Chen Lin: Capitalize on Oil Stock Fluctuations
Source: George Mack of
The Energy Report
: DEVON ENERGY GROUNDSTAR RESOURCES LTD. HARVEST NATURAL
RESOURCES LEADER ENERGY SERVICES LTD.
MART RESOURCES INC.
PAN ORIENT ENERGY CORP. PORTO ENERGY CORP. PROPHECY
RESOURCE CORP. VAALCO ENERGY INC. VAST EXPLORATION INC.
The Energy Report:
You spoke to
The Energy Report
approximately three months ago. We've been experiencing
some weakness in natural resources since then. How has your
performed since that time?
It's doing relatively OK. It's down slightly, but not much.
In the past few months, I've been telling my subscribers to be
careful, to raise some cash and to be prepared and to buy on a
dip. In the past couple of weeks, I have started to deploy some
capital into buying those cheap, undervalued stocks. So far I've
been doing OK, down slightly, I would say a few percent.
Have these buys on dips been additions to existing
positions? Or are these new stocks?
Some of these stocks were already in my portfolio and some
are new positions. I also want to say that I have sold some at a
profit, including some of the stocks mentioned in my last
The Energy Report.
You've told me that you focus on resources because the
entire sector is under-researched, and you can find undiscovered
jewels. How do you find an orphan stock? Do you discover these
companies at conferences, seminars? What is the process?
I find some companies at conferences. Some are already
known and they come here to have private meetings, at which time
I'm able to talk to the management. Also, I receive
recommendations from people I know and trust who have already
done some screening. So I can take a look see if a company's
Typically, people won't be talking to you about companies
that they might buy next week or the week after. They're talking
to you about companies they already own. You have to make a
judgment at that point on whether or not you're throwing good
money after bad, or whether it's truly a great growth or value
opportunity. Don't you?
Yes, absolutely. I should also add that some companies
actually have business relationships with some of my friends who
may already own the stock. So, they have some personal incentive
to promote the company. But that's fine. I only look at the
valuation. When they bring companies to my attention, I do the
research, and elect not to buy most of them. Many stocks have
been thrown to me, but I only pick a few that I believe are the
There is so much risk involved in a company that is not
under the microscope. So much can fly under the radar. How much
diligence do you do? How long does it take before you enter a
position in a company that you've never known before?
Usually it takes some time. Sometimes it takes days.
Sometimes it takes weeks. Sometimes it takes months and then
years. If I find a company of interest, I'm going to look at the
back history. When did it do a private placement? When does a
share become a free trade (expiration of lockup period)? Is it a
flow-through share, or is it a regular share? Who are the
shareholders? I want to see when it might be most likely that
people will be selling the stock.
So even if I like a particular stock now, I might put it on my
calendar to look at it six months from now. Perhaps at that time
those private placements will be finished selling shares, and it
could be a better time to enter the stock. So to answer your
question, it really depends.
So you want to see how much selling there is after a lockup
Exactly. As I told my subscribers, one stock I was recently
buying is a flow through, and it will expire. You buy a little
bit, and then when it drops, you buy more. When the stock dropped
30% in a couple of weeks, we bought more. Now it's up 30%. If you
followed those steps, you could have 30% gains in a week or
You probably find it to be a good sign if insider ownership
is increased from quarter to quarter.
Absolutely. We're in a period in which some energy stocks
were hit really hard. And when an insider buys from the open
market, that's a very good sign.
Out of the entire resource sector, in which industries are
you currently overweight, and in which are you underweight?
I'm currently overweighting energy because usually summer
is a very good season for energy stocks. There are going to be
heat waves and rolling blackouts, and oil demand is very
Do you currently prefer oil to gas?
Oh yes, I'm heavily in favor of oil. I would not want to
look at a company producing gas in North America unless it's an
extremely compelling situation. Gas is very, very cheap here in
the United States. If you calculate the gas-to-oil equivalent,
the gas price is $25-$30/bbl right now, while WTI oil is
$100/bbl. So, basically, if you use gas to run your car, it's
about $1 per gallon gasoline equivalent.
The United States is the world's largest oil consumer, and it
should be a no-brainer to switch to natural gas. In fact, most of
the natural gas here is produced in North America, while oil is
produced around the world, and by a lot of countries that are
enemies of the United States. Even in China, where the price of
imported natural gas is very high, people are still switching
from gasoline to natural gas.
It's very easy to switch. You just need to convert your
engine, and it's a very simple conversion. But it takes
government will to do that because you need to build natural gas
fueling stations nationwide. Once those are built, people will
enjoy $1 per gallon natural gas that is sourced in North America.
I do not understand why the government is not going for that.
Government is run by a lot of supposedly intelligent people. One
day they will wake up and say we should use natural gas, and so
I'm very bullish on natural gas for the long run.
During the month of May, Brent crude tested $110/bbl on the
downside three times. It looks like a perfect triple bottom, and
now oil has bounced. Was that what we needed for oil to continue
its bull market?
Goldman said before that it was bearish on oil, and that
pushed oil down. Now Goldman is bullish on oil, and it goes up. I
think maybe we're in a trading range for the near future. But my
energy companies are making extremely good cash flows at the
current price. I'd like the price to go lower.
Although I invest in energy companies, I wish oil would go
down to $80-$90/bbl. My oil companies are low-cost producers, and
they can still make a lot of money at $80-$90/bbl. They don't
really need $110/bbl to make extra profits. So I actually hope
energy prices will come down further, but I'm not counting on
that. As for the technical side, $110/bbl seems to be the support
What companies are you favoring right now?
My current biggest position is
Mart Resources Inc. (TSX.V:MMT)
. It's a light sweet oil producer in Nigeria. The company has
been ramping up production very nicely; current production is
probably three times last year's rate, and going higher. Well
drilling continues, and production just keeps growing. The stock
is trading at 1X pretax cash flow right now, and if production
continues to progress, it will be trading below 1X cash flow. We
know that most of the energy companies are trading at least 3-5X
cash flow. Because it's a Nigerian company, you have to give it a
little discount, but it's still extremely undervalued.
You say it's undervalued, but its share price performance
has been stronger than most of its peers over the last year.
Yes. I think that's partly because it has such a strong
cash flow supporting its stock. This company is generating
$15-$20 million per month in pretax cash flow right now, and the
market cap is only $200M; that's a really compelling valuation,
and I believe the stock will go much higher. [Editor's note:
After the interview, Mart Resources published a new
stating that they were generating $13.5 million in monthly
after-tax cash flow and around $20 million pretax.]
I'm noting that Mart's share of the Umusadege oil field
play during Q410 produced 104,000 bbl of oil, compared to 317,000
bbl of oil in Q409. What happened there?
There was a problem with a pipeline. What I heard was that
the pipeline owner fired the security staff, and then there was
some trouble and a significant pipeline disruption in Q410. But
right now, everything has quieted down, and there has been almost
no disruption since the beginning of the year.
I also noted that the company announced that the total
gross proved reserves in that field increased 56% year over year,
to 9.6 MMbbl of oil on December 31, 2010, compared to 6.1 MMbbl
at the previous year-end. Is that where you're hanging your
Yes, but I think that's just part of the picture. As the
company continues to drill and develop, I believe that the net
present value will continue to increase. So far, every well
drilled has been a success. So the number will be much higher by
the end of this year.
You're still very high on Mart Resources even though it's
up 153% over the past year, right?
Yes, that's correct.
Another company is
Porto Energy Corp. (TSX.V:PEC)
. It's a new addition to my newsletter. It owns almost 100% of a
big land package in Portugal, but the area has not had any modern
exploration yet, and so it's a virgin play. There are top-notch
people on board from
Devon Energy Corp. (
, including Joe Ash, who ran the Devon International division,
and that was a $10 billion business. He left to run the Porto
Energy startup, and it already has a natural gas
I want to add that the natural gas price in Europe is much
higher than in the United States. Porto has a natural gas
discovery with a much higher value than the current stock price;
also, there are going to be some very exciting oil wells drilled.
You can look at Porto's recent
to see how big it's aiming. This is an elephant, and so the
upside is very big.
Chen, I noted that Porto raised $70 million with its IPO
back on March 28th. Did you buy in at the IPO, or after the
Oh, I didn't participate in the IPO. I already participated
in the placement earlier, about two years ago. But I bought from
the open market recently, when the price dropped below the
You said it was a virgin play. Will that $70 million take
it to production?
It will take the gas into production. My understanding is
that Porto will start producing the gas already discovered in the
first half of next year. The good thing about these small
companies is that if they drill a well, and it's successful, they
can start pumping oil and then truck it out. There are two
refineries in Portugal, and both are importing oil. So I think
they'll probably be more than happy to replace that with domestic
oil, and as soon as the oil flow starts, cash flow will
Will the gas production fund operations for oil?
The $70 million will fund the drilling campaign this year
and next; next year, the plan is to start selling gas. Joe Ash
told me that if oil is found, it's very unlikely that Porto will
be an independent company a year from now.
You have been watching insider ownership.
Yes. There are three insider purchase companies I've been
watching. One is
Groundstar Resources Ltd. (TSX.V:GSA)
; I mentioned it last time I spoke with you. There has been
insider buying, and recently the stock started to rebound.
There's one play in Kurdistan, one in South America and one in
Egypt. The good thing is that Groundstar is not paying for the
drilling, except in Kurdistan. All the others are currently in
There are two other companies. One is
Harvest Natural Resources Inc. (
. It's pretty significant that one company vice-president spent a
half million dollars to buy on the open market. This company has
properties in Indonesia, in Africa (offshore) and in Venezuela.
There's an African well being drilled right now, in Gabon. I
didn't mention the company last time because it had a little too
much debt on its balance sheet. But since then, it has sold its
U.S. property for $4-$5/share cash, and the company today has a
very clean balance sheet.
After paying down debt and all the other improvements, HNR
probably has $3 or $4/share in cash, and this is a $12 stock. The
Venezuela property is fully funded and paying dividends, and
there is no need for funding. So it's a very good value
proposition, and the company is for sale. Management wants to
maximize shareholder value. Then you can see the VP put a lot of
money into this.
OK, you said there was another insider play?
Yes, another one with a pretty large insider purchase is
actually a coal company called
Prophecy Resource Corp. (TSX.V:PCY)
. The CEO has been buying the stock with significant amounts of
money recently. Also, other members of management have been
buying over the longer term. This company is starting two coal
mines in Mongolia. One is already started, and one is in the
process of getting the final permit. As we've seen, the price of
coal has been rising dramatically. This summer, China is going to
be experiencing the worst rolling blackouts in history. So I
think there will be a lot of demand from China for its major
power source: coal. The future looks very bright for coal. The
insider purchases make Prophecy Resource look really good.
Your three insider plays, Groundstar, Harvest Natural
Resource and Prophecy, are very interesting stories. What else
did you want to mention?
Last time, I mentioned a few stocks I'm still
Vaalco Energy Inc. (
Pan Orient Energy Corp. (TSX.V:POE)
Vast Exploration Inc. (TSX.V:VST)
. VAALCO and Pan Orient both have some very significant drilling
results coming in the next 6 to 12 months.
You've sold your
Leader Energy Services Ltd. (TSX.V:LEA)
That's correct, yes. Leader Energy went up a lot, and I had
a pretty good profit so I decided to take the profit on that. I
was pretty lucky because I sold it when it was quite high-much
higher than the current price.
Leader is up 300% over the past 52 weeks.
I just wanted to say QE2 (Quantitative Easing 2) is
finishing at the end of June. The market could be volatile this
summer, so it's always nice to have some dry powder. That's
pretty much my message right now.
Thank you, Chen.
writes the popular stock newsletter
What Is Chen Buying? What Is Chen Selling?,
published and distributed by Taylor Hard Money
Advisors, Inc., publisher of
J. Taylor's Gold, Energy & Technology
newsletter and Roger Wiegand's
Using his wife's Roth IRA account, Lin invested $5,411
in December 2002, and by December 31, 2010 it was worth
$1,188,993-with no cash added. You can see his portfolio
A doctoral candidate in aeronautical engineering at
Princeton, Chen found his investment strategies were so
profitable that he put his Ph.D. on the back burner. Chen worked
in the Internet and computer area where he founded a few start-up
companies. After the tech bubble burst of 2000, Chen was able to
move his technology portfolio into the resource sector with
considerable success. Chen employs a value-oriented approach and
often demonstrates excellent market timing due to his exceptional
technical analysis. To subscribe to Lin's
What Is Chen Buying? What Is Chen Selling?
, or call Claudio Bassi at (718) 457-1426.
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family own the
following companies mentioned in this interview: None.
2) The following companies mentioned are sponsors of
The Energy Report:
3) Chen Lin: I personally and/or my family own shares of the
following companies mentioned in this interview: All stocks
mentioned. I personally and/or my family am paid by the following
companies mentioned in this interview: In early 2010, when Porto
Energy was a private company, Chen Lin received shares from the
company to introduce it to hedge funds.
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