Casey Research Summit Special Report Part II: Drilling Down
into Oil & Gas Prices
Source: Karen Roche and JT Long of
The Energy Report
(5/10/12)
http://www.theenergyreport.com/pub/na/13325
The private panel that began with three key speakers at the
April 27-29 Casey Research Recovery Reality Check
Summit
continues with a second installment in today's
Energy Report
. This exclusive features
Casey Energy Opportunities
Senior Editor Marin Katusa, Global Resource Investments Founder
and Chairman Rick Rule and Casey Research Senior Editor Louis
James, turning their attention to oil and natural gas prices and
opportunities in equities.
The Energy Report:
Since we last talked in November, oil went from $90-110 per
barrel (bbl). Has it established a floor that will stick? Or, as
Porter Stansberry predicted during the summit, is it getting
ready to crash? He said that the same sort of technology that
brought on the glut of natural gas will lead to an abundance of
oil that will depress prices.
Marin Katusa:
Porter was basing his comments on the success of shale gas in
North America, and with that you have natural gas liquids and
some oil. In North America, gas became a victim of its own
success, worsened by a warmer-than-expected winter. But
understand that gas, in general, has very localized markets.
When it comes to the oil sector, people think
Exxon Mobil Corp. (XOM:NYSE)
,
Royal Dutch Shell Plc (RDS.A:NYSE;
RDS.B:NYSE)
and
ConocoPhillips (COP:NYSE)
are the biggest players. The big players are actually the
national oil companies (NOCs)-Saudi Aramco, Petróleos Mexicanos
(Pemex) and Petróleos de Venezuela, which are not reinvesting in
operations and exploration. Their production is decreasing as a
result. Cantarell, in Mexico, is one of the greatest oilfields in
the world, but it's decreasing by 3.5% every year. The NOCs are
distributing profits to fund massive social programs. For
instance, more than 55% of Venezuela profits from oil-funded
social programs.
"The reasons North American natural gas dipped under $2/Mcf
don't apply globally. India and Japan are signing $14-15+/Mcf.
It's twice that in Europe. North America is a unique case."
-Marin Katusa
By the way, America imports more than a million barrels of
Venezuelan oil each day and pays a premium over what it pays for
domestic oil. But that's another story.
I don't necessarily agree that the same reasons North American
natural gas went under $2 per thousand cubic feet ($2/Mcf) would
apply globally. India and Japan are signing $14-15+/Mcf. It's
twice that in Europe. North America is a unique case; the rest of
the world is nowhere near that when it comes to shale
exploration.
TER:
Will that change when the U.S. starts exporting in 2015 or
so?
MK:
I think 2015 is a very aggressive timeline. Eventually, the
market will fix itself. But to say that oil will go to $40/bbl by
Christmas? I wouldn't take that bet. That said, for two years
we've been using $60/bbl oil for our equations. We publish the
best netbacks in the business every quarter. So if a company can
make money at $65/bbl oil, it will make a lot of money at
$105/bbl oil. But if you invest in companies that need $90/bbl
oil to break even, you're not going to do so well.
TER:
You said the market will fix itself. Will oil go down to, say,
that $60/bbl you've been using?
MK:
Buyers are not paying producers $103-105/bbl. Because of the
massive differential for selling less, the Canadian oil sands
producers are selling as low as $63/bbl. In the Bakken, they're
selling for $72/bbl. So it finds its equilibrium. In the Canadian
oil sands, existing production can be profitable at $60/bbl,
which we've been saying for a couple of years. New production, if
it's open pit, it needs $90/bbl oil to be economic due to the
massive inflation in equipment, trucks, tires and skilled
workers.
TER:
Why do we quote oil at $105/bbl if it costs $63-72/bbl?
MK:
A lot of people think that
Suncor Energy Inc. (SU:TSX; SU:NYSE)
or any given oil producer is making $105/bbl for oil, but
companies are selling their product for $63/bbl. It depends on
the differential and Suncor's selling price versus the West Texas
Intermediate (
WTI
) crude oil price, which is the posted price. Gas producers in
Edmonton are getting much lower prices than what's quoted in the
Henry Hub. The oil price in North America or the Brent price
isn't necessarily the same price a company is selling its oil
for.
Rick Rule:
It's pretty complex. What people think of as the posted crude oil
price comes from either WTI or Brent. That used to be the way the
world worked, but we have localized differentials now. One of the
differentials that Marin was speaking about is the differential
between light sweet crude and heavy crude. And the differentials
widen and tighten depending on a variety of factors.
For example, production efficiency in Venezuela, the
traditional source of Gulf Coast sour crudes, is a factor.
Transportation and infrastructure bottlenecks are factors. We're
now to the point where a critical pipeline that once transported
crude from the Gulf Coast to the U.S. Midwest has been reversed
because of production declines in Mexico and Venezuela, which in
turn encourages U.S. Gulf Coast refiners to take heavy crude out
of Canada.
All of this is what creates localized markets in oil. The
international light sweet crude markets are very stout. Nigerian
bonny crude and Brent crude's international trade is marked by
tightness as a consequence of declining supplies in traditional
frontier market exporters, such as Nigeria as well as Venezuela
and Mexico.
The North American domestic market is ironically awash in oil
as a consequence of three factors: The high price of gasoline has
begun to destroy demand along with the weak economy. The
incredible de-bottlenecking that's gone on in the Athabasca tar
sands has doubled tar sands production in four years. And the
conjunction of technologies that Marin was talking about has
produced a flood of shale oil, particularly in the Bakken.
TER:
But when the gas at the pump is up, the excuse retailers give is
that WTI is at $105/bbl. That's the logic presented to
consumers.
RR:
I can't speak to other parts of the country, but being an oil
producer myself and a gasoline consumer, I'm certainly familiar
with the California gasoline market. California municipalities
constrain the construction of gas stations, so there are fewer
and fewer outlets. Some communities that were really tough on how
many gas stations they would permit have prices $0.25-0.30 per
gallon higher than nearby communities that were more
generous.
"What people think of as the posted crude oil price comes
from either WTI or Brent. That used to be the way the world
worked, but we have localized differentials now. . .that widen
and tighten depending on a variety of factors." -Rick Rule
On top of that, all the margins for producers, refiners and
distributors that are built into the price of gasoline go to the
government in the form of taxes. California is a high-cost
refining environment, with high taxes and constrained
competition. Gasoline demand in the U.S. has grown 1.2-1.3%,
compounded for 29 years, and the United States hasn't permitted a
new refinery for 29 years. Of course, it's possible that new
refineries would not have been built regardless, because refinery
and marketing margins are so lousy. But that's the picture.
MK:
Also, the older refineries need more downtime for maintenance.
All these things factor into the equation, and that's why you
have high prices at the pump. In Canada, more than 50% of the
price is taxes. Major global production is coming from these
NOCs, which I call the New Seven Sisters.*
Look at the coming nationalization of resources. Look at
what's happened in Argentina. The private companies, the Exxons
of the world, risk their capital and their shareholders' capital.
When they have success, the country nationalizes these resources.
So there's another factor to take into account if you want to
understand how tight the oil markets really are.
*[Before the rise of the OPEC cartel and NOCs, the original
Seven Sisters included Anglo-Persian Oil Company (now BP), Gulf
Oil, Standard Oil of California (Socal), Texaco (now Chevron),
Royal Dutch Shell, Standard Oil of New Jersey (Esso) and
Standard Oil Company of New York (Socony) (now ExxonMobil). The
Seven Sisters dominated the global petroleum industry from the
mid-1940s to the 1970s, and up until the oil crisis of 1973,
they controlled about 85% of the world's petroleum reserves -
Editor.]
TER:
A number of analysts we've interviewed lately say the best bet
now is to invest in the service companies-the drillers, pipeline
builders and so forth. What's your take?
MK:
Part of our portfolio in
The Energy Letter
is geared toward service companies, and certainly
Kinder Morgan Energy Partners, L.P.
(KMP:NYSE)
, which is one of North America's largest pipeline transportation
and energy storage companies, has been very generous to our
portfolio. In five months, there's been over a 30% gain.
But if you're going to go into the service sector, you have to
be confident in a company's ability to cover its debt, because a
lot of these service companies took on massive debt during the
bull market and will blow up on it.
TER:
Looking for other potential investments, Louis, you said that the
secret is to figure out what "real stuff" people need, because it
will retain value. When prices on valuable stuff go down
ridiculously, it's a godsend, because you can buy when it's cheap
and sell when it's expensive. Is the stuff people need cheap
now?
Louis James:
"Stuff" is not really cheaper. There is deflation in some asset
classes and some equities, but life for the average Joe is not
cheaper and commodities in general are not cheaper. Oil is still
above $100/bbl. When commodities have not lost ground but the
equities have, that's an alligator-jaw pattern. I'm not speaking
as a technical analyst-that's just a metaphor. But it's actually
fantastic if you have high, driving prices in the commodities,
and you find good, cheap companies with good management, money in
the bank and the wherewithal to weather the storms.
I also think we'll see more volatility, and the chances of
seeing much lower prices are pretty good. When a bear sentiment
grabs the market, it takes everybody down, both the best and the
worst players. If you have the courage to face it, that's very
good news.
"There is deflation in some asset classes and equities, but
life for the average Joe is not cheaper. Commodities in general
are not cheaper." - Louis James
If you're new to the game, you can get fantastic buys on
things that others have identified as great plays, already worked
on and de-risked. If you're already long, it's a matter of
self-discipline, which few investors have. Most of them get
burned again and again. They buy high when everybody else is
buying. They feel confident. They jump in. Things turn against
them. The tide goes the other way. They get scared. Everybody
else gets scared at the same time and they get creamed. Investors
need self-discipline, belief in what they're doing and they need
to know why they're buying something to be able to happily take
those shares off weaker hands.
I think there's a good chance we'll see much more of that over
this summer and I'm looking forward to it. After the sector
bounced back from 2008, I wrote that we should be so lucky as to
have another one.
TER:
Speaking of lower equity prices, Marin, last fall you told us
that quantitative easing was deflating equity valuations. "He who
has cash will be king," you said, "because he can afford to buy
discounted stocks." Is that still the case? Or are we too
late?
MK:
I still believe we're in deflating equity prices. By mitigating
risk, being strategic and always taking Casey free rides, the
portfolios for 2011 for both the
Casey Energy Report
(CER) and
Casey Energy Confidential
(
CEC
) gained over 20%. And Q1/12 was over 20% for both newsletters,
too.
Throughout the year, a few of our buys had massive gains-like
Poseidon Concepts Corp. (
TSX
)
,
Tag Oil Ltd. (TAO:TSX.V)
and
Africa Oil Corp. (AOI:TSX.V)
. Did we sell too early? Yes. But so what? We reduced our risk.
We made money. We lived to see another day. And with one of them,
we now have a dividend for free and the company's growing.
So if you do your homework and buy good companies, you can do
well. I don't think you're too late at all.
Founder and chairman of
Global Resource Investments
and president of
Sprott Asset Management USA
,
Rick Rule
began his career in the securities business in 1974 and has
been principally involved in natural resource security
investments ever since. He is a leading American retail broker
and asset manager specializing in mining, energy, water
utilities, forest products and agriculture. Rule's company has
built a sterling reputation for its specialist expertise in
taking advantage of global opportunities in the resources
industries. In 2011, Rule closed a landmark deal with Eric
Sprott, founder of Sprott Inc., another famous powerhouse in
the arena. Sprott Inc. offers resource-oriented investors
opportunities in segregated managed accounts, mutual funds,
hedge funds and private partnerships. The collective
organization offers unparalleled expertise and access to
investment opportunities in all resource sectors. Sprott Inc.
manages a portfolio of small-cap resource investments worth
more than $8 billion and boasts a workforce of more than 130
professionals in Canada and the U.S.
Louis James
is chief metals and mining investment strategist at Casey
Research, where he is also the senior editor of
Casey International Speculator
, Casey Investment Alert
and
Conversations with Casey.
When not in meetings with mining company executives in
Vancouver, British Columbia, James regularly travels the world
evaluating highly prospective geological targets and visiting
explorers and producers, getting to know their management teams.
For more than 25 years, Casey Research, headed by investor and
best-selling author Doug Casey, has been helping self-directed
investors to earn returns through innovative investment research
designed to take advantage of market dislocations.
Investment Analyst
Marin Katusa
is the senior editor
of
Casey Energy Report
, Casey Energy Opportunities
and
Casey Energy Confidential.
He left a successful teaching career to pursue what has
proven an equally successful-and far more lucrative-career
analyzing and investing in junior resource companies. With a
stock pick record of 19 winners in a row-a 100% success rate last
year-Katusa's insightful research has made his subscribers a
great deal of money. Using his advanced mathematical skills, he
created a diagnostic resource market tool that analyzes and
compares hundreds of investment variables. Through his own
investments and his work with the Casey team, Katusa has
established a network of relationships with many of the key
players in the junior resource sector in Vancouver. In addition,
he is a member of the Vancouver Angel Forum, where he and his
colleagues evaluate early seed investment opportunities. Katusa
also manages a portfolio of international real estate
projects.
The 300+ investors who attended the three-day
Casey Research Recovery Reality Check Summit
discovered a multitude of natural resource investing strategies
during daily
Gold and Resource Stock Roundup
sessions. These sessions featured Rick, Marin, Louis and Jeff
Clark, senior precious metals analyst at Casey Research, who
together revealed their favorite natural resource stocks to
invest in now. You can hear all of their recommendations, as well
as every recorded summit presentation-over 20 hours in all-with
the
Casey Research Recovery Reality Check Summit Audio
Collection
.
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DISCLOSURE:
1) Karen Roche and JT Long of
The Energy Report
facilitated this panel discussion. They personally and/or their
families own shares of the following companies mentioned in this
interview: None.
2) The following companies mentioned in the interview are
sponsors of
The Energy Report:
Royal Dutch Shell Plc.
3) Rick Rule: I personally and/or my family own shares of the
following companies I mentioned in this interview: None. I
personally and/or my family am paid by the following companies I
mentioned in this interview: None.
4) Louis James: I personally and/or my family own shares of the
following companies I mentioned in this interview: None. I
personally and/or my family am paid by the following companies I
mentioned in this interview: None.
5) Marin Katusa: I personally and/or my family own shares of the
following companies I mentioned in this interview: None. I
personally and/or my family am paid by the following companies I
mentioned in this interview: None.
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