Six Top CEOs Tell Their Story

By
Keith Schaefer
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When you talk to management teams of public companies directly, you get a lot more colour on the company…and of course, on who the CEO is as a person. It helps you decide if the company and stock are a good fit for you.  Institutions get that luxury all the time.  Retail investors like most of my subscribers…not so much.

That’s what makes my twice-yearly Subscriber Investment Summits (SIS) so valuable–we bring out some of the best teams in the junior space to meet with my paid subscribers.  One month ago, on March 5 in Toronto, we had over 300 investors come into Toronto to go face-to-face with these CEOs.  We sprinkle in a couple hedge fund managers to give perspective from the buy side, and it makes for a highly entertaining and educational one day event.

Below you will see videos of 6 junior energy CEOs from that day telling my paid subscribers all about their public company–and why my subscribers should invest in their company.

These are all very well run companies who can survive the current low price environment, with at least one flagship asset–low cost, big size–that gives them huge upside leverage to rising oil or natgas prices.

1. Richard Thompson of Marquee Energy (MQL-TSXv; MQLXF-PINK)

Thompson showed great stealth in accumulating a huge contiguous (all-together) land package in the Michichi play just northeast of Calgary.  In a very competitive basin, this was a huge coup.  Thompson explains how he did it, and goes through the low-cost economics of Michichi.

Capture sis 1

2. Brian Schmidt of Tamarack Valley (TVE-TSX; TNEYF-PINK)

Schmidt has done something remarkable–put together a package of wells that have 1.5 year payouts at just $35/b WTI.  His strict cost controls, strong hedges and ability to create efficiencies have made Tamarack Valley a “go-to” name for energy investors.

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3. Painted Pony Petroleum (PPY-TSX: PDPYF-PINK)

CEO Pat Ward’s foresight in developing low-cost land packages early has kept share dilution low and equity valuation high.  He was early into the Saskatchewan Bakken and sold that to Crescent Point for $100 million just before the oil price collapsed.  His all-in costs on his Montney natural gas is now under $1/mcf.  Remarkable.

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4. Renaissance Oil (ROE-TSXv; RNSFF-PINK)

CEO Craig Steinke and Chairman Ian Telfer did their homework on the recent bidding round in Mexico, and were the ONLY Canadian company to win concessions.  They instantly became a producer, and are leveraging their new “insider” status in Mexico to prepare for more acquisitions.

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5. Lithium X Energy (LIX-TSXv; LIXXF-OTC)

Chairman Paul Matysek, CEO Brian Paes Braga and financier Frank Giustra have assembled a management team and property portfolio that should develop into the largest lithium junior in the world.  I originally profiled this story at 45 cents/share, and it now trades great volume at $1.30 as investors realize the fundamental supply-demand for lithium for the next 18-24 months is very bullish.

Capture 5

6. NexGen ( NXE-TSXv; NEGXF-PINK)

NexGen’s stock has more than doubled since the February Subscriber Summit.  This uranium explorer (uranium is used in energy!) has announced stellar results from their Saskatchewan property.  This shallow asset will be one of the largest and high grade uranium assets ever found.  CEO Leigh Curyer tells the story here.

nexgen

March 5 in Toronto was our best event ever.  As we build our brand, more CEOs want to bypass analyst interpretations, and take their story directly to active retail investors.  It’s all about putting retail investors on the same information level as the institutions.  It’s a very empowering day.

JOIN US–our next conference is Tuesday October 11 in Vancouver.  You can sign up now at www.subscribersummit.com.  Sign up HERE.

Keith Schaefer

The $2 Trillion Energy Market That Is Just Ramping Up

By
Keith Schaefer
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I want to show you one of the most powerful charts I see in energy right now.

This chart doesn’t show where stocks are going, or where commodities are going.

It shows how energy is being used, and will be used in the coming years—and what is driving that growth.

And it’s so easy to understand—it’s called The Internet of Things, or IoT for short.

It’s where every appliance, every car part, every monitor…has a small computer chip in it that tells both the owner/user and the manufacturer how it’s doing, where it is, and transmits any data it’s programmed to.

It’s impossible to imagine the applications—and the energy savings—all this information—from every industry in the world—will generate.

But this isn’t a potential future market—the multi-TRILLION dollar rollout is happening now.

One of the first big “apps” is city streetlights being outfitted with energy saving LEDs, and having the computer chip tell the light when nobody is around—and lower the luminescence.

Cities are seeing an immediate 30-50% savings in electricity bills—which are often more than half of their overall electricity use.

Here’s a chart that help you get the picture:

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This chart says there will be tens of billions of units.

I think there will be more. Think of every towel in every hotel with an RFID tag/computer chip.  Theft goes to zero.

Think of every  parking meter in every city with a computer chip that can tell a server if that stall is empty right now.  The time savings, and the efficiency savings, will be incredible.

That’s why there is a spending spree happening in the IoT space by Big Technology.  I know.  My subscribers and I have already had one of our IoT stocks bought out for a 90% premium—that’s a near-double in one day.

I’ve found a stock with even more potential than that though—with big fat hardware margins and incredibly profitable and growing software margins.

Because this company has it all, I don’t expect them to be around long.   Their sales backlog is growing each quarter.

The growth here is stunning.  Investors are winning at energy right now in this space—with this stock.  Get the name and symbol—RIGHT HERE.

 

The Next Big Fight in Oil If Prices Rise

By
Keith Schaefer
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As the oil price fell from $105/barrel in 2014 to $26/barrel in 2016, producers, service companies and banks/lenders worked very co-operatively to keep as many people employed and as much oil flowing as possible.

It has been a remarkably co-operative endeavour for the global energy industry.

I expect that to change to become a lot more cut-throat between these players as the oil price rises.  There will be intense competition between the producers and service sector for every extra dollar that any increase in the oil price brings back into the energy complex.

Paul Kibsgaard, CEO of  Schlumberger (NYSE:SLB) sent a Big Warning to that effect during a speech at the Scotia Howard Weil Conference in New Orleans recently.

Schlumberger is the world’s largest oilfield service firm with 105,000 employees and operations in more countries than I can name.  These guys have a lot of fingers on the pulse of what is really going on in the industry.

Kibsgaard notes that the oil producers are now doing the same three things they have done in every prior oil crash since the 1970s.

First, companies bring exploration spending to a near complete halt. Second, companies slow development spending of already discovered reserves.  This is simple—less cash means less spending, and The Market will crucify any company  increasing their debt now.

The Third Factor is the producers across the industry simultaneously squeezing the service industry for price concessions.  This is a “my pain is your pain” kind of thing.

Kibsgaard believes that it is this squeezing of the service industry that has created almost all of the so-called “efficiency gains” that the producers have touted.  

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Source: Schlumberger Howard Weil Presentation

The producers would have us believe that they have gotten that much better at drilling wells faster and making them more productive.  You know, the graphs that look like this:

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Kibsgaard believes that there is some truth in that, but most “efficiencies” are really service cost reductions.

Kibsgaard’s view is that as soon as activity levels in the industry pick up those pricing levels are headed higher.  As the service costs rise, so too will the costs of drilling and completing a shale well.

The break-even costs being promoted by these companies might be true today, but as soon as activity heats up they are headed higher.

What he’s saying is that investors should not expect the cash flows of oil producers to rocket up along with any increase in oil prices—because the service sector will get be getting a good chunk of that increased cash flow.

Let me share two conversations I very recently had on costs with Canadian management teams, one from the service sector and one from a producer (I host my own conference calls with management teams on a regular basis and provide transcripts to subscribers).

From the service company executive:

“I think when the (oil) market comes back it’s likely not realistic…that the current service costs that the operators are enjoying—and rightfully so—and telling investors how they lowered drilling and completion costs and lowered finding and development costs.

It’s not what people think and it’s not guys in the field all over the place making $300,000 working half the year. It’s guys making decent wages but they have skills and experience that justifies what they are paid…I don’t think there is too much more room to go down.”

Now here’s the producer executive:

“I find in Western Canada we, as industry, haven’t made the adjustments there that are necessary.  There is a lot of room to go in those service costs. I know those guys won’t tell you but there is a lot of fat there that needs to be trimmed yet. I’ve had discussions with Presidents of those companies that they need to change.

“For example, I get on a plane and go to Toronto and its 20% full of oil field workers. How is it at $30 oil that we can afford to fly people back and forth to Eastern Canada? So there is one example and I can go on with about 8 or 10 but I’d still be talking here at lunch if I rattled them all off.”

Thems fightin’ words.

________________________________________

As an aside, Kibsgaard had one other major point in his talk–that the industry has not found any efficient new way to get oil out of the ground cheaply this century.  Shale didn’t work because of efficiencies he says–it worked because the industry threw hundreds of billions of low cost debt at it to make it work.

The yellow line in the slide below from Kibsgaard’s presentation shows the massive amount of dollars that were thrown at oil and gas development in recent years.  The increase in spending is incredible.

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Source: Schlumberger Howard Weil Presentation

The slide shows capex spending going from $100 billion in the year 2000 to nearly $700 billion in 2014.    Yet with a sevenfold increase in spending the rate of global production growth really hasn’t strayed from its gentle long term rise.

Very high (and for a while stable) oil prices combined with incredibly low interest rates funded all of this spending.  Yes the innovation was important, but without that incredible surge in spending the shale boom would not have turned global oil markets upside-down.

Money made it happen.  Lots of money.

And as Kibsgaard notes in his presentation:
“The fact remains that the industry’s technical and financial performance was already challenged with oil prices at $100/bbl, as seen by the fading cash flow and profitability of both the IOCs and independents in recent years”

The point of Kibsgaard’s presentation was to say that the industry does not have a cost-effective solution to develop increasingly complex hydrocarbon resources.

EDITORS NOTE–I do own some oil producers, but my biggest position is in an off-the-beaten-track energy stock that pays me a steady–and increasing–dividend. I make $3500 a month off this beauty–the symbol and name of this stock is right HERE.

How Investors Get Screwed by Big Oil

By
Keith Schaefer
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Energy Companies And Share Buybacks – A Lesson In Capital MismanagementThe job of the men and women at the top of Big Oil is to help manage capital through the volatile cycles of this business.For that they are handsomely rewarded with big salaries and stock options.These are experienced people who have been through the cycles of this industry.

Yet they allocate capital as though they have no idea that these cycles exist.

Remember, the job of Big Oil is not to grow quickly.  These companies grow slowly, professionally, reliably, and provide modest dividend growth.  Capital allocation is key.

So why is it when stock prices are high, the big oil companies buy back billions and billions of dollars of shares?  And then when stock prices are low the big oil companies shut their buyback programs down.

The management of senior oil—and even some intermediates—have abysmal track records in allocating big chunks of capital for share buybacks.

After I show you these numbers, I’ll show you The King of Capital Allocation—the best ever maybe.

Let’s look at a few examples.

In 2014 with its share price average $124 Chevron (NYSE:CVX) repurchased $4.4 billion worth of shares.

In 2015 Chevron with its share price falling as low as $70 per share Chevron has repurchased no shares.

chevron
Chevron was buying billions of shares at the worst possible time.  And buying none now that its shares have gone on sale.

That isn’t to pick on Chevron, they are just doing what the entire industry does.

In 2014 Marathon Oil’s (NYSE:MRO) stock price spent most of the year above $35 and the company repurchased $1 billion worth of shares.  Marathon is NOT one of the major oil producers and a billion dollars is real money.

In 2015 Marathon repurchased no shares even though its share price was near the single digits by the end of the year.
marathon
Marathon now finds itself looking to sell assets in a horrible market for dispositions in order to shore up its balance sheet.

I bet the company would like to have that billion dollars of 2014 repurchases done when the share price was near its all-time high back in 2014.

Again, this isn’t to pick on Marathon.  After all everyone is doing it.

Even the 800 pound gorilla Exxon Mobil (NYSE:XOM) buys shares aggressively when they are expensive only to cut back drastically when the share price is depressed.

Here are the last eight quarters of share repurchases by Exxon in the billions:

Q1 2014 – $3.9 billion
Q2 2014 – $3.0 billion
Q3 2014 – $3.0 billion
Q4 2014 – $3.2 billion
Q1 2015 – $1.8 billion
Q2 2015 – $1.0 billion
Q3 2015 – $0.4 billion
Q4 2015 – $0.5 billion
exxon
Once again this is a case of buy aggressively when the share price is high.  Shut down the buying when the shares are depressed.

I came away concluding that the people leading these companies have either done a terrible job in making share repurchase decisions or that they have no idea that they produce commodities that tend to be cyclical in nature.

Now, if  you haven’t stopped reading in disgust, I want to introduce you to someone.

Share Repurchases Done Right – The Henry Singleton Story
henry-singleton
Source: CSInvesting.org

“Henry Singleton of Teledyne has the best operating and capital deployment record in American business”.

That sentence above is not my assessment of Henry Singleton.  That quote is attributed to Warren Buffett in John Train’s classic investing book The Money Masters.

An investor who bought Singleton’s Teledyne stock in 1966 and held it for 25 years made 53X on the initial amount invested.  Cha cha cha!

The biggest key to Singleton’s success in creating shareholder was how he used the share price of Teledyne to his and his shareholders advantage.

During the 1960s Teledyne’s share price was soaring. Singleton himself thought Teledyne’s share price to be overvalued, so he took advantage of the situation.  Singleton used overvalued/expensive Teledyne shares to make acquisitions of companies at prices that equated much lower valuations.

Using richly valued shares to acquire other businesses at lower valuations is immediately accretive to earnings.

In total Singleton made 130 such purchases.

Make a note for later.  When your stock is expensive you don’t repurchase it, you look to use it as an acquisition currency.

But Singleton wasn’t a one trick pony.

In the 1970s the stock market swooned and so did the share price of Teledyne.  At this lower price Singleton believed that Teledyne’s shares were significantly undervalued by the market.

Teledyne shares were now a good buy.

Again, Singleton knew what to do.

He bought back shares.  A lot of them.

From 1971 through 1980 he reduced Teledyne’s share count by nearly 75 percent.  In doing so each remaining shareholder owned much more of Teledyne on a per share basis after the repurchases.

Singleton used what the stock market was doing with Teledyne’s share price to the advantage of his shareholders.  Teledyne didn’t suffer from stock market volatility, it benefitted from it enormously.

I know what you are thinking.  This isn’t rocket science.  Buy back shares when the stock price is depressed, issue shares when the stock price is high.

Who couldn’t figure that out?

It is a simple concept, yet few managers put it into practice.  None have successfully exploited the volatility of the stock market the way that Henry Singleton did.

When you see what the big oil companies have been doing the only conclusion you can reach is that they have never heard of Henry Singleton.

Big Oil–Don’t Let That Cash Burn a Hole In Your Pocket

Now, to be fair, nobody saw the sudden-ness or depth of this downturn in oil price coming.  But this IS a very cyclical business.

And now, all of these companies clearly need to stop repurchasing shares in order to protect their balance sheets. I’m not suggesting that they should be doing anything differently today.

However, this is the position that they have put themselves in.

If these companies had either paid down debt when oil prices were $100 per barrel and stock prices were high—or let the cash burn a hole in their pocket until a cycle trough—their balance sheets would not be a concern.

Investors see it cycle after cycle.

These companies get aggressive spending their cash when commodity prices are high only to have to hunker down to ride out the storm when inevitably the bottom falls out.

These companies shouldn’t be worried about cash burning a hole in their pockets.  They should not buy back shares at the top of the cycle.
Just relax and let the cash build up on the balance sheet.

Then when the cycle turns down that cash is available to buy back shares or make acquisitions or just allow shareholders to have a good night’s sleep.

Another word for this is discipline.

I didn’t carefully select Chevron, Marathon and Exxon to prove a point.  These were the first three large producers that I looked at.

Virtually the entire industry is run this way.

The cyclicality in this business should be there to be exploited.  Not to suffer from.

I’m pretty sure that is how Henry Singleton would do it.

Check that, I know it is.

$2 Trillion in Spending Will Create A Lot of Profits

By
Keith Schaefer
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In World War II, when the Allied countries laid out their first strategic bombing plans–the first target they selected was easy to agree on.

It was the German electrical grid.  The Allies knew that without electricity the Germans couldn’t do anything.

If Germany had been attacking the United States it would have selected the exact same target.  America’s most important asset was and still is its electric grid.  The entire economy runs on it.

Not much has changed with the U.S. electric grid since the 1940s.  I don’t just mean how important it is…..I mean that literally, almost nothing about it has changed.

It is antiquated.  And that has become a major problem.  In 2009 the U.S. Department of Energy released a report on the U.S. electric grid that said:

” . . . the current electric power delivery system infrastructure will be unable to ensure a reliable, cost-effective, secure, and environmentally sustainable supply of energy for the next two decades …..”

Sound the alarm bells please.  Within 20 years of this report the Department of Energy believed that the U.S. electric grid would be unreliable.

The report went on to conclude “the current U.S. Electric power grid is nearing the end of its useful life.”

Do you get how important those statements are?  America runs on that electric grid.  Everything in America runs in some way on that electric grid.

This isn’t a case where it would be nice to see some money spent on the grid to update it.

There is no option but to spend that money.

The United States will get this job done. The future in this case is certain. 

Massive amounts of money will be spent upgrading the U.S. electric grid and it all has to happen in the next two decades.   This is the opportunity investors have been waiting for.

The main reason why investing is so incredibly hard–is because the future is virtually impossible to predict.

That is why–when you find a company that fills you with an unusually high degree of certainty–you need to act.

The Size Of The Prize Here Is Enormous

The United States electrical grid has been described as the most complicated machine in the world.

According to a report from energy consultant firm the Rocky Mountain Institute the grid is going to require $2 trillion in upgrades by 2030.

That money will fund thousands of jobs, and billions in profits for the companies involved. If you have children heading off to college, this is the industry you may want to steer them towards.  This is the LARGEST sure-bet I see.

And it’s definitely the sector to be investing in.

I’ve been hunkered down in my basement researching the U.S. electric grid for the better part of nine months.

The reason that I became obsessed with this opportunity because it is truly the best of both worlds.

First, the amount of money that is going to have to be thrown at this problem in a short amount of time is simply staggering.  I mean $2 trillion in 20 years…….it is mind blowing.

Second, there is just no way around spending all of that money.  Nothing in the United States could function without a reliable electric grid.

After nine months of reading it became very clear which company I wanted to own to profit from this opportunity.

The main reason we think investing is so hard is because the future is virtually impossible to predict. That is why–when you find a company that fills you with an unusually high degree of certainty–you need to act.

I think the entire sector will do well as a whole, but this company….I found one that is really special. This company makes the US power grid better–and smarter. I have an unusually high degree of certainty in its growth and profitability.

Today, I want to share my full report on this company with you–risk free.  If I give you the best investment idea you are going to see in the next two decades I’m willing to bet that you are going to become an OGIB subscriber.

Folks, this isn’t an investment opportunity for the next 20 years.

This is the investment opportunity for the next 20 years.

I know, because my first investment in this space has already given me and subscribers huge profits.  PowerSecure (POWR-NASD) was just taken over by the Southern Company (SO-NYSE) utility for a 90% premium to its previous day’s close.  OGIB subscribers made 50% in six months from the original purchase price.

It’s a sure-bet sector.  And all my research says this debt free company is the right company to play it.  CLICK HERE for the name and trading symbol.

Keith Schaefer

 

This Man Called the Bottom (so far)

By
Reese Morgan
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 HF Logo

 Guest Post

Hi, this is Keith Schaefer—even though you don’t recognize the logo above.  Since oil crashed back in the fall of 2014 we have had a few false starts at an oil price recovery.

Is this rally real–or another tease?

I’ve helped the editor at Hedge Fund Insiders http://www.hedgefundinsiders.com/, Reece Morgan, start a brilliant investment website.  Reece keeps a close eye on what the best investors in the world are doing—the people who have amazing 15-20 year track records.  The Hedge Fund Insiders investing approach is to build a portfolio made exclusively of the best ideas from the best investors in the world.    

I’ve seen Reece’s research, and he is onto something.  

One of those elite investors thinks that a significant oil price recovery is in fact coming in 2016 and that our window to get long is indeed quite short.

Here is the latest from Hedge Fund Insiders:
Hayman Capital’s Kyle Bass made half a billion dollars betting against U.S. residential mortgage back securities in 2007.
Today he believes that there is by far one place where investors are going to want to be invested for the next 3 to 5 years.

It is the energy sector.

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Bass thinks that the window of opportunity to get invested in the sector will last another few months after which investors will be chasing the price of oil and related energy equities higher.

Given how far the sector has fallen, it could be a lot higher.

His Track Record For Making Successful Macro Calls

The great mutual fund manager Peter Lynch spent virtually no time thinking about macro level issues.  He famously said that “if you spend 13 minutes analyzing economic forecasts you’ve wasted 10 minutes”.

That approach worked out pretty well for Lynch.

As manager of the Fidelity Magellan Fund from 1977 to 1990 he achieved an annual average return of 29%.  The Magellan Fund had $20 million of assets under administration when Lynch took over and $14 billion when he left.

Simply ridiculous.

Kyle Bass has a very different approach.  He is very focused on the macro level and his approach has worked out pretty well for his investors.

He has successfully profited from investing based on the several macro calls:

  • He bet against U.S. residential mortgage-backed securities prior to the collapse of the housing bubble
  • He bet against the economic collapse of Greece in 2012 by owning credit default swaps on Greek Government Debt
  • He successfully bet on Japan embarking on a massive bond-buying program in 2013 by positioning his fund to profit from a decline in the Yen

Bass isn’t perfect, he isn’t right 100% of the time.  But he is right a lot more often than he isn’t and the results of his successful trades have been spectacular.

Why Bass Believes Oil Is About To Turn Higher

Bass believes that the world is going to be shocked how quickly we go from an oil “glut” to an oil “deficit”.

He doesn’t say this because he has a gut feel, he says it because he has crunched the numbers and the data tells him that it is so.

He explained his reasoning firstly as:

“In energy, I just believe that the margin of safety for the globe is the smallest it’s ever been in energy. Global demand is 96 million barrels per day, the highest it’s ever been, and incremental supply capacity, let’s say swing capacity, is at the lowest point as a percentage of that ever, about a million and a half barrels a day”

From 2006 through 2008 the reason that oil prices spiked up to $150 per barrel was that the market became increasingly concerned about the lack of spare capacity.

Well, we have even less spare capacity today as everyone (including OPEC) is essentially pumping flat out.

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The difference this time is that we also have an unusual amount of oil in inventory.

Bass believes that inventory is going to start to decline rapidly as U.S. production rolls over in a big way in 2016.
His firm had done a thorough analysis of oil supply.  Their conclusion was that U.S. production alone would drop by a million barrels per day from its March 2015 peak by April of 2016.

When that happens all of a sudden the world is going to be consuming more oil on a daily basis than is produced, and inventories are going to start to fall.  With everyone pumping flat out already, there isn’t going to be any new production readily available to make up for that shortfall.

From glut to deficit just like that.

How Bass Is Positioned To Profit

Bass got into this oil trade early.  Too early.

He was early in betting against the U.S. housing bubble too, but in the end he was very right and made a lot of money.
As of last June he owned several U.S. listed oil and gas producers in the Hayman portfolio.  Hayman had decent sized positions in Anadarko Petroleum, Bonanza Creek Energy, Continental Energy and Diamondback Energy to name a few.

Judging by his portfolio he had chosen to own a basket of oil and gas companies rather than make a concentrated bet on a few favorites.

Hayman’s September SEC filing revealed that Bass sold all of those positions over the summer months, likely surprised by oil taking a second leg down in August.

Bass is still long oil, but this time he owns the commodity instead of the producers.

The appeal is simple–by owning the commodity he won’t lose much if the price stays lower for longer.  But if he owned the producers lower for longer could end very badly for some companies.

What We Do At Hedge Fund Insiders

The core belief at Hedge Fund Insiders is that the retail investor is making a mistake trying to compete with professional investors.

A retail investor can dedicate a few hours a week to investment research. The top funds can dedicate hundreds of man hours researching a single idea as well as spend millions on third party research.

Instead of competing against the top funds, we suggest profiting from them. The complicating factor is that these funds have large minimum investment requirements and are only available to the wealthiest 1%.

That is where we come in. We level the playing field for the retail investor by studying the portfolios of the top hedge funds and digging out their very best ideas.

We focus only on the best of the best.  We follow only the managers that have proven themselves over decades to consistently outperform the market.  These investors make very few mistakes.

By building a portfolio comprised only of the very best ideas from the very best investors in the world we believe that we can both improve investment returns while reducing investment risk.

You have to admit, our approach makes a lot of sense.

So who is the best of the best?  That’s a tough call, but I’ll tell you who my favourite is.  And I’ll also tell you the stock in which he has been buying a BIG position lately.  And guess what—it’s an energy stock. Click here.  to get the name, symbol and my full report on it, for FREE.

The Right Guy, In The Right Place, At Exactly The Right Time

By
Keith Schaefer
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Sometimes you write a story.  Sometimes a story writes itself.

In the next three sentences I’m going to give you everything you need to know.

One…

With more oil and gas producers in financial distress than aren’t, this has to be an historic opportunity to be buying oil and gas assets (especially shale).

Two…

Former EOG Resources (NYSE:EOG) Chairman and CEO Mark Papa is likely the most respected shale oil businessman in the industry.

Three…

Papa just brought public a blank check company called Silver Run Acquisition Corp (NASD:SRAQU) which has nothing to do but spend $450 million of cash on oil and gas assets.

What a position to be in.

Countless companies are desperate to get rid of assets to raise cash.  Lenders are taking over oil and gas assets that they don’t want and also badly want to sell. Assets are available at rock bottom prices and buyers with cash are few and far between.

And here is Papa, one of the most knowledgeable players in the game in the very enviable position of being one of the very few buyers in a panicked market.

If that isn’t a recipe for success I don’t know what is.

The “Godfather” Of Shale Oil

While a significant percentage of the U.S. shale industry teeters on the brink of financial ruin shale oil producer EOG Resources (NYSE: EOG) remains on sound financial footing with some of the very best shale assets in the industry.

Shareholders can largely thank Mark Papa for that.  He retired as CEO of EOG in 2013 and resigned from the Board of Directors at the end of 2014, but he left behind a company with great assets and in great financial shape.

EOG of course is lucky to exist at all. In 1999 EOG was spun out of Enron, the high flying trading company which wanted out of the boring E&P business.  Papa became CEO and Chairman of EOG (which is short for Enron Oil and Gas).

That was great news for Papa and EOG.  As you know, Enron went down in flames in 2001 in one of the most high profile fraud cases in the history of American business.

The unwanted spinoff EOG went on to become a significant oil and gas producer.

Papa transformed EOG into a company focused on innovation.  It quickly became an early adopter of horizontal drilling and multi-stage fracking and became a leader in producing natural gas from shale.

As a testament to its innovative culture EOG would be nicknamed by an analyst as “the Apple of oil”.

The shale gas focus worked well for EOG.  It also worked really well for quite a few of its competitors.  In 2007 Papa suddenly had a moment of extreme clarity.

He realized before almost everyone else that there was so much gas being found in shale that U.S. natural gas prices were going to be ruined for decades.

So Papa decided to do something.  He immediately had EOG do a complete 180 degree turn.  He told his geologists to stop looking for natural gas and to start looking for shale oil.

Papa put EOG ahead of the game.  Conventional thinking in 2007 was still that the tiny pores in shale rocks worked well with small natural gas molecules, but that bigger oil molecules wouldn’t be able to flow through.

Dutifully, the EOG geologists followed their boss’s orders and came back with a shale play in Texas called the Eagle Ford.  For an entire year EOG quietly signed leases with landowners in the Eagle Ford and paid very little to do it.

In 2009 EOG tested a horizontal well with fracks and knew it had a big win.

Fast forward to the spring of 2010 and Papa and EOG were ready to tell shareholders that they believed they had locked down nearly a billion barrels of oil reserves in the Eagle Ford.

The company was busy elsewhere looking for shale oil.While Papa and EOG were locking up a big land position in the Eagle Ford they were also busy in the Bakken.

EOG had drilled a well as far back as 2006 in the Bakken, but at the time believed that only a very small portion of the entire formation would work.

That turned out to be a mistake because the decision resulted in EOG leasing only 20% of the land in the Bakken when it could have had almost all of it.

Near the end of 2008 when oil prices were crashing in the midst of the financial crisis EOG drilled an experimental horizontal well using a new fracking technique.That well came on production at more than 1,400 barrels which was more than 4 times what nearby wells had been achieving.

That high production well with the new techniques greatly expanded the amount of acreage in the Bakken that could be developed economically.

It also meant that Papa and EOG had built two massive land positions in the core of two of the major shale oil plays.

A Return Focused Mindset

Perhaps even more important than the assets Papa left EOG with is the culture that he created. More than most of the other shale oil independents EOG has been more “return” focused than obsessed with growth.

That has left EOG with a balance sheet much better equipped to handle the downturn.

Papa brings Silver Run Acquisition Corp to the public market as a “blank check” company.  That means that Papa and his crew have raised cash from investors for the specific purpose of making acquisitions.

The shareholders are willing to front the cash despite having no idea which specific assets or companies might be acquired.

The fact that Papa was able to get this done in this market speaks volumes.  So far in 2016 there have been only five IPOs vs 27 at the same point last year.  The market appetite for IPOs has been minimal and the appetite for energy companies significantly less than that.

Also a sign of respect for Papa is that Silver Run was able to raise $450 million which is $50 million more than the company was targeting.

The way a blank check company works is that management has two years within which to invest the cash or it is returned to shareholders.

Given the current state of the oil and gas market, finding an attractive acquisition target should not be difficult.

Papa Believes Shale Is In For A Rebound

While speaking at the CERA conference last month Papa suggested that the shale industry is in for huge pain for the next 6 to 12 months.

But for the survivors he sees much better days ahead.Papa believes that oil prices will swing higher, perhaps substantially so.

He believes that the driver of this will be world demand growth of a million barrels per day for the next five years and the fact that capital spending on mega projects has screeched to a halt.

Papa believes that the world is going to need more oil in the coming years.  With big project spending halted across the industry the source of much of that oil is going to have to be shale.

Which is right where Silver Run and Papa are likely to be. The right man, in the right place at exactly the right time.

Keith Schaefer

Editors Note—my favourite energy dividend stock has ALREADY increased its dividend in 2016—and now energy prices are on the rise.  It’s one of the few companies in the energy sector that has a business model that works here at $35 oil.  Get this stock working for you TODAY.

 

Iran and Natural Gas – Who Are They Kidding?

By
Keith Schaefer
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Iran has been very vocal about ramping up oil production by one million barrels a day. That’s a real threat to a global market already oversupplied.

The Iranians are also talking a big game about increasing natural gas production.

In two years Iran believes that it will take natural gas production in its South Pars field from the 14.8 bcf/day currently being produced to 26.5 bcf/day.

(http://en.mehrnews.com/news/114233/Iran‐to‐overtake‐Qatar‐in‐South‐Pars)

That is a huge number, even in a bull market.  But with the first LNG export leaving the US this month, and the US$54 billion Gorgon LNG facility in Australia about to come online—you have to wonder who will buy that gas.

But is that growth even possible for Iran?

Robin Mills is doubtful.  Mills is CEO of Qamar Energy, a Dubai-based consultancy that advises clients on strategic, commercial and business opportunities in Middle East oil and gas.

“Iran has no LNG export facilities today,” he explained to me in an email exchange.  “The Iran LNG plant could be completed perhaps within 3 years (optimistically); other facilities would take much longer.”

“Iran will probably export by pipeline to Oman and Pakistan, as well as expanding its current exports to Turkey, and starting exports to Iraq,” he continued.  “Other pipeline exports, like India or Europe, are more speculative. This will mean more competition for LNG supplies to those countries, and potentially competition for Russian gas into the shrinking European market.

“But Iran also has to balance all these gas export plans against domestic needs for power, industry/petrochemicals and EOR (Enhanced Oil Recovery). It has the gas resources to do everything, but only if it really steps up international investment into new fields.”

And it was only two years ago when the head of Iran’s Ministry of Petroleum Research Centre, Hamid Katouzian, was quoted as saying Iran will be the largest importer of natural gas in the world.  So could this latest Iranian claim be exaggerated?

To grow production by some 79% or 11.7 bcf/d is a big deal.  Some context on how significant 11.7 bcf/day is might help.  Consider the following:

  • The entire province of Alberta produced only 9.8 bcf/day in the most recent month.
  • 11.7 bcf/day is more than any U.S. shale gas play other than the Marcellus which is producing 15.8 bcf/day.
  • The 11.7 bcf/day increase by itself exceeds total natural gas production for all countries other than the United States, Russia, Iran, Qatar and Canada.

The amount Iran is talking about is big and the time frame it is planning to do it in is very short.

The Biggest Conventional Natural Gas Field Of Them All

South Pars is part of the largest conventional natural gas field in the world.  We used to be able to say the largest natural gas field period, but the estimates of how big the Marcellus is just keep growing and growing.

This field is on either side of the Iran/Qatar border in the Persian Gulf. In Qatar they call their portion of the field the North Dome.

The picture below shows just how massive the South Pars/North Dome field is.  The field is the giant red blotch that appears to be an Octopus trying to eat Qatar for lunch.

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Image from: Pesare amol 

In total the field covers an area of 9,700 square kilometers.  3,700 square kilometers is in Iranian territorial waters and 6,000 square kilometers is in Qatari territorial waters.

The field was discovered in 1971 and started producing in 1989.

The North Dome represents virtually all of Qatar’s 22.9 bcf/day of natural gas production.  The 15.1 bcf/day that Iran produces from its portion of the field is roughly half of Iran’s total production.

If Iran hits its 26.5 million cubic meters per day target for South Pars it will be producing more from the field than Qatar.

Where Is All Of This Additional Natural Gas Actually Going To Go?

Despite being the fourth largest natural gas producer in the world Iran isn’t even among the world’s top 10 gas exporters today.  Iran accounts for less than 1% of global gas trade, exporting just a little to Turkey and Armenia by pipeline.

Meanwhile Qatar has become the largest LNG exporter in the world thanks to the North Dome.

Qatar has a big advantage when it comes to exporting natural gas.  While Iran has 77 million people, Qatar has only 2 million.  Very little of the gas that Qatar produces gets consumed domestically.

Iran doesn’t just have more people, the country consumes natural gas very inefficiently.  Katouzian claimed its fossil fuel power plants have shockingly low efficiency rates of just 13 percent. Really bad ones would be 30-35%.  Modern plants in other parts of the world see closer to 70%. Thirteen percent is almost unbelievable (Iran actually has an educated and talented energy workforce.).

Iran actually uses oil to power some of its power plants because it doesn’t have sufficient natural gas supplies.

An additional issue is that Iran must re-inject a significant amount of the natural gas it produces into its aging oil fields to help sustain production.  A lot of that extra 11.7 bcf/day of production in a two year period will be used to help pump Iranian oil, and finally allow Iran to join the oil exporting club.

But they will need export markets to get that full amount online.  Where will all that gas go?

One certainty is that one to two billion cubic feet per day (1-2 bcf/d) of gas will be shipped via pipeline to Oman under an agreement reached in 2014.

That pipeline is already 80% complete.

Longer term Iran would be more likely to ship natural gas to Asia than Europe.

Already underway is a pipeline project to Pakistan where Iran has completed its part connected the South Pars field with the Pakistan border.

This pipeline could the easily be extended to energy hungry India which should have demand growth for decades to come.

Tehran could also restart work on Iran LNG, which was as shut down in 2012 after Western sanctions were tightened. LNG exports would allow Iran the freedom to pick where it wants to ship its natural gas at any point in time.   And as Mills points out, it takes a long time to build an LNG export terminal though, so that isn’t going to come on line any time soon.

EDITORS NOTE–Energy used to just be about oil and gas.  Now it’s about solar and wind and electric cars as well.  The entire US utility industry has to adapt to this–so they are creating The Smart Grid.  My first Smart Grid was PowerSecure (POWR-NASD) which was just bought out for a 50% gain in six months for OGIB subscribers.  Southern Company paid a 90% premium to the closing price.  I hope my second Smart Grid stock doesn’t get bought out for a quick 50% gain, because I think it has a long way to run…but it might…CLICK HERE to get my next Smart Grid stock before it’s gone.

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