Sunday, December 14, 2014

2015 Stock of the Year

IShares China large Cap ETF (FXI)

As I have done for the past seven years I am introducing my "stock of the year pick" for the upcoming year. The purpose of the stock of the year pick is to try and find a stock that has the possibility of doubling over the course of the following year. These picks are typically high risk/high reward selections and typically require a catalyst to get them moving. They are usually of a contrarian nature also which means that they are hated by the mainstream investment community and therefore are usually cheap and ignored. Unfortunately, for the last two years I have selected companies that have had bad news that killed their share price.

The 2014 stock of the year was Cub Energy. This is a company that drills for natural gas in Ukraine. Ukraine has exceptional pricing for natural gas due to its reliance on Russian imports ($11mcf vs. sub $4 in the US). The government in Ukraine was encouraging foreign companies to drill and apply western techniques to develop Ukraine's resources. The company has assets in both eastern and western Ukraine. Cub was having success increasing production in an environment of high gas prices. Then of course hostilities broke out and Cub was not able to continue its activities in eastern Ukraine. The new government put a "temporary" high tax rate on all gas production in order to help pay for the war in the east. This was way too much bad news for a junior oil and gas company and the stock cratered.

There has been quite a bit of volatility in the junior resource market this year so I am going to venture away from it and use an ETF this year. I am also going to recommend China. This will strike some as a strange idea considering all the media attention on the slowing Chinese economy and the impending Chinese credit bubble implosion that will be caused by the falling Chinese real estate market. I know about all this news and the attention it has been given. However, the contrarian in me also knows that when everybody already knows all of this isn't it already priced into the market? Recent experience in both Japan and the US should also have instructed us that a country's stock market performance is not necessarily correlated with its economic performance.

The conditions that fueled the recent big gains in the US and Japanese stock markets, notably an easy central bank, are now manifesting themselves in China.

Analysts say that mainland sentiment, driven mostly by retail investors, is celebrating monetary easing policies, which are seen as providing more liquidity for the current rally and also relieving Chinese banks from having to recognise bad loans by making it cheaper for borrowers to roll over debt.

China’s central bank cut interest rates unexpectedly on Nov. 21, stepping up support for the economy as it confronts slowing economic growth and mounting bad debts. Sources involved in internal policy discussions have told Reuters the central bank is ready to loosen policy again.

I have no doubt that at some point the Chinese are going to have to take their medicine  but in the meantime they will do what other central bankers have done and that is print money. The interesting thing to note is that the Chinese market has basically not done anything for years (late 2009 to be exact) until recently breaking out to the upside. China is a cheap unloved under owned market breaking out to the upside after years of sideways action. Couple this with interest rate cuts from the Chinese central bank plus a 40% drop in oil prices (China is the second largest importer of oil). All this equals a setup for a nice bull market. I am trading this with a 25% stop loss.

The blog Short Side of Long had an interesting post on the fact that Chinese stocks have had several periods over the last two decades when stocks in China have doubled.

Consider the fact that Chinese equities have doubled (sometimes almost tripled) over a 12 month time frame, five times in the last 18 years. In basic English, Chinese stocks have gone through the roof every 3.6 years in the last two decades. Also notice how the 3 year performance has been just as bad as it was during late 1990s, before the last great bull market began.

What fascinates me is the fact that throughout 2013 and 2014, pessimism on Chinese economy kept getting worse (until recently) and yet every China Stock Index refused to make new lows. Therefore, if the technical breakout seen in Chart 1 holds and continues to push higher, there is no reason to doubt that China equities could be starting a new multi-year bull market.

Saturday, December 13, 2014

Altius Minerals reports earnings

Link to earnings report:

Here is a summary from Seeking Alpha. Do not worry about the loss it is just an accounting entry as the company has to adjust the carrying costs of its various investments.

There were no surprises in the financial results and investors need to make sure they read the numbers together with the accompanying press release as Altius' corporate structure requires it to deduct a loss on the value of the JV from the actual revenue. This might be confusing and give people the wrong thoughts and opinions about Altius.

This loss is not a cash loss. If and when the value of the the JV interests increase the company will be forced to show a huge profit but as with this loss it is just an accounting exercise. Everything is on track with the royalties and this is just an exercise in clipping coupons and waiting for this great management team to come up with another great deal.

Lower crude oil prices will boost India's economy

Link:

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The timing of this windfall could not have been better for India’s economy. A new government with a huge mandate is in office and business is on the cusp of an upturn. 

The most obvious positive fallout is on price rise. Wholesale inflation growth could slow by around 2 percentage points, Nomura estimates. Consumer prices will ease too, though to a much less extent, it says. The spare cash from fuel cost savings, howsoever small, should increase consumer discretionary spending. Higher consumption adds to corporate incomes. Abating input costs too will widen profit margins for businesses. As balance sheets start improving, companies will be better placed to start new projects or revive stalled ones, generate new jobs and growth. 

Just as for companies, the government will be able to mend its balance sheet. The fortuitous oil-price situation released substantial savings on the fuel subsidy bill, which Nomura estimates at 0.1 per cent of the GDP. This has made it possible for the Finance Ministry to increase excise duty rates for petrol and diesel for additional revenue of up to Rs 15,000 crore this year. 

This one of the reasons I am still bullish on India. This lower oil price window should also allow the new government to push through reforms to the economy that will have even more long lasting effects. 

US drilling rigs drop by most in 2 years

Link:

U.S. oil drillers idled the most rigs in almost two years as they face oil trading below $60 a barrel and escalating competition from suppliers abroad. 

Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, Houston-based field services company Baker Hughes Inc. (BHI) said on its website yesterday. 

Of course this is what is to be expected when the price of oil drops by $50 in a few months. The real trick is to know when the point of maximum pessimism is reached so that one can buy and ride the inevitable rally once all of this supply is killed off. I think that there will news about bankrupt oil companies and articles suggesting a permanent lower oil price. Currently there is still quite a bit opinion that these lower prices will reverse course soon and we will go back to $100 per barrel. I think it will take 18-24 months to really wring out all the optimists and then we will see oil prices go higher. Enjoy these lower prices while they last.

Good comment on Seeking Alpha:

 As defaults start happening in shale junk bonds - that market is going to dry up right quick - and the memory of the losses will linger - so that financing will continue to be tight even after oil prices rebound.

So that is my hypothesis for why we might well see a surprisingly steep falloff in shale oil production volumes and it wont rebound very quickly. Which could lead to sharply higher prices within a year - because excluding US shale oil, the rest of global production is flat to declining in most places, while demand grows at about 1mm bls/day every year. i looked at the EIA data on global consumption - in the past 30 years there was only one year in which global consumption declined year over year - in 2009. So consumption is remarkable stable and growing at a bit over 1% every year - through the 1987 crash, the 1990 slowdown, the 2002 dot-com crash etc.


Thursday, December 4, 2014

Low prices already killing US shale

Link:


Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October. 

The pullback was a "very quick response" to U.S. crude prices, which settled on Tuesday at $66.88 CLc1, said Allen Gilmer, chief executive officer of Drilling Info.

New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota's Bakken shale.

As I have said before when discussing commodities, the cure for high prices is high prices and the cure for low prices is low prices. This is a pretty big drop off but it will have to get quite a bit uglier before it gets better. Quite a few of the major operators lock in the price of the their production for up to a year in advance. Therefore they will receive prices in the $90 dollar range for up to a year before they are forced to really cut back drilling. However some will try and drill through this period as they gamble prices will not stay low for a long period of time. I believe that the Saudi's will keep the price low enough for long enough that we see major bankruptcies in the oil shale space such that people will think twice before getting back into the space. The bright spot is that it should create outstanding bargains in the oil space in 18-24 months.

Sunday, November 30, 2014

Further thoughts on oil price and sudden turn in my thought process

Reading back on the blog I was pretty high on oil producers over the last year. I changed my view late last week as I simply did not think that OPEC would meet and not announce a production cut. Having thought it all through since then it does make sense. OPEC, which is really Saudi Arabia, has been losing market share due to prices hovering around $100 per barrel for several years. This price signal combined with the shale oil revolution led to an explosion in US production. So much so that the Saudis were losing market share. They are taking the long view that some short term pain of lower prices, they still have the lowest production costs, will force out the highly indebted marginal producers in the US.  We have already seen some of this filtering through into the junk bonds of some leveraged shale oil producers.

To make matters more complicated, many of these energy companies are financing their operations by borrowing in the junk-bond market, which means borrowing rates are relatively high.
"As oil prices have fallen recently, so have prices of high-yield bonds" Charles Schwab's Collin Martin wrote in October. When bond prices fall, rates rise.

"Oil prices can have a broad impact on the high-yield bond market because energy corporations have been increasing their share of the high-yield bond market. Today, energy companies make up more than 15% of the Barclays U.S. Corporate High-Yield Bond Index. That's up from less than 5% of the index at the end of 2005—and the chart below shows that the share has been steadily increasing over the past decade."

This is going to get ugly for the oil producers and places like Texas that enjoyed the spillover the oil boom. When things turn down in an industry everything gets thrown out the window including producers that can make money at lower prices. At some point in the future after we see some high profile bankruptcies it will be time to come in and pick up the bargains that will exist. You will know when that time is when you see the media talking about a shale bust and an era of low prices. Another metric I will be following is the Baker Hughes weekly operating rigs report. The report shows both vertical and horizontal rigs currently operating in the US. It will be instructive to see how quickly the horizontal rig usage responds to the lower oil prices. In the meantime there are several inter-market trades that will benefit from lower oil prices. Airlines, trucking, air transport, India, and China have been and will continue to benefit from lower oil prices.

It may seem schizophrenic that I changed my mind so quickly but when confronted with new information it is important to act decisively to minimize losses. In a couple years I will move back into the oil market and pick up the pieces at fire sale prices.

Thursday, November 27, 2014

Recent OPEC meeting means pain for US shale players

Link:

OPEC's contentious decision to keep its production target, leaving the market with a supply glut, could trigger a wave of debt defaults by U.S. shale oil producers, warn analysts. 

The 12-member oil cartel on Thursday said it would stick to its output target of 30 million barrels a day, triggering a sharp decline in oil prices, with U.S. crude futures tumbling nearly $6 to $67.75 on Friday - the lowest since May 2010. 

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 "In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again," Fedun said, as quoted by Bloomberg. "The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish," he said.

OPEC (which really means Saudi Arabia) has decided that $100 oil is encouraging to much production growth and competition from US shale. The decision has been taken by OPEC to keep pumping cheap crude in the Middle East and see if the US shale players will break. OPEC is playing a game of chicken with the US shale producers. OPEC needs higher oil prices to pay for social programs. The problem for US shale producers is that they cannot make money and service the tremendous debt they have incurred at these lower prices. Something has to give and we know one thing oil prices will be going lower. I will be liquidating all oil company holdings and ride this out on the sidelines. The upshot is that lower oil prices will benefit my airline trade and will benefit my India trade. We should also see a stimulus for consumers in the US.

Because of these lower prices expect investment in shale oil to decline precipitously. That will provide a huge opportunity to buy the survivors in 12-18 months. Remember shale oil is a red queens race. The wells deplete very quickly (up to 90% in one year) and the operators need to drill more and more wells to increase production while making up for depletion. That is not going to happen and that is the bet the Saudis are making.

Thursday, November 20, 2014

Madalena Energy could double in the next year

Link:


Here are nineteen reasons why  Madalena Energy  is positioned for triple digit returns over the next 12 months:
  1. The probability of hitting a "home run" is high with a number of company making plays being drilled internationally in 2015 including the Loma Montosa oil resource play, Vaca Muerta shale, Agrio shale, and "Montney-like" liquids-rich Mulichinco.
  2. Madalena is self-funded with a solid production and cash flow stream to execute the company's strategic business plan.
  3. There is a massive upside potential with approximately 35 Billion barrels of oil equivalent (boe) of in-place resources across Madalena's unconventional shale positions, driven by the Vaca Muerta and Agrio shale plays. Argentina's two shale basins could end up being the most active outside of the United States, and could even be bigger than the Eagle Ford and Bakken.
  4. Argentina has an improving energy macro environment. 
  5. Madalena has prime Vaca Muerta shale acreage in the Neuquen basin. Madalena's Vaca Muerta shale exposure alone could prove to be worth between USD $600 million to over USD $1 billion based on the market valuation for acreage in the surrounding area.
  6. Madalena is also sitting on prime Agrio shale acreage in the heart of the oil fairway, which offsets a recent discovery by state run company YPF.
  7. Madalena has an estimated 2.9 billion barrels of oil equivalent (recoverable) assessed to its holdings in Argentina.
  8. Madalena's lesser known Puesto Morales field (100% WI), which will be drilled in 2015, could be another company maker via a scaleable horizontal resource play across an already delineated, large-in-place oil asset.
  9. The Sierras Blancas light oil exploitation continues to add production and Madalena has successfully drilled three wells on this play, with plans to drill a fourth before the end of the year.
  10. Madalena also recorded a recent Nordegg oil & gas discovery in Western Canada, adding a low cost horizontal play into the mix across 140+ net sections.
  11. There is a focused and experienced management team in place with a seasoned group of oil patch executives on Madalena's board of directors.
  12. Madalena has laid out an active drilling program through 2015 with an expected three to four drilling rigs to run at different times throughout the year.
  13. The company has lots of assets and multiple blocks with call options for value enhancement.
  14. There is a sustainable business plan allowing for unconventional shale delineation activities and high impact horizontal drilling.
  15. George Soros is making big bets on Argentina and the Vaca Muerta shale. If Soros is correct, Madalena is one of the best ways to gain leverage and torque to the Argentina energy sector.  
  16. Madalena has much bigger neighbors and could be a prime takeover target as the Argentina energy market picks up steam.
  17. Strong Financial Position. Madalena expects to end 2014 without any debt, and has sizeable positive working capital and cash in the bank.
  18. Company valuation is highly attractive at the current trading levels. Investors can get a bargain at the current $0.32/share level as the market is not pricing in high quality acreage positions, nor is pricing inthe company's prime unconventional shale assets or 100% controlled Puesto Morales horizontal resource play.
  19. Madalena's stock could double over the next 12 months. 


I am a big proponent of Madalena Energy as I believe the political environment in Argentina will change next year when the current President's term ends. The government recognizes the potential of this shale play and has already passed legislation that is favorable to oil and gas developers. I like Madalena as a speculative play and YPF as a long term investment.

Tuesday, November 18, 2014

Uranium up again this week

Link:


Uranium advanced to the highest weekly price in almost 22 months amid an increase in demand from power producers, according to Ux Consulting Co., a provider of research on the nuclear industry. 

Spot uranium climbed $2.25 to $44 a pound in the week ended Nov. 17, the Roswell, Georgia-based company said in an e-mailed note today. That’s the highest level since Jan. 28, 2013. The atomic fuel has increased 28 percent this year. 

Demand from utilities is driving prices higher after uranium entered a bull market in September amid a labor strike at Cameco Corp.’s McArthur River operation in Canada, the world’s biggest mine for the fuel. Kyushu Electric Power Co. this month received local approval for reactors at its Sendai power station to resume operations, clearing the way for the first nuclear plants in Japan to restart as soon as early 2015.

Uranium is still cheap compared to where it is going over the next few years.

Altius Minerals sees bonus from Virginia Mines holdings

This is another reason I like this stock. They have quite a few irons in the fire and you just need to be patient and let these deals and relationships that Altius management has developed pay off.

Link:

 Altius Minerals Corporation (“Altius”) reports that Virginia Mines Inc. (“Virginia”), of which Altius owns 2,692,249 shares (or approximately 8%), has entered into an Arrangement Agreement to combine with Osisko Gold Royalties Ltd. (“Osisko”). Based upon the relative closing prices of Virginia and Osisko at the time of the announcement the transaction values Virginia shares at $14.19 per share. Altius has entered into a support agreement with respect to the proposed transaction.

Altius has been a shareholder of Virginia for several years and is also an exploration partner of the company through two strategic Alliances in Labrador and Quebec. Altius wishes to express congratulations to Andre Gaumond and his team for negotiating an agreement that adds considerable strength, diversity and opportunity for all Virginia shareholders. We look forward to continuing to work together with the new combined company to generate exploration value through our successful exploration alliances.

So the price of Virginia Mines jumped 40% on the news that it is combining with Osisko to form one of the top gold royalty companies. Osisko also announced they are going to start paying a quarterly dividend of $.03 per share. Altius is in a good spot here as they can sell out their shares or just take shares in the new combined company and sit back and collect dividends. All for basically doing nothing except buying in the past at a good price. This is why I like this company and why I like royalties.