The Energy Report: Marin, in your recent 2013 Energy Forecast, you wrote that the earth is running out of accessible supplies of oil, uranium, coal, metals and virtually every other resource—with the emphasis on "accessible." What does the loss of accessible energy resources mean for the margins of companies pulling the oil, gas and uranium out of the ground?
Marin Katusa: Let's start with oil and gas in North America. Unconventional production is becoming the new norm. This is a paradigm shift in domestic oil and gas production and a direct result of limited accessible resources and new technologies making once uneconomic resources economic. Another example I touch on in the special report is the move to deeper offshore wells. Look at the BP Plc (BP:NYSE; BP:LSE) 2010 oil spill in the Gulf of Mexico. If it had extracted every drop of oil from the Macondo prospect, it would not have satisfied the world's oil demand for one day. That gives you an insight into what the western world must do to satisfy its oil demand.
Another example: Companies with warm in-situ recovery (WISR) production are making good margins in the U.S. Investors looking for exposure to U.S. uranium should look towards WISR uranium production, which has better margins than traditional ISR and conventional production in the rest of the U.S. This is another item that we mention in the 2013 Energy Forecast that has never been mentioned anywhere in the analyst community. Eventually, companies have to pass the price on to the consumer, which indicates higher energy costs for consumers.
TER: Are consumers willing to pay for the cost of these unconventional methods, or do companies have to do more with less, thus leading to trouble with financing?
MK: It doesn't matter if you are Warren Buffett, Rick Rule or Doug Casey, the common trait of these three investing legends is investing in great people. Great people find great projects, and the smart money follows the smart people. Financing is a problem for most junior exploration and production (E&P) companies, as they rarely produce profits initially. The major producers, such as Exxon Mobil Corp. (XOM:NYSE), BP or Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) can find financing. Then you have a large category in the middle that seeks offtake agreements, debt and equity financings.
For example, companies in the Western Canadian Sedimentary Basin are trying to attract capital by promising yield to their shareholders. Many of these small public producing companies produce less than 10,000 barrels of oil equivalent per day. The companies are paid a discount to the West Texas Intermediate (WTI) and to the Henry Hub, so there is very little room for error and the profit margins are very tight. But they are tapping into the greed factor in the current yield-chasing market. By paying a yield, these companies are attracting investors who normally do not understand or invest in the sector, nor do they understand the inherent risks associated with such companies. We advise investors to be very careful, as the margins are so tight that management has no room for error. Once something does go wrong, which it will, investors in many of these companies will experience a portfolio meltdown. We are much more excited about regions that are paying a premium to WTI and Henry Hub pricing, which we call energy-hungry regions.
TER: Where are those energy-hungry regions?
MK: Europe. In certain parts of Europe, consumers are paying the Middle East and Russia over twice the price of natural gas in North America. It's the unconventional technologies that have lowered energy prices in North America, and these European regions have not experienced the energy renaissance yet, but they soon will. Some companies in Europe are making great margins at current prices. The Albanian government, for example, is signing offtake agreements with local producers at more than $8.50 per thousand cubic feet ($8.50/Mcf). The same gas is selling for $2.50/Mcf in Alberta. Investors who target the right companies could profit from higher oil and gas prices. The same situation is going on right now for oil in Germany, which has infrastructure, proven reserves and similar geology to Alberta, and yet the companies in Germany are making over 200% more for the same commodity as companies in North America, with similar production costs.
The hottest area in the world right now for oil exploration is the East African Rift, where it costs north of $50–60 million ($50–60M) to drill an exploration well. Casey Energy Report was the first to recommend Africa Oil Corp. (AOI:TSX.V) and to do a fundamental research report on the potential of not just Africa Oil but the region in general. Developing these resources in East Africa is a multi-billion dollar proposition. China, which is expanding its own domestic production, is also investing billions into the region because China wants secure, long-term offtake arrangements to satisfy its growing oil demand.
TER: Venezuela is using oil revenues to pay for social programs rather than investing in oil infrastructure. As a result, production is shrinking year-over-year. What will change with the death of Hugo Chavez?
MK: Nothing will change in the near term. Venezuela subsidized social programs and local demand for oil and energy using the revenues it once made selling its oil to the U.S. Now, the government cannot take away those subsidies for social programs, and although it already has one of the lowest gasoline prices in the world, it cannot raise prices without risking civil unrest. The only way out is to charge higher prices for the oil it exports. Already, Americans pay almost 100% more for Venezuelan oil than for Canadian oil. Chavez's last laugh is that Americans are paying twice the price to Venezuela than they are to their friendly neighbors to the north.
That will not change in the near-term. For the next couple of years, the main agenda of politicians in Venezuela will be to keep the peace, to keep things moving along. Eventually they will have to attract foreign capital and expertise to expand the resource and produce more oil. Until that happens, nothing will change.
What will change, on the American side, is more pipeline infrastructure development to increase access to less-expensive Canadian oil. That will happen with Keystone XL. Until then, Venezuela will remain the fourth-largest provider of oil to the U.S., and the U.S. will be paying a premium for Venezuelan oil.
TER: In a recent Casey Daily Dispatch, you predicted the Keystone pipeline will be built, but that the U.S. government will impose a "maple leaf oil carbon levy," creating a permanent differential for Canadian oil. What will that mean for companies working in the Canadian oil sands?
MK: Until pipeline infrastructure is built out to the west so the Enbridge Energy Partners L.P. (EEP:NYSE) pipeline can make Canadian heavy oil accessible to Asia, Americans will always get Canadian oil at a differential to WTI.
There will be a tax of some form on the "dirty" Canadian oil, which we'd like to remind Greenpeace is ethical oil, and of the highest global standards, unlike the bloody oil or unethical oil coming from some other parts of the world to the U.S. The Canadian oil sands are home to some of the largest projects in the world, run by some of the largest companies, using top technology regarding both environmental and safety standards.
That said, President Obama will use this situation to satisfy the environmentalists who support him by bringing in some form of levy, which will satisfy NAFTA agreements. The end result will be a discount for the oil sands producers. That is the opportunity. Investors need to identify their favorite oil sand producer and be patient, as eventually this will change. Remember, even though the situation is hopeless, it's not serious. In other words, there is a way we can profit from it.
TER: When we interviewed Porter Stansberry, he was encouraging the idea of American energy independence. Do you think that could happen?
MK: Porter is a good friend and a great speaker. Actually, if you ever get a chance to hang out with Porter, do. He is one of the most entertaining people I have ever met. He is smart, fun and fascinating. Porter and I have a bet going on right now. I took his money in a poker tournament with Doug, I beat him in golf and I will yet again take his money on this bet.
Porter said oil would be below $40/bbl by the beginning of May 2013. I think that is complete nonsense. We bet 100 ounces of silver. He wins if oil is at or below $40/bbl, and I win if it never touches or goes below $40/bbl.
I think it is in the best interest of the U.S. to become energy self-sufficient, but in the March Casey Energy Report, we identify all of the factual errors in the International Energy Agency report that states the U.S. will be on its way to becoming energy independent. The March issue of the Casey Energy Report is a must-read for anyone interested in investing in energy.
TER: Which oil-and-gas companies could benefit from increase in the prices of oil and gas?
MK: Our paid subscribers pay for that info, and I can't give it away for free here, but I encourage all to take us up on our trial challenge. As I mentioned earlier, we were the first to discuss Africa Oil Corp. We recommended it at under $1 per share. We made a good gain on that one and it has gone even higher since then. I can't emphasize enough how important people are when it comes to investing. With the right people, you will have the right share structure, the right cash in the bank, the right projects. If the management team is not significantly invested in its own company, you probably do not want to be invested in it either. In our reports, investors will learn more about the Casey 8 Ps in successful investing.
TER: You said that you probably would not invest in companies that cannot make money at current fuel prices. How does this theory apply in this uranium space, where spot prices are around what you called a low of $40 per pound?
MK: The uranium sector is the no-brainer of the energy sector right now. It's the perfect contrarian bet. It is the most unloved sector of the energy world and conventional producers cannot make a profit at current prices. That is a fantastic situation for investors with a longer-term time horizon.
In 1960, the U.S. led the world in uranium production at more than 36 million pounds (36 Mlb). In 2012, it produced just under 3.5 Mlb. There is an opportunity for the U.S. to increase its uranium production and become independent of Russian nuclear fuel. About one in every 10 houses in the U.S. is fueled by Russian uranium, an ironic result of the Cold War.
You want to invest in companies that can make money using new technologies, such as WISR production. As the price of uranium moves higher, their margins increase significantly. One company that has been in our ten-bagger club is Uranium Energy Corp. (UEC:NYSE.MKT). The company is run by smart people, who have actually done what they said they would. CEO Amir Adnani has put together a great team of people, such as Harry Anthony, who knows ISR production. This U.S.-listed company is a low-cost producer, and makes money at current market prices.
As for explorers, we had a great win with Fission Energy Corp. (FIS:TSX.V; FSSIF:OTCQX). It has the right management team that made not one, but two major discoveries. That doesn't happen by luck; that happens by the right people doing the right exploration, and investors have had +100% gains with Fission. If you want to invest in high-risk juniors, the Athabasca Basin is the king of all uranium basins. It has the highest-grade uranium in the world, but drilling there is very expensive, so make sure you invest in management teams that know what they're doing. Remember, it's all about the people.
TER: Do you have any parting thoughts for our readers?
MK: If you have a longer time horizon, fortune will favor the bold. This is a fantastic market, offering opportunities to make a lot of money in the sector. It's obvious the junior resource sector is in the doldrums, but this current bear market is providing great deals. Everyone wants to buy a Rolex for the price of a Timex. Right now, Mr. Market has put up everything on sale. But testicular fortitude is required in these markets, and if you invest in the right people, fortune will favor the bold.
TER: Marin, thank you for your time and your insights.
Investment Analyst Marin Katusa is the senior editor of Casey's Energy Report, Casey's Energy Opportunities and Casey's Energy Confidential. With a background in mathematics, Katusa left teaching post-secondary mathematics to pursue portfolio management within the resource sector. He is regularly interviewed on national and local television channels in North America such as the Business News Network (BNN) and many other radio and newspapers for his opinions and insights regarding the resource sector. A regular part of his due diligence process for Casey Research includes property tours, which has resulted in him visiting hundreds of mining and energy exploration projects all around the world. For more cutting-edge investment ideas from Marin Katusa's, get your very own 2013 Energy Forecast.
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1) JT Long conducted this interview for The Energy Report and provides services to The Energy Report as an employee. She or her 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 and Fission Energy Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Marin Katusa: I or my family own shares of the following companies mentioned in this interview: None. 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: None. 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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