Are junior resource stocks the investment equivalent of a game of blackjack? It depends on the investor as much as it does on the company. Sid Rajeev of Fundamental Research Corp. has come to expect stability from his picks. How? By using fair-value metrics and a longer-term timeline. In this exclusive interview with The Energy Report, learn how this pragmatic analyst plays a speculative market for reliable returns.
The Energy Report: In your last interview with us, you talked about your firm’s fair-value metric philosophy for evaluating which stocks look like good investment candidates. How has that worked out over the past year and a half?
Sid Rajeev: We are strong believers in fundamentals analysis. Short-term price movements are typically controlled by speculation and a lot of hearsay. It’s easier to identify good investment opportunities through fundamentals analysis, especially with a one-year minimum investment time horizon.
TER: How does the current global economic picture influence your decision-making for resource investments into the foreseeable future?
“Short-term price movements are typically controlled by speculation and hearsay. It’s easier to identify good investment opportunities through fundamentals analysis.”
SR: We have seen a lot of good developments in the overall market in the past few months. First of all, the TSX Venture Index is up 10%. Moody’s rating agency decided to maintain its rating on Spain. The U.S. economy continues to grow gradually. These are good developments that could result in a sentiment shift. We do see continued improvement, but it’s going to be gradual. There are still a lot of extremely undervalued opportunities in this market that can provide high returns over the next 12 months.
TER: Demand projections for China and other developing countries are shifting. How is this going to affect the fertilizer and potash markets?
SR: Potash was trading above $800/ton in 2008. Prices then crashed to just over $300/ton in 2009. They picked up after and went above $500/t. Prices however dropped by about 10% in the past few months. Now, it’s around $460–480/t. Our long-term potash price since last year has been $425/t. While many analysts and investors had to reassess their potash targets, because they were valuing those targets at extremely high potash prices, we did not have to make any significant changes. We continue to be strongly bullish on the segment in the long term, especially because the rationale is very simple. Developing economies need more and better food, and most importantly, the supply of arable land has been stable or decreasing, creating a huge need for fertilizers like potash.
“Many investors had to reassess their potash targets because they were using extremely high potash prices, but we did not have to make any significant changes. We continue to be strongly bullish on the segment in the long term.”
We are bullish on the commodity and even more bullish on advanced junior North American potash companies. Remember that the potash segment is an oligopoly that is currently controlled by a few major producers. India and China are big consumers and need long-term, stable supply at reasonable prices.…
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 all.
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).…
Oil prices are starting to creep back up while gas, coal and uranium are poised for moves this fall, according to Mark Lackey, long-time energy analyst now representing resource companies with CHF Investor Relations. In this exclusive interview with The Energy Report, Lackey shares his current insights on energy markets and talks about a number of companies he thinks are sleepers, ready to move quickly when the energy commodities take off.
The Energy Report: Since your last interview, you’ve made a jump from the research side of the business to the investor relations (IR) side. How has the view changed?
Mark Lackey: When I worked in the brokerage industry, I relied on IR people to bring me clients and stories, updates on companies I was following or promising companies of which I was never aware. There are over 3,000 companies listed on the TSX and TSX Venture exchanges and you can’t know all the stories, so analysts often need introductions. Here at CHF, I’m involved in taking clients, largely in the resource sector, to meet with research and corporate finance people and brokers as well as retail and institutional investors. We also help with companies’ press releases, presentations and even market-making.
But regardless of whether I’m doing research or IR, it’s still a function of whether you believe in commodity cycles and how certain sectors, companies, locations and managements will benefit and profit.
TER: Talking to other brokerage firms and people in the investment business, what’s the general mood at this point?
ML: In the small- and mid-cap market, the mood has been mixed. Some people are negative about the commodities sector in the short run, and some even think the whole commodity cycle is over. Others are more neutral. Then you have a smaller group of people who tend to support my view and are much more positive in the very short run.
TER: How does this affect your view of the oil and gas markets?
ML: I’m actually quite positive. After getting down below $80/barrel (bbl), West Texas Intermediate (WTI) is now back up over $96/bbl. The Brent price is at $115/bbl. Recent inventory numbers, particularly in the U.S., are down, so there’s no overhang in the near term. Demand has hung in reasonably well, considering all the European problems, and there’s still decent demand coming from the emerging markets. WTI will likely trade between $100/bbl and $105/bbl next year, with Brent between $115/bbl and $120/bbl.
Natural gas has been somewhat weaker, but it bounced off the $2/thousand cubic feet (Mcf) price a few months ago up to the $2.85–3/Mcf range in North America. With more industrial demand coming back, particularly in the auto sector, and stronger demand from electric utilities, gas should move back up closer to $3.25–3.30/Mcf in the next year. By way of comparison, prices in Europe can be anywhere from $4–8/Mcf, and in China they’re as high as $15/Mcf.
TER: What interesting oil and gas situations have you recently come across that deserve some investor attention?…
Doug Casey, chairman of Casey Research and expert on crisis investing, is on the search for real wealth—not investments in companies that push around paper. In this exclusive interview with The Energy Report, Casey shares his pragmatic take on what’s next for oil, gas and nuclear power.
The Energy Report: There will be a Casey Research Summit on “Navigating the Politicized Economy” in Carlsbad, Calif., in September. At the last conference, Porter Stansberry caused some excitement with his argument that oil could go to $40/barrel (bbl). What’s your view?
Doug Casey: We like to have a range of defensible views represented at our conferences. But personally, I don’t think it’s realistic to suggest oil prices will drop as low as $40/bbl. I am of the opinion that the Hubbert peak oil theory is correct. In the 1950s, M. King Hubbert projected that U.S. oil production would start declining in the 1970s, and he was accurate. Then he projected that in the mid-2000s, the world’s production of light, sweet crude would start declining. He was quite correct about that, too.
There will always be plenty of oil at some given price, but to produce oil—even conventional, shallow, light sweet crude—now costs close to $40/bbl in in many places. It’s extremely expensive to produce oil through unconventional techniques like horizontal drilling and fracking. Producing oil from tar sands is very expensive and problematical. Drilling 15,000 feet under the ocean is very expensive, and has a lot of risk. Drilling in politically unstable jurisdictions with sparse infrastructure is neither cheap nor fun. We’re talking about production costs of at least $80/bbl in many cases.
I don’t think oil is going down much from here. Let’s not, in addition, forget that it’s the most political commodity in the world, and that most of it still comes from the Middle East, where tensions will remain high. I’m neutral to bullish on oil. I’m not bearish at all.
TER: How will U.S. natural gas impact oil prices?
DC: The thing with natural gas is that it’s almost an entirely local market. Oil is very transportable, very fungible—it’s a world market. Oil prices are relatively consistent—say within 20–30% worldwide. But the price of gas differs by hundreds of percent around the globe because it’s not very transportable. It doesn’t seem that’s going to change in the near future.
The price of gas is going to stay low in the U.S. for some time because of new technologies, namely horizontal drilling and fracking, which allow the exploitation of vast new deposits. These deposits can produce large amounts of hydrocarbons, albeit at relatively high cost. As soon as prices start to rise, however, wells that have been shut because of low prices will start producing again—and that will keep a lid on gas prices for some time to come.
TER: Do you see potential for the U.S. to become a natural gas exporter at some point in the future?
DC: The problem with gas is that, unlike oil, it’s hard to move and inconvenient to export.…
There’s more to the oil and gas business than drilling holes and distributing what comes out of the ground. Technological advancements in other details of exploration and production are creating major opportunities. In this exclusive interview with The Energy Report, EnerTech Advisor publisher James West fills us in on new cost-cutting technologies and the relatively unknown companies behind them, as well as some major companies that are already benefiting from them.
The Energy Report: In your last interview with The Energy Report, “The Who, What and Where of Energy Investing,” you touched on a range of energy subsectors. Why are you placing more emphasis on energy rather than mining investments?
James West: Generally, I think the risk-averse sentiment in the global equities market is going to continue, which is largely because of government debt. This means there’s a real inclination toward disinvestment in highly speculative ventures, such as mining projects. Meanwhile, the world continues to consume about 88 million barrels of oil and about 20 million tons of coal every day. Even if economic weakness continues and energy demand decreases, these commodities will continue to be consumed in substantial quantities. That’s why I prefer energy investments over mining at this point. Until there’s some resolution to the global debt crisis, it’s not possible to have a healthy, risk-tolerant speculative market in mining commodities.
There’s no point in either buying or selling right now. I certainly don’t think we’ve seen the bottom in the market and that now is the time to accumulate. Nor do I see any point in selling the beaten-up assets below where I paid for them. You may as well just sit on everything in the mining space. I do believe you will be able to buy choice assets quite a bit cheaper than where they are today.
TER: You’ve launched the EnerTech Advisor newsletter as well as a related fund, the EnerTech Fund. Are energy technologies the land of opportunity in this market?
JW: Yes. I’m now focusing more on energy technologies. Public companies with technologies that remove substantial cost components for energy production, transportation, use and consumption will perform better than standard exploration and production companies. Plus, now is the time for energy technologies to see support from subsidies, soft loans and government loans that will help them penetrate the commercial market space.
TER: What’s going on in the energy services field as a result of the recent pullback in oil prices? Are there some interesting opportunities?
“Even if economic weakness continues and energy demand decreases, these commodities will continue to be consumed in substantial quantities. That’s why I prefer energy investments over mining at this point.”
JW: Yes there are. There is one company I’m heavily invested in and two others that look very promising. The first, NXT Energy Solutions (SFD:TSX.V; NSFDF:OTCBB), is involved in the earliest stage of exploration and production. The company has developed a prospecting tool focused on stress field detection—that’s why its ticker is “SFD.” NXT Energy Solutions has some patented technology.…