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Baby Steps: Mackie's Bill Newman Finds Oil & Gas Plays That Produce No Matter What

|Includes: Canacol Energy Ltd. (CNNEF), POEFF

Volatility in the oil and gas markets continues, with prices plunging yet again in the recent chaos surrounding Greece's default negotiations and other global political and economic uncertainties. But a rebound is inevitable, and Mackie Research's Bill Newman has his eye on companies that have managed to grow, step-by-step, even in hard times. In this interview with The Energy Report, Newman identifies companies with individual stories that will, in the end, defy the trend.

The Energy Report: With the collapse of the crude oil price and the timing of a recovery difficult to predict, the energy sector has fallen out of favor with investors. In the current oil and gas investment climate, are there any stocks that are immune to the negative sentiment and can still perform?

Bill Newman: Yes, there are. But investors need to choose companies that are decoupled from oil prices in the short term and have other drivers that can gain investor attention to move the stock price up.

And yes, you're right. The sector is out of favor right now, so investors should look for companies that don't have to rely on accessing the debt or equity markets, and are able to fund operations with internally generated cash flow.

Also, we think investors want to see step growth in production. Most oil and gas companies have slashed their budgets and are focused almost entirely on low-risk development projects, so they're just treading water. You can understand the lack of enthusiasm for the sector. Unfortunately, almost every oil and gas company has traded down with the sector as a whole, even if the individual story has nothing to do with oil prices. We think this presents a double opportunity. The first is that, as the company demonstrates step-growth production, the stock should go up. Second, we expect another lift when the price of oil rebounds and the sector is back in favor again.

TER: What are your favorite stocks right now?

BN: We like Canacol Energy Ltd. (OTCQX:CNNEF) [CNE:TSX]. Last year, Canacol completed the acquisition of the VIM 5 block, which completely surrounds its producing Esperanza block, and the VIM 19 block, which is adjacent to Pacific Rubiales Energy Corp.'s [PRE:TSX; PREC:BVC] La Creciente field. Canacol now has a 100% interest in all three blocks, which are located in the Lower Magdalena Basin in Colombia. The primary focus in 2015 is on the appraisal and tie-in of the potentially large Clarinete natural gas field, which was discovered on VIM 5 late last year. Natural gas production from the Esperanza and VIM 5 blocks is expected to increase from about 20 million cubic feet per day [20 MMcf/d] to 83 MMcf/d by the end of this year. Canacol has secured long-term, take-or-pay contracts for its natural gas production at prices ranging from US$5 per million British thermal units [US$5/MMBtu] to US$8/MMBtu. The company also has ~1,700 bbl/d of tariff production in Ecuador, and is paid US$38.54 for each incremental barrel of production over a baseline. With tariff production, Canacol is paid a fee for its production, so there are no production costs.

We expect current production of ~12,000 boe/d to increase to more than 20,000 boe/d by year-end, with approximately 80% of the production locked in at contracted prices. That will provide a predictable cash flow base in 2016, which the company will use to pay down debt and to fund exploration targeting oil on the LLA 23 block in the Llanos basin, and natural gas on its large land base in the Lower Magdalena Basin.

TER: Can you update us on stories that we've talked about in previous interviews?

BN: Sure. Let's start with Pan Orient Energy Corp. (OTCPK:POEFF) [POE:TSX.V], which recently sold a 50% interest in the L53 block in Thailand for CA$49M. The company retains a 50% interest in the block. With the sale, we estimate Pan Orient has net positive working capital of approximately CA$92M, which works out to $1.66 per share versus the current market price of about $1.50 per share. The company is trading below cash value right now. Part of the reason for the discount is likely due to that fact that Pan Orient is nearly a pure exploration company, although it does have about 300 bbl/d net of production remaining in Thailand.

The real upside in the story in the near term is exploration drilling in Indonesia. In August, Pan Orient expects to spud the Akeh-1 exploration well on the Batu Gajah block, and if the well is successful, then the company should immediately follow up by drilling two more Akeh appraisal wells. We believe this is a relatively low-risk play because the Akeh prospect is located a few hundred meters away from the Selong oil and gas discovery, which is located on the adjacent block. Also, in Q2/16, Pan Orient plans to drill the Anggun prospect, which is a very large prospect on the East Jabung block. Pan Orient recently farmed out a 51% interest in the block to a subsidiary of Talisman Energy Inc., which is now Repsol-YPF S.A. [REPYY:OTCPK], in return for a cash payment of US$8M and the funding of the first US$10M toward the drilling of the Anggun-1 exploration well. If the well is successful, we see a lot of upside in the stock.

TER: Thank you for your time, Bill.

This interview was conducted by the Staff of The Energy Report and can be read in its entirety here.

Bill Newman is vice president of international oil and gas with Mackie Research Capital Corp. He has been an energy analyst for 19 years. He holds a bachelor's degree in commerce from the University of Calgary, and has a CFA designation.

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1) Staff compiled this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as employees. They own, or their families own, shares of the following companies mentioned in this interview: None.
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3) Bill Newman: I own, or my family owns, shares of the following companies mentioned in this interview: Pan Orient Energy Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Within the last three years, Mackie Research Capital has managed or comanaged an offering of securities for, and received compensation for investment banking and related services from Canacol Energy Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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