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:
  • Natural Gas Has Sex Appeal: Andrew Coleman

    Source: Zig Lambo of The Energy Report (10/23/12)

    http://www.theenergyreport.com/pub/na/14620

    With prices on the rise and a cold winter approaching, some gas names have already begun to rally. But Andrew Coleman of Raymond James takes a cautious approach-that's why he looks for oil and gas companies that can survive a tough market. In this exclusive interview with The Energy Report, Coleman shares how to gain exposure to promising shale plays using defensive investing tactics. Read on to learn which companies are measuring up with strong balance sheets, dominant acreage positions and top-tier technology.

    The Energy Report: In your last interview, you talked about raising price targets on energy sectors and individual stocks with promising reserves and production growth. Is that still your view, or have circumstances changed?

    Andrew Coleman: What we're more worried about at this point is that the U.S. economy has been slower to recover than we expected. Meanwhile, the situation in Europe is getting worse and China's growth is slowing. To help us evaluate oil and gas markets in this context, our team here at Raymond James put together a bottom-up supply model looking at the oil shales, which was a follow-up to work the team had done on gas shales a couple of years earlier.

    The gas outlook has remained cautious, although not nearly as bearish as it was a couple of years ago. We have, however, become much more nervous on the short-term outlook for oil. We have a $65 per barrel (bbl) forecast for West Texas Intermediate (NYSE:WTI) and an $80/bbl forecast for Brent for 2013. The forward curve on gas is getting better, and certainly 2013 gas is over $4 per thousand cubic feet (mcf) right now. Oil is our big concern and back in June we downgraded virtually every name that we follow in the E&P space to the point where we now have no strong buys in our coverage group.

    The uncertainty on the demand side and increased production growth due to the shale drilling technology indicates a significant inventory oversupply by the second quarter of 2013, which should lead to lower oil prices. Although prices have remained relatively robust in the U.S., we're waiting to see the supply and demand fundamentals even out before we get more constructive on the space.

    TER: So, you figure that these prices are going to be affected worldwide, even with the difference between WTI and Brent?

    AC: Yes, over time. We're still looking for a $15 differential between Brent and WTI. In North America, there's a lot of supply in just a few basins and transport options are still evolving to get those barrels to the most favorable markets. A reversal at the Seaway pipeline and the approval of Keystone XL would definitely help. The conclusion of the presidential election would remove one more big uncertainly, and the next step would be getting through any transition of power and seeing what happens with the fiscal cliff. Having a few more months of macro data never hurts either.

    TER: Is the current gas supply and price playing any role in this?

    AC: Yes and no. Generally speaking, oil is a transportation fuel. Natural gas is a power generation fuel. Natural gas and coal compete quite hardily. Gas prices have rebounded recently, but there was a tremendous amount of utilities switching from coal to gas. As natural gas goes higher, more plants might switch back to coal. Gas remains cheap relative to oil and my view is that oil is still probably a better medium-term commodity to be in. The current headwinds for oil point to it potentially falling by 25%, which would be very bearish for oil stocks in the short term.

    The warmer than normal winter last year caused an excess supply of propane (and natural gas), which in turn put pressure on ethane. Average natural gas liquids (NGLs) prices followed gas prices lower, putting pressure on the entire gas value chain. With winter just around the corner, there is some optimism that normal weather will improve both the gas and NGL price outlook. If not, then weakness in oil prices would further hurt gas producers, as liquids revenues comprise up to 50% of total unhedged revenues for even the heaviest gas producers.

    TER: Your downside price for oil is lower than what I've heard anyone else talk about. What's your upside for the next year or so?

    AC: Longer term, we're looking for $80/bbl WTI, and with a $15 differential for Brent, so we're looking at $95/bbl. The current large crude stocks and diminishing storage for all that crude, along with continued production growth, mean that pricing could fall in the early part of 2013. We think the price will average $65/bbl next year, based on our math, which suggests $65/bbl is the price at which most U.S. oil drilling stops. Remember, in the fourth quarter of 2008, WTI averaged around $60/bbl followed by $40/bbl in the first quarter of 2009 before averaging $62/bbl for the year. We think that WTI may bottom at $60/bbl and then start rebounding back to $80/bbl by 2014.

    TER: That will make for a lot of happy drivers, but isn't it going to change the planning for companies in the production business?

    AC: We've continued to hear expectations of service-caused cost deflation from exploration and production (E&P) companies. A couple of years ago, everybody needed frack crews, frack sands, rigs, drill pipe and lots of other service components. Now with most companies not investing in any dry gas production and with oil price uncertainty and additional services capacity being brought to the market, we see an opportunity for service costs to come down a little, which would be a positive for the E&P guys.

    TER: What factors are you considering most important in deciding which stocks look like the best buys at this point in time?

    AC: We definitely try to do a lot of work at the beginning when we select companies for coverage. Between nine analysts and fourteen associates, our energy team covers around 150 energy stocks. On the E&P side, we start by looking at where the most activity currently occurs and where we think that activity will be in a couple of years. We also look at the major players, like Anadarko Petroleum Corp. (APC:NYSE), Devon Energy Corp. (DVN:NYSE) and Chesapeake Energy Corp. (CHK:NYSE), and try to find nimble small or mid-capitalization peers positioned to succeed in those same areas.

    Ultimately, we want to follow high-quality management teams because economic conditions continually change. If a management team can stay ahead of those tides, then shareholders benefit from growth, an improving asset mix and returns.

    TER: Maybe we can look back on some of these companies that you talked about last year that you still cover and like, and you can bring us up to date on what's happened with them.

    AC: Of the 21 stocks that I follow there are eight that I have an Outperform rating on. Because of our oil price call, we do not have any Strong Buys. My top three picks would be Continental Resources Inc. (CLR:NYSE), Energy XXI (EXXI:NASDAQ) and EOG Resources Inc. (EOG:NYSE) followed by QEP Resources Inc. (QEP:NYSE), Bonanza Creek Energy Inc. (BCEI:NYSE), Denbury Resources Inc. (DNR:NYSE), Devon Energy Corp. and Anadarko Petroleum.

    When I look at companies, what I consider first is the commodity backdrop, which is currently cautious. I tend to pick names that have better balance sheets when we don't know about the direction of the commodity or we think it's down. All three of my top picks have excellent balance sheets. EOG's debt to EBITDA is less than one times. Continental Resources is around 1½ times and Energy XXI is around one times. They're some of the best-levered names in the group in terms of liquidity and their ability to take on debt, should their revenues fall because of quickly softening oil prices.

    Continental Resources is the biggest landowner in the Bakken and at its analyst meeting last week, management highlighted additional inventory potential there.

    Secondarily, I'm looking for companies that have dominant acreage positions or top-tier technology in what they do. Energy XXI is one of the highest oil-weighted players on the shelf in the Gulf of Mexico. This company has been a strategic acquirer of assets. It purchased about a billion dollars of assets from Exxon about a year and a half ago, which really expanded its footprint. At the time of that deal, it operated one of the top-thirteen biggest fields ever discovered on the shelf. After the Exxon deal, it now operates six [of the twelve largest oil fields in the Gulf of Mexico] and has a working interest on the seventh. So it's the third-biggest player in the Gulf of Mexico shelf and is 70% oil. Continental is 80% oil.

    EOG is a gas story and one of the largest names I follow. It's been hugely successful in developing its Eagle Ford shale acreage and getting oil and liquids throughout that field. It's become a great stock to hold in an uncertain environment. Of the eight names that I follow, those three are the most interesting to me, given our commodity outlook. They have dominant acreage footprints, excellent execution and great balance sheets to withstand any price softness that could come down the short-term pike.

    TER: They're more defensive stocks than they are aggressive buys. Is that right?

    AC: Yes. When we look at our coverage in general, we don't have any Strong Buys. We define strong buys at Raymond James as outperforming the market over both a six and twelve-month basis. The Outperform rating is what we think will outperform the market over a twelve-month basis.

    TER: How about some small- or micro-cap companies? I was looking at your coverage list and there are some that are fairly low priced compared to a lot of the others that are in the $50 to $100/share range. Do any look interesting?

    AC: Bonanza Creek Energy Inc. is one I would point out. It went public last year and is a Niobrara oil shale producer. The Niobrara is outside of Denver, Colorado. Anadarko Petroleum has a huge footprint in the Niobrara. To incentivize the construction of the transcontinental railroad, the government granted right-of-way access to the railroads and Union Pacific, which ultimately became Anadarko, and the company now owns that acreage in what has turned out to be the heart of the play at the Wattenberg field.

    Bonanza Creek has 30,000 net acres adjacent to some of Anadarko's lands in the core of the Niobrara, called the Wattenberg field. This is a company that has a great balance sheet with a one-time debt to EBITDA while it's ramping up its drilling program. It's basically following on what Anadarko or Noble Energy Inc. (NBL:NYSE) will do-those companies are the two biggest landholders in the Wattenberg. Bonanza is hoping to prove up its Niobrara oil shale acreage and almost double production this year, to almost 10,000 barrels per day (bpd), up from nearly 6,000 bpd at the start of the year.

    Shares at the time of the deal fell to $12 as this was IPOed in December 2011, which was a very difficult market at the time. It has now rebounded into the low-$20 range. From my conservative standpoint, it's worth between $25-40/share. The large range depends on whether you're evaluating the stock on a pre-tax or post-tax basis and on how much activity you're giving them credit for. We risk the acreage pretty heavily and think that getting into the upper twenties is really what happens when the company executes like its peer group.

    The first hurdle it has to get over is to show investors that it can execute as well as everybody else. Then, the next step is to show that it can find and develop new plays, the Niobrara being one of them. Transitioning into a peer resource E&P then drives a lot more value creation, which can get you north of $30/share. I think Bonanza Creek is a small-cap name that has the right ingredients to outperform.

    TER: Any other smallcaps worth looking at?

    AC: You can also look at Swift Energy Co. (SFY:NYSE) and PetroQuest Energy Inc. (PQ:NYSE). I rate both as Market Performs.

    PetroQuest is a more gas-weighted E&P company. It has a discovery well at the La Cantera prospect that adds more drilling inventory. The company also built a nice Mississippi Lime presence in Oklahoma to go along with their Woodford shale acreage in Oklahoma and their East Texas acreage in the Carthage field. It has attractive economics in the Mississippi lime and Woodford resulting from a joint venture with NextEra.

    Swift Energy is a smallcap that has 78,000 net acres in the Eagle Ford shale in South Texas, South Louisiana, and 100,000 net acres in the Austin Chalk trend in south-central Louisiana. Some of its south-central Louisiana acreage could be prospective for the Tuscaloosa Marine shale, so we are watching players like Encana Corp. (ECA:TSX; ECA:NYSE), Devon, Goodrich Petroleum Corp. (GDP:NYSE), EOG Resources, Anadarko and Halcon Resources Corp. (HK:NASDAQ), which we do not cover. Swift recently closed its 2012 funding gap, but its higher beta would make it a stock to watch should (a) the pricing environment improve, and (b) the TMS data points surprise to the upside in 2013.

    TER: What do you see in the near term for the O&G sector and how should investors approach this market to take best advantage of what lies ahead?

    AC: Clearly, gas has some sex appeal at the moment. The forward curve has moved up north of $4/mcf and heading into earnings season, we'll be watching to see if these producers are adding price protection (e.g., hedges) for 2013+. On average, shares of gassy E&Ps are up 10% in the past three months, with a name like Southwestern Energy Co. (SWN:NYSE) leading the pack.

    In the short term, some exposure to gas certainly doesn't hurt. If we think oil is going to suffer, perhaps gas can be the beneficiary as we go into the winter heating season. We should get a sense in the next couple of months as to what winter weather will be like and if we can repair the NGL market, which is the next leg of the gas market. Then we'll get some views as to what's going to happen with oil, based on global demand, supply growth and this economic expansion. Heading out of winter, we'll have to see if we have enough data to say that the oil players can hold up, or if it is still time to be cautious. That's why we don't have any Strong Buys and remain defensive, with maybe a little bit of gas exposure, heading through year-end.

    TER: When do you think there might be a turnaround in the whole picture?

    AC: I'd still like to see gas production decline. No company that we follow is drilling any dry gas wells but they're still drilling wet gas wells to get the NGLs, and oil players are getting associated gas with their production. A meaningful slowdown in gas production should be positive for prices. Also, if we get increased demand due to colder weather, that would also help to underpin a more positive sentiment on the space.

    From a funding standpoint, credit remains relatively accessible, but we are in the period when company credit facilities are reevaluated. Any pressure here could lead to more producer hedging, but overall we are not overly concerned. Recent high-yield deals have been done at rates between 5% (large-cap companies) and 7-8% (smallcaps). The improved sentiment for gas likely points to improved liquidity. While we're worried about the short term, we don't see a huge amount of distress right now.

    TER: We appreciate your thoughts and insight today, Andrew, and we'll be watching to see how all this turns out.

    AC: Thanks for having me.

    Andrew Coleman joined Raymond James Equity Research in July 2011 and co-heads the exploration and production (E&P) team. Since 2004, he has covered the E&P sector for Madison Williams, UBS and FBR Capital Markets. Coleman has also worked for BP Exploration and Unocal in a variety of global roles in petroleum and reservoir engineering, operations, business development and strategy. Coleman holds a Bachelor of Science in petroleum engineering from Texas A&M University and a Master of Business Administration in finance and accounting with a specialization in energy finance from the University of Texas at Austin. He is a director for the National Association of Petroleum Investment Analysts (NAPIA) and a member of the Texas A&M Petroleum Engineering Industry Board, the Independent Petroleum Association of America's (IPAA) Capital Markets committee and the Society of Petroleum Engineers (NYSE:SPE).

    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: Energy XXI Ltd. Interviews are edited for clarity.
    3) Andrew Coleman: 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

    Oct 23 2:49 PM | Link | Comment!
  • Jeb Handwerger: Uranium Stocks Are At Two-Year Lows, Pounce Now And Ride The Upswing

    Source: Brian Sylvester of The Energy Report (10/18/12)

    http://www.theenergyreport.com/pub/na/14596

    Jeb Handwerger, Gold Stock Trades editor, says coal and natural gas lobbyists are kicking the uranium industry while it's down in the shadow of the Fukushima nuclear accident. It's still stormy out there, but the sector may prove be the pot at the end of the rainbow for contrarian investors. In this interview with The Energy Report, Jeb Handwerger challenges investors to take a calculated risk on a sector with major potential.

    The Energy Report: Jeb, in a September post on goldstocktrades.com, you opined that nuclear energy is essentially being kicked while it's down. Can you explain that for our readers?

    Jeb Handwerger: We experienced the Fukushima disaster, plus a very risk-off market for most of 2011 and 2012 in commodities and mining equities, with investors concerned about the global economic situation. That added up to two major hits to the uranium sector. In addition, we had many lobbying groups pushing their individual energy sources, such as natural gas, coal, wind or solar, to take advantage of the nuclear slowdown. We also saw a large short position build in many of the uranium miners and we've seen the short-term uranium price correct. At this point, the uranium miners are trading near 52-week lows, and I believe they are extremely undervalued. Even Japan is looking to acquire uranium miners.

    TER: You think Japan as a country is looking to acquire uranium miners?

    JH: There was a report that Japan Oil, Gas and Metals National Corp. (JOGMEC) is signing a production-sharing agreement with the government of Uzbekistan. It was also interesting that the CEO of Cameco Corp. (CCO:TSX; CCJ:NYSE) went to Japan to try to buy surplus uranium from utilities, but couldn't finalize a deal. This indicates to me that Japan is going to turn some of these reactors back on, especially the newer, safer, more efficient reactors.

    Over the next 12-18 months, the uranium sector is going to have a very powerful rebound based on supply-demand fundamentals. So it's very important to watch what the smart money is doing when prices are down and the uranium miners are trading at 52-week lows.

    Also, consider the recent deals that have been occurring, including a utility signing an offtake agreement with Paladin Energy Ltd. (PDN:TSX; PDN:ASX) and Chicago Bridge & Iron Co. (CBI:NYSE) buying The Shaw Group Inc. (SHAW:NYSE) for its nuclear building capabilities.

    TER: Is most of the nuclear rebound wrapped up in what's happening in Japan or are there other catalysts?

    JH: There are other catalysts, such as BHP Billiton Ltd.'s (BHP:NYSE; BHPLF:OTCPK) decision to delay the Olympic Dam expansion because of the $30 billion cost. This delay may have significant impact on the uranium spot market.

    We also have the expiration of the highly-enriched uranium (HEU) agreement with Russia soon. The Russians are signaling that there is not going to be any increase of the secondary supply. We are heading toward an even larger uranium deficit right now.

    On the demand side, we're seeing the building of new reactors in the Middle East, Saudi Arabia and the United Arab Emirates. We recently saw the power outage in India, which demonstrated the importance and the hunger for power upgrades in that country. That's one of the major areas of growth. India is building something like 42 reactors by 2032. China is going full-speed ahead with nuclear power and is still pushing for 60 new reactors by 2020. We may hear some major announcements after the transition of leadership on November 8th. China is already discussing a major infrastructure program. We believe the nuclear buildout is part of that initiative. The Middle East issues and rising energy prices are really forcing Asia to think more about energy, including nuclear energy and uranium. Demand from China and India alone will push us further into this shortfall. So we don't think these uranium prices will stay at multiyear lows. Get ready for a catapult-like move.

    TER: Investors interested in entering the energy sector have a number of options. These include green energy, natural gas, coal and uranium. Where is the best place for them to be right now?

    JH: We believe for baseload energy, uranium is providing a very good opportunity right now because it's trading near multiyear lows. Because of the low spot price, the assets are priced as bargains. The upside has great potential. We think that nuclear is the choice of the emerging nations, such as China, India and the Middle East.

    There is something very interesting going on in that we're seeing Saudi Arabia and the center of the oil world looking into nuclear energy. This, to us, has significant implications, meaning that maybe peak oil is here and they're realizing that, even in their own society, they can't base it completely on oil, natural gas or coal. If Saudi Arabia, with the largest oil supply in the world, is building nuclear, shouldn't countries dependent on fossil fuels also be looking at alternatives? Both Romney and Obama have goals of being energy independent. Nuclear is a critical part of reaching that goal.

    Nuclear is growing in the developed world too. For the first time in 30 years, we're building three nuclear reactors in the U.S. Canada is building reactors. Europe is building reactors in Poland, Finland, Spain and Slovakia. In all of these regions there is significant growth, and it's providing investors with a great opportunity because you're able to get in at 52-week lows.

    Most investors don't realize that Europe currently has approximately 160 working nuclear reactors. It has the largest per-capita consumption of nuclear power. Most people don't realize that France, Lithuania, Slovakia, Belgium, Sweden, Slovenia, Hungary, Bulgaria, the Czech Republic and Finland have more than 25% of their electricity coming from nuclear power. Despite that, Europe has only one uranium mine in production. Europe is a major importer of uranium.

    TER: Where is that uranium mine in Europe?

    JH: It's in the Czech Republic. The other deposit that is in development is European Uranium Resources Ltd. (EUU:TSX.V; TGP:FSE). It has a deposit in Slovakia and recently the nuclear giant AREVA (AREVA:EPA) became a major shareholder and sits on European Uranium's board. Slovakia recently elected a new prime minister who is a major supporter of nuclear energy. The party has officially stated that it believes that domestic assets, such as European Uranium's Kuriskova project, should be developed.

    TER: With juniors trading at near 52-week lows, why haven't we seen more consolidation?

    JH: We have seen some deals. Cameco raised capital and went into Australia to buy the Yeelirrie uranium project in Western Australia for $430 million ($430M). Rio Tinto outbid Cameco and bought Hathor for a large premium in the Athabasca Basin. I think as the uranium prices bottom and as the large miners' prices increase, we will see more of these deals. There will be more confidence in the sector for mergers and acquisitions activity. And as we get closer to some of these supply shortfalls, such as the 2013 Russian HEU agreement expiring, near-term producers, especially in the U.S.-where there is already a huge supply-demand deficit-the near-term U.S. producers, such as Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT), Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT) and Uranium Energy Corp. (UEC:NYSE.MKT), are going to become more highly sought after by the majors. We may see consolidation in these near-term producers, especially as they begin to produce profitably.

    TER: Uranium Energy Corp. is currently producing uranium from its Palangana in-situ deposit in Texas, and it is developing the Goliad in-situ project, also in Texas. Is the success of that company impacting others in the sector? In other words, is this a template that investors can follow with similar companies?

    JH: Yes, exactly. When you start seeing new U.S. uranium production, it's a huge boost of confidence for the entire sector. This may impact other companies such as Ur-Energy, which recently received its permits for construction and Uranerz, which has a great position in the Powder River Basin and which already has a processing agreement with Cameco at its nearby Smith Ranch in-situ uranium asset. It already has an offtake agreement with a very large utility at much higher uranium prices, at like I think $60-65/pound (lb). We believe it will shortly receive its final deepwater disposal well permit for production.

    TER: Do you think there will be further consolidation in the Athabasca Basin? Or is Texas looking ripe for the picking right now?

    JH: You have to look for operations where it is already working, such as in the Powder River Basin of Wyoming with Uranerz or in the Athabasca Basin. Some names there are Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT), UEX Corp. (UEX:TSX) and Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX), which could attract a major that is looking for exploration plays modeled after Hathor Exploration's success, using some of the same technical personnel.

    Also in the Athabasca Basin is explorer Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX), with its Keefe Lake property. We expect that it is probably going to do another drill program utilizing Dr. Zoltan Hajnal's seismic technology at the University of Saskatchewan. That might be interesting if a company is looking for an early-stage exploration success. Dr. Hajnal was a critical player in using seismic data to discover Hathor's Roughrider deposit. Athabasca Uranium has millions of dollars of seismic data, which helps the geologists pinpoint exploration targets.

    TER: Do you think Cameco or a company like Cameco is more likely to do an offtake agreement or an outright takeover?

    JH: Based on Rio Tinto (RIO:NYSE; RIO:ASX) buying Hathor Exploration in 2011 for $650M, we think Cameco will outright buy. Especially in the Athabasca Basin, we think that it is going to do takeovers and have more equity deals. The Hathor deal was very significant for Rio Tinto and the industry. This was the first major takeover since the credit crisis. It may be forecasting a commodity deficit-especially in light of BHP not expanding its Olympic Dam, which hosts a whole wide range of commodities. Uranium is a byproduct of that, and BHP's decision is really based on the economics of other metals and the costs to expand.

    Other assets around the globe could be significantly cheaper than Olympic Dam and produce a lot of uranium. U3O8 Corp. (UWE:TSX; OTCQX:UWEFF), which has the Berlin deposit in Colombia, is coming out with a preliminary economic assessment (PEA) by the end of 2012. It has rapidly expanded its resource base over sevenfold. It just announced recent results showing an increase in the size of the deposit, which may be able to go up to 100 million ounces (Moz) uranium. It also has credits for vanadium phosphate and rare earths that are going to pay down the cash costs for the uranium. What's really interesting is that it has shown recently some positive metallurgy. That has always been the concern from the majors about this project. Progress with metallurgy and an official PEA could be the criteria for a major to make a buyout offer. Assets like U3O8's Berlin deposit could become very attractive for the majors who want to expand and produce profitably at lower costs.

    TER: Paladin recently signed a $200M offtake agreement with an energy utility, but most of that money will go toward paying down some bonds that are going to be due in March 2013. Is the Paladin Energy situation unique or should investors look forward to more of these deals over the next few years?

    JH: I think it shows that the utilities are concerned about long-term supply. Over the short term, we're seeing some weakness because of all of these different macroeconomic situations. That's really where uranium investors need to look, 18-24 months down the road. Yes, we do think that there are going to be more deals like this and that the supply-demand equation is already in a major deficit. Utilities are going to lock in at these record low prices.

    TER: What's your strategy for buying these stocks? Are you a buy and hold investor? Are you buying them and then going to exit your positions on a price rally or when uranium gets to $80/lb?

    JH: We're contrarian investors. We use a whole mix of signals to buy. Right now, we believe that the sector is hitting 52-week lows and is off investors' radars, making it a great contrarian investment opportunity with possibly exponential gains. When we see that it becomes overbought and extended, as we saw in early 2011, that's when we're going to recommend to sell.

    The mainstream is beginning to accept the new nuclear reactors-which are smaller, safer, more economical-and we're even seeing smart investors such as Bill Gates and his company, TerraPower get behind the sector. Major deals are taking place such as the one between Chicago Bridge and Iron and Shaw Group, which is a major builder of nuclear reactors. These large corporate entities see the long-term picture and are investing in nuclear energy's future because it has no carbon footprint and it is safer, cleaner and more economical than all other power sources. We are going to see a lot of growth in the sector over the next 18-24 months. When people see the uranium price basing at lows and there's concern for the future of the sector, those are the opportunities for investors who have the courage and the foresight to realize the upside growth in this burgeoning sector. Investors may look back at this time one day and see it as one of the great investment opportunities that comes around once in a generation.

    TER: Let's end on that note. Thank you, Jeb.

    JH: Absolutely.

    Jeb Handwerger is a newsletter writer who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets-particularly the precious metals sector. Subscribe to his free newsletter.

    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) Brian Sylvester 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: U3O8 Corp., Athabasca Uranium Inc., Fission Energy Corp., Uranerz Energy Corp., Ur-Energy Inc., Uranium Energy Corp. and European Uranium Resources Ltd. Interviews are edited for clarity.
    3) Jeb Handwerger: I personally and/or my family own shares of the following companies mentioned in this interview: European Uranium, Uranerz, Ur-Energy, Athabasca Uranium, U3O8 and Denison. 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

    Oct 18 3:15 PM | Link | Comment!
  • Energy Investment Is An International Adventure: Darrell Bishop

    Source: Alec Gimurtu of The Energy Report (10/11/12)

    http://www.theenergyreport.com/pub/na/14549

    Looking for outsized returns? Then broaden your horizons, suggests National Bank Financial Analyst Darrell Bishop, who focuses on regions where property acquisition is cheaper and oil sells at the Brent premium. In this exclusive interview with The Energy Report, Bishop whisks us around from Western Europe's North Sea, to behind the former Iron Curtain in Albania, to developing energy plays in New Zealand. Learn how to navigate the risks of the space and what makes a far-from-home smallcap worth it.

    The Energy Report: You make the case that investors should take a look at small-cap international energy companies. Why?

    Darrell Bishop: The main attraction is exposure to high-impact exploration targets. In the international space, a small-cap producer can prove up material reserves with a single well. This compares favorably with the junior space in North America, which has transitioned to an unconventional resource play based primarily on multi-stage hydraulic fracturing technology. The North American juniors are in a lower-risk and lower-reward environment. International companies are inherently more risky, so the potential for higher returns needs to justify that risk.

    TER: How do domestic and international projects differ for small energy companies? Is technology a differentiator?

    DB: Land acquisition costs in North America can be a huge barrier to entry for junior companies. We see a willingness for teams experienced in North American geology and technology to seek out opportunities in international jurisdictions where they can apply that expertise in a less-competitive setting. The junior international explorers tend to be the first movers in discovering emerging global plays. These projects can generate major shareholder value for investors. That's why I think investors should look overseas when evaluating smaller energy companies to add to a portfolio.

    TER: What geographies do you think are geologically and socially prospective for international energy development?

    DB: There are many factors that investors have to look at in the international space. It comes down to a balance between geology, the fiscal and geopolitical climate in the country and the investor risk tolerance. The majority of the world's reserves are located in less-stable regions. Negative regional headlines can impact the share price of companies that operate anywhere within that region-even if it is in a different country. Much of the time, news will affect share prices for companies totally unaffected by regional political developments. A recent example is Chinook Energy Inc. (CKE:TSX.V), which has operations in Tunisia-the epicenter of the Arab Spring uprising. Despite not experiencing a day of operational downtime through the unrest, the stock traded at a discount to its international peers. With that said, there are a few jurisdictions worth mentioning, although not without risk. Kurdistan and parts of Africa continue to attract investor attention based on recent exploration success, the potential for large reserves and production growth and increased interest from the majors.

    On the other hand, once-popular regions in Argentina and Colombia have cooled. Argentina has tremendous shale potential, but investor interest has dried up following the government's expropriation of Yacimientos Petrolíferos Fiscales (YPF:NYSE). In Colombia, which was once the poster child of international success stories, the risk appetite has fallen off as many of the lower-risk exploration targets have now been identified. That's forcing companies to step out into more expensive and riskier frontier regions that show a lower chance of exploration success. Production from small international projects can decline steeply, so companies need to be successful with the drill bit in order to backfill potential production shortfall.

    TER: You cover some offshore companies in the North Sea. How do smaller international energy companies fit into that market? What's their niche?

    DB: The North Sea has been in production for decades. The consensus is that most of the major fields have already been discovered. At this stage, the focus is shifting to increasing recovery from legacy fields and developing the remaining smaller fields. There are government incentive programs to partially offset the high taxes that are seen in the North Sea. That encourages smaller field development and opens up opportunities for small companies like Iona Energy Inc. (INA:TSX.V). These discoveries are too small for most of the majors to care about (because the majors need scale and large reserves), but smaller companies can build a business out of only a few discoveries.

    We cover Iona Energy, which is a pure play on the North Sea. It's focused on growing production from undeveloped discoveries that were too small for the majors. The majors ignored these deposits because they were not material additions to their reserves. However, for a smaller company, these reserves are potentially very material.

    Iona trades at some of the cheapest metrics in our international space. Investors will have to be patient with a stock like this, as the major operational catalyst for the story is the first oil from its Orlando field. That's currently not scheduled until mid-2013. Although it's primarily an execution story, many investors have been burned in the North Sea and are cautious. That's because North Sea projects tend to take longer and cost more than originally planned. With Brent prices now north of $110/barrel (bbl), industry activity and costs are likely to increase in the coming years. Short-term investors won't pay for development projects that are a year out, but long-term investors may have a good risk-reward opportunity at these levels.

    TER: International energy companies generally sell their production at the international price, which is currently at a large premium to U.S. domestic pricing. Will international energy pricing remain robust?

    DB: Our thesis is that domestic West Texas Intermediate (NYSE:WTI) will continue to trade at a discount to the international (Brent) pricing in the near term. That likely won't change until more domestic production can get waterborne.

    TER: What metrics do you use to evaluate smaller international energy companies?

    DB: You have to be pretty selective when you're playing the international space because of the jurisdictional risk. Typical smaller international energy companies are exploration focused. Frontier exploration success is less than 20%. To flip that around, you have a greater than 80% chance of failure on your exploration target. The current market is not paying much for exploration upside. For this reason, we tend to favor companies that have a balance of development opportunities (for cash flow) and exploration upside as a bonus. To evaluate production, look at cash flow metrics. To evaluate exploration prospects, look at the risk basis. Next, you break it down to a present value based on the number of barrels in the ground and the cost of extracting that. Management also is very important-they need a track record of success and in-country connections. A lot of times for junior companies in international jurisdictions, it's who you know that matters most to help navigate the regulatory approval process rather than who you are. One last point: the international space, especially for small companies, is operational catalyst driven. Investors should watch for drilling events that may drive value.

    TER: One of the jurisdictions you follow is unusual -Albania. Can you explain the investment thesis and the current opportunities?

    DB: We cover three companies in Albania. The first two are primarily focused on increasing oil recovery from legacy fields-Bankers Petroleum Ltd. (BNK:TSX) and Stream Oil and Gas Ltd. (SKO:TSX.V). Bankers is not a small company; it has a market cap of approximately $800 million (NYSE:M). The third company we cover in Albania is an early-stage explorer called Petromanas Energy Inc. (PMI:TSX.V). It is an interesting story for many reasons. Earlier this year, Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) farmed in for a 50% interest in two of its blocks, which, combined with cash on hand, basically funds exploration plans through 2013.

    TER: Are these offshore explorations?

    DB: No, these are all onshore. Shell is interested in these blocks because of similarities to the Val d'Agri and Tempa Rossa fields located across the Adriatic Sea in Italy. One of those fields is currently producing 90 thousand barrels a day (Mbblpd) from fewer than 30 wells. Shell and Petromanas are currently drilling their first exploration well in Albania. That well cost $30M and is carried almost entirely by Shell. The well is a re-drill of an existing discovery that flowed oil to surface about 10 years ago, but the rate was limited due in part to a series of operational issues and poor decisions. Well results are expected by year-end. If successful, we see this as a potential company maker for Petromanas. Additionally, Petromanas has two other wells it is planning to spud before year-end, which means there are several potential drilling catalysts on the horizon.

    TER: How about the political and social issues in Albania? For most investors, it must be an unknown.

    DB: For the most part, it is unknown to most investors. Albania, up until about 20 years ago, was a Communist society. It's been in transition to democracy for the better part of the last decade. There are social and environmental issues in Albania. However, the government is pushing to turn things around and be more investment friendly. The country is applying for European Union status, which is a vote of confidence in foreign investment in the country. While the country is still in transition mode and has challenges, the big picture is positive over the longer term.

    TER: Is the geology in Albania somewhat complicated compared to North America?

    DB: The risks there are primarily a function of geology. To date, exploration and production activity in Albania has focused on shallow formations (less than 2,000 meters) that produce heavy oil. Petromanas is targeting much deeper, more complex sub-thrust structures. There has been limited exploration on these formations to date. With advances in three-dimensional technology and deep drilling, plus experience in geologically similar Italy, the companies feel like they have a better understanding of how to create exploration success in that geography.

    TER: Is the major trend for the small-cap international energy sector the application of new exploration and development technologies?

    DB: There are a couple of major trends in the industry. The single biggest factor is technology. In most international jurisdictions, expertise and the rate of technology adoption greatly lags that of North America. We see adoption of seismic, drilling and completion technologies that were pioneered and perfected here in North America as the catalyst to advance the industry internationally. In the international jurisdictions, the use of these technologies is just beginning to grow. These technologies have been key to discovering new areas for exploration and production that were not considered prospective or economic until now. One example is the worldwide emergence of onshore unconventional shale plays. Another example is the advance of deepwater exploration technology that is unlocking huge exploration potential in places like Angola, Namibia and Brazil.

    The second trend driving the sector is commodity prices. In most international jurisdictions, oil is priced relative to Brent, which as we discussed is at a healthy premium to North American oil. A similar pricing structure is in place for natural gas, which can fetch three to five times more internationally than in North America. This is a significant motivator for international companies, as the potential return justifies riskier exploration targets.

    TER: Another underexplored location with complicated geology you cover is New Zealand. Can you give us an overview of the energy investment situation there?

    DB: New Zealand has received increasing attention from oil and gas companies because they're seeking out new regions to explore globally. New Zealand offers a bit of a unique opportunity in our international space. It is underexplored, but also benefits from a politically stable climate with fiscal terms that encourage investment. There are multiple sedimentary basins with known or potential hydrocarbons-both onshore and deep-water offshore. There have been multiple discoveries, even hydrocarbon seeps to surface, which demonstrate an active petroleum system in many of these basins. Currently, all of New Zealand's oil and gas production comes from the Taranaki Basin on the west side of the North Island. Because of the tectonic setting, the geology is favorable for structural petroleum traps. However, exploration is complicated because of the lack of structural repeatability of these formations. Advances in technology, mainly seismic and drilling, have enabled companies to better focus their exploration efforts. While current production is on the west side of the island, the east coast is where things get interesting. There is tremendous exploration potential in some of the shale reservoirs, which are yet to be tested and estimated to contain billions of barrels of undiscovered resource.

    TER: So New Zealand is a frontier-which companies are there now? Are both juniors and larger companies there?

    DB: Shell has been a major player in the country for some time, but we've also seen some heavyweight companies recently step in, such as Petrobras (PBR:NYSE; PETR3:BOVESPA), Anadarko Petroleum Corp. (APC:NYSE), Apache Corp. (APA:NYSE) and Exxon Mobil Corp. (XOM:NYSE). But there are also a couple of junior, Canadian-listed companies with a presence. Tag Oil Ltd. (TAO:TSX.V) is one we recently initiated coverage on, as well as New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX), which is another Canada-listed junior in the area.

    TER: Tag has an interesting past-and investors have done well with it. It's not a smallcap anymore. Is there upside to the stock? What events are you looking for?

    DB: I agree, the stock has had a good run the last couple of years, and that's mainly on the back of success with the drill bit. Two of Tags fields transitioned from discovery to production, but we still see upside from here. The current valuation is supported by shallow conventional development at these two fields. Production is approximately 2,400 bblpd now and set to ramp up to between 5-6 Mbblpd between November and March. That's entirely from 14 drilled wells that are behind pipe-awaiting infrastructure expansion. It has less than 10% of its production permits explored to date. We see Tag in the early stages of unlocking the potential of these assets from a conventional perspective.

    Besides these assets, Tag has three high-impact, liquids-rich prospects that are drill ready. Two of these prospects, Cardiff and Hellfire, are slated to be drilled within the next six months and could add material value to the company. The real game-changer for Tag could come from a carried call option that it has on an unconventional resource in the east coast. Apache farmed in and is carrying Tag for the first $100M in exploration capex to test unconventional shales in the East Coast Basin. If the partners can prove moveble hydrocarbons with an upcoming four-well program, it's likely going to be all systems go for Tag. On the regulatory front, there are still public concerns over hydraulic fracturing. That's a hot topic with industry and the government. Tag has been working to dispel the myths associated with hydraulic fracturing. There is a parliamentary report due in November. That could be an important factor in unconventional operations going forward.

    The bottom line is that we continue to like the stock at these levels. Tag has a very strong balance sheet, and we see the valuation as being underpinned by significant near-term production given those already-drilled wells. There is additional upside potential from a busy "catalyst-rich" operational calendar over the next 12 months.

    TER: What does the New Zealand energy market look like in terms of import/export and pricing?

    DB: With respect to oil, New Zealand is a net importer of oil. Current production in the country is approximately 50 Mbblpd. Demand in the country is approximately 150 Mbblpd. With respect to pricing, oil is priced relative to Asian Tapis pricing, which is comparable to Brent. With respect to gas, the situation is similar to North America in that New Zealand natural gas is a landlocked product. Current production is approximately 400 million cubic feet a day (MMcfpd). Pricing is generally between $4-5/Mcf, which is a healthy premium to what North American producers receive.

    TER: If New Zealand natural gas production increases dramatically, what happens to the price? It is a small domestic market.

    DB: That has been some of the pushback for the story of gas production in New Zealand. Offsetting the small domestic market is the fact that the major gas fields that are in the country have been in steady decline over the last few years. There is talk that demand for gas will increase over the coming years, in part due to the expansion of the Methanex plant in the Taranaki Basin. If existing production drops and there is an increase in demand, then new production can be easily absorbed by the market.

    TER: Are there any final thoughts you want to leave with investors who are contemplating how to get into the smaller overseas energy explorers and producers?

    DB: Investors need to be selective when they're playing the international space. There are unique risks in each jurisdiction. Look for stocks that balance development and exploration. The current market does not pay much for exploration, but that may be an opportunity for longer-term investors. Keep an eye on operational catalysts and favor companies with strong management teams.

    TER: Thanks a lot for talking with us.

    DB: I appreciate the opportunity.

    Darrell Bishop is a Research Analyst with National Bank Financial (NBF) covering international oil and gas E&P companies. Based in Calgary, Bishop joined NBF in late 2011 after working as a senior research associate at Macquarie Capital Markets where he focused on international oil and gas E&Ps. Prior to Macquarie, Bishop had 10 years of industry experience with CorrOcean Aberdeen, Petro-Canada East Coast and Devon Canada where he worked in various roles including asset optimization, production engineering and corporate development. Bishop holds a Master of Business Administration from the University of Calgary and a Bachelor of Mechanical Engineering with a specialization in oil and gas from Memorial University. Bishop is a Professional Engineer with the Association of Professional Engineers and Geoscientists of Alberta (APEGGA).

    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) Alec Gimurtu 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: Royal Dutch Shell Plc and New Zealand Energy Corp. Interviews are edited for clarity.
    3) Darrell Bishop: 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

    Oct 11 5:08 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

  • "If $NMXEF can produce lithium hydroxide in a single step, which so far seems possible"-Paul Renken. Read More: http://ow.ly/OHtss
    Jun 23, 2015
  • " $ELGSF produces coarse phosphate for the local agricultural market; that preserves its margins"-Paul Renken. http://ow.ly/OHtZs
    Jun 23, 2015
  • "The mineralization is shallow at $FCUUF's Triple R and amenable to mining"-Paul Renken. Read More: http://ow.ly/OHtJS
    Jun 23, 2015
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.