Byron King: Opportunities Across the Energy
Source: Brian Sylvester of
The Energy Report
When it comes to energy, Newsletter Editor Byron King likes to
keep his fingers in a lot of pies. He doesn't limit his coverage to
U.S. or even North American companies. He literally travels the
world to find unique investment opportunities for his loyal
subscribers. In this exclusive interview with
The Energy Report,
Byron discusses his recent trip to Serbia and some his favorite
The Energy Report:
Byron, you edit Agora Financial's
Energy and Scarcity
newsletters. What's the difference between those publications?
focuses on large-cap companies and
Energy and Scarcity
deals with smaller-cap companies. I cover energy investments in
both and, in particular, oil and gas, oil services, uranium,
geothermal and other energy cats and dogs. I get into oil sands in
Canada, shale gas in the U.S.-things like that.
You also write for
Whiskey and Gunpowder,
which goes out to a broad audience well after the information is
Energy and Scarcity.
In a recent issue, you reported that the Obama administration could
soon loosen the restrictions on offshore drilling in the Gulf of
) that were imposed after BP's Macondo accident. What are you
hearing on that now?
Well, I'm not hearing anything different. On one hand, you've got
Michael Bromwich-the new head of what was called the Mineral
Management Service, which is now the Bureau of Ocean Energy
Management. He's saying we will have deepwater drilling.
You hear these good things, but then you hear the government
wants to have more knowledgeable, independent regulators overseeing
offshore drilling. My question is: Who are these human beings? Only
a handful of people in this country are physically and
intellectually qualified for that job. I don't know who the
government will find or how quickly these people could be hired and
The current moratorium is supposed to expire Nov. 30, 2010-28
days after the election. A lot is going to happen between now and
the election and between the election and Nov. 30. Yes, the
moratorium may expire; but will the people overseeing these things
still be around to implement the changes?
The oil industry is desperately hopeful it can get back to
deepwater drilling. This is costing a lot of people a lot of money.
You've got rigs and rig crews that are idle. To the industry's
credit, it hasn't had mass layoffs because it might not get those
people back when they're needed. Only a handful of rigs has left
the GOM. It's a question of how long the oil industry can absorb
this hit. Every one of those idle rigs has probably 1,500 jobs
directly associated with it.
You recently interviewed
Chevron Corporation's (
Ali Moshiri, who's dealt with offshore drilling in his 30 or so
years with the company. He's dealt with wells much deeper than
Macondo. What did he have to say about offshore drilling in the
Ali is the head of Chevron's Latin America/Africa division, which
produces about 850,000 barrels of oil per day (bpd), or about 1% of
the world's daily oil output. That's a lot of responsibility.
As a deepwater developer, Chevron has a very large, very
aggressive offshore program. It drills a lot of wells that are
deeper than the Macondo. That well was in 5,000 feet of water;
Chevron's drilling wells in 10,000 feet of water. Macondo was not
at the limits of modern technology.
Mr. Moshiri said that if Chevron can get the U.S. regulatory
climate working, it has great hopes for continuing to drill
deepwater wells in the GOM. There are super huge oil fields out
there-that's where the big oil is. There's a lot of oil left to
find onshore, but finding any more Saudi Arabias or Kuwaits onshore
is going to be difficult.
The Brazilians have found the equivalent of Iraq off the coast
of Brazil. They're very humble about it, saying: "Yes, we found
15-20 billion barrels of reserves," or what have you. But, when you
talk to the people who really know, it's more like 5x-6x that
amount. They just don't want to talk about it for political
People in Brazil have visions of sugarplums in their heads and
have already spent the money they're not going to see. I mean, this
money isn't going to come in for 20-30 years, but it's already
spent if you talk to the Brazilian politicians.
Last time you talked with us, you mentioned some drilling suppliers
that have seen their share prices hit by the drilling moratorium.
What suppliers could benefit from a reverse on the moratorium?
When the moratorium kicked in, the oil service group declined
pretty much across the board because GOM deepwater drilling is a
big part of their business.
I've looked at a couple of companies that I think have great
fortunes in front of them.
Schlumberger Ltd. (
is always too expensive; that's because it's such a good company,
it never gets cheap. If Schlumberger ever gets cheap, buy your
shares when you can. Right now, I think Schlumberger is in that $50
range. It's a really nice play over the next 12-18 months. Oil is
under $75 a barrel; but if it goes to $85 or $90, that $60 share
could go to $90.
Another great company tainted by the BP blowout that will do
well in the future is
Halliburton Co. (
-a key player in deepwater around the world. It helped
drill the original Tupi offshore well in Brazil where 8 billion
barrels of oil were found. Halliburton supplied the equipment and
did the cementing job, as well.
But I live in Pennsylvania, where we talk about the development
of the Marcellus Shale. Some of the most difficult, most
complicated wells being drilled in the Marcellus are being drilled
by, or in cooperation with, Halliburton-its technology is critical
to future energy development.
Another large oil services company that I like is
Baker Hughes Inc. (
. The stock has been down; but they just hired a new CEO, so I
think we'll see more of an emphasis on the bottom line. It will
become more profitable and, as a result, Baker Hughes will see very
significant share-price appreciation over the next 12-18
You recently visited Serbia. When most people think about
hydroelectric power, they think of state-run utilities-not
necessarily investment opportunities. Yet that's precisely what you
saw on your recent visit to Serbia. Tell us about what you
I looked at a couple of different energy projects, one of which
represents one of the most important new hydropower developments in
Europe. Serbia is in the Balkans, a series of mountains. People
might not really have an appreciation for how much snowpack is
there in the winter. Serbia gets a lot of water, so it has pretty
In the days of communism in old Yugoslavia, the communists
wanted to dam up every river; but with limited resources, not
everything got built. When Yugoslavia fell apart in the 1980s, and
then during the wars of the 1990s, everything just stopped; the
region saw zero development for years.
Now comes along a very nimble Canadian company called
Reservoir Capital Corp. (TSX.V:REO)
, which managed to get into former Yugoslavia in the last few years
and pick up the concessions to build two low-head hydro dams on the
Lim River in southern Serbia-where the communists wanted to build
one of these giant dams. Today, you can't build a gigantic dam for
environmental reasons; but you can build two much smaller dams and
still capture a lot of potential power.
You're right; it's very uncommon to associate big hydro
developments with private capital. But Reservoir has a license and
solid support from the Serbian government and a lot of the
preliminary engineering work is already done. I visited the site.
There's a whole lot of water coming out of those mountains in the
middle of August, let alone when the rains come in September.
I suppose such a cash-strapped country doesn't have the money to
develop these resources, so they have to privatize them.
Yes, only in the last few years has Serbia made a comeback in terms
of rebuilding its economy. But where are you going to get the
capital to build a dam? A small company like Reservoir has been
able to get the concessions, do the engineering work and build good
relationships with the government and various communities around
Reservoir is now negotiating a power purchase agreement (
) with electric utilities in Italy, which is not far from Serbia.
There is electrical infrastructure there to wheel the power. Once
you get the PPA nailed down, that is a bankable document; you
borrow against it for the capital to build the dam.
Reservoir is also exploring for copper and gold, as well as
Now you're getting into the other side of Reservoir. I like it as
just a hydropower play, but this is the sweetener. It has also
gained control of numerous geothermal sites in Serbia, which I
visited. There's so much hot water bubbling out of the ground;
2,000 years ago, the Romans built a bath in one of those areas.
That's actually one of Reservoir's issues-the geothermal sites are
right on top of priceless archeological sites. But that part is
The company's got boiling water coming up to the surface and, in
other places, it has steam. Reservoir could do primary
geothermal-using just the steam-or it could use a binary system
wherein hot water is used to spin a turbine. The question is: Will
the company do it as Reservoir, or will it spin out the geothermal
assets into another play?
If that's not sweet enough, Reservoir has also gained control of
mining concessions next to one of the largest copper mines in
Europe-Bor in southeastern Serbia. It's been an open-pit copper
mine for probably a century. It is a gigantic mine that, quite
frankly, is an environmental mess. But the spoil pile from this
environmental mess contains higher-grade copper than is mined in
most of the rest of the world. The company also controls the mining
rights north and south of Bor and on strike. Reservoir's been
conducting an aggressive drilling program. I could literally put my
finger on the copper ore in the core they pulled it out of the
It's almost like Reservoir met with the government officials and
went on a one-stop shopping spree.
It was one-stop shopping. But I guess it's more like Reservoir was
nimble enough to get into the country when it started to form a new
government after the civil war. It's really quite a story. I don't
want people to be confused by the fact that it's a mining,
geothermal and hydropower play. Reservoir's a great company. If you
buy a share-in a year or 18 months, you could wind up with three
different shares of stock.
But did the Serbian government give too much away?
These are not sweetheart deals. I mean these deals have work
requirements; they have timetables. Fortunately for Reservoir, its
management is good enough to do all these things. They've hired
local people to do a lot of the work. I've met the company's
world-class geology team. These guys are really good and they know
their stuff. Reservoir employs geologists who have this classical,
old European-style training mixed with the ability to work with
modern technology. That's a rare combination.
You mentioned geothermal there. We recently
Edward Guinness of the Guinness Atkinson Alternative Energy Fund.
There are 30 companies in that fund but only two are geothermal
companies. He said the reason for that is because geothermals are
"lower-quality companies" that they might have concerns about, and
that the number of companies in the space has been trading at very,
very high multiples. Would you agree?
I wouldn't disagree with it. If you want to own a share of the
largest privately owned geothermal company in the world, you should
buy a share of Chevron because it produces more geothermal power
than anybody-and does it in Indonesia.
Not long ago, I asked the Chevron people why they weren't doing
geothermal in North America. In a very diplomatic way, they said
that in North America they would rather use their money to drill
oil wells. This is Chevron-a sophisticated, well-financed company;
and that's what they think when they look at North American
geothermal. Don't do it. Drill for oil instead. Of course, that's
I'm sure drilling for oil is more cost effective because they
already have oil infrastructure in place in America. The geothermal
companies still have to build it.
You have a couple of different things going on in North American
geothermal. You have a bunch of speculators who've gone around
Idaho and Nevada and eastern Oregon buying up the low-hanging fruit
in terms of controlling the leases. But they're grossly
undercapitalized and largely unable to develop those assets.
In public hands, you've got a number of smaller geothermal
companies with limited capital. What they're doing, they're doing
slowly. Their share prices tend to bounce around depending on which
newsletter writes a good article about them. It's a tough way to
make a living.
Now you're starting to see "rollups." You've got the
Magma Energy Corp. (TSX:MXY)
power play. You've got the
Ram Power Corp. (
play where management has started to bring some smaller companies
into the fold. Ram Power brought in Polaris Geothermal Inc., which
was working in Nicaragua. They brought in Western Geothermal
Partners LLC, which was working in the geysers of California and in
Chile. They're kind of cat-and-dog plays, but they're trying to
roll them up into a larger play. I think there is a good future for
geothermal in the U.S. electric mix. It's baseload power. There are
good tax benefits to it. Environmentally, it's a no-brainer because
there are no CO2 emissions.
I was talking to a guy who was drilling a geothermal well in
California's Napa Valley. He said: "I've drilled oil wells and I've
drilled geothermal wells. I'm using almost the same rig, the same
pipe and the same drill bit to drill a geothermal well in
California; but I've got people inviting me to their houses for
dinner, so I can tell them about this geothermal project. If I was
drilling an oil well, I'd have to have armed guards."
But you shouldn't dismiss Mr. Guinness' critique out of hand.
The geothermal sector does have a lot of lower-quality companies
that have traded, over the past couple of years, at multiples that
were simply too high.
Let's talk about uranium. John Rowe, CEO of
Exelon Corporation (
, which is the largest nuclear power producer in the U.S., recently
told Bloomberg that "as long as natural gas is anywhere near the
current price forecast, you can't economically build a merchant
nuclear power plant" in the U.S. Are low natural gas prices
inhibiting the price of uranium?
That's a good one. Well, considering how many plants Exelon owns,
I'm not about to tell the CEO he doesn't know what he's talking
about. But here's my view-we've heard a lot of really good news
about natural gas in the U.S., basically because of the shale gas
plays. Technology has unlocked literally hundreds of trillions of
cubic feet of new natural gas. People are talking about many
decades' worth of abundant, cheap natural gas-maybe a century or
more of supply.
My concern with that is the hype. I think the U.S. energy
economy has 10-15 really good years in front of it, based on shale
gas. Then I think we will have some serious gas issues facing us by
the year 2025, and certainly by 2030. When you look at permitting,
construction and operating cycles, 2030 is not that far away. The
people not building nuclear plants are going to be sorry in about
15-20 years when the natural gas situation tightens up in North
When you look at the rest of the world, there are lots of
nuclear reactors being built. China, Brazil, South Africa and some
parts of Europe are taking a hard look at nuclear power. That's
creating a buying opportunity for good uranium plays right now.
What are some of your favorites in that space?
My absolute immediate favorite play is
Uranium Energy Corp. (NYSE.A:UEC)
. That's because UEC has managed to resurrect the uranium-solution
mining industry in the great state of Texas. It's re-established
the uranium production industry that, literally, collapsed in a
matter of months back in the mid-1980s. Companies like Westinghouse
Electric Company LLC,
U.S. Steel Corp. (
and Union Carbide Corporation shutdown, took their exploration and
production materials and stuck them in warehouses.
UEC has put all that back together in the last couple of years,
starting with one major project southeast of San Antonio where UEC
will be producing uranium by about November. UEC is on the cusp of
having cash flow with a modern, environmentally responsible
uranium-mining program. I don't mean digging dirt-I'm talking about
leaching, which, basically, pumps hydrogen peroxide down one hole
to dissolve the uranium in the sands, and then pumps it up another.
There's a special resin that they use to remove the U3O8 and make
yellow cake. I've been there, seen the site and the holes in the
ground. I've seen the processing facility-it's all there. My most
exciting uranium play is UEC.
Maybe one more before we go?
Another exciting uranium play that I really like is
Manhattan Corporation Ltd. (
. The CEO, Allen Eggers, is the kind of guy you want to hang around
with because he started
Summit Resources Ltd. (ASX:SMM)
from nothing and wound up selling it for $1.2 billion to Paladin
Energy Ltd. He's a guy that knows how to take a dirt patch in the
middle of nowhere to a finished product that you can sell to a
Having done that once, he's decided to do it again. Manhattan
has the Double 8 uranium deposit, which is a development project.
The company's still drilling and scoping out the resource. It's in
a known uranium district-an old river basin filled with roll-front
uranium deposits. It's very much amenable to
leaching. I think that's going to turn into a good play for a
patient investor over, say, the next 24 months.
Do you have any final thoughts on the energy space?
The thing to keep in mind is not to be U.S.- or North-America
focused when it comes to energy because the rest of the world has
figured out it also needs energy. They are exploring. They are
drilling. They are developing. There are many companies in many
locales that are not U.S. names, but they are still doing great
things. You can buy some of them on the U.S. markets, while others
require you to go overseas. You have to keep looking. There are
lots of opportunities out there.
Look for Byron King's comments on precious metals and rare
The Gold Report
Byron King Plays Gold, Silver and REEs
Byron King writes for Agora Financial's
(a self-styled "independent investor's daily guide to gold,
commodities, profits and freedom"). Byron edits two
Energy & Scarcity Investor
He studied geology and graduated with honors from Harvard
University and also holds advanced degrees from the University of
Pittsburgh School of Law and the U.S. Naval War College. Earlier in
his career, Byron worked as a geologist for Gulf Oil in the
exploration and production division. He served for many years in
both the active and reserve components of the U.S. Navy. Byron
also, at a different time, practiced law, focusing on bankruptcy
and other contentious matters involving people and money. Byron has
written extensively about peak oil and world energy developments.
His expertise includes precious metals and alternative energy
sources, such as solar, wind and geothermal. Byron has also advised
the U.S. Department of Defense on national energy policy.
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1) Brian Sylvester of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Energy Report:
Reservoir Capital and Ram Power.
3) Byron King: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally
and/or my family am paid by the following companies mentioned in
this interview: None.
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