Frank Curzio may focus on small-cap companies, but the
Penny Stock Specialist
editor understands the importance of a big-picture view when it
comes to investments of any size. In this exclusive interview
The Energy Report,
Frank presents some promising oil, natural gas and coal stocks
with caveat emptor-"volatile markets demand extra attention."
The Energy Report:
Frank, as editor of
Penny Stock Specialist,
you cover a number of stocks trading under $10. But you recently
wrote a report on
Exxon Mobil Corp. (
and its competitors for
Growth Stock Wire.
So, tell us what you specialize in.
I specialize in small-cap stocks, but it's very important to look
at the big picture-the macro view-to get a good read on smaller
companies. For example, most analysts are now lowering estimates on
Exxon due to lower natural gas prices following its recent
XTO Energy Inc. (NYSE:XTO)
. We have an enormous amount of natural gas in the U.S.-enough to
supply consumers for more than 100 years. And producers continue to
drill. Just knowing that information through looking at some
larger-cap companies makes me a little nervous recommending
smaller-cap natural gas companies. As for Exxon, it's trading over
10 times next year's earnings-a little more than 2% yield. I'd
Chevron Corporation (
. They trade at a lower multiple, pay a higher yield and, actually,
are growing faster than Exxon.
Speaking of Chevron, its margins are pretty substantial with oil
around $80/barrel. It's going to use some money to buy back shares
starting in the fourth quarter. Chevron's one of a number of
companies that has announced stock-repurchase programs in recent
months. Do these buyback programs form an investment thesis among
Not for all oil companies. Exxon buys stock back every single
quarter. In fact, it bought back $8 billion worth when the stock
traded at $95, which was its all-time high in 2008. Some companies
announce buybacks and don't follow through on them. Companies also
use those buybacks to enhance earnings. For example, Exxon's
buybacks last quarter was one reason the company beat analysts'
estimates. Chevron is announcing a new buyback. So, I think that's
a good thing. I think management has this one right and I think
Chevron's cheap. Hopefully, management will buy some of that stock
down at these levels.
However, I'd rather see oil companies use cash to raise their
dividends, especially if I'm a shareholder because that's what The
Street is craving. That's why Microsoft jumped on rumors about its
special dividend. The market's really craving yields right now.
Instead of buybacks, which can be announced and take place anytime
over a two-year span-and sometimes just expire-I'd rather see
companies increase the dividend. That has an immediate impact on
the stock. As a shareholder, you'll probably see a lot of those
energy companies go higher if they raise dividends.
Are there some names out there that recently upped their dividends
that you believe are better buys as a result?
They're not necessarily better buys. I think the valuations will
stay the same but interest rates are very low right now. It's very
difficult to find yield. For retiring people, it's one of the most
difficult environments ever. I'm more of a younger guy, so it
doesn't really hurt me as much. So, from a stock point of view,
it's not necessarily that the fundamentals are going to be that
much better; but I think the multiples will go higher. And they'll
deserve that higher multiple because there's a lot of
cash-particularly in the bond market right now that wants to come
into the stock market.
You're going to see dividend yields rise and money will flow
into some of these stocks. Again, Microsoft is a good example. A
lot of the staples continue to raise their dividends even though
their margins aren't as high. You see them raise those dividends,
and money is flowing into these stocks. So, from a valuation
standpoint, it's not so much that investors are saying: "Hey, I
want to invest in that." But you're going to see the stock move
higher because people are just craving yields and they're willing
to pay up for those yields.
Are there some oil and gas (O&G) names that have started a
dividend or upped dividends?
Other than Chevron, we've seen a lot of large-cap oil companies buy
back stock for a while now. But you're going to see that from a lot
of the large caps. The mid caps are really focused on growth, so
they're putting their money into more exploration. So, from a
large-cap perspective, it's Chevron, Conoco and Exxon; but again,
Exxon's been doing this for a while. And I really wouldn't use that
as an indicator to buy Exxon.
Oil's down to $80/barrel today, and $80 oil isn't overly flashy. It
is, however, providing healthy margins for low-cost producers and
relatively good margins even for mid- to high-cost producers. What
sort of general oil investing advice are you giving your readers
Oil provided healthy margins at more than $80/barrel; we'll see if
it can resume-and maintain-those levels after China's interest-rate
hike yesterday. Again, it's a question of how long we can stay the
re. Fundamentally, we're seeing drawdowns in inventory based on the
latest data. That's a positive. And strong manufacturing data from
the U.S. and China-the two biggest oil-consuming nations-is another
High oil prices don't matter if the dollar rises. The USD has
been collapsing from quantitative easing 2 (QE2). I think the
government's going to come in with more, which is why we were
seeing a real surge in commodities. But the USD gained on China's
rate move, so we're now seeing an oil price pullback off prior
eight-week highs. Investors should definitely pay attention to the
So, you're saying a high dollar means higher costs.
No, not higher costs. A higher dollar is not good for commodities
in terms of price movement. When the dollar rebounds, you see
commodities come down, as we've just seen with China's rate hike.
Prior to that, commodities were on fire with gold reaching new
all-time highs repeatedly over the course of a few weeks, silver
hitting a 30-year high and copper really surging. You saw that push
oil higher, too. It had really moved up over the last several weeks
before China upped interest rates, which drove oil prices down 2%
yesterday. So, again, I'd definitely pay attention to the
Can you give us a few exploration and production (E&P) names
you're following in
Penny Stock Specialist
Sure. One company,
Magellan Petroleum Corp. (
, is a small oil and gas play with a market cap of about $100
), $33M and no debt. It's nice to see a micro-cap O&G company
that has very little debt and a lot of cash.
Bill Hastings is the CEO. He took the job in 2008 and, since
then, the stock's been on fire. Bill is a 30-year veteran of the
industry who's led oil teams of more than 1,000 people. He can work
anywhere he wants and make a ton of money. But he decided to become
CEO of this tiny oil company. When I met him at a meeting, I asked
him why, because I'm familiar with this company. My late dad
followed the company for about 20 years as a portfolio manager. His
name was also Frank Curzio. He was on CNBC and quoted often in
major financial newspapers. When I asked Bill why he took the
company over, he said his dream was to start an oil company from
the bottom and build it up into a mid-cap company. It's something I
love to hear, because he wasn't just there for the money-he was
there for the long term.
As soon as Bill became CEO, he decided to sell non-core assets
and put his cash to work buying properties in Montana and the
Bakken Shale. Magellan also signed an agreement with the largest
methanol producer in the world-
Methanex Corp. (NASDAQ:MEOH; TSX:MX;
-to operate an Australian plant to supply China with methanol. So,
it's a long-term plan that won't materialize for another two to
four years. But I really like the direction in which the company is
going. From a fundamental point of view, I believe Magellan is
worth more than $4 based on its assets, cash on hand and gas sold
to its customers. I would buy it under $2/share; today it's trading
In your newsletter, you likened Bill Hastings taking this position
to that of the Yankees' starting shortstop going into the
Yes. Though I've been familiar with Magellan for a long time, it
really had been off my radar up until the point I saw Bill come to
the company. So, I did a little research and discovered the guy had
been in the business for 30 years. When you're in the oil business
for 30 years, you can work behind a desk for any oil major you want
and make a high, six-figure salary. This guy is getting his hands
dirty again going with this small cap. He's a humble guy, a good
CEO and he reports news whether it's good or bad. I love that. We
have clarity on the company, something we didn't have in the
What's the catalyst for growth?
I base its catalyst for growth on the simple fact that it's the
Bakken Shale-one of the large shale areas. A lot of the large caps
are getting in. Longer term, Magellan plans on selling to China,
which is a huge market for methanol. And the plant's Australian
location provides a direct route to China, which is great.
What other E&Ps do you like?
SandRidge Energy, Inc. (
, which has been all over the place, just announced a takeover that
pushed the stock down a lot; but the stock's come roaring back. I
believe it was trading at $35/share not long ago, and it went all
the way down to $4. Now, it's about up to $6. It's a great play due
Arena Resources Inc. (NYSE:ARD)
takeover, which will provide two revenue streams from natural gas
and oil. And its high debt position won't be a concern going
forward. I like the company and think it can turn around. SandRidge
reminds me of
Ashland Inc. (
, a chemical company that really got beat up in late 2008. It went
from $50/share to $7, and then $6 after announcing a major
acquisition. We were able to pick it up when it went all the way
down to $5. It was risky at the time but had no short-term debt
concerns. Once the synergies of this deal are realized, the stock
is going to take off. Today it's $50.
Something you do that many analysts are hesitant about is cover
companies that operate in China, some of which list in the U.S. but
are primarily China-based. How do you determine which of these
companies to write about?
I just came back from a 10-day trip to China in August where I
visited all the usual places-Hong Kong, Shanghai and Beijing; but I
wanted to get a better picture of China, so I visited Shenzhen and
Xian. I can tell you firsthand that the growth there is absolutely
phenomenal. Wages are rising and jobs aren't leaving China-they're
moving inland. That's creating a rising middle class and a huge
wave of construction wherein builders work around the clock. So, I
think you should have exposure to that economy.
In terms of finding stocks there, you really have to be careful
in the small-cap space. China is a conservative nation that's not
nearly as leveraged as the U.S. So you're going to see strong
balance sheets for most of these companies. But I want to see
strong growth on both the top and bottom line. Where possible, I
want to see the insider buying that reduces downside risk (if key
insiders are buying at current levels). I also look for experienced
management-that's where I start. China is a much different economy;
it's kind of like the U.S. in the '40s and '50s.
But are you looking for a certain multiple threshold? Are you
looking for cash flow?
Well, you're going to see strong cash flow and fundamentals. Many
Chinese companies have these qualities. But I think you have to
look a little deeper to ascertain where else the company has
exposure. You have to look at what's driving its growth (e.g.,
stock price moves over the prior 12 months) to see where it went
down. You're not going to see charts that go straight up over those
12 months. Small caps, particularly, are all over the place. If you
see the stock rise or fall 20%, find out why. Is it because of
earnings? If it is, you can go back to the earnings conference call
on the company's website to identify what investors want to see in
With Chinese companies, you really have to go that extra mile.
You can access free conference call transcripts on Reuters and
other sites. But you really have to do a little bit more digging;
the fundamentals are positive, so you need to make sure they're as
accurate as possible. Hopefully, you can find a company that is
audited by one of the Big 4 firms. Some are; some aren't. Those are
the steps I take to determine if a company's share price can go a
What about oil versus gas in China? Natural gas prices are
certainly higher there. But there's not enough to go around, so
it's importing liquefied natural gas (
). Is that a game changer for Chinese and American O&G
It does change the game a little bit. I would go into the natural
gas sector in China quicker than I would here in the U.S. because
we have a ton of supply. But I really look at fundamentals.
What are some Chinese companies that you like?
One company I really like is called
Puda Coal Inc. (
. China uses massive amounts of coal; in fact, coal provides more
than 70% of China's energy needs. I'm sure many of your readers
know that about China, but what they don't know is that China sees
more mining deaths than any other place in the world. Most of these
deaths come from small mines operated by underground millionaires
who don't bother with safety inspections.
The government is cracking down on these small coal mines by
forcing sales of their mines to larger players. The government
calls these companies "consolidators," of which Puda Coal is one.
It's able to buy these mines at $0.30 on the dollar. Earnings from
these mines won't hit Puda's bottom line for another six to nine
months. In the meantime, Puda's normal coal-washing operations are
on fire. The company beat its last-quarter earnings by about 50%.
And, over the last 12 months, Puda was able to generate $260M in
sales from its coal-washing business alone. Going forward, half of
its revenues will come from coal mining-which provides much, much
higher profit margins. Puda Coal is an incredible, under-the-radar
play; and I think its earnings will more than double once mining
operations are up and running next year.
That's fantastic. What about some other Chinese plays?
One company I like is
Fuel Tech, Inc. (
, which makes fuel technology to reduce emissions in its coal-fired
plants. The company has small operations in China that are
expanding rapidly. Its earnings last quarter were very strong; Fuel
Tech is a great company, and it's been doing quite well lately.
Do you have some parting thoughts on the oil and gas sector in
I mentioned a lot of companies today. Investors just need to be
patient with entry points. When the S&P 500 goes down 6% in
August and up 8%-9% in September, you're going to see massive
fluctuations no matter what a stock's fundamentals look like. So,
if you're going to buy a lot of these stocks, definitely use stop
losses and be patient on your entries. You might not see wide
fluctuations in the large-cap space, but small caps could see
15%-20% price movements over the next 12 to 18 months. Be patient,
and scale into these positions.
Frank Curzio is the editor of
Penny Stock Specialist
-an investment advisory that focuses on stocks trading under
$10-and its exclusive
Phase 1 Investor
advisory. With more than 15 years of investing experience,
Frank is the latest addition to the Stansberry and Associates
Before joining Stansberry, Frank wrote a newsletter on
under-$10 stocks for The Street. He's also been a guest on various
programs, including Fox Business News and CNBC's
The Kudlow Report
and is a featured guest on CNN Radio. He's also been quoted in
financial publications-both online and off-and has enjoyed numerous
mentions on Jim Cramer's Mad Money. Frank's "S&A Investor
Radio" is one of the most widely followed financial broadcasts in
the country, and his investment strategies-value, growth, top-down
and technical analysis-have regularly produced 200%-500% winners
for his subscribers over the past 15 years.
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1) Brian Sylvester of
The Energy Report
conducted this interview. He personally and/or his family own
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3) Frank Curzio: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally
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