ARE SPREADS THE THIN EDGE OF THE WEDGE?

By
Keith Schaefer
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Everyone is an oil bull right now.

In the last 6 days I’ve listened to Vitol Asia head Michael Muller, UAE Energy Minister Suhail Al-Mazrouei, and Trafigura CEO Jeremy Weir all warn of higher prices.

Muller said that limits to Saudi production are “very bullish for oil”.

Al-Mazrouei believes “prices may well climb further”.

Weir went furthest of all, saying prices could reach “a parabolic state”.

Now these are smart guys and smart guys saying oil is going higher is not necessarily bearish.

Except… it is not just the smart guys.  It is pretty much everyone.

We’ve got Jamie Dimon saying $150 to $175 oil is in the cards. 

We’ve got Jim Cramer, the guy who two years ago said he was done with fossil fuels, giving us headlines like this:

Source: CNBC.com

Forgive me if this all makes me a little bit skittish.

Name me an oil bear right now – and I don’t mean a permabear – I mean someone that has been bullish before but has now pulled the plug.

It is not easy to find.
 

WHAT IS DRIVING OIL RIGHT NOW?

 
Okay, so we’ve got an oil bull market and a whole lot of oil bulls.  Maybe it is just that the bull case is that strong?

Maybe.

Demand is surprising to the upside – travel, travel, travel – no question.  Still, oil is more about supply than demand right now.

But is oil actually “tight”?

Pinning down tightness in the oil market is a tricky business.

You’ve got spare capacity tightness.  You’ve got actual tightness of the physical market – the supply and demand.

Then, maybe most important right now: you can have varying tightness across the crude slate. 

Not all oils are made equal.

There is light oil, there is heavy oil, there is sweet and sour.  Demand can vary quite a bit from one crude to another.

Usually, give or take a few bucks, different crude types move in lockstep.  But what I’m seeing now is that this is not the case.  It is making me wonder if the historical ties are broken, and why that might be?
 

IS OIL TIGHT?

 
If you look at oil at a high-level you would be hard pressed to say its tight.

On one level, talking spare capacity, you can make the argument.  Spare capacity is basically how much more can OPEC+ pump.  This is tighter than it has been in a long time.

The very excellent Energy Tidbits, put out by SAF Group each week, linked to a podcast interview with Vitol Asia head Michael Muller this week.

On the podcast Muller said, “smart money is of the view that the Saudi current sustainable production limit is somewhere 11 point something, a huge gap vs “surge” KSA #Oil of high 12’s mmbbl/d… Very bullish for oil as demand keeps going up.”

It may very well be that only Saudi Arabia and the UAE have spare capacity right now.  The Saudis may have less than we think.

Is it 12+ million barrels a day?   Or is it, like Muller says, something closer to 11?  If it is 11 – that’s tight.

While spare capacity is tight, it is a bit less clear if the physical market for crude is really that tight.

For one, Russian crude exports have not actually been hit like many thought they would.  Again, to quote from the Muller interview (my highlight):

“When you look at information available today… crude output from Russia is still level-pegging with what it was, and its products that have been hit”

Even with all the talk about the loss of Russian oil, that isn’t happening.  Yet we are adding more crude into the supply from the SPR.

I think that Christof Ruhl, from The Center on Global Energy Policy, hit it on the head later in the same interview when he said:

“There is no shortage of crude oil… crude oil doesn’t seem to be the big problem at the moment… its with products, in particular with diesel.”
 

THE CHIRPING CANARY

 
Here is where things get interesting.  While the crude market is at best marginally tight, mostly with respect to spare capacity, it is the products market that is just plain tight across the board.

I wrote about this in a blog post two weeks ago (Are We in a Refining Golden Age?).

We lost refining capacity with COVID.  We lost even more refining capacity when Russia went rogue. 

Now the world is getting back to where it was pre-pandemic – but there are less refineries available to get there.

You can drill a well a lot faster than you can build a refinery.  That is if you even want to consider a long-lived project amidst a fossil fuel sunset.

We’ve got diesel and gasoline inventories at multi-decade lows.  We’ve got Europe importing all they can from the United States and anywhere else that has inventory (re-read that comment from Muller: its Russian product exports that have been hit). 

Unlike oil, government emergency stockpiles of gasoline or diesel are not the same scale as oil.
No surprise that crack spreads are making oil prices look pale.
 

Source: Bank of America Global Research

This is not just a US thing.  Refining margins everywhere are parabolic. 

Margins in Singapore have gone from under $10 per barrel to nearly $50 per barrel in the last 6 months.

With that in mind, I stumbled on the following chart this week:
 

Source: Bloomberg

My first reaction to this chart is – WTF?  How can we have tight oil and ballooning differentials?

Of course, the answer when it comes to Canada is usually egress capacity.  In other words, there isn’t enough pipeline to get the oil out of Canada.

But that doesn’t seem to be the case this time.  The Line 3 replacement project, owned by Enbridge, expands an existing pipeline running through Minnesota to 760,000 bbl/d.  It is up and running and has added ~350,000 bbl/d of new capacity.  There was another 200,000 bbl/d added with the Southern Access expansion.

From what I read there is around 300,000 barrels of extra pipeline capacity right now.

Yet the heavy oil differentials are going south.

Some of this has to do with the SPR releases.  They are putting more heavy crude on the market.  But I don’t think that’s the whole story.

I think widening diffs are the canary in the coal mine.  They are hinting at what is really happening in the oil market right now.

With refining margins off the charts every refinery is trying to produce as much product as possible. 

They don’t care about how much it costs to buy the crude – just produce as much gasoline, diesel, and jet fuel as you can.

We know that heavy oil produces less of those products, and more of the lower end products (stuff like asphalt), per barrel compared to a light or medium crude.

Because product margins have gone into stupid land, for maybe the first time ever the refiners really don’t care if they have to pay up for the better-quality oil.  They will more than make up for that on the sale of their products.

Now I know there are other considerations.  The oil complex is nothing if not complex.  But at the margins I think this is driving some of the price action we are seeing.

This is a whole different ballgame than we are used to.  Refining is not a high margin game – UNTIL NOW.   

Usually refiners are like nature’s equilibrium, making sure that all ends of the crude slate are in balance as they try to maximize their margins. 

Now, with margins through the moon, refiners have abandon that post.  They have the unusual incentive to bid up crude that will give you the most product and not to worry about the cost.
 

WHERE FROM HERE?

 
Keep in mind that this is all just my theory.   I can see that something different is going on and this fits the evidence.

If I’m right, then we are in a whole new world.  If refining margins can stay in the stratosphere, the old rules do not apply.

Rising oil prices are not about a shortage of oil.  If there was a shortage of oil, we would see refiners scrambling for every barrel.  That is not what’s happening.

Refiners are looking at heavy barrels from Canada and saying no thanks. The same is happening for heavy Mayan crude from Mexico, or medium-sour crudes like Mars.

What we have is a shortage of product, leading to massive refining margins that are causing distortions in the market.

As a result, it looks like we don’t have enough oil.  But its really a refining complex that simply doesn’t care what they pay for the best oil – for WTI.
 

REFINERS IN THE CATBIRD SEAT

 
If I’m right, then the price of WTI and Brent are going to be driven less by the overall supply and demand for oil and more by how wide refining margins go.   

As for stock-picking, it looks like refiners are the place to be if you are bullish the energy sector.

I am long a little bit of oil, and we have a big position in one microcap natural gas play.  I have a bigger position in one refiner, and I wish I had bought some others.  But I’m skittish to buy now.

What makes me hesitate?  Why not buy more refiners? 

Well, what I’m describing here is why I think the oil price has been going up. 

Which is different then saying that I think refining margins can stay at this level.

Maybe they can.  But if you have watched the oil markets for as long as I have, it is hard not to look at those crack spreads, shake your head, and think something has got to give.

The questions are what, and how high? 

The Problem With The Uranium Supply Chain

By
Keith Schaefer
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Every form of energy is going through the roof.  Oil, natural gas, refined products, coal – you name it, if it’s a fuel, it is going up.

Except for one.  Uranium prices, which caught fire in the fall and again during the first few weeks post-invasion, have taken a tumble.

The spot price of uranium traded as  high as $58 per pound in March.  But they have fallen back to below $50 since. 

Uranium spot price chart

Source: Morgan Stanley

What’s going on here?  Shouldn’t uranium be flying high as we re-evaluate the path to zero carbon while at the same time trying to ban every energy export out of Russia?

Well, it turns out that the Russian invasion of Ukraine is the cause of the slide in uranium prices.   But it’s not what you think and not at all bearish.

HOW THE RUSSIAN INVASION GUMMED UP
THE URANIUM SUPPLY CHAIN

Leading up to the Russian invasion uranium fundamentals were on the rise.

In 2021 and early 2022 utilities were laser focused on shoring up their uranium supply.

Last year, the price of uranium rose by 45%, going from about $29 per pound at the start of the year to $50 per pound in September.

There was a fundamental story that was gaining traction.

The Russians invasion changed that.   How?  It diverted the attention of the utilities to a bigger problem – their uranium conversion and enrichment supply chain.

As an electricity producing fuel, uranium is not like the others.  With coal or natural gas, what you get is what you use.  You buy it and you burn it.

Not so with uranium.  Uranium needs to be processed before it can be used in a reactor.

Specifically, reactors need a particular isotope of uranium – U-235.  Mined uranium has about 0.7% U-235 content.  Reactors need that content to be “enriched” to a higher value – 3% to 7% for most legacy reactors and up to 20% for newer high-efficiency reactors.

The two key processes to make uranium “reactor-friendly” are conversion and enrichment.

Nuclear fuel cycle
Source: World Nuclear Association

Conversion consists of turning mined uranium (uranium oxide) into uranium hexafluoride, or UF6.  UF6 is a gas and a necessary precursor material for the enrichment process.

There are not a lot of conversion plants out there: only Canada, France, Russia and China have them.  There is one plant in the United States, owned by Honeywell (HON – NYSE) and General Atomics (PRIVATE).  But is closed and not expected to restart util 2023.

Nuclear fuel cycle
Source: World Nuclear Association

Most importantly, Russia has 27% of global conversion capacity.

Once converted, the uranium needs to be enriched.  The process of enrichment is essentially taking the UF6 and filtering out more of the U-235 isotope that the reactors need.

There are a few ways of doing this.  Most enrichment facilities today use centrifuges to “spin out” the U-235 isotope.  There is a newer Australian process in development (more on this later) that uses laser excitation to increase U-235.

Since Fukushima there has been way too much enrichment capacity.   As the World Nuclear Association (WNA) stated at the end of last year: “there is a significant surplus of world enrichment capacity”.

No one has worried about a shortfall of enrichment capacity.  Until Russia went rogue that is.

According to the WNA about 90% of world enrichment capacity is in the five nuclear weapons states… 

And about half of that is in Russia.  Whoops.

World uranium enrichment capacty
Source: World Nuclear Association

THE RUSSIAN CORNER

Taken all together here you can see the issue.  Russia has 50% of global enrichment capacity.  27% of global conversion capacity. 

Cameco’s CEO Grant Issac described it at a recent Bank of America conference:

“Us and our competitors in the industry were seeing a lot of interest in uranium. But that changed also on February 24. Utilities shifted their attention from where’s my long-run uranium coming from to where’s my enrichment and conversion going to come from”

Since the invasion, we have seen a 40% jump in enrichment prices, from $70 to $120 per unit. Cameco described it as “a panic”, saying conversion is “about as hot as we’ve seen it ever”.

But uranium is not forgotten.  It’s just taken a back seat for the time being.

Once the enrichment and conversion capacity has been locked up, utilities will get back to focusing on uranium.

URANIUM WILL COME BACK INTO FOCUS

Uranium has very concentrated production itself.  The top 4 producers have 56% of total production

  • Kazatomprom: Kazakhstan-based, ~21% of production; 13 mining assets located in Kazakhstan
  • Cameco: Canada-based, ~15% of production; ‘tier-one’ operations in Canada and Kazakhstan
  • Orano: Paris-based, ~13% of production; production sites mainly in Canada, Niger, and Kazakhstan
  • Uranium One: Wholly-owned subsidiary of Russian state-owned Rosatom, a Canadian uranium mining company headquartered in Toronto, ~8% of production

Russia makes up 14% of worldwide production and about 20% of production that is exported to the United States.

In addition, about 50% of the uranium mined in Kazakhstan (they are the biggest uranium producer in the world) is transported through Russia, via the port of St. Petersburg.

This is all material that goes to Western power producers. 

It is a precarious situation.

On the Western end we have legislation pending in Congress to cut-off access to Russian material.

On the Russian end, there are plenty of threats that they will cut it out from their end in retaliation to other sanctions.

The bottom line here is that more Western capacity will be needed to meet Western demand. 

BUY THE DIP

While questions surround future supply, the interest in uranium has never been higher.

According to Cameco CEO Tim Gitzel, “things are moving very quickly in our industry, and we’re seeing countries and companies turn to nuclear with an appetite that I’m not sure I’ve ever seen in my four decades in this business.“

It sounds like a recipe to buy the dip.

There are a couple obvious ways to do it.  First, buy uranium.  The Sprott Physical Uranium Trust (U.UN – TSX) is trading all the way back down to where it was before Russia invaded Ukraine.

SPROTT chart
Source: Stockwatch.com

The trust is an investment vehicle for uranium – all of its assets in uranium in the form of U3O8.

The Sprott Trust made headlines last fall when its buying of physical uranium for the fund contributed to a rise in prices, setting off a virtuous circle.  That could happen again.

Second, just buy Cameco.  The biggest western uranium producer.  The only western source of operating conversion capacity.  Cameco stands to benefit from all the steps in the process.  As uranium goes, so goes Cameco.

DOWNSTREAM PLAYS – NOT A LOT OF OPTIONS

These are good ideas, but what I would really like is a targeted play on conversion and enrichment.

It’s a no-brainer that conversion and enrichment capacity will come back to the West.  Companies focused on the uranium supply chain should be big winners.

The trouble is finding the right company to fit the bill.

That’s probably not surprising.  These are niche processes with only a few operating plants.  The whole opportunity is in front of us because so much of existing supply comes from Russia.

There are two public companies with a foothold in conversion and enrichment.

The first and only North American traded one is Centrus Energy Corp (LEU – NYSE).

Centrus looks really good and really bad.  The bad is that right now Centrus is basically a middleman.  They generate revenue from buying enriched uranium from overseas producers and selling it to utilities.  

Unfortunately their main supply of enriched uranium is from the Russian company Tenex.

That makes Centrus directly in the site-lines of any coming sanctions on Russia.

The good is that Centrus has a head start producing enriched uranium in the United States.

Centrus operated an enrichment plant in Piketon Ohio until 1997.  Last year, the Nuclear Regulatory Commision (NRC) gave Centrus a license at Piketon to enrich uranium up to 20% (this is called high-assay low-enriched uranium or HALEU) using centrifuge technology. 

This is the only license of its kind.  Centrus is in the process of building the demonstration facility.   They said on their Q1 call that they now plan to supplement HALEU production with low-enriched uranium (LEU) production, the type that could be used by existing reactors in the US.

It sounds promising.   But there are more wrinkles.

The DOE partnership originally had a scope that included operations beyond the demonstration phase.

That sounded great – it meant a runway to fully operational enrichment.  But the DOE changed the terms in February, instead splitting the project up into two phases – with the second, operational phase up for another yet-to-come bid.  Centrus says they are well positioned to win this, and well, they should be – but this is government so…

Nothing is certain here.

Maybe the most intriguing thing about Centrus is the recent insider buy.  A director at Centrus recently bought over a million bucks of the stock.  Makes you wonder what they see?

Centrus chart
Source: INK Research

The second name in the conversion and enrichment mix is an Australian company SILEX Systems (SLX – AU). 

The strike here is that I don’t invest in Australia.  But if you do, SILEX might be worth a look.

SILEX owns 51% of a joint venture called Global Laser Enrichment (GLE).  Cameco owns the other 49% with an option to increase their ownership to 75%.  SILEX also holds a 7% royalty on revenues GLE makes from the process.

SILEX licenses the rights to use their laser enrichment technology to GLE. This process is more advanced and higher efficiency that the centrifuge process.

SILEX
Source: SILEX Systems Investor Presentation

SILEX is in the midst of a pilot at its Paducah Kentucky facility, with commercial operations expected in the late-2020s.

SILEX timeline
Source: SILEX Systems Investor Presentation

Maybe most interesting, SILEX also has announced they plan to bid on the operational phase of the DOE/Centrus HALEU project.  It is worth considering whether the DOE redefined their project scope to allow SILEX/Cameco and their new technology to get in the race.

JUST BUY URANIUM AND FUHGEDDABOUDIT

While both Centrus and SILEX are interesting, both companies are still years from commercial production.

These stocks are a lot like buying a copper exploration project because the price of copper is taking off.  Not usually the best expression of the idea.

While it would be great to take advantage of a seemingly sure bet on onshoring the uranium process, the simpler path is just to buy the uranium dip.

If you want some upside on conversion and enrichment, Cameco can give you that.

Utilities will refocus their attention on uranium procurement soon enough.  When they do, we will be starting at a uranium price that is way higher than it has been in years.

The long-term outlook for uranium looks better than it has in years.

And the chance of an upside surprise, either from Russia banning exports or the West banning Russian imports, could mean a payoff overnight.

ARE WE IN A REFINING GOLDEN AGE?

By
Keith Schaefer
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This is a Market with very few places to hide.

All the favorites are getting killed.  You thought you could hide in consumer staples, in big tech?  Think again.

With the world upside down, is it any surprise that the biggest safe haven has been the most volatile and treacherous market in the past?

Bear market?  What bear market?  The Van Eck Oil Refiners ETF (CRAK – AMEX) just cracked (pun intended, sorry) through its 52-week high.

1
Source: Stockwatch.com

My subscribers have benefited – I’ve piled into a refiner play that I called the best stock set up I’ve seen in years – its up 25% already and I think it has further to go.

But the whole group is making money hand of fist right now.  So my question is – do I make a wider sector bet?
 

GOLDEN AGE

 
Bank of America is calling this “the golden age” of refiners.   You would have been hard pressed to see that coming – refiners have been a beleaguered group for years.  But now I gotta admit, there are a bunch of reasons to think that refiners will be in the catbird seat for some time to come.

We are at multi-year highs in crack spreads.

Both gasoline and distillate crack spreads (that is the spread between what it costs refiners for oil and what they can sell the product for) are at multi-year highs and nearly 4x the 5-year average.

In a recent blog post, RBN Energy pointed even more historic extremes, saying that “diesel inventories are at their lowest level for May since 2000 and East Coast stocks recently hit their lowest mark for any week or month since the EIA started tracking them in 1990”!!!

The following chart says it all:

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Source: Bank of America Global Research

WHAT HAPPENED?

 
Cracks have gone parabolic for 3 reasons:
  1. A recovery in demand as travel comes back
  2. Capacity rationalization – shutdowns of refineries from COVID
  3. Changes to export flows – in particular the US becoming the marginal supplier of refined barrels to the world
The combination of no new refineries and increased exports make me think this cycle could be longer and stronger than anyone might expect.  

As Bank of America put it, there is “a long-term structural cost advantage anchored on US vs International natural gas” while “net US refinery closures that will see the domestic refiners with 10% less refining capacity”.  That sounds like a lethal combination.

Distillate spreads have been the biggest story.  The Gulf Coast distillate crack is $70 per barrel.  The 5-year average in $15.  That is nearly 5x higher than the average margin!

Distillate is diesel, jet fuel, home heating, etc.  It may not be what you see at the pump, but the price of distillates hits you in a whole bunch of ways.

It is not a stretch to say the East Coast is about to run out of diesel, jet fuel and other products.  PADD 1 inventories (that is the East Coast) are less than half the 5-year average.

3 2
Source: Credit Suisse

We are just coming up on the summer driving season where refiners will be switching away from distillate in favor of gasoline.  They’ve been putting off that switch because distillate has been so darn profitable.

Refining is seasonal.   In early spring refiners change their output – from ‘max diesel’ to ‘max gasoline’ – to gear up for driving season.   This year the spread between diesel and gasoline was so wide that refiners delayed the switch.

While that kept distillate inventories from going dry, it had an inevitable impact on gasoline.  Since the beginning of May gasoline has made a big catch-up.  Gasoline spreads are now as high or higher than distillate.

4 2
Source: Credit Suisse

This puts gasoline in the headlights as we approached summer driving.  Gasoline inventories look like a tech stock – plummeting through the 5-year average in the last few weeks:

5 2
Source: EIA

How did this happen?  How did any of this happen!   COVID, of course.  And the Russian invasion of Ukraine.

6 2
Source: EIA

COVID hit and refining became very unprofitable.  The renewable narrative—The Green Trade—got REAL loud.  Refiners felt the heat of being not just unprofitable but unprofitable and polluting.

So they shut it in.  Over one million barrels of refining capacity was lost through the pandemic.

7 2
Source: EIA

One million barrels!  That is 5% – a big number once the economy came back and travel began to normalize.

8 2
Source: Bank of America Capital Markets

Outside of the United States another 2 million barrels a day went offline. 

The second big factor has been the Russian invasion and subsequent spurning of Russian product.

In Europe, Russia was a big supplier of diesel – to the tune of 800 thousand barrels per day.  That demand is now largely coming from United States exports.

These exports have eaten into distillates that might otherwise come to the Eastern United States, where distillate inventories are tightest. 

They have also created a domino effect.  Distillate supply from Asia to the West Coast has not been showing up.  Inventories on the West Coast are quickly tightening.

Even as domestic distillate prices soar, exports out of the United States remain high – at levels last seen in 2016-2017.

9 2
Source: EIA

Every molecule of oil and gas that can be exported out of North America IS getting exported.   North America still has the lowest (unsubsidized) energy prices in the world. US distillate exports are WAY UP to meet that OECD demand!!

It is a mess.  And it is not clear what ends it.  As SAE Group reported:

Once again, Saudi Energy Minister Abdulaziz is able to clearly and very simply explain the oil situation – there is no refining capacity to meet the summer expectations of demand

A BOOM TO THE BOTTOM LINE

 
Refiner stocks are all very levered to crack spreads.  These companies make big money on big spreads.  But profits are usually fleeting so the stocks get very low PE multiples.

Their leverage has never been more evident than it is now.

10 2
Source: Credit Suisse

To give you the most levered example:  PBF Energy (PBF – NYSE) is always the refiner most levered to price.  For every $5 increase in the gasoline crack, EPS for PBF Energy increases over $3 per share. 

Gasoline spreads are $35-$40 over the 5-year average.  That means PBF is looking at 7x-8x that $3 per share if cracks can stay at this level for a year.  PBF Energy is a $30 stock today.  A venerable windfall!

But you don’t have to go that far down the quality curve to get leverage to price.  According to Credit Suisse, among the majors, with close to ~4.3MMb/d of net global refining capacity, Exxon (XOM – NYSE) is most levered to higher gasoline crack on absolute and on earnings impact basis.”

11 2
Source: Credit Suisse

HOW LONG?

 
This is the only question that matters.  How long can these spreads last?

When I look at the supply side, it is hard to see the bear case.  The Russians don’t look like they plan to let up–and even if they do those sanctions are going to stick.

New capacity is NOT going to come to the rescue.  The renewable mandate has changed the game—shoveling billions of dollars to build new refineries while every Western Government is telling you in 10 years it won’t be needed…??? It simply does not make sense.

Refinery utilization is about 90% right now.  It could go higher, and likely will, but that alone is not going to solve prices.

The gotcha for the refinery trade lies firmly on demand.  Will demand hold up with high prices?

That is a tough call.  The old saying – the biggest cure for high prices is high prices – is in full effect. 

You also have a Fed that is hell-bent on squeezing the consumer to slow demand across the economy.

Taking a roll on the refiner trade here is making a bet that neither of these headwinds can steamroll demand – and margins.

That seems risky to me.  My big picture view has been on recession alert.  Which is why I have played the refinery trade in a single, very specific way.  One refiner that has hit on the jackpot and yet still trades at a very reasonable price.  If  you want to read my full report on it—RISK FREE–click HERE.

As for the rest of the space, I’m going to have to leave that for others.  I love the idea of windfall profits.  Who doesn’t?   But refiner profits are also their own worst enemy and I don’t want to be caught when the cycle turns.

small scale NUCLEAR POWER…MAYBE THE NEXT BIG THING? NUSCALE POWER – SMR-NYSE

By
Keith Schaefer
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My big question with the energy transition has always been: where’s the baseload going to come from?

We want to get rid of oil.  Okay.  Around 80% of a barrel of oil is used in transportation.  If we electrify everything – EVERYTHING – you get rid of a lot of oil demand.

But now you need a whole bunch more electricity.   It can’t come from gas, oil, and certainly not coal.

How do we get all this electricity, all day, and all night, from wind, solar and water?

Batteries?  Storage?  That always the response, but I’m skeptical that can do it on its own. 

Battery tech is hitting more walls than it is scaling.

I’m not the only one to have a healthy skepticism.

Just last week Tennessee Valley Authority (TVA) CEO Jeff Lyash said that “without technological advances” the Biden administration goal of 100% renewables by 2035 is not going to happen.

Lyash cannot be brushed off easily.  The TVA is the largest public utility in the United States.

Lyash pointed out that electricity use could as much as double by 2050 as we shift all our transportation to electric.  We don’t have a clear path to meet that demand.
 

HOW DO WE GET THERE?

 
Lyash called out technologies that need to move ahead fast if we want to hit our zero-emission goal.

Energy storage, carbon capture – you’ve heard those before.  But he also named a third, one that is often maligned – small modular reactors (SMRs); small nuclear really.

As a potential solution to our zero-emission goal, SMRs get a pretty bad wrap.

When four Canadian provinces – Ontario, Alberta, Saskatchewan and New Brunswick – recently announced plans to jointly develop SMRs, it set off a flurry of commentary.

Canada’s Globe and Mail business newspaper and The Toronto Sun both published more than one article throwing shade on SMRs.

The arguments against SMRs are not without merit.  But many of these arguments could be said of any new technology: it’s expensive, its uncertain, its not yet in operation.

Those ARE challenges.  But they can be overcome.

When I see broad bashing of a new technology that clearly holds some promise, I wonder if it has more to do with where the interests lie than the merits of the technology itself.

 

NUSCALE POWER – THE SMR PLAY

 

To help form my own opinion, I decided to dive into a newly public company (A SPAC no less) right in the middle of the SMR debate – NuScale Power Corp (SMR – NYSE).

NuScale is a provider of SMR technology.  They have been developing an SMR module for over 20 years.

They recently signed their first deal, with Utah Associated Municipal Power Systems (UAMPS) to provide a 460 MW plant by 2028.

NuScale reached an agreement with Spring Valley Acquisition Group in December to go public via a SPAC.

The SPAC gave NuScale $413 million of cash, including $180 million from a PIPE financing.

NuScale says this will be enough cash to get them through to cash flow positive – expected to happen 2024.

The SPAC values NuScale at $1.9 billion.  This is NOT a cheap name.

I am skeptical of any SPAC in this market.  NuScale has many of the same markings of past, failed SPACs – long dated forecasts, revenue growth to the 2030s, 2026 EBITDA projections.

We know where that sort of thinking got us.

But there is reason to keep an eye on NuScale.

 

SUPPORTED BY INDUSTRY AND GOVERNMENT

 

First, this is not some fly-by-night operation.  NuScale comes out of Fluor (FLR -NYSE). Fluor has been building BIG mines around the world for decades.

Fluor owned 100% of the company pre-SPAC and still owns ~60% of them now.

Second, NuScale seems to have the US government on its side.

Even as the Canadian media turfs the idea of SMRs, the US Government is taking a different tact. 
The DOE has been shoveling money to NuScale for over a decade.

In 2013 Nuscale won $226 million in funding from the DOE, outcompeting bids from Westinghouse and General Electric.

In 2020, after receiving design approval from NRC, the DOE awarded Utah Association of Municipal Power $1.4 billion to assist them in de-risking that first NuScale project.

In total, Nuscale has received $500 million from the DOE over the course of the last 10 years.  They have another $200 million of award still coming.

According to NuScale management, the Biden administration has been “extremely supportive”.  The Build Back Better plan added another $10 billion towards nuclear.

The support has been bi-partisan.   Management says that the Trump administration was supportive as well.

It also extends outside of the US.  Japan and Korea have moved ahead with investments in NuScale.
Samsung C&T Corp took down 5.2 million shares as part of the PIPE investment.

The Japan Bank for International Cooperation, which is a financial arm of the Government of Japan, invested $110 million into NuScale.
 

FIRST MOVER – OR ONE OF THEM

 
It has been a long road.  NuScale has been developing their tech since the early 2000s. 

They applied for their regulatory license in 2016.  It wasn’t until 2020 that the NRC approved the application.

Their process is patented: 425 patents issued and another 209 pending.

Yet even though the tech has been in development for 20 years, it is still considered a new technology. 

In fact, this is one of the points the naysayers love to point out.  It took 20 years!  We still don’t have one in operation!  It must be a dud.

Well, maybe.  The first solar panel was made in the 1950s.  The first wind turbine for power generation in the 1880s.  Sometimes technology takes time.  Especially when you are dealing with a nuclear rod.

The NuScale module is a very simple machine.  A modular design, this is a light water reactor, a 70-year-old technology.  No fancy materials, most of it is off-the-shelf.  It is like the big nukes that are used today, only smaller.

One power module can produce 70 MW of electricity.
 

1

Source: NuScale April Investor Presentation

Modules scale up to 12 per plant which gives you a size of 924 MW or the size of a large coal plant.

NuScale has 3 standard configurations for their design:
 

2

Source: NuScale April Investor Presentation

The target sites are existing coal plants.  NuScale counts 132 coal plants that need retiring by 2050 – all sites ripe for SMRs.

The footprint fits because the scale is MUCH smaller than a big nuke site.  A 12-module plant takes up about 30 acres, whereas a traditional nuclear plant has a 10-mile radius.

 

NOT THE ONLY GAME IN TOWN


 
NuScale said on their conference call in December that they were ahead “5-7 years of any other US technologies”.

That may be the case.  I’m no nuclear physicist, so far be it for me to compare tech.  I will say that NuScale is not the only game in town.

Bill Gates funded TerraPower is another US SMR developer.  Like NuScale, TerraPower is getting big-time funding from the Federal Government.

TerraPower was almost first out of the gate.  Before the Trump administration put the kibosh on China, where TerraPower was in line to build the first SMR there, a 600 MW reactor. 

With China on hold, TerraPower is still on target to build their first reactor–now in Kemmerer Wyoming, with it being operational by 2028.

The TVA and Ontario Power General (OPG) both announced SMRs in the last few months.  The utilities are partnering on their development, using a common platform – but notably it’s not from NuScale.  Instead, TVA and OPG are going with a Ge-Hitachi BWRX-300 reactor.

 

THE MARKET IS BIG… I THINK

 
Even with the competition, there is plenty of opportunity if SMRs catch on.  This is a potentially huge market.
 

3

Source: NuScale April Investor Presentation

The big questions are how many get built and when.

A recent decision by the Oregon Public Utilities Commission (PUC) highlights the challenge.

In March, PUC “declined to acknowledge” – a polite way of saying they aren’t endorsing but also not vetoing – a plan by PacifiCorp (PPW – NYSE) for a 345 MW SMR to be built by TerraPower. 

Now to be clear, the project isn’t dead.  PacifiCorp said they would “move forward in pursuing advanced nuclear technology”.  TerraPower is intent to move forward as well. 

But it does show that this could be a bumpy road.

Another datapoint: recently Duke Energy (DUK – NYSE) reduced their own expectation for their installed SMR capacity in the next 10 or so years from 1,350 MW to only 300-600 MW.

So how many get built remains a big question.  But you can’t deny the growing interest.
 

SMR’S GAIN STEAM

 
NuScale has said they had 140 opportunities in their pipeline.  These ranged from “very developed” to early stage.

They have publicly announced 20 memorandums of understandings (MOU).
 

4

Source: NuScale April Investor Presentation

Their first deployment is going to be with UAMPS, where they have an agreement signed and are ramping up the early-stage development.  The UAMPS SMR is expected to deploy 2029.  This is a VOYGR-6 plant, meaning 6 modules producing ~460 MWe of power).

The plant is part of UAMPS initiative to replace 700 MW of coal power by the end of 2030. 

Next steps for the project are ordering materials for the power module by the end of this year and submitting an operating license to the NRC in 2023.

NuScale noted that there has been a surge in interest among other utilities with the Russian-Ukrainian war lighting the spark. 

NuScale has an aggressive forecast for deployments.  They expect to deliver 16 modules in 2029 (6 of those being the UAMPS project).  That will scale to 85 modules by 2033.
 

5

Source: NuScale April Investor Presentation
 

NUSCALE ECONOMICS

 
NuScale will earn revenue through the life of each SMR project. Revenue starts about 9 years before the SMR is deployed.

6

Source: NuScale April Investor Presentation

Revenue scales up in the four years right before deployment.  Service and maintenance revenue continue over the life of the SMR.

NuScale collects payments from the customer in advance, which they can use to acquire materials and parts. 

They are always running a cash surplus.  This should allow them to hit cash flow positive sooner.

If there is a “gotcha”, it’s in the accounting, which is caused by GAAP.

GAAP accounting will not let NuScale recognize revenue until the modules are delivered.  That means that while NuScale will be collecting revenue for years up to deployment, that revenue won’t be recognized on the income statement until 1-2 years before deployment.  It will be a bit messy.

If they can meet their forecast, the cash will flow.  Cash EBITDA is expected to reach $1.6 billion in 2028 – about the current enterprise value.  Free cash flow will be nearly $1.2 billion in 2028.
 

7

Source: Nuscale Power April Investor Presentation
 
 

THE NUCLEAR ELEPHANT IN THE ROOM – COSTS


 
The big issue with nuclear (other than safety) is costs.  Can we trust the cost projections and will the project produce cheap power?

A report released by the Institute for Energy Economics and Financial Analysis (IEEFA) in February scrutinized the cost of NuScale’s project with UAMP.

According to the report, in 2015 the company said the entire capital cost “would be $3 billion, which has more than doubled to $6.1 billion, even before construction begins”.

The IEEFA report also says that costs of electricity will be significantly higher than solar or wind.
 

8

Source: IEEFA Article

I suspect this report was in part the source for some of the negative Globe and Mail and Toronto Sun coverage on SMRs.  On the surface, it looks like a kill shot for NuScale.

But maybe not.  I dug up the most recent NREL report–National Renewable Energy Laboratory–on Solar PV + Storage costs (here) and the devil seems to be in the details. 

The costs of solar PV plus storage is indeed around $55/MWh.  But that is with something called the ITC – investment tax credit.
 

9


Source: NREL: U.S. Solar Photovoltaic System and Energy Storage Cost Benchmark: Q1 2020 – Jan 2021

Without the ITC, costs are $80+/MWh, or above NuScale’s estimates.

The analysis is also based on something called LCOSS accounting.  LCOSS stands for “Levelized cost of solar plus storage”.  While the details make my head spin a bit, NREL themselves says that “it is important to remember that LCOSS does not necessarily tell us which option is the most economically viable”

Now I for one don’t know whether NuScale’s costs are accurate or even NRELs for that matter.  I also don’t know which technology is going have lower costs 10-years from now (though assuming that solar and wind will see improvements while SMRs does not seems a little biased to me).

But tax credits aside, it looks to me like NuScale’s SMRs are in the ballpark.
 

MAYBE, THE NEXT BIG THING?

 
Energy is always after the next big thing.

Shale oil, LNG going global, these were all HUGE, decade long stories that made (and lost) millions and changed the energy landscape.

Each of these next-big things has one thing in common.

It is trying to fill the energy gap.

Today there is a BIG energy gap on the horizon.   Small nuclear could help fill it.

Small nuclear could be a big story.   BUT: I can’t say that for certain.

I see a media that is not on board.  I see government’s that are onboard.  I see hesitation, baby-steps.  It is going to be uphill, but not impassable.

Meanwhile, as for NuScale, if SMRs takeoff then the stock will be the real deal.  But it is far from cheap right now given where we are at.

The best thing to do I think is watch and wait.  See what the regulators approve.  See what the utilities say on their calls.  See where solar and wind costs actually go – not where they are supposed to go.

We already see what solar and wind did to Europe when the wind stopped blowing and it got cloudy for a while.   When Mother Nature does not cooperate, having a nuclear baseload that provides stability to the grid seems like a pretty good idea to me.

GOLDEN SHIELD GSRI-CSE IS THE NEW MICRO-CAP STOCK of LEO HATHAWAY

By
Keith Schaefer
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Golden Shield Resources (GSRI:CSE, 4LE0:FRA) is Leo Hathaway’s new micro-cap company–with just 28 million shares out–that holds the 100% owned Marudi Mountain asset—one that Leo believes has the potential to be a multi-million ounce gold deposit.

And he is backing that up very quickly with some BIG numbers—in the first drill program he hit 9.1 grams per tonne gold (g/t Au), and gave the Market a much larger hint of what Marudi could be.

GSRI has only been listed for two months—nobody knows this story. That’s why retail investors—usually the last to know—have the rare opportunity to get in on the ground floor ($20 million market cap) with Leo.

Golden Shield is backed by mining sector billionaries because they know exactly what Leo can do—because he has made them so much money before.  They hogged the only round of financing Leo has done so far.

Golden Shield is being built around a big (5500 hectare) out-of-the-way asset with incredible geology.

Leo and his team brought a new thinking to the Marudi project—and hit BIG on the very first round of drilling. New lobe, open at depth, much higher grade.  Dream start.  Hitting on every cylinder.

With enough money to start his next round of drilling, Leo will keep the news flow going steadily through 2022.
 

Marudi Mountain – The Opportunity Is Clear As Day
 

 
Marudi is located in Guyana, the only English speaking country in South America. Guyana is absolutely booming on the back of major oil discoveries and massive infrastructure spending.
 

1


To run Golden Shield Leo has partnered with CEO Hilbert Shields——Guyanese born, Canadian since 1980s—the perfect guy with Leo on this play.

His career has touched many major gold assets in Guyana Shield—he was a big part of the team that discovered Omai Mine—and that stock went from 40 cents to $6 as the asset went from acquisition to feasibility and became a producer.

Shields was also on the team that discovered the +10 million ounce Rosebel gold deposit in Suriname right next door, owned by IAMGold.

So now we have TWO men at the helm who have created a lot of wealth for shareholders.

Guyana’s region at the northern tip of South America is host to the Guiana Shield (+110 million ounces of gold discovered) the geological sister of western Africa’s Birimian Shield (+275 million ounces of gold discovered).

Marudi is in southern Guyana—which is much more remote and much less explored than the north.  Leo liked that—off the beaten path.  And, Hilbert had actually been on the property 20 years, ago, and knew there were sniffs of very good gold grades.

The two men studied the data, and realized that not only was there a vast open property with historical high grade on it—they had a sense of what others had missed.

And it didn’t take long to prove themselves right. The first thing they did was a detailed re-interpretation of the geophysics, which made multiple drilling targets as clear as day: just follow the blue in the map of the property below——  the existing discovery (the oblong white object) at the Mazoa Hill target is in the middle of it. This is the one with a historic resource of 269,700 ounces in the Indicated category and 87,600 ounces in the Inferred category.
 

2


So far, all of those squarely deep blue areas are like Mazoa and when Leo’s team goes onto those areas, they are finding surface mineralization and often rock with visible gold.

That means that potentially there is a huge number of other Mazoa-Hill-like-resource-accumulations across the project. Everywhere that is blue on that map is ripe for exploration and almost all is undrilled.

Almost 95% of the property is untouched and all of that blue in the map above deserves attention. They’ve got seven other prospects that all have similar characteristics to Mazoa Hill.

Surprisingly, nobody else had interpreted the geophysics in this way.

With that data, and the idea that previous operators had NOT been drilling perpendicular to the way they thought the orebody was trending—they set out for their first drill program.

And wow, did they hit a whopper.

 

Marudi Mountain’s Evolving Model


 
They came up with a drill hole of 9.1 g/t Au over 50 (FIFTY) metres.  And the way they drilled it now makes them think there is an entirely new lobe of high grade mineralization to be found.

Now folks, listen to me here—this is early-stage drilling.  I can’t promise you there is a multi-million ounce deposit here. But I know Leo, his track record, and that he hit a hole like this on the first round—and the stock is still just 70 cents—has me excited!

Leo and team’s initial drill results at Mazoa Hill have changed the entire geological model—which is what they thought might happen.  They had a good sense it would be open at depth, but they had no idea they could start to model another lobe completely.

See OLD Interpretation of Mazoa on the left.  Then see NEW interpretation. See a difference?
 

GSRI drill holes


Drilling so far intimates that this is wide open to depth.   The next drilling—which will be starting soon—will step out until they find the bottom of this big structure. 

If these grades hold up, with drilling you can add a lot of ounces quickly. 

These drill results will be coming steadily through 2022.

And this is just one target. There are seven high priority targets to go after next. 

Marudi now has HUGE potential. They hit a crackerjack hole.  It makes Leo and Hilbert—who have a lot of success backing them—think this is not just higher grade, but bigger tonnage.

With just a small tweak in thinking, Leo is seeing that this could be a much bigger deposit than even his team thought.  There are great grades at surface and now they are also getting great grades at depth.

Hilbert says this is how all these Guyana Shield assets develop; start with one pod, and then over time several more get found to give a mine critical mass and into development.

 

I Wish All My Investments Were This Easy
 

 
All of that blue on the geophysical map is the opportunity. Almost 95% of this promising property is completely untouched.

The first terrific hole would stand up as one of the best holes in any deposit anywhere.

They find mineralization all over the property.

They have a new lobe, increased depth potential, and an upcoming drill program run by a guy who knows the geology, the people and the government like the back of his hand.

Oh, and that guy has a multi million-ounce discovery on his own, without Leo, in Guyana already.

There is already a historic gold resource at just Mazoa Hill and numerous addition prospects to go and test.  All of this is packed into a company with an incredibly tight share structure (only 28 M shares out!!) , led by Leo who has billionaires lining up to bet on him. 

On any kind of good news, he has a network that can bring money to the table instantly.

And there’s now newly discovered geology here that has high grade AND, size.

Great team, great structure, great hit on the first program, enlarging both grade and size potential. 

But this is exploration. The price you pay for a potential 10-50 bagger in the geology world is fickle.

They don’t all turn out like you want.  But we couldn’t ask for a better jockey.

And it looks like he’s riding a thoroughbred.  Drill results will be steady throughout 2022.  Be ready—I am. I own stock.
 
Sources:

  1. https://statisticstimes.com/economy/country/guyana-gdp-growth.php
  2. https://archive.macleans.ca/article/1985/8/12/a-high-risk-hunt-for-guyanese-gold


Golden Shield Resources has reviewed and sponsored this article. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons. Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom. Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements. No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

 
Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity. He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

SHOULD YOU GET KOLD THIS SPRING ? KOLD-NYSE–SHORT NATURAL GAS

By
Keith Schaefer
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0

I want to tell you that you HAVE to short natural gas.
 
I want to tell you that the $8.50/mcf natural gas that we saw this week is crazy.  
 
That the price is going to come down hard.  The market is hugely backwardated–meaning prices are much lower in the months farther out on “the strip”.
 
The easy way to get short is through the levered inverse ETF Proshares UltraShort Bloomberg Natural Gas (KOLD – NASDAQ).
 
I want to tell you this because everything I have seen over the last 20 years is telling me this is the perfect setup. I mean $8.50 gas? $8.50 gas!
 
I have lived through 20 years of watching every pop in natural gas come right back down as producers ramp production and flood the market with product.
 
My gut instinct when I see a 8-handle on gas: Sell it All.
 
But I can’t do it. I can’t tell you to short this.
 
I’m not saying be long. I’m just saying don’t short. Sit this one out.
 
Why? Because there are two big reasons that natural gas might not go down this time.
 
I know, I know, I’m really going out on the limb here. Might. Maybe. But again, this is $8 gas we are talking about here. This should be a sure thing. You should buy KOLD like it is a blue light special (sorry, showing my age there).
 
Instead, two big shifts are going on with natural gas. These shifts make it really hard to know the right price for gas. It could be different this time. At least for a while. 
 

PRODUCER CALLS ARE DEPRESSING

 
I just finished listening to my 7th natural gas producer conference call. It is hard to believe that natural gas is $8+ after listening to these execs. You would be hard pressed to find a more dour group.
 
The sour mood is not without reason. These are executives schooled in the era of production growth. Now, with a gas price that should be fueling hyper-growth for their business, most are sitting around with their hands tied.
 
How so? Takeaway capacity. It is just not there. Building it could take years.
 
Consider EQT (EQT – NYSE), which produced 5.1 bcf/d of natural gas in the first quarter (about 5% of US production). CEO Toby Rice basically said they would not, could not, increase production in response to the strong gas price.
 
We’re sticking to maintenance mode. We’ve been pretty vocal about this. Without more pipelines, the prudent thing for us to do is to continue to stay in a maintenance mode. So that’s been our mentality in the past. It’s our mentality until we start getting some more pipelines put in.
 
Instead, EQT will be directing cash to buybacks and dividends.
 
Ditto for CNX Resources (CNX – NYSE), producer of 1.7 bcf/d of natural gas and liquids, almost entirely in the Marcellus and Utica basins. CNX CEO Nick Deluliis had some particularly harsh words.
 
The domestic natural gas, oil and pipeline industries in the nation, they can’t ramp up production to anything close to the levels that the U.S. and the EU is clamoring for anytime soon. And that’s not because of industry unwillingness…
 
No. Instead, it’s simply and starkly because the policy is consciously and methodically looked to strangle infrastructure investments in the pipes and in the processing and the power generation and, yes, in the LNG infrastructure.
 
On top of the regulatory environment CNX sees the capital markets as second constraint. Their solution? Become debt free.
 
We believe access to the capital markets for our industry is going to continue to be more restricted… to manage this risk, we believe the prudent course under our sustainable business model is to maintain a debt level and a maturity schedule on a liquidity level, whereby we never need access to debt markets.
 
Same story from Range Resources (RRC – NYSE). No plans to raise capital expenditures. 
 
Coterra Energy (CTRA – NYSE), the recently merged Cabot and Cimerex play, produced 3.1 Bcf/d of natural gas in Q4. Conterra guided to a decline to 2.7 – 2.85 Bcf/d in 2022.
 
Coterra is actually increasing production, just not natural gas. Coterra’s production is balanced between the Permian and Marcellus. They are putting their capex towards the Permian, which favors oil over gas.
 
Only Southwestern Energy (SWN – NYSE) has offered a glimmer of growth among the mid-cap names. Southwestern produced 1.8 bcf/d of natural gas in Q1, up from 1.7 bcf/d in Q4. Production should reach 2 bcf/d by year-end.
 
What was the reason for the increase? Simple – they can.
 
Southwestern has a large position in the Haynesville – in Louisiana – where regulatory constraints are loose and pipelines are aplenty.
 
With a couple of acquisitions late last year, Southwestern increased their Haynesville land position significantly. The Haynesville is now the focus of their capital spend.
 
But even Southwestern has constraints.  While there is growth in the Haynesville, it will be offset by declines in Appalachia.
 
Comstock, another Haynesville play that produced 1.3 Bcf/d in Q4, is also forecasting modest growth – 4-5% year-over-year. Comstock report Thursday and it will be interesting to see if they adjust that forecast up at all.

THE STORY OF THREE BASINS

 
There are really only 3 basins on the Lower 48 that can put a meaningful dent in natural gas production. 
 
Appalachia, Permian and the Haynesville.
1

Source: Morgan Stanley

Most of those miserable executives talking about capacity constraints produce mainly from the Marcellus/Utica in Appalachia.
 
That leaves the Haynesville and the Permian, where there also appears to be plenty of takeaway capacity.
 
But natural gas is not the reason you drill the Permian. Gas is associated with oil production, and how much natural gas is produced depends more on oil prices than on natural gas.
 
Chevron (CVX-NYSE) has become a big player in the Permian. 
 
It accounts for 20% of their capital budget this year. Chevron sees lots of room for growth (both oil and associated gas):
 
“We don’t flare in the Permian and so we’ve got to be sure we’ve got gas takeaway or we aren’t going to produce any oil. And so it’s a high priority for our midstream tea.  But we don’t see pinch points anytime soon.”
 
Chevron’s US natural gas production grew from 1.7 Bcf/d to 1.8 bcf/d in Q1 largely on the back of the Permian. They expect to grow Permian production 5-10% this year.
 
The other big Permian player, Exxon (XOM-NYSE) produced 560,000 boe/d from the Permian in Q1 and is expecting to grow Permian production 25% this year.
 
Pioneer Natural Resources (PXD-NYSE), another big Permian producer, produced 0.8 bcf/d of natural gas in Q4, which was double the year before.
 
Pioneer CEO Scott Sheffield had been one of the loudest voices saying he would not grow production. 
 
We’ll have to see what he has to say when Q1 results are released Wednesday.
 
Occidental Petroleum (OXY-NYSE) another large Permian and Rocky Mountain producer with 1.3 bcf/d production in Q4, said at the time of their Q4 release: “ we have no need and no intent to invest in production growth this year.”
 

 INCENTIVES NOW AND IN THE FUTURE

 
 What complicates matters this time around is that we are not just incentivizing natural gas demand for next winter. We need to look further ahead.
 
Since the Russian-Ukrainian war, the gas market has taken more of a forward-looking view, realizing that it has to replace Russian gas quickly.
 
LNG, LNG, LNG. The world needs more LNG. It is about to get it.
 
When the company reported two weeks ago, Baker Hughes (BKR – NYSE) CEO Lorenzo Simenilli put out an extremely bullish LNG forecast to 2030.
 
“Given the current LNG price environment and the quickly changing dynamics, we believe that global LNG capacity will likely exceed 800 MTPA by the end of this decade to meet growing demand forecast. This compares to the current global installed base of 460 MTPA and projects under construction totaling almost 150 MTPA.”
 
That works out to almost 50 Bcf/d of new installed capacity in the next 8 years.
 
In February Shell (SHEL-NYSE) gave their annual LNG outlook. 
 
Near the end of the conference call, they gave us their estimate of the supply gap that was developing.
2

Source: Shell 2022 LNG Outlook Presentation

 
This was before the Russian invasion of Ukraine.
 
What Baker Hughes is now telling us is that this supply gap, which already looked pretty bad, has grown – potentially by a lot – and we are going to need a lot more gas over the next 5-10 years in order to fill it.
 

 WHERE IS THE GROWTH GOING TO COME FROM?

 
When I step away from all these company calls and consider how much gas we will need if Baker Hughes and Shell are right and I weigh that against how much we can get from our big basins given the constraints… well, I just find it hard to be too bearish.  
 
Producers in the Appalachian are telling us they can’t grow–but I’m not convinced that’s true. What certainly is true is that there is no more LNG exports for a couple years–so any big demand increase is capped.  
 
Producers from the Permian can grow, and some of them will grow, but others are reluctant, and anyway the growth depends far more on oil prices than gas. The Haynesville can certainly grow, as can the second-tier basins, but at what price will they grow enough?
 
And remember–they are growing production now for the hope of big LNG prices when the next US LNG train comes online–not for another couple years.
 
That is the question that the market is trying to figure out. What price of natural gas do we need to get ready to meet all this LNG demand?
 
In other words, $7 gas is incentivizing the marginal basins to produce more gas now so the gas is there where the LNG comes.
 
We know that more gas will come as prices rise. Sentiment of these execs be damned. When a wildcatter sees $$$’s they will pick up the drill bit. 
 
Now is $7-$8 the right price to incentivize production? I still think its too high. It could be $5. It could be $6. It probably isn’t $4, and it definitely isn’t $3.
 
But a finger-waving guess that $7 is too high is far from a good reason to go short natural gas. 
 
There are times to be long and times to be short and times to just step aside. Let the market figure this one out first. This is one of those times.
 
One smart way to get long this trade (and short natgas) via KOLD is to do it as a paired trade where you go long a natgas producer. Because multiples are low, the world still has to figure out how to replace Russian molecules—sentiment could keep these stocks higher than the highly backwardated natgas curve.
 
(I just bought a big position in a fast growing natgas play this week)

Keith Schaefer
Publisher, Investing Whisperer 

Our Oil Reliance On Putin Is Scary — Our Food Reliance Even More Concerning

By
Keith Schaefer
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0

As I’m sure you noticed———the world has just changed.

For years now we’ve ignored the fact that Putin’s Russia is a threat. 

Reality has hit home.  Reliance on Russia for anything important is now a major concern for every Western Country.

The obvious problem is energy, but the role that Russian and Ukraine play in feeding the world is huge. 

Russia/Ukraine combine for a third of the world’s wheat and barely exports…….while Russia is the world’s single largest supplier of FERTILIZER.

No surprise then that fertilizer prices have skyrocketed since the invasion broke out.

Food prices are headed the same way.  Bloomberg indicates that wheat has traded between $3 and $6 per bushel for decades…..it is now over $13.

This is going to hurt us here in North America.  For developing countries the problem is much bigger——people are going to be priced out of the food market and human beings are going to starve.

If you think energy security and independence is important then how big of a deal to you think FOOD INDEPENDENCE is going to be going forward?

This invasion is going to continue to pressure prices of everything but beyond that the West had already realized that we need to have our own supply chain IN ALMOST EVERYTHING.

We need to get every ounce of food that we possible can out of our productive land but we can’t continue to blast that land with chemicals that are also destroying it.

Thus we come to our solution.
 

Bio-Fertilizers Are The Future



Microbial activity is essential to the soil.

Though we can’t see them in action without a microscope, beneficial soil bacteria are an active part of nutrient absorption and are spread within the soil. Without these microbes, the organic cycles that allow plants to naturally use nutrients will not work properly.

The use of synthetic fertilizers, fungicides, and pesticides destroys these bacteria over time.
Bio-Fertilizers do not.

Bio-Fertilizers are designed to restore the soil’s beneficial bacteria and microbial health. These biological fertilizers contain beneficial bacteria cultures and nutrient solutions to support both plant and soil health.

They are ideal substitutes for conventional fertilizers that have been causing soil degradation.

Bio-Fertilizers are substances that contain living micro-organisms, which colonize in the soil or interior of the plant.

Working with natural systems, rather than against, natural fertilizers feed the plant by feeding the soil. Think of using traditional fertilizers as a body-building steroid for the plant for that one season—but steroids can be harmful for human body builders (addiction/hair growth/mood changes/higher risk of infection).

Bio-Fertilizers are more like eating super healthy every day, and not using any steroids. Bio-Fertilizers leverage the soil’s biology help unlock nutrients that are tied up in the ground, improving ROI for farmers.

It works!  The key being the biochemical reaction that mimics the conventional fertilizer production process to deliver nutrients to the plant.

Regenerative fertilizer is the future.

The opportunity here is huge and it is an inflection point in the world of agriculture. 

Western countries simultaneously need to produce as much food as possible, domestically source as much fertilizer as possible and IMMEDIATELY find a replacement for the fertilizers that have massively degraded our essential topsoil.

My #1 junior stock is a fast growing fertilizer PRODUCER that comes complete with offtake agreements for every bit of BioFertilizer they can make for the next 5 years.

That means that as fast as they can produce it customers have already committed to buy it.

What an opportunity.  Insatiable demand for what you produce.  All that this company needs to do is ramp-up that production.
 
To get the name and symbol CLICK HERE

WE’RE KILLING OUR SOIL WHEN WE NOW NEED IT MOST HERE IS THE SOLUTION

By
Keith Schaefer
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Fertilizer stocks have been on a tear.
 
This is just the start of a major move. These stocks are going to have a long runway.
 
There multiple tailwinds behind these companies——each of which are going to be supportive for years to come.
 
It all starts with a problem here at home.
 
In the quest for ever-greater productivity from our farmland — using traditional fertilizers, herbicides, pesticides — is KILLING our soil. 
 
I’m not kidding. And it’s polluting our water bodies too.
 
While the United States has some of the richest soils in the world, decades of agricultural abuse have taken their toll. The soil has been depleted of essential nutrients and bacteria and fungi. The organic material essential to plants is being depleted.
 
What happens is that the current herbicides and pesticides are like chemotherapy for cancer. It isn’t targeted——it kills the good bugs as well as the bad bugs. All of the fungi in the soil gets targeted. But the fungi and bacteria are essential.
 
The result has been soil degradation. Farmers are left with unhealthy soils that are less productive———which in turn makes them use even more chemicals to enhance their crop yield.
 
The world grows 95% of its food in the uppermost layer of the soil. Because of conventional farming practices, half of the most productive soil in the world has disappeared over the past 150 years. (1)
 
In the United States soil on cropland is eroding 10 TIMES FASTER than it can be replenished. The UN Food and Agriculture Organization have warned that the world could run out of topsoil in 60 years. (2)
 
Conventional fertilizer changes the pH of the soil, leaving it more acidic, more susceptible to disease, and less able to withstand changing moisture conditions.
 
Those conventional Chemical fertilizers known as Urea, MAP, DAP and AMSare all salt based and pH altering. They are soil bio-diversity’s worst enemy.
 
I want you to think about this issue in another way—Vitamin C is essential and important to your health. But if you chew it in tablet form to get it in your body, it erodes the enamel on your teeth.
 
So they are nutrients, yes, but if not applied properly it can have some harmful side effects.
 
The global annual application of Chemical fertilizer is equivalent to dumping 460 billion litres of bleach into the world’s soils. This is a global issue, not just North America.
 
Half of all applied phosphorous and two thirds of applied nitrogen is NOT used by crops – so it ends up in ground water contaminating natural environments.
 
To appreciate how big of a problem this water contamination is all you need to do is learn about the Gulf of Mexico “DEAD ZONE”. This is an area of low oxygen that can kill fish and marine life near the bottom of the ocean——and now measures 6,340 square miles!
 
 
Sources: https://www.epa.gov/ms-htf/northern-gulf-mexico-hypoxic-zone
 
That equates to more than four million acres of now uninhabitable ocean for fish and bottom species. If you understand the Butterfly Effect you will appreciate how worrisome and ecological impact like this is.
 
The cause of the Dead Zone is what the Mississippi River is dumping into the Gulf of Mexico. The Mississippi is like the drainage system for your street, but it connects 31 U.S. States and even parts of Canada. The excess fertilizer/herbicide/pesticide pollution from farm fields all along the Mississippi is now all getting dumped into the same place.
 
What happens from this massive pollution dump in the ocean is called hypoxia, where oxygen in the water becomes so low it an no longer sustain life.
 
We have a growing disaster both in the water and on land where the productivity of the soil is cratering. Food production takes up 38% of the world’s land surface and fears of global food shortages grow each day with the world’s population about to crest 8 billion—making this a very big deal.
 
We need to stop the destruction of the topsoil and pollution of our water.
The world can no longer choose between yield and soil health—fortunately we don’t have to.
 
Salt-less fertilizer is one of, if not THE fast growing sector of the global fertilizer market. The stock market is buying up these stocks like crazy—look at the chart of Verde Agritech, NPK-TSX:
 
 
I’m not buying Verde right now—I’m buying the next fertilizer stock to move. It too is growing incredibly quickly…
 
And their stock trades for less than 50 cents a share! I just completed a full report on the company—and you can get it risk-free by clicking HERE. 
 
Get the name, symbol, and my take on the upside that this incredibly cheap stock has—right now!
 
 
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