honda, Marquez and Church Rock projects in New Mexico are owned by Uranium Resources and Strathmore Minerals jointly.

    TER: Uranium Resources has shown itself to be acquisitive. But it is a small company with an $82M market cap, while Strathmore has a smaller still market cap of $40M. Would you expect this to be a stock transaction if Uranium Resources bought Strathmore?

    AS: You are absolutely right. If there is a transaction, and I'm not aware of one happening now, I think it would be a stock transaction. If you look at a map of the properties that they own, the two companies basically have stakes in each other's properties. They have land positions close to each other, and it just makes sense for them to join hands. In that case, they would only have to build one central mill, and Uranium Resources has already taken one step by buying Neutron Energy.

    TER: My understanding is that Strathmore's Roca Honda project is the largest uranium mine development proposal in the U.S. in decades. How long would it take for that project to get to production?

    AS: Yes, Roca Honda is one of the largest and highest-grade proposed uranium mines in the U.S. in over 30 years. If the permits are obtained on time, we should see Roca Honda in production by late 2016.

    TER: Uranerz, which is a near-term ISR producer, is surrounded by much larger companies-Uranium One Inc. (UUU:TSX) and Cameco. Do you think of that as a takeover target?

    AS: Uranerz could be a takeover target. So could Ur-Energy and Strathmore Minerals. Once Uranerz gets that last permit and starts production later this year, it will become more attractive as a takeover candidate. Denison, Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and Cameco are all looking to grow their production profiles. Cameco even made a bid for Hathor, but Rio Tinto won the bidding war, and so Cameco is definitely looking for assets as well.

    TER: It sounds like there is a lot of action ahead in this sector. Thank you Alka, I enjoyed speaking with you.

    AS: I enjoyed it too. Thank you.

    Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto. Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names. Singh has since started her own independent research firm, Mine2Capital, to provide unbiased research for clients. She holds a Bachelor of Science in geology and a Master of Business Administration in finance. She is a CFA charter holder.

    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., Ur-Energy Inc., Uranerz Energy Corp. and Strathmore Minerals Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

    3) Alka Singh: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

    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

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    May 29 5:54 PM | Link | Comment!
  • 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

    Fax: (707) 981-8998

    Email: jluther@streetwisereports.com

    May 24 5:07 PM | Link | Comment!
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