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  • The Who, What And Where Of Energy Investing: James West

    The Who, What and Where of Energy Investing: James West

    Source: Brian Sylvester of The Energy Report (2/23/12)

    http://www.theenergyreport.com/pub/na/12658

    James West, publisher of the Midas Letter, asks himself three questions when considering energy investment opportunities: Who is the management? What is the asset mix? Where is the project located? He shares the names of companies in the oil, gas, uranium and lithium sectors that have all the right answers in this exclusive interview with The Energy Report.

    The Energy Report: James, what percentage of the Midas Letter model portfolio consists of energy-related plays?

    James West: Energy holdings represent 15% and I expect that to grow closer to about 20-25%.

    TER: Starting with oil and gas, which fundamentals are pushing you to invest?

    JW: I have to qualify that oil and gas no longer track each other in prices. In fact, they are so widely divergent as to be almost opposing markets. Gas in North America is much cheaper than gas in the Ukraine. In the Ukraine, you are looking at $10/trillion cubic feet (Tcf) at the wellhead; in Canada and the U.S. it is below $2/Tcf. Oil and gas companies are valued on a premium depending on how much oil and condensates they produce relative to gas.

    In domestic Canadian plays, I look for a much higher oil:gas ratio, in excess of 70%. If the ratio is reversed, I am not interested. However, for TSX-listed companies in Poland, Germany or France, the oil:gas ratio is not important. Large quantities of both are excellent, especially if the companies are producing light, sweet crude and low-sulfur gas. That is the best-case scenario.

    Once I've evaluated a company's asset base, I look at the people behind the project. I look at capitalization and management's fundraising abilities because a lot of oil and gas plays are very expensive. If the company will be an operator, does management have operating experience?

    Next, I look at location. Is the project in a politically tricky jurisdiction? The Niger Delta is somewhat of a hotspot now. Kurdistan is a bit problematic; Uzbekistan, Afghanistan-the -stans are always problematic. The elections in June make Mongolia a question mark right now.

    TER: Recently, Canada's National Post reported that oil majors like Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and Malaysia's Petronas Nasional Bsd are evaluating plans to build terminals in the Kitimat, British Columbia area to export liquefied natural gas (NYSEMKT:LNG) to Asia. The Postspeculates that the need for more natural gas could lead to a rash of takeovers with names likeTalisman Energy Inc. (TLM:TSX), Painted Pony Petroleum Ltd. (PPY.A:TSX.V), Progress Energy (PGN:NYSE) and even Encana Corporation (ECA:TSX; ECA:NYSE). What are your thoughts on that speculation?

    JW: The oil majors are considering LNG terminals for export to Asia because they get a better price in Asia, where there is a big and growing market. A lot of fundamental market drivers support that idea.

    Companies like Talisman, Progress and EnCana are looking down the road. Building an LNG terminal can take up to 10 years from baseline environmental studies to the time you turn on the tap and start loading ships. This talk and activity is about capturing opportunities to move gas from its source to where it is needed, and in anticipation of the time when the global inventory diminishes.

    Today, fracking and horizontal drilling have created new opportunities and new reserves of oil and especially gas. Now, you can drive a drill bit anywhere you want. Trillions of cubic feet of gas are in the global inventory. The market-always irrational-overreacted to that and now gas is at an all-time low. That will not last.

    There is increased resistance to hydraulic fracking because blasting a toxic concoction of chemicals and fluids deep into the ground undermines the competency of the rock structures, and causes both the chemicals and natural gas to contaminate aquifers that supply drinking water. That is not just radical environmentalism; it is a real concern. For example, New York has banned fracking because of the problems with drinking water in Pennsylvania and in other places.

    But the environmental concerns are up against equally strong economic concerns. With the economic weakness, the collective mindset is against environmental interference that delays economic activity derived from hydrocarbon exploration in the form of hydraulic fracking.

    TER: What investment-worthy themes do you see playing out in the energy space this year?

    JW: I think uranium prices will recover. I am not a fan of nuclear power, but as an investor, you cannot ignore the price movements of commodities and the inherent opportunities. Very knowledgeable people tell me there is demand for uranium in anticipation of a nuclear power construction boom in China.

    I think lithium prices will increase and we are already seeing higher graphite prices.

    Oil prices will continue to rise incrementally, with gas prices remaining stable or even tipping a bit going into summer in the Western Hemisphere. The Eastern Hemisphere is a different story. It will retain its higher gas pricing premium, roughly five times that of the Western Hemisphere.

    There are a couple of caveats regarding incremental price increases for oil. If Iran, the second-largest OPEC producer, experiences a military regime change, the price of oil could spike to $140/barrel (bbl). The rise in sectarian Muslim violence in the Niger Delta, the largest African producer of oil, has already caused disruption, including a pipeline explosion.

    TER: What about coal?

    JW: Coal is like natural gas. I always ask: Where is it? What kind is it? Who are you going to sell it to?

    The best coal story in terms of near-term depreciation is Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE). It has 1.4 billion tons at its Chandgana Ulaan Ovoo project. It has two coal mines in Mongolia. One is immediately south of the capital, Ulan Bator, where Prophecy has a permit to build a 600-megawatt power plant that will consume more than 2 million tons (Mt) of its coal annually. Called the Mine-Mouth Power Plant, it will be built right at the mine, and should be operational by 2016. The company is negotiating the power offtake agreement. According to its preliminary economic assessment (PEA), it has a good internal rate of return, but the exact numbers depend on what the power purchase agreement number is. It looks like it might be $0.06/kilowatt hour (KWh). The financing will be 70% through debt, 30% equity. Now, 70% debt is not what you'd call a done deal, but all of the Chinese and Mongolian players are ready to write checks.

    TER: Prophecy is already producing coal. Will all of its coal go to the Mine-Mouth plant, or will it still export some?

    JW: That is the beautiful thing about Prophecy, it has flexibility. It has an immediate project that will consume 2 Mt/day. It has a great offtake partner in itself. Essentially, it will sell the coal as electricity. It also has tons left over for export. It has exported some coal from its mine in Northern Mongolia to Russia, and that will likely increase in the future.

    The company also owns 42% of Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). Prophecy Platinum is a very liquid stock, last trading at more than $4. Basically, Prophecy Coal's entire market-cap value is in Prophecy Platinum shares. It is as if the power plant and the coal operation are a bonus for investors.

    There is a discount because Mongolia is perceived as a bit flaky when it comes to deciding what to do with its natural resources. The Mongolian election in June adds some uncertainty. But the bottom line is that Mongolia is growing and it needs electric power. No matter who is elected, this plant will get built. The government will not steal it from Prophecy Coal because the government does not know how to run it and it lacks access to capital. China, its next-door neighbor, will make sure everything happens according to plan.

    TER: Are there any gas-heavy names you believe deserve attention?

    JW: Let's look specifically at names that might benefit from construction of LNG terminals in Canada. Although LNG terminals only process large suppliers of gas, even small suppliers can benefit indirectly.

    The majors are going to be looking for juniors like Aroway Energy Inc. (ARW:TSX.V; ARWJF:OTCQX), which has an inventory of production and exploration targets in the form of lots of good three-dimensional (3D) seismic data. Besides drilling nine new wells this year, Aroway is shooting 3D seismic over 75% of its 101 sections on its 29K hectares. It is building itself into an attractive takeover target.

    Shell Canada Ltd. is just to the south of Aroway. Birchcliff Energy Ltd. (BIR:TSX) is immediately to the west, and it has Crescent Point Energy Corp. (CPG:TSX) on its northeastern border. Aroway is essentially surrounded by billion-dollar plot companies, all of which will be looking to supply those LNG plants.

    TER: Where and how is Aroway drilling?

    JW: It is drilling in a very prolific region, into the Peace River Arch in the Leduc Formation. It's a traditional well with vertical and horizontal wells.

    TER: In its first year, Aroway's share price went from $0.20 in July to the mid-$0.80s now. Can the company follow that with another successful year?

    JW: I believe its second year will be even better for a couple of reasons. First, its joint venture partner controls the distribution and gathering infrastructure for the oil and gas on its land. Second, the company did a private placement at the end of 2010, which put some selling pressure on its stock. That pressure is gone; the company is cash-flow positive and no longer needs to raise money. At this point, there is no downward pressure on the share price from previous financing.

    In 2011, Aroway said it would exit with 600 barrels per day (bbl/d). In fact, it exited with 670 bbl/d. Aroway under-promised and over-delivered. That is a key driver to getting a better share price valuation. But it remains under the 1,000 bbl/d mark. A company is not even considered a junior producer of any substance until it produces over 1,000 bbl/d. This year, Aroway's targeted exit production is 1,200 bbl/d. That will put the company into a new category and more companies will be looking at it as a takeover target and as a good, largely derisked investment, one with long-life wells and a clear growth strategy for a land package that could support average production of at least 100 bbl/d per well.

    Its neighbor Birchcliff Energy is a billion-dollar company, producing 17,000 barrels of oil equivalent per day (boe/d). The possibility for Aroway to do that only grows with time. At the current price, it is still a fraction of what I think it will be worth. And remember, that 670 bpd reported production and its 1,200 bpd target for 2012, is only 50% of the oil being produced from those wells. Aroway's joint venture partner accounts for the remaining 50%. So, in essence, Aroway exited 2011 with more than 1,200 bpd on its own balance sheet.

    There will be a lot of compelling reasons for Aroway and its joint venture partner to merge. At that point, it becomes a very attractive takeover candidate for a large mining company. I think 2012 will be even better than 2010 and 2011.

    TER: Do you have another gas name?

    JW: BNK Petroleum Inc. (BKX:TSX) is one of my favorites. The first thing that attracted me to BNK Petroleum is its people. Ford Nicholson, the chairman, was a board member of Bankers Petroleum Ltd. (BNK:TSX) and InterOil Corp. (IOC:NYSE). He also was with Tartan Energy Inc. (TEW:TSX.V). Bob Cross is another marquee name in oil and gas investment, former chairman of Yorkton Securities and of Northern Orion Resources Inc. (NNO:TSX) and non-executive chairman of B2Gold Corp. (BTO:TSX; BGLPF:OTCQX) and co-founder and chairman of Petrodorado Energy Ltd. (PDQ:TSX.V). General Wesley Clark is also on the board. The caliber of people involved is quite impressive.

    The company is the largest landholder in Europe in terms of shale gas formations. Its share price has fallen, which is an opportunity for risk-tolerant and opportunistic investors. It is trading at $1.70 and has a total market cap of $250 million. In Europe, it is largely in Spain and Poland-two countries that need the bounty afforded by rich gas deposits. It also has very large land holdings in Texas and in Oklahoma in the Tishomingo field. Considering the size of its land position and the scarcity of gas in Europe, the company is in the right places.

    It is in production: just under 40 Mboe, 24% of it oil and 40% is natural gas liquids. There is a real premium for that. I recommended it at $2.20. Then it lost $1.70 on the negativity associated with its lack of success on its first wells in Poland. This was an overreaction by the market. I think the company will rebound.

    TER: What are some liquids-rich plays that you have some exposure to in terms of condensates?

    JW: Again, BNK is a good one. New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX) has just started to really get up steam in the market. Here too, management is important. John Proust and his team have been working diligently.

    This is the first onshore drilling production in New Zealand, which has always been a large importer of oil and gas. The company is producing 550 bpd light crude from its Copper Moki-1 well in the Taranaki Basin. It will drill as many as 10 exploration wells in 2012. The company has 152,000 acres, a potential 66 MMbbl resource and 730 MMbbl oil in plays.

    TER: For the first time since 1978, the U.S. Nuclear Regulatory Commission has licensed construction of two new nuclear reactors, and you mentioned the Chinese nuclear construction plans earlier. Are you partial to any particular uranium plays?

    JW: Athabasca Uranium Inc. (UAX:TSX.V; ATURF:OTCQX) is shaping up well. It just finished its first round of drilling and we are waiting for the assays.

    NexGen Energy Partners LLC is another. It is a private company at this point, but will be going public. The dough is still rising. This is going to be the uranium play of the year if Athabasca Uranium is not.

    TER: Do you have any parting thoughts on the energy space?

    JW: I think lithium is going to be of growing interest and would like to mention a couple of companies close to production. Lithium One Inc. (LI:TSX.V) is headed by Paul Matysek, who created Uranium One Inc. (UUU:TSX), a multibillion-dollar company. Its board of directors includes Sal de Vida and, as a major offtake partner, the Korean consortium. It has a salar deposit project in northwest Argentina that is in prefeasibility. Its other project is a pegmatite deposit in Ontario's James Bay.

    I also like International Lithium (ILC:TSX.V), which just started trading last year. It has the same sort of profile. Its pegmatite deposits in Ireland and Canada are very advanced and very rich. It also has a 160 square kilometer salar brine deposit in Argentina that looks very rich.

    TER: Is International Lithium's Argentine project close to any others, making it a takeover target?

    JW: Yes, there are a bunch of lithium companies operating in the northern Argentina zone, south of Bolivia, but I am not as familiar with them. I'll stick with Lithium One and International Lithium, the two that I think really have a shot.

    TER: James, thank you for your time and your thoughts.

    Read James West's gold and precious metals market insights here.

    Midas Letter is the investment strategy journal of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the portfolio and investment advisor to the fund. Every month, West's Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.

    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 or The Gold Report: Royal Dutch Shell plc, Lithium One Inc., New Zealand Energy Corp., B2Gold Corp., Aroway Energy, Inc., Athabasca Uranium Inc., Prophecy Coal Corp. and Prophecy Platinum Corp. Streetwise Reports does not accept stock in exchange for services.
    3) James West: I personally and/or my family own shares of the following companies mentioned in this interview: Aroway Energy Inc., Athabasca Uranium Inc., Birchcliff Energy Ltd., BNK Petroleum Inc., Crescent Point Energy Corp., Encana Corporation, International Lithium, Lithium One Inc., New Zealand Energy Corp., Painted Pony Petroleum Ltd., Progress Energy, Prophecy Coal Corp., Prophecy Platinum Corp., Royal Dutch Shell Plc and Talisman Energy Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for 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.

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  • Biofuels Carry Upside For Early Investors: Jim Lane
    Biofuels Carry Upside for Early Investors: Jim Lane

    Source: Zig Lambo of The Energy Report (2/16/12)

    http://www.theenergyreport.com/pub/na/12599

    The biofuel sector, already an $80 billion a year industry, is still in its infancy. In this exclusive interview with The Energy Report, Biofuels Digest Publisher Jim Lane discusses the exponential growth slated for this once-obscure energy source, and how its market resembles the traditional oil and gas industry in many ways. While biofuels are not for the faint of heart, as Lane cautions, investors who do their homework can get in early on companies that offer incredible upside potential.

    The Energy Report: Many investors have some level of familiarity with biofuels, but don't have the depth of understanding required to enter that market with confidence. As the publisher of Biofuels Digest, which focuses exclusively on this sector, what do you think is the best way for investors to dip their toes into these equities?

    Jim Lane: The biofuels sector has grown into an $80 billion (NYSE:B) industry today, even though it's only in its infancy. Why be interested in the sector? Because it's big and it's going to get bigger. There's lots of money to be made and lots of good to be done.

    TER: What exactly is a biofuel?

    JL: Biofuels include any fuel molecule produced from a plant source using tools and microorganisms from synthetic biology. It could be a residue from agricultural waste, forest waste, municipal solid waste, animal waste, or something made using a biological process. There are about 100 different plants that can be used to produce biofuels, and many can be grown in areas that won't support traditional food agriculture. The main plant sources are still corn, sugar cane and soy beans, but biofuels can also be made synthetically from carbon dioxide and water, or carbon monoxide and water. Biofuel processes can turn pollutant waste streams with little or negative value into value streams sometimes worth thousands of dollars per ton.

    The main basis to date has been using traditional processes, such as yeast fermentation, to produce an alcohol fuel known as ethanol. We also have a process that takes plant or waste oils and turns that into what's called biodiesel. Those are pretty built-out industries in many ways. They'll grow, but they won't grow quite as much in the future as what we call advanced biofuels, which use exotic processing techniques to extract value from unusual feedstocks.

    TER: Are investors making money in this space at this time? What segments are doing best at this point and why would that be?

    JL: Yes, investors can make money in this market. It depends on the stage of the company. It generally takes about 10 years to go from the original lab or research work to producing on a commercial or industrial scale. Depending on a company's stage of development, investors may see early-stage cash burn, the beginnings of commercialization, or substantial profitability. The companies that are further along on their path are very profitable. For example, Valero Energy Corp. (VLO:NYSE) is a major U.S. oil refiner, and last quarter its most profitable division was ethanol production, based on about 1,100 million gallons in capacity. But the bigger opportunities for investors are in selectively picking the winners of tomorrow, because those will offer more upside.

    TER: Is there a lot of research going on in different areas that aren't anywhere close to commercialization at this point, or has commercial production been largely standardized?

    JL: While there are well over 200 companies currently developing projects around the world using advanced biofuel techniques at various stages of development, there are three basic areas for investors to consider, much like the oil and gas market. We designate these areas as upstream, midstream and downstream.

    The upstream segment includes companies that are developing advanced feedstocks with higher yields that grow under more exotic conditions. They're working on genetics and seed development.

    Midstream companies utilize processing technologies that extract fuel from plants or waste material, similar to an oil refinery, whereas upstream is comparative to traditional oil and gas exploration. Consider the feedstocks an above-ground oil fuel, if you will.

    Downstream companies are the ones that get the fuel to market, such as the pipelines or the gas stations that are delivering those fuels to consumers.

    TER: What would you say to those critics who suggest that biofuels are just another passing fad? What are the growth prospects for this industry?

    JL: Any business that's gotten to $80B in sales is real, and in the United States and Brazil it's now an unsubsidized business. Ethanol, in Brazil, is unsubsidized and actually outsells gasoline. The International Energy Agency projects that 30% of all transportation fuels could be biofuels by 2050. We use 1.2 trillion gallons of traditional fossil fuels worldwide, so the demand potential is in the hundreds of billions of gallons and the sales will be in the trillions of dollars. It's definitely not a passing fad; the potential is just being unlocked now.

    TER: What are the job creation possibilities in this industry?

    JL: It's a very robust job outlook, according to a recent report by Bloomberg called Moving Towards the Next-Generation Ethanol Economy. Looking just at U.S. ethanol, which is a small piece of the pie, they expect that by 2030, 2.4 million man years of employment would be created. A lot of that is in construction-680-odd thousand man years between now and 2030. This includes engineering talent, operators, laborers, people who collect and transport the biomass and the fuel and also the administration and management. These are very similar to jobs in traditional oil and gas facilities, with a few more biologists.

    TER: What factors and investment criteria should investors consider if they want to get involved in this industry space?

    JL: Investors should look at three main factors. First is the extent to which the processing technology is proven or demonstrated at scale. Has it been done at pilot? The earlier you take that on, the more risk you have that the technology may fail along the line. A later-stage technology gives you more confidence. But, the returns are going to be commensurately smaller. So, the more research you do on the processing technologies, the earlier you can invest with confidence; which should give you a bigger return. I think that goes for every kind of high technology.

    Next is feedstock. To what extent does the processing technology have a guaranteed price at which that feedstock can be acquired? A company that has a 20-year contract for municipal solid waste at a fixed price is on solid ground. If it is buying a commodity crop with fluctuating prices, investors need to understand how the company has hedged that, because you don't want to be buying $8 feedstock to make $3 fuel.

    On the downstream, you want to make sure there is an offtake contract with a credit-worthy buyer. You certainly don't want to have a long-term contract with a company that may go bankrupt. Investors should look for companies that have done a really good job of locking in feedstock costs as well as a reliable offtake contract.

    The more certainty investors have on those three fronts, the less risk they will shoulder. On the other hand, less risk usually means less potential reward.

    TER: What are some of the leading companies in the industry at this point, and what are they up to?

    JL: We've had seven companies with successful IPOs in the last 18 months, with 10 in the IPO queue right now. Of the entire cleantech sector, 75% of the companies in the IPO queue are biofuel companies. That tells you a little bit about where Wall Street is putting its emphasis and which of these sectors is going to succeed in the short term. The biggest success stories include companies like KiOR, Inc. (KIOR:NASDAQ), which went public last year. It's a company that uses a technique called Biomass Fluid Catalytic Cracking. KiOR creates diesel, jet fuel and gasoline from wood chips very cost effectively. The company already has over $1B valuation. It's now building its first commercial facility in Mississippi with very strong support from former Governor Haley Barbour to build a total of six plants in the area.

    Renewable Energy Group Inc. (REGI:NASDAQ) is another company that just did its IPO. That company is the number-one biodiesel producer in the United States, at about 300 million gallons a year, and had strong revenue growth last year.

    TER: What other companies look interesting?

    JL: Solazyme, Inc. (SZYM:NAS) is a company that makes renewable oils from algae using advanced synthetic fermentation. It also makes skin creams, which are selling on the Home Shopping Channel very successfully. Solazyme is making fuel and also has a joint venture with Roquette Group. It is also making algae cookies and has all kinds of products it can make from renewable oils. We expect them to be very successful not only in food and skin care but also in making jet fuel for the Navy and in all kinds of applications across the spectrum.

    Gevo Inc. (GEVO:NASDAQ), went public last year and makes isobutanol, which is an alcohol-based fuel. Isobutanol also a very important component in the chemical industry. Gevo is just building its first commercial facility, which will be open in the first half of this year. That's a very exciting company to watch.

    Amyris, Inc. (AMRS:NASDAQ) is based out of Silicon Valley. Its technology uses sugar cane syrup and is being commercialized now in Brazil. Amyris makes an exotic collection of fuels and chemicals and lubricants and all kinds of great products from sugar cane, as well as a renewable jet fuel and diesel being commercializing in Brazil.

    Another Silicon Valley company, Codexis Inc. (CDXS:NASDAQ), is an enzyme, fuels and chemicals developer. Its major investor is Shell, and it is producing enzymes and other components of fuel creation in its work. The company recently bought its chemical rights back from its original parent, Maxygen, Inc.(MAXY:NASDAQ). Codexis is now deploying a wide variety of solutions to make low-cost sugars for the chemical industry. That's important because you need sugar in order to turn something into a chemical. This company is going to be the "Intel-inside" of the industry.

    Then there's Rentech, Inc. (RTK:NYSE.A), which has a very advanced process making diesel and jet fuel through what's called gasification. It's based in Los Angeles and commercializing its technology in Ontario, Mississippi and Colorado. These companies are examples that are at, or are going to commercial scale right now, in which investors can take a position today.

    TER: Are these companies making money, breaking even, or are they still in the "trying to get there" stage?

    JL: Most of them came out quite early. Biotech stocks often come out either pre-revenue or early stage. Renewable Energy Group came out a little bit later in its evolution. The other ones are still in the cash-burn phase. I think Amyris is deploying its second commercial plant and the others are in the process of building their first commercial facility. Amyris will need to get three or four up to be solidly profitable and cover the overall administration and R&D costs. You would expect to see most of those in the black around 2014 or early 2015. The most important thing for an investor is not current profitability, but where they are on their path to profitability. Waiting until they are totally in the black and everything is already established is less risky, but you're going to be sacrificing some of the upside.

    TER: What sort of capital costs are involved in putting a commercial plant into production?

    JL: The first commercial plant is usually the most expensive due to the R&D involved, and can cost anywhere from $250-400M. Larger projects can be up to a billion dollars apiece. As the industry develops standard designs, costs could drop to somewhere in the range of about $200-300M per project. So this is not for the faint of heart. Certainly these companies will be accessing project financing for the debt component. This is a very capital-intensive industry similar to the traditional oil and gas industry.

    TER: You also publish the Biofuels Digest Index composed of 30 component stocks that seem to cover a pretty broad range of companies. How do you determine who you cover?

    JL: We look at the 30 companies that have the largest capacity and also include some pure plays. So, we have companies like BP Plc. (BP:NYSE; BP:LSE) and Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). BP's biofuels unit alone has 4,000 employees. It's a very heavy investor in biofuels. Shell also just did an $8B acquisition or joint venture and merger last year. We also have Archer Daniels Midland Co. (ADM:NYSE). From large-caps we go down to some of the smaller ones I've mentioned like Solazyme, KiOR, Gevo, Amyris, Rentech, Codexis and Renewable Energy Group. The key there is that all of them are fully focused on biofuels and chemicals, or it's a significant part of their operations and profit flow. We change them around a little bit, of course, as we've had a lot of recent IPO activity. It has been a pretty good sector to invest in over the last 18-24 months.

    TER: Do you have any other points you'd like to discuss and closing thoughts you'd like to leave with our readers?

    JL: Investors usually ask me what the best way is to pick winners and avoid losers. The answer to that is to read a lot and study up on the technology. Never buy anything that you're not sure of, or you don't know. These are exotic technologies. A lot of them are early stage. It's very important for investors in early-stage, high-technology companies to be fluent in understanding a company's upstream feedstock strategy, if its processing technology is proven, and who's the offtaker. And is that represented in hope or is that represented in hard contracts and real dollars? If you've done your homework, you can find a lot of value, which plenty of investors have. It's all based on being a knowledge worker before you are an investor.

    TER: We greatly appreciate your time and input today on a sector that certainly provides another growth area for investors to consider. We'll look forward to talking with you again to see how these companies progress.

    JL: Much appreciated.

    Jim Lane is the editor and publisher of Biofuels Digest, the most widely read biofuels daily newsletter.The Digest covers producer news, research, policy, policymakers, conferences, fleets and financial news. It is home to the Biofuels Digest IndexTM, The 30 Most Transformative Technologies, and the "50 Hottest Companies in Bioenergy" annual rankings.

    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: Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for services.

    3) Jim Lane: 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 for 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
    Feb 21 6:16 PM | Link | Comment!
  • Oil Prices Make For Profitable ETF Trades: Roger Wiegand
    Oil Prices Make for Profitable ETF Trades: Roger Wiegand
    14 February 2012 @ 07:29 pm EDT

     

    Oil Prices Make for Profitable ETF Trades: Roger Wiegand

    Source: Brian Sylvester of The Energy Report (2/14/12)

    http://www.theenergyreport.com/pub/na/12577

    Today's retail investors have more options than ever before, but there is a shortage of practical information on how to manipulate different investment products, be they ETFs, options or equities. Enter Roger Wiegand, editor of Trader Tracks. In this exclusive interview with The Energy Report,Wiegand discusses his methods for energy investment and how to set tailor-made time and price windows to realize solid gains.

    The Energy Report: Roger, we are still in the early stages of 2012 and gas prices are near all-time lows, with a barrel of oil bobbing in the US$100 range. What approach are you employing to make money on oil without getting burned by gas, given that many names out there have substantial assets in both commodities?

    Roger Wiegand: We have three trades on right now. Our futures trade is an oil spread where we buy a window of opportunity on price, which allows investors to fix their positions according to their own price constraints and risk comfort levels. We are looking for an oil futures price to high of $120 a barrel (bbl) for May to June of this year. Oil is around $100.60/bbl and there is very good support for oil right now. Over the years, we have found that oil will move in a trading range of $4 increments. We are in the middle of those increments now. I call it $98.50-102.50/bbl. As the cycle and the calendar move forward, we are looking for a high of $115-120/bbl for the first half of 2012.

    For share traders, we have two positions in stocks, both exchange-traded funds (ETFs). One is ProShares Ultra DJ-UBS Crude Oil ETF (UCO:NYSE.A), and the other is Horizons BetaPro NYMEX Crude Oil Bull Plus ETF (HOU:TSX). The UBS Crude Oil ETF is a double-long position ETF on oil, meaning that if oil went up $1, investors would earn $2 on this particular trade. The Horizons BetaPro NYMEX, a bull-long ETF, is much the same. Normally, when we recommend a share in our letter, either an ETF or a company, our objective is to make +25% in 90 days. We can't always do it, but we do quite well.

    TER: You trade all manner of ETFs: gold ETFs, oil ETFs and even a Canadian dollar ETF. Why do you find these instruments so appealing and what did you do before ETFs existed?

    RW: Before ETFs, we would trade companies, using options and/or spreads on currencies and futures. It is very handy for a shareholder to buy an ETF because investors are basically buying an index or a bundle. Some of these holdings offer very attractive leverage; I like the ones that are x2 or x3.

    One warning I would give is that there are so many ETFs on the market now that they are becoming diluted. We used to trade SPDR Gold Shares ETF (GLD:NYSE) for gold and iShares Silver Trust (NYSEMKT:ETF) (SLV:NYSE), but we do not recommend them any longer because they do not move as they did before. Other kinds of trades can give us a better position. SPDR Gold Shares and iShares Silver Trust have become elephants and it takes a lot of buying to create movement.

    But, we are happy with our oil ETFs, and we like the Canadian dollar ETF because it is a way to park money in Canada, which we feel is a much better place than the U.S. dollar. Canada is a commodities-driven country and the Canadian dollar is strong with good underpinnings. We featured it a year or two ago in our newsletter and the traders that opted into it are now up over +20%. We also see the Canadian dollar going to 108.00 on the index. It is at about 100.48 right now.

    TER: There is quite a media buzz about ETFs, but many retail investors do not have a thorough understanding of how best to trade them. Could you outline some must-have information for retail investors looking to play?

    RW:Take the oil ETF, USB Crude Oil, for example. It is a double-long on oil. Normally what will happen with oil in the first half of any year is that it will start out slowly, go to a peak, then correct. There will be a correction when the refineries change over from heating oil to gasoline for the summer. If you can find two good long positions during the year-normally January to May, and September to November/December-and if you have a modest goal of making 25% within 90 days, each of those segments work quite well. You can do the same thing with gold. We have grain and corn ETFs too. The objective is to match up the ETF's price, buy it at the low and try to make 25%. Keep in mind those trades must fit the calendar cycles.

    TER: What is the downside risk to ETFs?

    RW: We do not look at gold and silver ETFs, but in our opinion-and I cannot prove it-the gold ETF does not have 100% of gold behind it for every share. If things got really dicey in the gold market, and they could as it is very volatile, there might be some difficulty in getting out quickly enough on an exit. There are probably better trades that you can work with to do that. The NYSE AMEX (NYSE.A) exchange lists the ETFs-you'd be amazed at the number available. People like them because they do not have to pick a company; you can just buy a market index sector, but some of these sectors will sit and not move. Sometimes an ETF or an index will only move modestly when the overall sector is moving a lot. You have to be careful.

    As far as determining a good entry point for futures or stocks, you can take the high and low, add them together and divide by two. That will give you the mean and the point where you can match price with the calendar and decide where it could go from there. We get spots on the calendar during the year when we are too high on a lot of gold and silver stocks and, while we like the companies, you must consider the amount of potential movement to make money. If we can see only a movement of 5% or 10%, we will not take it. If somebody wants to buy it, we will say okay, but hold it and understand that there could be a couple of pullbacks before it goes up to the next price.

    TER: Do you expect oil to outperform gold in 2012 in terms of percentage?

    RW: It is hard to tell because the gold price is getting quite large. But consider that gold pretty much gave us 15+% for a whole decade from about 2000 to 2010. In the last couple of years, the return has been more like 17-18%. If you use leverage and spreads the way we do, and if you are a good stock picker, you can do better than that. We have had some stocks that we have been in and out of four or five times that have made 50, 60 and 100% every time. That is why in our letter you will see a lot of stocks that are negative right now being recommended at previous highs, but people need to understand that those who have been reading the letter for a long time have purchased those companies maybe two, three or four times and made some excellent gains.

    TER: Natural gas prices are in the doldrums. How long do you expect it will be before gas prices begin to stabilize above $4 per trillion cubic feet? (tcf)

    RW: It will be a while because of oversupply. About two years ago, two major natural gas wells were discovered in Louisiana. One thing that will push gas up in the summer is air conditioning demand. Air conditioning demand will cause power companies running power plants on natural gas to burn quite a bit more. What will happen then is the gas price will go up. We have been lingering at around $2.35-$2.50/tcf. It probably should go up maybe $0.25-0.30/tcf for the summer, but I cannot really see gas going back to $4-5/tcf for quite some time.

    TER: That is unfortunate. What are some other ways that you have exposure to oil in terms of equities?

    RW: One of the other things you can do is buy options on big oil companies. With some of the biggest ones, if you understand the calendar and the way their stock price moves within a window, you can buy an option for $1.50-2.50 and within 90 days, it will usually return 100%. They seem to work pretty well.

    TER: How do you know when to get in and out?

    RW: Again, that is the calendar. For example, say that you have Exxon Mobil Corp. (XOM:NYSE) stock. It has about $45 million (NYSE:M) in cash in the bank. It is at a point where they are not spending a lot on exploration right now. They take cash and buy entire exploration companies, or entire major, proven energy fields, which is easier. Suppose we think that within a calendar window of about 120 days, a company has the chance to bypass performance and go up +$20. What we would try to do is look at our call option that would be close to being in the money, and buy one at the money or slightly above it for $1.50-2. Then, when the stock price rises up, the option goes up in value. Those have worked out pretty well. We had many of them, not only in energy, but also in gold and silver and precious metals companies like Goldcorp Inc. (G:TSX; GG:NYSE) and others in 2006 and 2007. The volatility and changing markets will go in and out as far as your ability to do this. We have been away from that opportunity for a while, but it is starting to come back again. Trading and investing strategies are in constant change.

    TER: How do you respond to someone who says, "I don't trust newsletter writers because they often get shares in exchange for promotion?"

    RW: I have heard that before. The answer for my newsletter is that I do NOT trade any of the shares, which is purely deliberate on my part. For ethical reasons, I do not want to be recommending shares or ETFs or anything related to shares and then buying them myself. Now, newsletter writers can do that legitimately. The good ones I do know, who do it legitimately, will make a recommendation and buy it themselves 10 days later. And, when they put out an order to sell it, they wait 10 days and then sell their position. Obviously, there is going to be some influence. All of us in this business know the miners, the companies and the officers. What I look at, being a technician, is if the stock does not move, I do not want it. Periodically, we will get one that is a good company but, for whatever reason, it just sits still.

    TER: Can we discuss equities? What are some of your positions in the energy side?

    RW: It is not in the letter right now, but we do like to trade Exxon because it is easy to trade. Some of the refinery companies such as Valero Energy Corp. (VLO:NYSE) and a couple of other ones have not done that well right now because the refining business is very competitive.

    I would suggest that if readers are looking to buy shares in an oil company right now, one thing they can do is go toward the explorers. We have one good explorer in New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX). New Zealand Energy hit a big well. Its activities are confined primarily to the country of New Zealand, and it has done a tremendous job. This well is producing 550 barrels a day. It has a second well being drilled right now and their stock just took off like a rocket when the well came in. If you can find the right one, it is a wonderful thing to be an investor.

    TER: How did you learn about that particular company?

    RW: I was referred to it by a radio friend of mine who bought it. I looked at the chart and the website and studied it, and it looked like a super opportunity.

    TER: What is the chart telling you now?

    RW: The chart paused because it had a big ride in the value of the shares with that well coming in. There was a little bit of a pullback, but we are seeing what I call a continuation triangle in the chart right now. The chances of the next well coming in appear to be pretty good. We like the company and the management. We think that when that second well comes in, it will go up quite a bit more.

    TER: On its website, the company says it has the stated goal of being the largest independent oil producer in New Zealand. As you have said to me in the past, you set a goal of making 100% every year. Do you like the fact that this is a lofty goal?

    RW: Absolutely. It is hard to make 100% on a stock. The stocks where we have done so have usually been gold and silver. But this particular oil stock has been absolutely great from the standpoint of those who got in on the ground floor. There was some profit taking because it made so much money in a short period of time regarding the news on that first well. But the second well is starting up and I am fairly positive it will do well. You can buy the shares and hold the stock, although with some of these juniors, you are probably better off if you do not. It does have risk. It is a junior exploring company and its future is based on oil discovery, but now it is in a position where it has five more wells on the schedule. It is generating cash flow and preparing to drill another one. And, it has five major permits right now with multiple wells planned for 2012. I would say the chances are fairly good for another well to come in and then the stock would go higher.

    A good junior oil explorer is hard to find because they are quite risky. We had one about six years ago with good managers and a lot of cash-a well in Wyoming, I believe. It was straddling a land position between two big wells that were operating-one with Exxon and one with Marathon Oil Corp. (MRO: NYSE). They were operating 50 miles apart and this one was right in the middle. It looked good and the stock was about $2.50 when we recommended a buy. The promotion was heavy on it and even though it had not really hit a well, the stock went almost to $7. My concern was if it came up dry, the stock would make a big reverse. So I walked people up using risk exit points and we got all the way to $6 and change. Then an announcement came that they were going to delay drilling. I told people to sell it. For some reason, they never drilled the well and the price went all the way back. But, my people were in from $2.50 to more than $6 based on a strategy that I devised to protect their position. I told everybody, "If the well comes in, you can buy it again at about $7.50 on the charts." But we elected to get out at $6.50.

    TER: Any parting thoughts in the energy space as far as what retail investors should expect for this year?

    RW: Natural gas is going to be flat. I would leave that one alone. The most opportunity for junior stocks is in the explorers. We can trade call options based on inflation and share prices rising in some of the seniors. That would really pretty much cover the yard as far as opportunity this year. Also, there is this Iranian question that is wide open. I do not think the Straits of Hormuz will be blocked, but the threats do so create a premium of $5-10 in the oil price. I think that premium pretty much went away as things calmed down, but it still could be as high as $5 and move up to $10. That premium is above the fundamental value of the shares themselves. I think inflation in the U.S. right now is running at 11.5%. They claim it is almost nonexistent, but that is not true. If you want to see good inflation numbers, look in the little box where they report in the Wall Street Journal commodities over a one year span and today's prices. The differences are very dramatic.

    Roger Wiegand is the editor of Trader Tracks, a newsletter based in Maspeth, N.Y. that provides investors with short-term buy-and-sell recommendations and commentary on political and economic factors that are driving the market. He can be reached at tradertracks.com ortraderrog@comcast.net. Contact Linda Gorman at Resource Consultants for information on Roger Wiegand's Technical & Fundamental Trading Class in Tempe, Arizona on April 26, 2012. Wiegand is also speaking at the annual Wealth Conference at the same location April 27-28 along with five other nationally known speakers. Call Linda Gorman at 800-494-4149 or 480-820-5877 for information and registration.

    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: New Zealand Energy Corp. Streetwise Reports does not accept stock in exchange for services.

    3) Roger Wiegand: 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 for this interview. As reported above, Roger Wiegand does not personally trade any shares but trades futures and commodities for his own account. His personal trades are posted in Trader Tracks Newsletter available by subscription. Contact Claudio Basis, 718-457-1426 to sign-up.

    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

    Feb 17 5:16 PM | Link | Comment!
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