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Chen
Lin isn't one for doom-and-gloom prophecies, nor is he particularly
interested in energy-related political squabbles. As the title suggests, the publisher of What Is Chen Buying/Selling? is first and foremost a trader, and he's booked the
profits to prove it. In this exclusive interview with The Energy Report,
the ever practical Lin discusses where to look, when to buy and which names
will have him coming back for more later this year.
The Energy
Report: Chen, we last spoke in February. What's new in
energy markets since then?
Chen Lin: The
oil price has mildly declined since then, despite the war between Sudan and
newly independent South Sudan that interrupted the oil supplies. In general,
oil prices tend to go up during the spring and summer. This year, however,
the price is telling a different story. A lot of traders are trying to
front-run the trend, and recent problems from the E.U. are creating
volatility. Personally, I believe $70–80/barrel (bbl)
oil is fair. At this price, most producers are very profitable and gasoline
prices would be acceptable to most consumers. The high volatility of the oil
price created a lot of booms and busts in the industry. As a trader, however,
this created excellent opportunities to buy low and sell high.
TER:
What about natural gas?
CL:
Natural gas in North America took a big dive; it dropped below $2/thousand
cubic feet (Mcf). Many North American natural gas
producers are leveraged plays, and that can create some unfortunate
situations. At the current price, they may have trouble paying back bank
loans. Banks may even start to pull credit lines. This could create chaos in
the next 6–12 months. As an investor, I am waiting for market forces to
take out some weaker players. That could create good buying opportunities
down the road.
TER: In
other words, a market that punishes companies can reward traders. What is
your investment style in this landscape?
CL: I
focus on different sectors and I'll overweight an undervalued sector at a
given time. For example, in Q4/11 I saw that the energy sector was greatly
undervalued, and I was buying energy stocks aggressively when we last spoke.
Since then, I have been busy booking profits in energy. Now I'm starting to
look into the precious metal space, which has been hit very hard in the past
few months. I sold New Zealand Energy Corp.
(NZ:TSX.V; NZERF:OTCQX), TransGlobe Energy Corp. (TGL:TSX; TGA:NASDAQ) and Ithaca Energy Inc. (IAE:TSX) and
I reduced my position in PetroBakken Energy Ltd. (PBN:TSX) and
sold my shares in its sister company, Petrobank Energy & Resources Ltd.
(PBG:TSX), for nice profits.
TER:
What energy positions are you still holding? Who is the mainstay?
CL: My
personal largest position is still Mart Resources Inc. (MMT:TSX.V). I just went
to the HiAlpha conference, where its CEO, Wade Cherwayko, was presenting. He told investors that Mart
has over $60 million ($60M) in the bank and each month it is generating $15M
in after-tax income (about CA$50/share in annual income). The company is
about to pay dividends and is discussing dividend vs. share buyback. In the
meantime, it is very close to announcing a deal with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) to
build a pipeline and triple its current production in a year. The investors I
met at the conference were very excited about Mart's future, both near term
and long term.
Mart just filed
its annual report. It earned $71.8M for 2011, or CA$21.4/share. Its cashflow was $144.1M for 2011, or CA$42.9/share. Field
was pumping at about 7 thousand barrels per day (7 Mbpd);
Mart got 71% or 4,941 bpd because of cost recovery. This year, Brent was over
$120/bbl for most of the time, and Mart is getting
a premium to Brent, at least $125/bbl. It's pumping at about 15 Mbpd, according to its recent presentation. Using these
factors, it is easy to see that Mart is earning about CA$50/share on an
annual basis, with cashflow at about CA$1/share.
Next year, when Mart increases production to 30 Mbbl,
45 Mbbl and even higher, you can expect the
earnings to double and triple again. Mart's market valuation will be higher
than the current stock price.
TER:
What are some other long-haul names?
CL: My
next largest position is still Pan Orient Energy Corp. (POE:TSX.V). The stock was
hit hard recently on the mixed test results from its L53D well. Most analyst
reports mentioned both positives and negatives in the announcement, but
investors tend to sell first and ask questions later. This tells us how
nervous investors were. Also, most funds exited the company at the end of
last year and investors are generally not very risk-tolerant. Last year, I
was telling everyone to load up on the stock. The company made a nice
discovery, but the stock didn't show much appreciation. The company is
drilling very high-impact wells in Indonesia after four or five years of
preparations, but the market is completely ignoring it. It has no debt and
trades at less than two times its cashflow, with
blue sky opportunities in Indonesia. Currently, the stock offers a very good
entry point for those who are willing to take limited risks.
I am still
holding Porto Energy Corp. (PEC:TSX.V). It is about
to start drilling the high-impact presalt well
around the mid year. Considering the stock is
trading at a huge discount in light of its recently announced deals, I like
the risk-reward ratio here.
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
have been down sharply lately, like most junior mining stocks. Insiders
participated in the recent private placement at much higher rates than the
current stock price. I believe both stocks offer good values.
TER:
Thanks for the company rundown. What's your reading on current market
movements, and how should investors play it?
CL: In
general, we have recently seen sharp pullbacks in resource stocks. The market
is suffering greatly from lack of liquidity. That offers good opportunities
for long-term, value-oriented investors. I am mostly holding companies with
good balance sheets and cashflow. I intend to buy
stocks on the cheap later this year.
TER:
Thanks for catching up with us today, Chen.
CL: My
pleasure.
Chen Lin
writes the popular stock newsletter What Is Chen
Buying? What Is Chen Selling?,
published and distributed by Taylor Hard Money Advisors, Inc. Lin is a value
investor who focuses on deeply undervalued stocks or sectors that are ignored
by the market. He also demonstrates excellent market timing due to his
technical analysis.
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DISCLOSURE:
1) The following companies mentioned in the interview are sponsors of The Energy Report: Mart
Resources Inc., New Zealand Energy Corp., Pan Orient Energy Corp., Prophecy
Coal Corp., Prophecy Platinum Corp., Royal Dutch Shell Plc
and Transglobe Energy Corp. Streetwise Reports does not accept stock in exchange for services.
2) Chen Lin: I personally and/or my family own shares of the following
companies mentioned in this interview: All. I personally and/or my family am paid by the following companies mentioned in this
interview: None, with the exception of Porto Energy, from which Chen Lin
received shares to introduce it to hedge funds in 2010. The company was not
publicly traded at that time. I was not paid by Streetwise Reports for
participating in this story.
The Energy Report
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