Tap Energy Profits with Undervalued Producers: Chen
Source: George S. Mack of
The Energy Report
The idea of finding an undervalued stock is enticing, but how
can investors distinguish between an international value tap and
a bottomless money trap? Private investor and newsletter writer
Chen Lin combs every continent to find junior exploration and
production companies whose balance sheets outshine low stock
valuations. In this exclusive interview with
The Energy Report
, Lin shares some lesser-known names that offer major profit
The Energy Report:
Chen, you follow world events very closely. Do events in Europe,
especially Greece, have any effect on any of your decisions to
buy or sell?
Yes, but I look more at the fundamentals. Greece is on the edge
of bankruptcy, but I think the market is well prepared for that.
I'm looking more at whether there's a major impact to the
How would it affect the way you trade?
If we have another round of a huge deleveraging, I think I will
be more conservative in general. I've become very aggressive in
my investing since the beginning of the year because the European
Central Bank (ECB) did another round of money printing and
low-interest loaning to all the banks for three years. That
dramatically expanded balance sheets, just like quantitative
easing (QE) did in the U.S.
You have had stellar returns in your portfolios. You grew $5,411
as of Dec. 31, 2002, to $1,383,041 by Dec. 31, 2011, but your
portfolios were down 11% in 2011. What were the issues that
resulted in that downturn?
In 2008 I had a down year by a similar amount. I usually invest
mostly long in the market, and I like to invest in undervalued
stocks. Sometimes if they are extremely undervalued, I overweight
them. So that tends to concentrate those stocks. When the market
is down and investors don't recognize the value, my stocks can be
dragged down along with the overall market. Considering how tough
the market was in 2011, I think I did relatively well in the
period. I'm up quite significantly since the beginning of this
year. People were seeking refuge in U.S. Treasury bonds, and now
are suddenly starting to put money back to work. There has been a
huge run-up of commodities and commodity-related stocks.
At the end of 2011, you said that energy stocks were on a
year-end clearance sale. After some price appreciation, are they
still on clearance?
A lot of the stocks I own have already appreciated dramatically
since the beginning of the year, some even close to 100%.
However, because they went down very hard last year and people
panicked and sold everything they could to raise cash, I think
there are still a lot of extremely undervalued energy stocks
right now. Historically, if you compare the risk-reward, they're
still extremely undervalued. So I'm still overweighting energy
versus precious metals.
Are you currently trading out of equities that have greatly
appreciated since the beginning of 2012?
No, I am not. Well, some stocks I have, but mostly I've stayed
with what I'm holding. I believe this rally still has legs. My
largest position is
Mart Resources Inc. (MMT:TSX.V)
, and my second largest is
Pan Orient Energy Corp. (POE:TSX.V)
. Although I've been mentioning them in my newsletter for quite
some time, I am still holding and riding those two stocks. I
believe they are still very much undervalued.
You've written that you're expecting some big news from Mart
I'm hoping the company can deliver a dividend. Its cash has been
increasing dramatically in the past few months. It's going after
light sweet oil in Nigeria and selling it at a premium to Brent
crude, so the company has a lot of free cash flow. The money is
just piling up on its balance sheet, and I expect that to
continue for the rest of the year. It's pretty amazing that only
two years ago the company was close to bankruptcy. Since then, it
has just changed dramatically, and I don't think it is
appreciated by the market. I'm still very optimistic about the
company and holding my position.
Mart Resources has given back about 6% over the past month. Is
this a buying opportunity?
I think so. If you compare the valuation of Mart to other
companies in the space, seldom do you see a company trading
potentially at one or two times this year's cash flow.
Potentially, it could more than double its cash flow next year
because it is finding more and more oil. Every well has been
great in the past two years. That's very unusual for a junior
company. In addition, its wells have no decline. That's something
that amazes me because if you look at nearly all energy
companies, you're looking at very sharp declines in the first
three to six months.
Is there no sign at all of depletion? This huge oil field just
continues to keep producing?
That's the thing. My guess is that it is sitting on a huge oil
pool that's interconnected and extends over a very big range.
Once it pumps oil out, still more oil flows to the area, and so
there's no decline. This type of well is very hard to find on
earth except in Saudi Arabia and a few other countries.
So, Mart is producing oil that gives the company a marketing
advantage because light-sweet refinement is low cost and
therefore commands a premium price to Brent crude. Plus,
depletion is not notable yet. What am I missing? I'm sure the
picture can't be this bright.
Exactly. Well, the issue is Nigeria. It is a country where there
are frequent protests and attacks on the pipelines. But those
conflicts are mostly in the north, whereas Mart operates in the
south, near the coast. So it's pretty far away from the major
violence. There is still tremendous opportunity and tremendous
cash flow for this company. I think this will be the year when
people see a dramatic rise in cash on its balance sheet and
hopefully, with all that cash, it can pay dividends and bring in
more rigs. It will build a pipeline and do everything organically
without coming back to the market. That's the beauty of this.
A year ago you said you expected investors to begin accumulating
shares in Pan Orient based on anticipated production from its big
land position in Indonesia. You were correct. Shares are up more
than 60% over the past three months. How much more growth can we
Pan Orient has a slightly different thesis than Mart Resources
because there is some exploration/discovery risk. It is drilling
wells, potentially very big wells, but I don't know if the wells
will be successful. With Mart, there is much more certainty.
However, though there is risk for Pan Orient, it is a very
experienced oil exploration company, and it's been in Thailand
for five years, drilling and fine tuning its technology.
I shared with my subscribers a report that estimates each of
the three Pan Orient wells in Indonesia is worth about $3 of net
asset value (
)/share if successful in the first half of 2012 and $2 for each
of the other three wells in the second half of 2012. In addition,
Pan Orient also has an oil sands property in Canada that it wants
to sell. The company has $1/share cash on the balance sheet and
cash flow over $1/share right now, and this is in addition to the
oil sands property that it has for sale. Thailand is ramping up
production and Indonesia has the big wildcat wells at work. So in
terms of risk-reward, it's an ideal situation. I wouldn't be
surprised to see the stock be a ten-bagger by the end of this
year. The company could be a $1 billion (
) company. It was a $2 stock when I recommended it in my
newsletter. Right now it's $3 and change. With some success in
drilling in Indonesia, I'm looking for a ten-bagger. Seldom do
you have those in one year, so I have pretty high hopes on the
What other companies do you like?
This year, I have put a new fracking company in my newsletter,
New Zealand Energy Corp. (NZ:TSX.V;
. It has done very well so far. The stock has really exploded,
and some of this excitement is about the company getting ready to
explore for shale oil in New Zealand. The company has a big land
package, and I think Apache is going to start drilling in April
not far from their huge land package, and so we may see some
results in H212. In the mean time, the company has drilled a nice
conventional well, which has 500 barrels per day on restricted
flow. It is drilling the second well and planning the third. The
success of the current drilling program can move the stock as
I still have
Porto Energy Corp. (PEC:TSX.V)
on my list. It was one of my biggest losers last year. You win
some and lose some. The stock has been down to about $0.11
recently, but I'm seeing significant insider purchases. The
company has about $10 million (
) in working capital, but it doesn't intend to use all the money
to drill the well on its own and then have to come back to the
market to raise money at this depressed level. Instead, it is
looking to do a joint venture (JV). So basically it would like
its partner to pick up the costs and risk. I just spoke with the
company, and management is still optimistic about getting a JV
deal very soon. Porto is unique in that it has a huge land
package in Portugal of over 1M acres on trend with the North
You've said that the Portuguese government wanted to do anything
it could to help Porto, and so it's disappointing to see that the
stock has been so weak. What is the government doing to help the
I think the government is making it easier to get permits. Porto
has drilled three dry holes. It hasn't found any major oil yet,
and that was its big downfall last year. I was told last year
that if it found oil it would be easier to work with the
government to bring the oil into production.
Portugal is trying to do everything it can to avoid the fate
of Greece, and so an oil discovery would be very significant.
Porto is being run by very experienced oil guys, and most of them
Devon Energy Corp.'s (DVN:NYSE)
international division. In fact, Joe Ash was running the
International division, but he left a comfortable, high-paying
job to run Porto because he believes in the potential. You can
see from insider trading reports that he has recently purchased
more shares with his own money. So that tells you the people
still believe in the whole thesis of finding massive amounts of
oil in Portugal.
At this low $25M market cap, it seems like Ash with a few other
people could easily buy this company and take it private.
Yes. But when the stock went down, the company adopted a poison
pill. I think it's afraid of a hostile takeover. Taking it
private is possible.
You mentioned New Zealand Energy. Its shares, as you indicated,
have gone to the races. The company is up well over 100% over the
past three months. That's a lot of conviction.
I believe there is the potential of doing fracking on this
Bakken-like land. There will be some development later this year,
and that's actually driving the stock price. This stock is still
Are there other companies you like?
There are quite a few still that I like.
PetroBakken Energy Ltd. (PBN:TSX)
has been a big winner for me. It was paying a 10% dividend when I
picked it up, but it's up almost 70% since then, and now it is
paying a 6-7% dividend. The key is that if you compare the
company with other North American-based fracking companies in
Bakken plays, it's still relatively cheap. I think it could
potentially have more upside, but the easy money has been made
with this stock.
I am also holding
Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX;
Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK;
. Both stocks are rising this year. I like Prophecy Coal as it is
getting close to a contract with Mongolia's government. That will
lead to financing and construction of the power plant. Prophecy
Platinum should have its preliminary economic assessment very
soon, so investors can get a peek of the project's huge
Most of your stocks are microcap companies. I find it interesting
that you own Petrobakken, which has such a large market cap at
As far as market cap, it's one of the largest I own now, but it
had been hit very hard, and thankfully I was able to pick it up
when it was quite depressed.
What about another company that you like?
Another company I like, which still hasn't appreciated much, is
Harvest Natural Resources (HNR:NYSE)
. This company has had bad luck like Porto. It drilled three dry
holes in a row, and the stock is still very close to its 52-week
low. The main attraction is that it has a big oil field in
Venezuela. If you are looking at normal valuations, and if it's
not in Venezuela but rather a country friendlier to the U.S.,
then the company is probably worth at least $20/share. The stock
is trading at $6-7. Venezuela is going to have an election this
year in the fall, and Hugo Chavez will be seeking his third term.
With all the things happening around the world, like the Arab
Spring, I wouldn't be surprised if Venezuela has some major
changes this year. If that's the case, this stock can have a huge
Harvest Natural just hit another dry hole, but clearly the dry
holes don't make you as nervous as the Venezuelan government, is
If it gets a hit in Indonesia that would be great. But this
company already has a huge oil field in Venezuela that is
self-funding. It doesn't need to put money in. It was hoping to
get money out as dividends for shareholders, but so far it has
been having trouble getting any money out because of the
government. But this could change overnight if the government has
a change of regime.
What other companies did you want to mention to us today?
Another company is
TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ)
, which I own. It is operating mostly in Egypt and Yemen. If you
compare the company, cash-flow wise it is very, very cheap. Due
to political problems, the company has mostly stopped production
in Yemen. If it can start flowing again in the country, that
would be another big catalyst. I like the stock, and I own the
stock and options.
What effect has the Arab Spring in Yemen had on TransGlobe's
business? Its shares have been above water for the last six
The Arab Spring in Yemen actually depressed the stock. It used to
produce from Yemen but because of violence, it stopped producing
there. Any peaceful resolutions and new production would be a big
Any other positions you could talk about briefly?
I also have two companies in the North Sea. Both did very well.
Ithaca Energy Inc. (IAE:TSX)
. It just went up 40-50% because of a potential takeover. Another
Iona Energy Inc. (INA:TSX.V)
, which was funded by the founder of Ithaca Energy. Both of these
have done very well.
Do you have any new positions?
I recently purchased
Coastal Energy Co. (CEN:TSX.V)
, operating in offshore Thailand. It has been growing its
production quite dramatically in the past year, and it continues
Coastal is another larger name with a $2B market cap. But just
the opposite is
Groundstar Resources Ltd. (GSA:TSX.V)
, which you owned last year.
Yes. Groundstar was one of the worst stock picks I had last year.
It drilled a well in Iraq and one in Egypt, and every well it
drilled turned out to be a dry hole. So I had to cut my losses
and get out of the stock when I saw it was raising money and
diluting shareholders at a very low share price. The stock would
have probably had a difficult time rebounding.
It is so nice speaking with you again, Chen. Thank you for your
I enjoyed it. Thank you.
writes the popular stock newsletter
What Is Chen Buying? What Is Chen Selling?,
published and distributed by Taylor Hard Money Advisors, Inc.
While a doctoral candidate in aeronautical engineering at
Princeton, Lin found his investment strategies were so profitable
that he put his Ph.D. on the back burner. He employs a
value-oriented approach and often demonstrates excellent market
timing due to his exceptional technical analysis.
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1) George S. Mack 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
The Energy Report:
Mart Resources Inc., New Zealand Energy Corp., Prophecy Coal
Corp., Prophesy Platinum Corp., Iona Energy Inc. and TransGlobe
Energy Corp. Streetwise Reports does not accept stock in exchange
3) Chen Lin: I personally and/or my family own shares of the
following companies mentioned in this interview: Mart Resources
Inc., Pan Orient Energy Corp., New Zealand Energy Corp., Porto
Energy Corp., Devon Energy Corp., Petrobakken Energy Ltd.,
Prophecy Coal, Prophecy Platinum, Harvest Natural Resources Inc.,
TransGlobe Energy Corp., Ithaca Energy Inc., Coastal Energy Co.
and Groundstar Resources Ltd. 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.
I was not paid by Streetwise for this interview.
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