The Energy Report: Chen, you have had some real successes. Are you going to remain a family office, or will you branch out into hedge-fund management?
Chen Lin: I don't have any plans to start a hedge fund. My own portfolios are growing at very rapid pace in the past decade. I'd rather focus on investing my own money or some money from my family. I feel it is more rewarding and more fun this way.
TER: Do you have a theme right now?
CL: I am quite cautious about the general market. As I mentioned in my newsletter over a month ago, I saw a significant slowdown from China. In addition, the EU is back in a recession and the U.S. is slowing down. However, a lot of people and fund managers I know are holding large cash positions. Everyone is expecting a repeat of 2008 and it may not happen. A lot of companies I own have excellent balance sheets and great cash flow. Their downside is very limited. In general, investors may be holding too much cash and they are creating a huge bubble in U.S. government bonds. That's why I am still close to fully invested.
TER: I understand that your portfolio was up 27% in the first three months of 2012. How did you do in Q2/12?
CL: My portfolio is up nicely again this quarter, thanks largely to nice appreciations in some of my top positions, including Mart Resources Inc. (MMT:TSX.V), Pan Orient Energy Corp. (POE:TSX.V) and Petaquilla Minerals Ltd. (PTQ:TSX; PTQMF:OTCBB; P7Z:FSE). I am up about 40–50% for the year.
TER: We have been in a prolonged period where investors have ignored good news and hammered stocks on bad news. You've found some stocks that have reacted positively to news. Was it just a matter of time before the situation changed? Has it changed?
"The market has once again failed to calculate risk-reward benfits. That could create good opportunities for investors who are willing to take on risk."
CL: The market was and continues to be difficult. However, my stocks were so cheap for so long, and it has been really nice to see them moving up with good news against the market downtrend. I am glad both Mart and Pan Orient started to move up with positive news. However, they are both still extremely cheap. Mart, for example, is still paying a double-digit sustainable dividend with possible increases in the next 12 months. Pan Orient is still trading at cash levels; the market is pricing all its other assets at zero even after the management demonstrated its capability to monetize those assets. These are real companies with real assets, and they are still screaming "BUY" even at their current prices. If they don't move up, I don't know what stocks would.
TER: It's amazing to see good performance in such a weak, risk-averse energy market. What industries have been strong in 2012? Which have been weak?
CL: So far, only fixed-income-related stocks have been strong—almost every other sector has been weak. That's why Mart and Pan Orient started to pay dividends, at which point the market started to pay attention. There is a lot of cash on the sidelines collecting zero interest and subsidizing the U.S. deficit. Once investors see a stock yield in the double digits, they rush to it, just as they did with Mart.
TER: How are you weighting and underweighting now?
CL: I am still overweighting selected energy stocks and underweighting everything else, including gold miners, agricultural stocks and biotech. For 2012, I think it is a stock picker's market. You need to consider each stock on an individual basis. I have plans to use the dividends from Mart and Pan Orient to buy cheap stocks in a few sectors, including gold mining.
TER: Mart investors are looking forward to a dividend. When might that occur?
CL: It looks like the company is going to pay a 10c dividend in July and followed by 5c-per-quarter regular dividend.
TER: Capital investment is so hard to come by in these dislocated markets. Aren't there better ways to use cash than to pay it out? Why not buy new assets in a lower-priced energy market?
"My stocks were so cheap for so long; it has been really nice to see them moving up with good news."
CL: Mart is looking for other assets in Nigeria. However, the Umusadege field is generating huge after-tax cash flow and the capital requirements for other new assets are not high. Mart is still accumulating a lot of cash even after the double-digit dividend payouts. Plus, it is expecting to double or triple cash flow after a new pipeline is built, supposedly sometime next year. I wouldn't be surprised to see higher and higher dividends in the next year or so.
TER: Mart is a very low-cost producer now, but could average cash costs increase if it purchased new assets?
CL: Mart's Umusadege field is one of kind. The company saw no significant oil production decline from the wells over the past three years. I am not sure anyone can find another field like this, even in Nigeria. So it would be hard to duplicate the same success. As a shareholder, I really hope Mart focuses on Umusadege while maybe picking up some other fields nearby.
TER: The company just inked a new pipeline deal with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). What kind of leverage does this new capacity give the company? What does this mean for investors?
CL: It can double, triple or even quadruple current production, which will leave room for significant dividend increases down the road. Personally, it is still my largest position and I haven't sold a single share since its huge run-up after the dividend announcement.
TER: Shifting gears to Pan Orient, you recently spoke to some investors earlier this summer who were surprised when you told them the company had a producing field that could be scaled up in a short period of time, significantly mitigating cash burn. Why is this development flying under the radar?
CL: Pan Orient's stock had a lot of wild swings in the past a few years, and it doesn't have a strong shareholder base, much like Mart's earlier days. This means a small rumor could crush the share price and there are all kinds of false perceptions about the company. However, I believe as the management continues to execute, much of the misperception will gradually go away.
TER: On May 23, Pan Orient agreed to sell its 60% interest in its Thailand concessions, from which it would net about $162M. The stock rebounded dramatically, and has held its gains. What does this asset sale mean for the company?
CL: It means that the company is trading at the cash level. All the rest of the assets, which the company has been accumulating for the past five years, are "free" to investors. That includes Batu Gajah, the crown jewel of the company. Pan Orient holds 50% of the concession. PetroChina holds the other 50%, currently producing about 50,000–60,000 barrels of oil equivalent per day, with pipelines and all the other infrastructure in place. The company is planning to start drilling Batu Gajah in two to three months.
It is amazing how cheap Pan Orient is right now. It will also be drilling about 10 wells in the next 12 months. Each well costs a few million dollars to drill, but the upside is it would add $2–3 to the dividend if successful. In terms of risk-reward, there are no other companies like Pan Orient. It is still one of my largest positions.
TER: On May 24, Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) said it had entered into a deal with an unnamed Mongolian buyer for its iron manufacturing plant to purchase 22 thousand tons (22 Kt) of coal this year. What is your impression of this news?
CL: I think it is creditable. I went to the mines over a month ago. It has a lot of coal ready to mine. There is a huge amount of energy demand in Mongolia, so I wouldn't be surprised if the company continues to find more buyers. The key is the selling price. Prophecy has been selling to local buyers at cost to show good will. However, this deal looks like it could have a nice margin.
TER: Chen, Mongolia has not been friendly to mining in the past, but it is now a fledgling democracy and it seems open to Prophecy. Does Mongolia present high hurdles to other companies wanting to enter the market?
CL: Yes, the hurdle is high for newcomers to Mongolia. Prophecy has already been operating there for a while and has the advantage of knowing the country and the people. Mongolia is a huge country and there are a lot of opportunities there, and like many companies I own, Prophecy Coal is deeply undervalued. Now I am waiting to see the company's progress before I decide when to buy more. If there is no significant news and the market doesn't improve for the rest of the year, then tax-loss selling later this year could present a bargain-hunting opportunity.
TER: Do you own shares in Harvest Natural Resources (HNR:NYSE)?
CL: Yes. I am holding, though I am tempted to add to my position on weakness.
TER: On June 21, the company announced that it had agreed to sell its 32% stake in its Venezuelan operation, Petrodelta for $725M, on which it will net approximately $525M. The share price nearly doubled on that news. What's your take on this?
CL: It was a very smart move indeed. The deal was worth more than $12 per share but the stock is still trading at $8–9.
TER: Harvest Natural Resources has fairly advanced exploration programs in Indonesia, Gabon and Oman that it brought to the drilling stage last year. Any one of these could be worth, at minimum, half of the company's current market cap of $326M. What is the market waiting for?
CL: Harvest will need to close the deal first. That would require government approval from Venezuela and Indonesia. If one of the governments doesn't approve, the deal is dead. I think the market is fearing this outcome. However, I believe the market has once again failed to calculate the risk-reward benfits. That could create good opportunities for investors who are willing to take on a little risk.
TER: Thank you for sharing your strategies with us.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
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1) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Resources Inc., Pan Orient Energy Corp., Prophecy Coal Corp., Petaquilla Minerals Ltd. and Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
2) Chen Lin: I personally and/or my family own shares of all companies mentioned in this interview. 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.