Chen Lin: The oil price has mildly declined since then, despite the war between Sudan and newly independent South Sudan that interrupted the oil supplies. In general, oil prices tend to go up during the spring and summer. This year, however, the price is telling a different story. A lot of traders are trying to front-run the trend, and recent problems from the E.U. are creating volatility. Personally, I believe $70–80/barrel (bbl) oil is fair. At this price, most producers are very profitable and gasoline prices would be acceptable to most consumers. The high volatility of the oil price created a lot of booms and busts in the industry. As a trader, however, this created excellent opportunities to buy low and sell high.
TER: What about natural gas?
CL: Natural gas in North America took a big dive; it dropped below $2/thousand cubic feet (Mcf). Many North American natural gas producers are leveraged plays, and that can create some unfortunate situations. At the current price, they may have trouble paying back bank loans. Banks may even start to pull credit lines. This could create chaos in the next 6–12 months. As an investor, I am waiting for market forces to take out some weaker players. That could create good buying opportunities down the road.
TER: In other words, a market that punishes companies can reward traders. What is your investment style in this landscape?
CL: I focus on different sectors and I'll overweight an undervalued sector at a given time. For example, in Q4/11 I saw that the energy sector was greatly undervalued, and I was buying energy stocks aggressively when we last spoke. Since then, I have been busy booking profits in energy. Now I'm starting to look into the precious metal space, which has been hit very hard in the past few months. I sold New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX), TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ) and Ithaca Energy Inc. (IAE:TSX) and I reduced my position in PetroBakken Energy Ltd. (PBN:TSX) and sold my shares in its sister company, Petrobank Energy & Resources Ltd. (PBG:TSX), for nice profits.
TER: What energy positions are you still holding? Who is the mainstay?
CL: My personal largest position is still Mart Resources Inc. (MMT:TSX.V). I just went to the HiAlpha conference, where its CEO, Wade Cherwayko, was presenting. He told investors that Mart has over $60 million ($60M) in the bank and each month it is generating $15M in after-tax income (about CA$50/share in annual income). The company is about to pay dividends and is discussing dividend vs. share buyback. In the meantime, it is very close to announcing a deal with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) to build a pipeline and triple its current production in a year. The investors I met at the conference were very excited about Mart's future, both near term and long term.
Mart just filed its annual report. It earned $71.8M for 2011, or CA$21.4/share. Its cashflow was $144.1M for 2011, or CA$42.9/share. Field was pumping at about 7 thousand barrels per day (7 Mbpd); Mart got 71% or 4,941 bpd because of cost recovery. This year, Brent was over $120/bbl for most of the time, and Mart is getting a premium to Brent, at least $125/bbl. It's pumping at about 15 Mbpd, according to its recent presentation. Using these factors, it is easy to see that Mart is earning about CA$50/share on an annual basis, with cashflow at about CA$1/share. Next year, when Mart increases production to 30 Mbbl, 45 Mbbl and even higher, you can expect the earnings to double and triple again. Mart's market valuation will be higher than the current stock price.
TER: What are some other long-haul names?
CL: My next largest position is still Pan Orient Energy Corp. (POE:TSX.V). The stock was hit hard recently on the mixed test results from its L53D well. Most analyst reports mentioned both positives and negatives in the announcement, but investors tend to sell first and ask questions later. This tells us how nervous investors were. Also, most funds exited the company at the end of last year and investors are generally not very risk-tolerant. Last year, I was telling everyone to load up on the stock. The company made a nice discovery, but the stock didn't show much appreciation. The company is drilling very high-impact wells in Indonesia after four or five years of preparations, but the market is completely ignoring it. It has no debt and trades at less than two times its cashflow, with blue sky opportunities in Indonesia. Currently, the stock offers a very good entry point for those who are willing to take limited risks.
I am still holding Porto Energy Corp. (PEC:TSX.V). It is about to start drilling the high-impact presalt well around the mid year. Considering the stock is trading at a huge discount in light of its recently announced deals, I like the risk-reward ratio here.
I am also holding Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) and Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). Both stocks have been down sharply lately, like most junior mining stocks. Insiders participated in the recent private placement at much higher rates than the current stock price. I believe both stocks offer good values.
TER: Thanks for the company rundown. What's your reading on current market movements, and how should investors play it?
CL: In general, we have recently seen sharp pullbacks in resource stocks. The market is suffering greatly from lack of liquidity. That offers good opportunities for long-term, value-oriented investors. I am mostly holding companies with good balance sheets and cashflow. I intend to buy stocks on the cheap later this year.
TER: Thanks for catching up with us today, Chen.
CL: My pleasure.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. Lin is a value investor who focuses on deeply undervalued stocks or sectors that are ignored by the market. He also demonstrates excellent market timing due to his technical analysis.
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1) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Resources Inc., New Zealand Energy Corp., Pan Orient Energy Corp., Prophecy Coal Corp., Prophecy Platinum Corp., Royal Dutch Shell Plc and Transglobe Energy Corp. Streetwise Reports does not accept stock in exchange for services.
2) Chen Lin: I personally and/or my family own shares of the following companies mentioned in this interview: All. I personally and/or my family am paid by the following companies mentioned in this interview: None, with the exception of Porto Energy, from which Chen Lin received shares to introduce it to hedge funds in 2010. The company was not publicly traded at that time. I was not paid by Streetwise Reports for participating in this story.