I don’t want to exaggerate…

But it does seem to happen every year:  the MLP sector – Master Limited Partnerships – wraps itself up as a wonderful Christmas present for investors to open in the New Year.

Ok, not every year.

But almost every year… investors buying the sector after heavy selling near the ends of 2015, 2017 and 2018 all had profits of 20% within the first six months of the next year (excluding dividends). (1)

MLPs were built to pay out big dividends – and many of them are.  But the stocks have traded down hard in H2 19 – in sympathy with the oil producers, the E&Ps, which have just been crushed.

For investors buying the MLP sector in December it has been like shooting fish in a barrel.  Buy in December, sell in June – book your 20 percent profit plus dividends.

2019 is shaping up to be the fourth year out of five that this happens.  After the usual first half rally in 2019, the MLP sector has fallen off a cliff in the second half.

Much of the decline has happened since the beginning of November.

Now what we need to consider…

Is the MLP sector another 20% gift waiting to be unwrapped or a big lump of coal stuffed into our stockings?

Why MLPs Are In The Doghouse Again…

Now before we get all “pound the table” excited about another MLP first-half-of-2020-rally coming our way we need to tap the breaks just a little bit…

The investor pressure on MLPs isn’t just annual tax loss selling – although that is undoubtedly a part of it.  There are also real concerns that investors have raised with this sector.

First Concern – Elizabeth Warren And The Far Left

I don’t know who will win the Presidency in 2020 – but I do think the election will be much closer than it was 2016.

Energy investors are rightly concerned about left-leaning candidate Elizabeth Warren.  It is not a complete coincidence that as the rise of Elizabeth Warren happened in the polls in 2019 the selling of MLPs kicked into gear.

Ms. Warren is openly hostile to anything tied to hydrocarbons.  She has blatantly stated that one of her first acts as president would be to ban fracking entirely, while also doubling down to ban all drilling on Federal lands.

That would unquestionably be great for oil and natural gas prices, but terrible for the volumes of the stuff that is being transported through pipelines owned by mid-stream MLPs.

Second Concern – An Increasing View That
The Energy Sector Is Uninvestable

There is a growing belief amongst professional investors that the energy sector has become uninvestable.  These folks aren’t reducing their energy sector exposure… they are cutting it to zero.

More than 1,000 different pension funds, endowments and institutions representing $8 trillion of assets have officially declared the sector off-limits. (2)

Those are the capital allocators who have chosen to this for the betterment of the planet – that doesn’t factor in the investment managers who have abandoned the sector for investment performance reasons.

Many managers think this industry has no future.

The feeling from many corners is that we are nearing the end of the age of oil – that a replacement energy source is near at hand.  If you buy that view – the implication for midstream assets is that they will become worthless because there is nothing going through them (think of all the LNG import terminals that were built right before shale gas hit it big).

In addition to professional investors seeing green (as in a new era of energy) they are also seeing red… as in the color of their portfolio if they had exposure to shale producers.

It is very hard for a sector to go anywhere but down if there is no interest from the people in charge of allocating hundreds of billions of institutional dollars.

Third Concern – Getting Pipelines Approved
in the USA Is Too Easy!

Oh, the irony…

While Canadian mid-stream companies can’t get a pipeline approved to save their lives – their stock prices are doing great.

Meanwhile south of the border mid-stream companies are having great success getting pipelines approved – in fact far too much success.  A surplus of pipeline space is emerging.

Even in the Permian where production has soared there is talk of overcapacity… who would have seen that coming?  And now investors are concerned that will lower toll rates and dividends for these US midstream MLPs.

Between EPIC Midstream, Plains All American (PAA:NYSE) and Phillips 66 Partners (PSXP:NYSE) there will be 2.5 million barrels of new pipelines moving oil from West Texas to the Gulf Coast that have been added in the second half of 2019. (3)

Toll rates for oil transport on these lines have come in below expectations, and this is before the impact of a mass reduction of Permian drilling hits production levels.

Typically rates for most Permian pipelines had been ranging from between $4 and $7 per barrel over the past year – but (as reported by Reuters) EPIC just cut its spot rate on its new Permian pipeline to $2.50 because it was more in line with market conditions.

Those rate cuts directly hit cash flow for EPIC and competitors.

That Sound Is Music To Contrarian Ears….

I have to admit, when I hear talk that includes words like “uninvestable” I get more than a little interested.

And not for a second do I buy into the idea that we are anywhere close to the point where global hydrocarbon demand is about to roll over.

I’m excited about the money that can be made investing in renewables in the coming years – but oil and gas will continue to power the developed world for decades.

As to whether it is time to buy MLP operators… unquestionably the MLP sector is about as cheap as it has ever been.

And of course the yields on these stocks are huge right now.  The Alerian MLP Index (AMLP) alone is over 10% today – in a world where finding yield is virtually impossible.

How often can you get a 10% yield from a diversified basket of the best operators in a given sector… there is clearly a lot of really bad news priced in here.

Will history repeat itself yet again in 2020 with an MLP rally?  Or will the sector be giving investors a lump of coal.  I’ll revisit this thesis in May 2020.

Sources:

1. https://blog.evergreengavekal.com/love-love-them-dont/
2. https://www.theguardian.com/commentisfree/2018/dec/16/divestment-fossil-fuel-industry-trillions-dollars-investments-carbon
3. https://www.reuters.com/article/us-usa-permian-pipeline/new-us-pipelines-poised-to-start-price-war-for-shale-shippers-idUSKCN1UY2EG 

Turmalina Metals (TBX:TSXV) is the next high grade, tightly structured venture from backers of K92 Mining (KNT-TSXv) – the hottest team in the junior gold sector.

The stock price of K92 Mining has rocketed this year… up from 70 cents to $2.70 (almost 400%!) as their Kainantu Mine keeps churning out more and more gold at over 20g/t (half an ounce or better!).

Early investors in K92 have made as much as 15x their original investment.  Turmalina Metals is their next venture – and it just listed TUESDAY – 2 days ago!

And they already have a high grade discovery – in fact, their San Francisco project may be the top of one of the highest-grade gold-copper tourmaline breccias ever discovered.

Super-high-grade gold results that are close to surface – 36.9 metres of 6.3 g/t gold and 122 g/t silver in one hole and 85 metres of 4.4 g/t gold and 109 g/t silver – were released at the IPO.

There are over 65 more breccias identified on their property – the nearest one only 200 metres away. That makes San Francisco look more like a district than a property.

A new 15-hole program will soon be underway – as well as work on other breccias they’ve found.

They have packaged all this up in a tight share structure – with only 49 million shares out, the market cap of the company was just $25 million, and the Enterprise Value – where you subtract the cash in the kitty or add the debt – was only $18 million. K92 now has a market cap over $500 million.

You can do the simple math on the potential that exists here at this early stage with Turmalina. OK I’ll do it for you – K92 has 20x the market cap of Turmalina. Only 14 million of the shares are freely-tradeable.  Turmalina has a MUCH tighter share structure than K92 did then – increasing leverage for investors.

In one sense, that’s all you need to know. BUT… Turmalina has one of best creation stories of any junior mining company I’ve ever been involved with – and I’ve been doing this since 1991.

Three Worldly Geologists with One Focused Goal:
Find the Single Best South American Gold Project

Everything seems to happen so fast in the stock market.  K92’s share price has soared higher and now this team has another gold venture ready to go.

In the real world though these things take a lot more time… and EFFORT.

Two years ago, a group of wealthy mining entrepreneurs including K92 Mining founder Bryan Slusarchuk tasked three of the top geologists on the planet with one goal:  find the best advanced stage high-grade deposit in South America.

One of these men was Doug Kirwin, who played a key role in the early days of getting K92 Mining their high-grade mine in Papua New Guinea.  Kirwin led the geological team that discovered the massive Oyu Tolgoi mine in Mongolia, which was developed by Robert Friedland’s Ivanhoe Mines.

Kirwin knew exactly who to call – his good friend Dr. Rohan Wolfe, now the CEO of Turmalina.

Wolfe helped discover the Merlin Molybdenum-rhenium deposit in Australia, but his real value-add for Turmalina comes from another part of his resume: he spent five years working for mining legend Robert Friedland scouring everything in the Americas.  He spent up to 200 days a year on the road, as Friedland’s Gold Hunter in South America.

As Wolfe began his search, he kept running into one man: Chico Azevedo. Chico had a very similar resume, : he had spent 35 years looking for gold deposits in South America, the last six years in the same “Gold Hunter” role for South African mining giant Gold Fields.

Kirwin and Wolfe recruited Azevedo.  Between these three men – Kirwin has his own network in South America–they had seen almost every gold asset in South America there was to see – or so they thought.

Here was their criteria for their South American treasure hunt:

1. An asset that the public markets had never seen before – a new, fresh story
2. A specific and overlooked deposit type – a high-grade, tourmaline breccia
3. An advanced stage asset that could be developed and monetized FAST; i.e. not grassroots
4. In an area where the community had been supporting mining for decades
5. All 3 of these geologists had to agree that they LOVED it – it had to be unanimous

Criteria #1 and #5 were the toughest. They had to start looking in the large arena of family-run assets that were still private.

This, of course, would be a literal gold mine.  So many assets here would not have had either proper funding or proper, modern exploration methods used.

The art-of-the-deal would be to find the right asset owned by the right family who would be willing to share in the upside of Turmalina as a public company – no small task.

But for any geologist this is a dream job… no time pressure and solely focused on finding a career making asset (or two).  These three proven geologists took their time and did this right.

I’m sure it got tense at times.  Sometimes two out of the three would get excited and passionate about a project but the third wouldn’t – frustrating, but the rules meant that it was time to look at the next project.

Frustrating but worth it… patience and being extremely picky pays off.  After two full years of searching through hundreds of projects the three geologists found two high grade, massively underexplored, drill ready projects.

They got their next round of funding, and they’re now public – and the drill has been turning and producing some ultra high grade gold results already.

San Francisco de Los Andes
High Grade and Low Capex Potential

Asset #1 – where the very high grade drill results came from – is called San Francisco de Los Andes.

San Francisco has been privately owned for decades.  It has never been exploited with modern mining techniques. It’s high grade; in fact it is one of the highest-grade tourmaline breccias ever discovered.

The private owner of the property mined it off and on for decades, but only at the surface level – but The Really Big Prize is much deeper.

The target shape of the San Francisco deposit is like an inverted carrot.  The Turmalina team believes that the deeper you go the wider it gets… and not just wider, but also higher grade.

Turmalina has found that at 50 meters the deposit is already twice of what it is at the surface.

The team has been drilling at San Francisco and the early results are spectacular. Drilling will quickly re-start, and if experience is any guide, those results will be a major catalyst for the stock in the coming weeks and months.

This is exactly how K92’s share price was driven up over 500% in the last 18 months.

Medium-to-long term the regional exploration upside around San Francisco is huge.  The property has been massively underexplored… San Francisco is just 1 of more than 60 breccias that are in the JV area.

San Francisco is a perfect project for a junior gold miner.  It isn’t at altitude, it is in a mining friendly region with infrastructure (home to 12 operating mines, five in construction) and labor and carries no political risk.

Most importantly it is VERY high grade, potentially low capex target.

The second asset, which is called Turmalina, is similar in many ways and is the same geological model. While all of the attention right now is on San Fransisco, and rightfully so given the great start there, this second project could also potentially add some additional sizzle down the road.

The Market WANTS This Type of Stock

Turmalina Metals is exactly the kind of stock that investors want to own in this sector right now.

The Market loves the K92 team.  The market loves high grade assets… especially now at the start of a bull market in gold.

This is when investors and institutions are just coming back into the sector.  They don’t want bloated share structures and old stories. New money in the sector will focus on proven financial backers with fresh assets AND high grade.

That is why K92 Mining turned into a five-bagger in 18 months.

There will be a time for large, lower grade and high capex operators – as the gold bull market matures.  Not now.

The share structure on Turmalina is tight… just 49 million shares outstanding.  Management and directors are loaded with shares, just as they were with K92 where they have been richly rewarded because of it.

The K92 team were able to attract A Dream Team of the world’s top geologists, fund them and give them enough time to do their job right.  These men have been responsible for discovering billions of dollars of economic metals.

These properties are fresh and the Market will be excited by that. The San Francisco project offers truly stunning, shallow grades and more drilling could provide a rich run of catalysts for months to come.

It could happen fast, but if Turmalina Metals turn into an overnight success, it will have been two long hard years in the making.

I think this Dream Team can make Turmalina a second major success for them and shareholders – just getting it to the same market cap as K92 over time makes it a 20-bagger from here.

I’ve got 82,500 shares at 54 cents and I’m buying more.

While the article contains the opinions of the author, Turmalina management has reviewed and sponsored this article. For more information regarding risks and results to date, view the company’s disclosure including the 43-101 report filed on SEDAR.com. Mining and mineral exploration is a high risk business and investing in this sector should be considered high risk. 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.

Making a lot of money in junior mining is actually pretty simple. Put together a strong technical team with a strong finance team, and pay up for good assets. Insert all that into a tight share structure where the insiders don’t get too greedy and leave some room for retail investors to make money.

I have found such a company.  I know the team VERY well — and not just because their flagship gold play has gone up 567% in the last 18 months.

Their stock was able to do that because they have what the market wants — high grade gold deposits that have low capex — ones that don’t take a lot of money to get into production.

This new listing — and you get the name and symbol for free tomorrow — follows that Modus Operandi perfectly.  They have TWO advanced stage gold bearing assets, and they are bringing it to trade with only 49 million shares out, a market cap of just $25 million, and the Enterprise Value — where you subtract the cash in the kitty or add the debt — of only $18 million.

The company has just listed their shares — this is the ground floor. I’m telling you about it before ANYBODY else.

Their assets combine what the Market wants now — both high grade and low development cost.

This group is strong in the market — really strong.  Well respected technically, and investors love them.

They could bring the most remote piece of moose pasture to investors now and the stock could be a double or triple. But that isn’t how they operate.  And the truth is that this next venture launching is years in the making.

The Top Geological Detectives On The Continent

Two years ago this team recruited three of the world’s top geologists and gave them money to go find something very specific.  The marching orders for the geologists was to find:

1. Something in South America.
2. Something the public market has never seen before.
3. Something with high grade gold.
4. Something technically advanced — maybe an old producer, for example
5. Something that they could possibly raise $20 million quickly in a good gold market.

Yes, this was no easy task.

But… they also gave these geologists the most important advantage in the world — they gave them the advantage of TIME.  The geologists weren’t tasked with finding something fast, they were tasked with finding something good.

Really, REALLY good.

All three geologists are credited with mine discoveries.  Two of them spent many years specifically looking in South America for big gold deposits for major mining companies.

This group isn’t just knowledgeable about the region… they are the most knowledgeable players on the continent.

They knew where to look, who to talk to, to literally find that hidden gem, that hidden nugget – a great asset that was unknown to the general market.

The geologists’ asset selection strategy was actually pretty simple.  All three of them had to agree 100% on an asset, otherwise they took a pass.

When I say agree what I mean is that they all had to believe that each asset was basically a lay-down homerun. “Good” didn’t cut it.

The approach here was all about building the ultimate shortlist of assets… no properties with “7 out of 10” potential allowed, just perfect 10s — and they all had agree.

Hundreds of potential projects were considered.  The CEO of this new listing — who was one of the geologists — spent countless hours searching the public domain for the highest grade assays all over South America.

That list was whittled down to 100 that were “interesting”.  Then came the deep dive — site visits, desk-top modelling, intensive research.

After 2 years of scouring the continent the list of 100 “interesting” properties became just the 2 assets that the geologists could all agree on — but OMG their patience has paid off with some incredible projects.

This will be one of the hottest plays of the year, especially given how much the market already loves this team.

Nobody Knew the Family Was Sitting On a (Potential) Major Gold Mine

I’ve never wanted to be a geologist so bad as when I heard the story behind this team finding their marquee asset.  To me it sounded like was part two-year trip of a lifetime exploring South America, and two parts Indiana Jones-like treasure hunt.

Of course the reality would have been much different — this would not have been a sexy experience. Spending hour after hour, day after day, week after week digging through decades of old mining records—with zero guarantee that anything good would ever be found — would be excruciating.

While I don’t have the patience (or ability) to spend two years grinding like this, these guys do and it was well worth the wait.

They knew what they were looking for.  They had a very specific geological model in mind, and the asset had to be privately held (think—rich Latin family office) that would be unknown to the public markets.

It took months and months, but their marquee asset was exactly what they were scouring for. It was owned by a private family — it had been for decades.  The asset had been mined by the grandfather decades ago, using the tools and techniques of his time.

The property passed to the sons who were lawyers, not miners.  Not only were they not interested in developing it, they didn’t think there was any money in it anyway.

They were wrong — it just took the trained eyes of three world class geologists to recognize it. While the grandfather had worked the surface of this asset for years, The Really Big Prize lay further below — and would cost some money to develop.

It’s not his fault, he wasn’t a world class geologist with decades of experience.

This style of mineral deposit is shaped like an inverted carrot… skinny at the top and wider as you go down.

While the grandfather had done some work on the tip of the carrot — almost all of the resource lies below.

After months and months of searching this was the asset that ticked all of the boxes.  This was the asset that all three geologists agreed was worthy.

1 – High grade, this was mandatory
2 – Low cost development, easy to mine
3 – Modest entry cost, wanted to keep share count tight, low acquisition cost greatly improves the economics
4 – Easy to access location, safe political with infrastructure and labor

It wasn’t easy to find a project that had been hidden for decades, owned by a low-key private family. All it took was the three most connected South American geologists ever and two years of work to dig it out…

Now they develop it. The first high grade assays were released upon listing — tens of metres long of multi-gram per ton gold.

The Drill Bit Will Again Drive the Share Price

The team behind this new listing has huge credibility.  Their flagship gold stock is now up 500%, and research reports are flying out of the brokerage houses on it — with target prices almost double the current share price.

Fantastic drill results drove that share price increase.

I expect that will be the case again here… and the drilling is happening now.

The way this geology works, investors can expect to see is that not only the size of the resource here going to get bigger (perhaps exponentially so), but also the already high grade is expected to improve.  That is how the geology in this type of deposit works.

The real prize here is deeper underground and it has been left completely untouched by previous surface level development.  Past mining has been at the surface only, and with a limited amount of drilling.

But that drilling was enough to provide the data that shows that this deposit is going to get much wider, much BIGGER with depth.

The top of the deposit is actually one of the highest grade gold copper tourmaline breccias ever discovered — so it is very exciting that the data points to the deposit getting wider and higher grade with depth.

Now after decades this property is finally going to get developed properly.  With modern techniques an technology, by a company with a deep bench of expertise and proper capital to exploit the opportunity.

Over the next six months the drill bit is going to be producing news flow for this company.  If this asset is what this team thinks it is… the next six months is going to be very exciting.

DO NOT MISS MY NEXT E-MAIL!!!

This stock has everything I could ask for — A Dream Team Management with a 500% win this year, so their network is strong — with a fresh story of high grade gold and a tight share structure.

That is the combination that you want, because that is what ultimately drives cash flow.

Tomorrow I’m going to reveal to you the name and ticker of this company that offers you all that.

The market will love anything that this team comes out with after their last big win. A deeper dive will give you more reason to appreciate this company.

This is a fresh story, with an advanced stage property inside a well-funded and tight share structure… it’s a perfect setup for gold investors. At such a cheap valuation, there is lots of room for share price appreciation — assuming the management team can deliver the drill results.

In addition to the name and ticker of this company… tomorrow I will tell you exactly what you need to know:

A. Details of the 500% return that this group’s last company has produced

B. Background of the talented South American geologists who spent two years digging out the best new asset on the continent

C. A breakdown of the assets that made the grade after two full years of searching

D. The game plan for the marquee asset where the drill bit is turning today

The assets that these geologists have found have never seen the light of day in a public company. Nobody knows these stories.

They are ultra-high-grade. They have been owned by wealthy South American guys for years, mined at some small scale.

This Dream Team of geologists used all their experience and connections to being these assets to the public markets for the first time ever.

The stock has only been listed for days. Word is just starting to get out. It’s a ground floor opportunity for retail investors with the best team in South American exploration — High grade gold has already been released – tens of metres long of multi-gram per ton gold.

Tomorrow you can profit from their lifetime of hard work.

BE READY!!!

I’m not going to try and forecast the 2020 election at this point.

Not with impeachment, Ukraine, Biden’s son, quid pro quo, Michael Bloomberg and who knows what else between now and then.

But a chart I found today made me think of what would happen if Democrat Elizabeth Warren wins the White House exactly one year from now, in November 2020.  This chart shows how important fracking is to US oil production:

Climate Change is a major issue for her and her voting base.

Elizabeth Warren is on record as saying that on her first day as president she intends to completely ban fracking — EVERYWHERE.

Here it is, straight from the horse’s mouth…

That is concerning, although it is hard to say how doable it is for her.

Without an act of Congress, the President could not issue an outright ban on fracking across the US. There are however a number of regulatory and executive actions an administration could take to prevent or shrink the use of fracking technology.

Even if she can’t ban it, she can surely slow it down.  Perhaps even make it economically unviable.

If you think this is crazy talk, note that the state of California just ordered a review of all pending fracking in the state AND halted steamflooding — a secondary recovery method to increase production from old oilfields (mostly worked on conventional, non fracking fields).

The hit to the economy would be enormous — tens of thousands of job losses, especially in the western states, and WTI oil prices would jump 50% in a week.  The stock market would crash, sending the world into a global liquidity crisis — for a while.

But if you’re an investor in Canadian oil stocks, you will have the best year of capital gains in a long long time!

Her Election Chances Look As Good As Anybody

There was point in time where the idea of someone as far left as Elizabeth Warren winning anything was far-fetched.

Today she isn’t even the furthest left of the serious Democrat contenders — although far left she most certainly is relative to what we are used to from nominees.

Former US President Barack Obama is so concerned about an Elizabeth Warren nomination that he recently came out of political retirement to remind his flock that going too far left would be a bad idea.

Warren is currently neck and neck with Obama’s buddy and former VP Joe Biden in some polls.  Second place in almost all of them.

Can she beat Biden?

If you combine her supporters with the Bernie Sanders brigade, she has a realistic  chance at the nomination.

Realistically, the Democrats aren’t going to nominate Sanders.  He is 78 years old and just had a heart attack.

His campaign proposals are truly radical, he wants to overhaul nearly every institution and industry in the country.

In many cases, his proposals are further to the left than even movements on the ground have called for.

Warren is no spring chicken at 70, but next to curmudgeonly Bernie she seems barely middle age. Plus her policies aren’t nearly as extreme… she isn’t calling for a systemic transformation.

Many of her proposals leave the door open to further compromise down the line — such as the claim that Medicare for All is a good “framework,”.

Against Trump, all the Democratic leaders are actually currently polling pretty well nationally.

Of course we don’t even know for sure that it will be President Trump that they are running against by the time the election arrives — so these polls might not mean much.  Michael Bloomberg could complicate things further.

Warren is no shoe-in to be sure, but right now I’d say she might be the favorite out anyone (Democrat or Republican).

RBC believes Warren would probably be able to ban fracking and all output on federal lands. Oil output on federal lands is about 2.7 million barrels per day, or 22% of total output.

If such a ban took effect in early 2021, it would slash US oil production by about 300,000 barrels per day that year, RBC said. And by 2025, the firm’s US oil production forecast would decline by 1.2 million barrels per day.

The impact on natural gas could be even bigger given that shale production is now the majority.

What actually caught my attention more than her drilling moratorium and fracking ban was this report from the Wall Street Journal:

A spokeswoman for the Warren campaign said that motivating investors to move money from the oil-and-gas business is the aim. “We hope they respond accordingly by shifting their investments to zero carbon sources instead of continuing to pollute our planet,” Alexis Krieg said. (1)

That is pretty blunt isn’t it?

She has no bones about blatantly telling the world that she wants to make the oil and gas sector uninvestible.

If we start thinking about what this means for specific companies, I have some initial thoughts…

Who Loses if Warren Wins…  U.S. Frackers

If fracking gets banned or slowed down the companies that are fracking pure-plays obviously have huge problems.  Their production declines very fast, so no drilling or slower drilling is going to crush cash flows.

That is especially true for those with a high percentage of production from federal lands.

Drilling on federal land occurs mostly in the West, from southeastern New Mexico’s Permian Basin up to North Dakota’s Bakken Shale, as well as in the Gulf of Mexico.

Companies with significant federal land exposure include EOG (EOG), Devon Energy (DVN) and Concho Resources (CXO).

Who Loses If Warren Wins…  Oilfield Service Companies

Entire oil-field service companies could become obsolete if she puts a smacking on fracking.

International service companies like Schlumberger would at least have a fighting chance, but for companies operating completely within the U.S. Warren would be a disaster.

The entire sector is going to hurt and would likely need to be avoided.

Who Loses If Warren Wins…  Pipeline Operators

Pipeline owners would suffer without replenishment, as existing wells decline.

No mystery which pipeline operators either, virtually everything onshore in the United States would be hit.

Warren’s impact to pipeline operators is more than just the impact she would have on production levels — she is also extremely anti-pipeline.

She was opposed to Enbridge Inc.’s Line 3 oil pipeline replacement and expansion project, and has also mentioned permits being revoked for TC Energy Corp.’s long-delayed Keystone XL oil pipeline.

Who Wins If Warren Wins…  WTI and Henry Hub Prices

From 2008 to 2018, US crude oil production more than doubled, from 5 million barrels a day to almost 11 million barrels a day.

That is all fracking my friends — see the first chart I showed you in this story.  These wells now represent half of U.S. production and those wells decline very quickly.

Natural gas is the same story, only more.

US brokerage firm Tudor Pickering–a specialized energy boutique — estimates that if fracking were banned, natural-gas prices in the U.S. would jump to somewhere between $9 and $15 and that oil would rise to the $80-to-$85 range and could risk shooting to $150 a barrel during market shocks.

Who Wins If Warren Wins…  Those Who Don’t Frack

The majors would benefit from this.  They have production from shale but it is a small percentage of the pie… her impact on commodity prices would be more important to them.

As the commodity prices go up the majors would reap the cash flow rewards and could shift capital to drilling elsewhere.

Who Wins If Warren Wins…  Those Out Of Warren’s Reach

Canadian producers which are dirt cheap today, international producers, and suddenly offshore (outside of the U.S.) and deepwater gets back in the game.

She could create some pipeline complications for Canadian oil, but the province of Alberta is much better equipped to handle that with curtailments.

Declining U.S. production and soaring oil prices would be great for Canadian producers and service companies.

Who Wins If Warren Wins…  Renewable Energy Companies

Warren wants to suck the capital markets out of oil and gas and into renewables.

That will happen if she kills or bogs down the fracking business model.

By bringing the cost of capital down for renewable businesses (cheaper loans, higher valuations on stock) she can accelerate their progress.

Higher oil and gas prices will also provide more tailwind to get the transition to renewables going; their economics are benchmarked against oil and gas.

She is serious about fighting climate change.

So I wonder… the Market talks about a risk premium for Gulf Oil production in the Middle East… could it one day soon talk about a risk premium for US oil production?

How do resource companies—those who extract large amounts of commodities from the earth—meet new ideas on ESG investing?

ESG stands for Environmental Social and Governance, and it means investing money in sustainable ways.

But can resource extraction companies be ESG compliant when they are removing huge amounts of rock—like open pit mines—or bringing billions of barrels of hydro-CARBONs to the surface?

They can…sort of, says Sarosh Nanavati, an investment research analyst with the Pennock Idea Hub in Toronto.  He specializes in finding investments that score high in ESG for his clients—the competitive fund managers (the “buyside”).

“Environmental concerns (the “E” in ESG) are generally where most resource companies run into controversy,” he says.

“These relate to the impacts which their operations have on land, water and air.  Common examples would be things like waste management, like mining tailings, or excess gas flaring.

Source: University of Oxford/Arabesque Partners

“For a mining company it’s a bit simpler.  It’s about using best practices to minimize their environmental impact, and adequately sharing the benefits of resource development with the local communities in which they operate.

Oil producers have another hurdle to face, he says. “Energy companies must of course do the same (manage their “controllables”), but they face additional scrutiny for the environmental impact of their end products.”

Prior to specializing in ESG, Nanavati had a lengthy career on Bay Street on both the buy side and sell side, including 18 years as a fund manager investing primarily in the resource space.  So he’s been on the other side of the fence, and he knows what these fund managers want in ESG investing.

“For me, I focus on using ESG analysis to improve investment performance. Fund managers are interested in outperforming their peers, and they’re looking at ESG analysis as a way of doing that.

“There’s a pretty substantial body of empirical research that shows that companies who manage ESG issues which are both relevant and material to their business tend to be more profitable than their peers, and additionally their stocks tend to outperform their peers.  Some of the research even suggests that this outperformance effect is most evident in the energy sector.

Source: Fidelity International

“To me that just makes sense.  When you have a healthy relationship with your employees, you encounter fewer labor disruptions.  When you have a good relationship with the communities in which you operate, your projects are permitted and put into production more quickly.  These are real financial benefits, and they show up on your bottom line.”

Can anything resource companies do/be good enough for some investors who care about ESG?

“Well as you can imagine there’s a diversity of opinion. I think that globally we’ve seen a number of large sovereign pension funds step away from the energy space. We’ve seen in Quebec that’s happened as well.”

Nanavati is currently helping raise some capital for a publicly traded coal bed methane play in Botswana based on its ESG principles—which is very counter-intuitive. Methane? From Coal?  Those are two of the worst environmental bad guys—how can that be ESG focused?

“Botswana mostly uses diesel and burns coal for electricity. And in the communities, they typically utilize biofuels—wood and dung–in their homes for heating and for cooking, which is very dangerous.

“With the development of a domestic natural gas resource, Botswana could provide incentive for the construction of additional power generation in the country run by natural gas, convert much of the utilization of diesel by local industries to natural gas or compressed natural gas in the case of mining trucks and… local transportation is primarily buses, so local buses.  As well as long-haul trucks, to reduce outdoor pollution in the country.

“So it’s really an interim step, I think, dramatically reducing the amount of particulate matter that is being spewed out into the local communities.”

So he’s really talking about a lighter shade of grey—on the way to white.

I asked Nanavati what the biggest mistake management teams make around ESG, and do small resource companies – like the ones that I mostly cover—have any special challenges around ESG?

“The biggest mistake that management teams are making I think is ignoring ESG. Don’t ignore it. You need to take steps, tangible steps to demonstrate that you understand that stakeholders are looking at it, and that you are looking at it yourself and using it as a tool to manage risk internally.

“I think a lot of times companies shoot themselves in the foot because they’re doing a lot of really good things but they don’t talk about them. So that’s an easy first step, just be more communicative about the positive things that you’re doing in the communities in which you operate.

“Smaller companies in particular are challenged because there is some requirement for resource allocation here, you have to throw some money at this. But the reality is that you will find that you are paid back on that investment … it’s not an expense, it’s an investment with a return.

“The resources that are required are going to be used to perhaps include some additional color in your annual report, or when you’re writing up your conference call scripts you will have to include a section on what you achieved that quarter in the ESG area.

“So I don’t mean to suggest that it’s this huge cash outlay, but typically it’s the utilization of people’s time that is going to be the primary cost.”

“I think the important things for resource companies to focus on are the factors that they have control over.

“I think the things that management can control in an energy company, how they treat their workers, how they operate in their local communities in which they’re located, the safety of their workers … a lot of the social aspects, the “S” components of ESG.  Discrimination in the workplace, workforce diversity, and so on.

“And then on the governance side, governance is essentially oversight of the company’s operations and management.  So again, issues with respect to corruption for example.

“Compliance with the Foreign Corrupt Practices Act.  It also includes board composition — does the board have the appropriate skill sets, is it adequately diverse, does it have sufficient industry experience, etc.

“Management compensation, that’s a big one.  Hiring and firing of the CEO.  These are all governance concerns. That’s the “G”.”

In large cap energy, BP—British Petroleum is a great example of ESG investing at work.

The company had received lots of negative press before the Macondo blowout in the Gulf of Mexico in 2010.

The large index company, MSCI, had already excluded BP from its sustainable equity indices for a refinery explosion at Texas City in 2005.  For the five years after Macondo,–one of the best oil bull markets in history–BP’s stock has consistently underperformed its peer group—by a whopping 37%!

And to a large degree, Nanavati’s research for investment firms is to help them avoid ESG blow-ups like this (pardon the pun).

In conclusion, Nanavati says “ESG in investment management is not is a fad. It is becoming pretty much embedded in the investment process for most portfolio managers.  And they use it because it generates better risk-adjusted returns for their clients.”