James West: The Revolution in Energy Investments
Source: Alan Trujillo for
The Energy Report
James West's Midas Letter, a fixture in the world of resource
stock investing for the last three years, is a well-known source
of precious metals investing ideas. In an exclusive interview
The Energy Report
, Writer Alan Trujillo talks with West about how he is
expanding his focus to include energy. West covers a wide range
of topics, from the shift in the traditional energy investment
paradigm to where investors can get a foothold in companies with
The Energy Report:
I understand the
has recently begun to focus on energy stocks in addition to
Yes, that's correct. We began covering energy stocks earlier this
year and now seek to provide a balance between mining and energy.
With the increasing shift away from conventional oil and gas
(O&G) sources, future energy will be derived as much from
mining various substances as it will from oil and gas.
And what does
see for the future of energy investors?
Well, first of all, energy investment can no longer be accurately
categorized as one asset class. Besides the traditional O&G
investments, we've now got energy metals, shale oil and gas,
heavy oil companies, new energy technologies and alternative
fuels as distinct categories that appeal to completely different
classes and categories of investors. So when you say, "What do we
see for the future of energy investors?," my first response is
Second, I think energy investment is undergoing a revolution,
in that with the momentum towards more ecologically acceptable
forms of energy generation, there is an equal rush to exploit
what's left of the dirtier fuels-coal especially-before the
regulatory willpower of world governments renders them
Third, the global economy is still very much a lame duck. So
investment and development of alternative fuels (algae,
bio-diesel, hydrogen, etc.) remains quite distant right now. They
are super-clean, yet it's very expensive to develop the
infrastructure for full commercialization that these require.
The upside to that situation is new technologies have the
opportunity to develop at the university level and displace
technologies that are also new, but have been rendered obsolete
by the rapidly evolving science surrounding various technologies.
For example, the great hope surrounding hydrogen fuel cells has
been displaced by rapidly advancing battery technology.
So these three major factors have caused a shift in the
traditional energy investment paradigm, and investors need to
change their thinking accordingly when it comes to each of the
various energy sub-sectors.
Why don't we start with oil and gas, and expand from there?
Okay. Well this week, we're seeing the price of crude hovering
around $100 a barrel, and there is no reason to expect that price
to go down in the immediate term. The reason for that is simple:
Oil is pretty much globally perceived as the most strategic
commodity on the globe in terms of security. And so we're now
locked into a pitched battle for control of the world's last
known remaining conventional oil fields, because they are the
easiest and least expensive to produce.
So the price is no longer affected merely by near-term supply
and demand, but also largely by a new dynamic that puts a premium
on larger, conventional oil fields close to and exploitable by
existing production and distribution infrastructure.
For investors, it's hard to find emerging (junior) companies
in this space with large potential upside, because in general,
the prime addresses where huge discoveries have been made are
quickly tied up by major exploration companies. The only option
for junior investors is in new jurisdictions like Colombia,
offshore West Africa and less stable regions of the Middle East.
Unlike mining, where a junior can usually quite easily stake good
ground at a low cost right next to a major mining company,
O&G majors price concessions out of the realm of possibility
for juniors, which are typically limited to capital projects with
an entry fee of less than $10 million initially.
After the major Brazilian discoveries of the last couple of
years, juniors that held ground even in onshore Brazil found that
the concession rates rose astronomically, and they could no
longer hang on to them. So opportunities for junior investors in
Brazilian oil don't exist anymore.
So is there anywhere junior investors can get a foothold in
companies with mega-discovery potential?
Oh yes, absolutely. . .there are always exceptions. One premium
opportunity that made an absolute fortune for
Xcite Energy Ltd. (TSX.V:XEL)
. Xcite management is all ex-
, with hands-on experience developing fields in the North Sea,
which is where Xcite's fields are. CEO Richard Smith was formerly
with Halliburton Group. So this team of well-seasoned oil and gas
production executives was able to acquire prime real estate in
the North Sea and with their depth of experience, were able to
establish and beat milestones very quickly. That stock took off
from just under a dollar in the summer of 2010, and now is
trading in the $5-$6 range. The company owns 100% of the Bentley
Block, where flow testing in December recently confirmed 2,000
barrels of oil per day (bopd).
So would you say that Xcite is still a buy?
Well, yes and no. It still has the potential for share price
appreciation, but there are better opportunities out there at
this point. Xcite will probably grow in share price more
incrementally in the near future. It was a win for our
subscribers, but we're looking at earlier-stage opportunities
with better upside potential at this point.
Well, I'm really liking what I see in
Brownstone Energy Inc. (TSX.V:BWN)
. I spent a full hour on the phone with President Jonathan
Schroeder back in December, and these guys have multiple
high-impact plays going on in a geologically diverse portfolio
that is truly impressive.
They've got a 25% working interest in the Canaguaro Block in
Colombia, and the operator of the project recently flow-tested
rates in excess of 3,900 bopd. They also have a 20% paying
interest to earn a 14% working interest in Block 36 of the Llanos
Basin. And they are shooting 3D seismic across that and Block 21,
which is a 50% paid interest to earn 35% working interest, and
Block 27, where they are earning a 34.25% working interest.
3D seismic routinely delivers a success rate of 80%-90% in
wells drilled to date, so that gives the company a lot of upside
just on its Colombian assets.
They also have 300,000 acres in the prolific Piceance/Uinta
Basins in Colorado and Utah, 253,000 acres in Rio Negro province
in Argentina, some prospective interests in Brazil, a 50%
interest in 300,000 hectares in the Quebec lowlands and 15%
participating interests in several offshore Israel O&G
So the company is really nicely diversified across
conventional O&G as well as shale oil and gas plays.
Colombia really seems to be quite the destination for oil and gas
plays at this point?
You bet. The country is coming out of almost 60 years of a
murderous war involving rebel guerilla groups and of course a
narcotics traffic trade that kept Colombia's resources largely
out of the realm of possible exploration. Now, with almost 10
years of relative security, the country is rushing to replace the
narcotics trafficking economy with a resource-based economy in
the interests of domestic security.
So Canadian resource entrepreneurs like Frank Giustra and
Sheldon Intwentash (Brownstone Energy CEO) have been able to
acquire high-potential assets on very attractive terms. Giustra's
PetroAmerica Oil Corp. (TSX:PTA)
is another case in point. We got into the stock very cheaply, and
probably sold it too early, even though it was a 100% win for
some of our subscribers.
I'd say there's a lot of upside potential in Petroamerica
again that wasn't there when we sold it. Since then they've
signed a definitive agreement with
Talisman Energy Inc. (
, a Canadian major producer, to acquire participating interests
in four exploration blocks in the Llanos Basin, which is the same
basin where Brownstone's assets just started pumping 3,900 bopd.
Petroamerica will earn 25%-50% working interest in these blocks
for US$18 million, which sounds like a lot, but is actually a
very good deal for Petroamerica.
Unlike Brownstone, Petroamerica's strategy is to focus
exclusively on the Llanos Basin in Colombia, which is a good
strategy too, considering the success that has been seen there
You mentioned you like the fact that Brownstone was diversified
into shale oil and gas plays. Shale oil is not something we've
heard much about in the last 10 years.
That's true, and that's because since the conception of shale
oils in the first part of the last decade, we knew they were
there, but we didn't really know how we could get at them. Now
hydraulic fracking has made these deposits accessible, and that
has had the effect of creating a new exploration rush into shale
O&G plays that are still more or less under the radar of the
average energy investor.
Fracking is basically delivering high-pressure fluids to
underground rocks that contain kerogen, which is contained in
fine-grained organic rich sedimentary rock, from which shale
O&G are extracted, so that the rock is fractured, allowing
the contained hydrocarbons to flow towards a gathering point in
the deposit deep underground.
With recent advances in this technology, combined with the
enhanced precision now available in horizontal drilling, these
previously inaccessible hydrocarbons have become very much
accessible. In fact, in the EIA's latest update, "U.S. Crude Oil,
Natural Gas, and Natural Gas Liquids Reserves," a summary of its
Annual Energy Outlook 2011, the agency reports U.S. natural gas
reserves, driven almost entirely by shale gas additions,
increased by 11% in 2009 to 284 trillion cubic feet (Tcf.) That's
the highest level since 1971. The EIA now projects technically
recoverable unproven shale reserves standing at around 827 Tcf.,
474 Tcf. above its 2009 projection- twice as much as previously
So that means shale O&G production may actually have the
effect of displacing conventional O&G production where shale
gas and oil production is cheaper.
So you have some promising companies in this sector?
Oh yes, definitely. One that we talked about in the September
when it was trading at $0.30 was
Realm Energy International Corp. (TSX:RLM)
, which has large landholdings in Poland. Realm has seen its
share price soar from that $0.30 to current levels of around
$1.43, which was a 400% win for our subscribers-and the company
is still in its early days.
They're sitting on a 2,500 sq. km. land position there, which
is huge, and obviously Realm itself isn't going to have the
access to capital necessary to develop anything that shapes up
there, but with the success recently of other companies operating
in the area, Realm's land position becomes more and more valuable
without their lifting a finger to do any exploration on their
own. It's the ultimate example of being in the right place at the
So there has been drilling success in these Polish shale gas
Sure there has. Lane Energy drilled Lebien LE1 in September, the
first of two wells that Lane is drilling in there, and reached in
record time, including coring operations of the target shales.
Drilling on the second well, Legowo LE1, began on August 27 and
operations are proceeding on schedule. And just last week,
LNG Energy Ltd. (TSX.V:LNG)
announced it had spudded its first shale gas exploration well. By
some geologist estimates, there may be as much as 100 billion
barrels of light oil in the Paris basin where Realm has
Where do you see Realm's share price going in the next few
Well, you know I'll get myself into trouble if I start pulling
numbers out of thin air. . .I'm not the Federal Reserve after
all. But let's just say that if Conoco Phillips and Talisman
Energy, both of whom have major exploration budgets on European
shale oil plays in 2011, see anything approaching large-scale
success, the sky is the limit for Realm, just because everybody
is going to be fighting over the company's assets. They're almost
better off not doing any of their own exploration and just
waiting for their more powerful neighbors to prove the concept
So Europe is the center of shale oil and gas exploration activity
Oh no, I wouldn't say that. . .not by a long shot. Europe is
seeing aggressive exploration because there are serious issues in
terms of energy security for Eastern Europe, thanks to Russia's
control over the majority of heating energy and the
transportation pipelines that currently have the area over a
barrel when it comes to pricing and delivery. If those area could
be brought onstream relatively quickly, that will have the
benefit of significantly kneecapping Russia's highly abusive
stranglehold on the region. So there is a real drive to get those
assets producing sooner rather than later.
But exploration is considerably more advanced, and the fields
more accessible in areas like the Quebec lowlands, and the Bakken
Formation in northwestern United States/southwestern Canada.
One of the companies we really like there that has been a
Primary Petroleum (TSX.V:PIE)
. I think Primary Petroleum is shaping up to be a takeout target
long before tenbagger status is ever achieved. They're becoming
too important a player in the Montana extension of the Bakken
Formation, which is seeing an awful lot of well development
attention from some 50,000 bopd players in Alberta and south of
the border. In total, there are four companies that have drilled
a total of 20 wells on either side of the border, though no flow
rates have yet been published. Strong flow tests from any of
these will likely make Primary's share price respond
Okay, so what about the "energy metals" group you mentioned
Well, the number-one energy metal, in terms of consumption and
value going forward, is uranium. If the Chinese raging bull can
stay on its feet for another decade, Chinese consumption of
uranium will drive prices significantly higher.
What companies do you like in this space?
Well, at the top of my list is
Uranium One Inc. (
, which just announced last week record production and sales for
the fourth quarter of 2010. They produced over 2.1 million pounds
(Mlbs.) of uranium, a 75% increase over the same quarter in 2009,
which is really impressive.
As a producer, and industry consolidator, the company has
demonstrated an aggressive growth strategy that I think will make
it a takeout target sometime in the next year, if not sooner.
What about junior companies?
There are a handful of Canadian juniors that I think have a great
future- especially if the anticipated demand from China
Athabasca Uranium Inc. (TSX.V:UAX)
would appear to have a great portfolio of projects on the
southeastern margin of the Athabasca Basin in Saskatchewan, which
is really the premier address in the world for an exploration
junior. They have 100% interest in 24,000 hectares there and a
50% interest in a 7,500 hectare piece adjoining
Denison Mines Corp.'s (TSX:DML; NYSE.A:DNN)
JNR Resources Inc.'s (TSX.V:JNN)
South Cigar Project.
Another Canadian junior that I've liked for a long time, and
which was formerly a client of a related company, is
Strateco Resources Inc. (TSX:RSC)
. The company has raised a pile of dough (over $13 million last
year alone) to put its 100%-owned, 60 Mlb. Matoush project into
production. Strateco is essentially the most advanced uranium
deposit in Canada that is not yet a mine. A lot of people are
completely obsessed with
Hathor Exploration Ltd. (TSX.V:HAT)
, which is a great company as well, but I think there's a lot
more near-term potential in terms of share price appreciation in
Now what about some of the other energy metals. What about
lithium, for example, or rare earths?
Rare earths prices have been going through the roof, and the
bottom-line effect is that resource company executives are
scrambling to transform their companies into rare earths deals.
There's a lot of "me too" going on, where the "wannabes" are
doing everything under the sun they can to look just like the
"gonnabes," who are the real players in the rare earths
It's largely rare earths prices-particularly for lanthanum and
cerium, which are used in fluid catalytic cracking units (FCCUs)-
that have driven up the price of gasoline. Prices for these two
rare earths have tripled just between the second and third
quarters of 2010. It's only going to get worse. So there's a real
boom on the horizon for rare earths explorers that can credibly
identify potentially economic deposits.
One of my favorites is
Hudson Resources Inc. (TSX.V:HUD)
, which started off as a diamond exploration company, but in the
process of exploring for diamonds, stumbled across a significant
rare earths deposit in Greenland. In the last 18 months, Hudson
has defined a pretty substantial resource at its 100%-controlled
Sarfartoq Rare Earth Element deposit there, having identified 40
million kilograms of neodymium oxide, for example, and the
deposit is still open along strike and down dip.
As far as lithium is concerned, I like
Lithium One Inc. (TSX.V:LI)
, because they have a strong management team and two really great
projects. Their flagship, the Sal de Vida Lithium project in
Argentina, is in one of the richest commercial lithium-producing
regions of the world, where 16% of the global supply currently
comes from. They've got a world-class exploration team, and with
many of the same players who got Uranium One off the ground, you
can pretty much count on the same outcome for Lithium One.
Thanks very much for your time James. Illuminating as ever.
, James West has devoted over 20 years to helping small
companies in the resource sector-helping them raise money,
further their projects, build their identities and get their
stories in front of investors on the lookout for quality
investments with excellent returns.
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1) Alan Trujillo conducted this interview. He personally and/or
his family 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: Primary, Strateco and Lithium One.
3) James West: I personally and/or my family own shares of the
following companies mentioned in this interview: PetroAmerica,
Brownstone, Hudson and Primary. I personally and/or my family am
paid by the following companies mentioned in this interview:
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