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 potential.
you look at nearly
all energy companies, you're looking at very sharp declines in the first
three to six months.
TER: Is there no sign at all of depletion? This huge oil field just
continues to keep producing?
CL: 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
TER: 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.
CL: 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.
TER: 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 expect?
CL: 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 (NAV)/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 (B) 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 stock.
TER: What other companies do you like?
CL: This year, I have put a new fracking
company in my newsletter, New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX). 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 well.
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 (M) 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 Sea.
TER: 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 company?
CL: 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 came from 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.
TER: At this low $25M market cap, it seems like Ash with a few other
people could easily buy this company and take it private.
CL: 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
TER: 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.
CL: 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 very undervalued.
TER: Are there other companies you like?
CL: 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; 1P2:FSE) and
Prophecy Platinum Corp.
(NKL:TSX.V; PNIKD:OTCPK; P94P:FSE). 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 potential.
TER: Most of your stocks are microcap companies. I find it interesting
that you own Petrobakken, which has such a large
market cap at $2.8B.
CL: 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
TER: What about another company that you like?
CL: 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
TER: Harvest Natural just hit another dry hole, but clearly the dry
holes don't make you as nervous as the Venezuelan government, is that right?
CL: 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.
TER: What other companies did you want to mention to us today?
CL: 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.
TER: What effect has the Arab Spring in Yemen had on TransGlobe's business? Its shares have been above water
for the last six months.
CL: 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 plus.
TER: Any other positions you could talk about briefly?
CL: I also have two companies in the North Sea. Both did very well.
One is Ithaca Energy Inc. (IAE:TSX). It just went up 40–50%
because of a potential takeover. Another is a Iona Energy
Inc. (INA:TSX.V), which was
funded by the founder of Ithaca Energy. Both of these have done very well.
TER: Do you have any new positions?
CL: 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 to grow.
TER: 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.
CL: 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.
TER: It is so nice speaking with you again, Chen. Thank you for your
CL: 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: None.
2) The following companies mentioned in the interview are sponsors of 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 for services.
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.