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Oil and
gas markets, as well as the technology to produce, distribute and utilize
them, are evolving to meet growing global energy needs. In this exclusive
interview with The Energy Report, Frank Curzio, editor of the Penny
Stock Specialist newsletter, brings us up to date on his views for what
lies ahead in the energy markets and offers several ideas for investors
seeking underpriced bargains with great growth potential. While his
newsletter's definition of penny stocks extends beyond pennies, he believes
that the opportunities are in the dollars.
Companies Mentioned: Abraxas Petroleum Corp. - BP Plc. -
Canyon Services Group Inc. - Chesapeake Energy Corp. - Chevron Corporation -
Clean Energy Fuels Corp. - ConocoPhillips - Devon Energy - Encana Corporation
- GMX Resources Inc. - Royal Dutch
Shell Plc - Tetra Technologies Inc. - Weatherford
International Ltd. - Westport Innovations Inc. - Yamana Gold Inc.
The Energy Report: Frank, when people hear "penny
stocks" they usually take those words quite literally and think in terms
of stocks certainly trading under a dollar, if not under two bits. Your
definition, as editor of Penny Stock Specialist, is a little broader.
Tell us why.
Frank Curzio: Sure. Penny Stock Specialist is more of an
under-$10 newsletter. We do have some penny stocks in there, but you may see
some large caps that trade under $10 as well. About 80% is in small caps. In
May, most small caps were trading at their most expensive valuations to large
caps in more than three decades. That was before we saw seven straight weeks
of declines. I may lean toward recommending even more mid- to larger-cap
companies going forward.
TER: You follow the energy industry in a broad context, which includes
everything from small oil and gas exploration companies to international
majors as well as various types of service and technology companies related
to energy production. Can you give us a brief overview of how you see the energy
arena now compared to your last interview with us in October?
FC: There have been a lot of major changes. I do like oil right now.
Most analysts and people I talk to see lower prices in the short term. But,
looking at the long-term picture I think oil is getting more difficult to
find. The political landscape is more challenging than ever. That is probably
why every major oil company is spending billions of dollars buying shale gas
assets in North America. Short term, we may see oil prices push under
$90/barrel (bbl.), especially with the political motivation to release oil
from the strategic oil reserves, a step that is only supposed to be taken
under extreme emergency conditions.
The last time we released any significant oil from strategic oil reserves was
2005 during Hurricane Katrina. That was an emergency. Also during the Gulf
War. That was an emergency, but oil at $100/bbl. is not an emergency. So, it
seems more like another short-term stimulus package aimed at pushing the
price of oil under $90/bbl. ahead of an election year. But longer term, I
like oil and I think it goes a lot higher from here.
TER: So, what do you think the prospects are for developing any
significant new reserves in the U.S. at this point? Probably not great.
FC: No, it's not great. The majors are using a big chunk of their
capital expenditures buying up shale gas assets across the U.S. That tells me
they are looking to transition into natural gas. I think if they could find
oil they would use that capital expenditure (capex) to continue drilling to
find more. Longer term, I think oil is going to be more difficult to find.
And that's going to reflect in supply and demand, making the price go a lot
higher.
TER: So, it appears that natural gas is the game of the day. Give us a
little summary of what you think is going on there since we had the big peak
in gas prices back in 2005 and 2006 and then another, lower peak in 2008.
What's in the future?
FC: I think we all know by now we have a huge
supply of natural gas. It's keeping prices below $5 thousand cubic feet (Tcf)
at current demand levels, with roughly 80 years of supply. However, I think
demand's going to pick up sharply. I think liquefied natural gas (LNG) is a
major factor as we begin to export natural gas to huge growth markets like
India and China. This may take a decade, or even longer, but eventually it's
going to happen. Natural gas use for electricity production continues to grow
each year. Right now it accounts for 23% of electricity generation in the
U.S., with coal at 45%. In 15 years, I would not be surprised to see these
percentages reversed. Finally, many truck companies including UPS, Huntsman
and Ryder, are transitioning their truck fleets from diesel to natural gas.
More than 5 million heavy duty diesel trucks in the U.S. could convert. I see
all of these trends accelerating over the coming 5 to 15 years. That will
increase demand and cut into supply, resulting in higher natural gas prices
over the long term.
TER: We've been hearing a lot about the "fracking"
controversy lately related to natural gas production. What do you see
happening there and what are the possible consequences?
FC: I think the environmentalists may be bored right now. That's the
only way I can explain why they hate natural gas. Maybe they prefer we use
more coal. But, seriously, there have been reports that fracking leads to
contamination of water. Numerous independent studies show there is no
contamination being caused by fracking after tens of thousands of wells used
this technology.
TER: People can't be opposed to every source of energy and domestic
natural gas seems to be a more benign a source of new energy than coal or
imported oil, isn't it?
FC: I'm a facts guy. I just haven't seen any evidence that supports
most of these claims that are being made. If I did, then I'd probably change
my outlook on the industry. Right now, there's just nothing there. So, I
think there's still tremendous opportunity in natural gas. And, yes, fracking
is going to be used for a very long time. That's why I continue to like the
industry, especially the service providers, which continue to see enormous
demand. Companies like Tetra Technologies Inc. (NYSE:TTI), Canyon
Services Group Inc. (TSX:FRC) and Weatherford
International Ltd. (NYSE:WFT)—which are
dirt cheap at these levels—provide a broad range of oil and natural gas
services.
TER: In your newsletter you follow a number of companies in the oil
and gas production industry and related support and technology businesses.
Can you tell us about some you particularly like there?
FC: One company I do like is Abraxas
Petroleum Corp. (NASDAQ:AXAS). It's a great buy under $3.75. The company
has over 160,000 acres in shale areas across the U.S., including in the
Niobrara, Eagle Ford and Bakken regions. Bakken has experienced terrible
weather conditions. Most companies operating in the sector lowered production
estimates last quarter as roads were damaged. Many of the areas were flooded
and Abraxas was no exception. So, they happened to report very weak earnings
in May and the stock got crushed. However, they expect to drill five wells in
the Bakken over the summer so I think the company is a steal at this price.
Moving on, GMX Resources Inc. (NYSE:GMXR) is a great play. Six
months ago the company made a major transition from just a natural gas
producer to an oil and natural gas producer to take advantage of the higher
oil prices. This company recently entered the Bakken and Niobrara regions as
well. That gives them the potential to drill over 300 wells. We're talking
about a very small company here. They do have some debt issues, which is why
it's trading below $5. But, they have enough cash to cover their capex
through 2012. It's very cheap—trading at a 25% discount to its peers.
I also like Tetra Technologies, which I mentioned earlier. That's more of an
oil and natural gas services play. As long as companies are drilling for oil
and natural gas, this company is going to continue to print money. Customers
include all the major oil and gas companies. We're talking BP Plc.
(NYSE:BP; LSE:BP), ConocoPhillips (NYSE:COP), Royal Dutch
Shell Plc (NYSE:RDS.A; NYSE:RDS.B), Chevron
(NYSE:CVX), Chesapeake Energy Corp. (NYSE:CHK), Encana
Corp. (TSX:ECA; NYSE:ECA), Devon
Energy (NYSE:DVN). . .Tetra is the largest provider of idle well services
in the U.S. After the BP oil spill, the Department of the Interior announced
that 27,000 non-producing wells in the Gulf may need to be plugged. It was
called the Idle Iron program. This could add a ton of business for Tetra. I
think it's a big catalyst that few people are talking about. I believe the
company's a steal at under $13 a share. It got hit along with the rest of the
market and it's now trading at a very favorable valuation. Demand is there
and growth is there as well.
TER: Do they plug these wells temporarily, pending future market
changes?
FC: These are non-producing wells. The government says 3,000
definitely need to be plugged for good and it is evaluating the other 27,000
wells. Tetra is the largest provider in the U.S. of these services. So, a lot of these will need to be plugged just in case you
see a possibility of another oil spill. Whenever we see major unexpected
events happen, there's always an overreaction. But, Tetra Technology is going
to get a lot of that business from this initiative.
TER: That sounds like some great potential. What else do you like?
FC: The last company that I have for you is called Westport
Innovations Inc. (TSX:WPT). It manufactures truck engines that run on
natural gas. The company has a partnership with Cummins, the largest engine
manufacturer in the U.S., Weichai Power, which is a $90B engine manufacturer
in Hong Kong, and also one with Volvo, the European giant. That's a $35
billion market cap company.
A lot of companies with trucking fleets are making the switch from diesel
engines to natural gas. Companies used to wait for incentives from the
government. Today, the economics make sense and if the government does
provide incentives, that would be the best case scenario for Westport. We could
see 50% of the trucking fleets in the U.S. switch to natural gas. That would
be roughly 2.5 million trucks and Westport is a clear leader in this space. I
think the stock will surge if this happens. The company has exposure to
India, China and Europe, where millions of trucks could also make the switch
to natural gas. I recommended the stock at roughly $15 a share. We are up
about 50% right now. But, I think it's a huge buy under $24. I see a lot more
upside for Westport.
TER: What do they have in the way of competition?
FC: There's very little competition and they're well ahead of it. They
just took over an Italian competitor to get more exposure to India and other
markets in Europe. In fact, they have partnerships with the major engine
manufacturers in almost every area of the world. They are the cream of the
crop when it comes to manufacturing engines that run on natural gas. It's a
very strong buy here.
TER: What about the stations for the fuel?
FC: Well, there are other companies, like Clean
Energy Fuels Corp. (NASDAQ:CLNE), which actually make the gas stations.
As this transition takes place, more gas stations are going to provide
natural gas over the next five to ten years. A lot of people are on hold
right now to see if the government will pass the $64,000 per truck tax credit
in T. Boone Pickens' proposed Natural Gas Act. But, when you're seeing
companies like UPS, Ryder and Huntsman making the switch now, that's a sign
the economics work right now. So, Westport is building revenue right now and
if the government provides these incentives I think Westport will really
skyrocket a lot higher.
TER: Do you have any other interesting situations you think our
readers ought to be aware of at this point?
FC: The good thing about Penny Stock Specialist is that we're
not limited to one or two industries. Right now I see tremendous opportunity
in gold stocks. I think we're going to continue to throw money at every major
problem we have in the U.S. We're going to see inflationary conditions
eventually. I think a company like Yamana Gold Inc.
(TSX:YRI; NYSE:AUY; LSE:YAU), a major producer trading at 10 times
earnings, is a very good buy. The economics behind it make sense and it's a
huge growth model. A lot of gold stocks, if you're looking at trading, are at
the same levels now as when gold was trading at $1,000/oz. So, I think there
are good opportunities right now. Some small cap gold companies have sold off
20%–30%. Gold stocks seem to still have a tailwind behind them,
especially on the economic front. So, it's one of the sectors I'm looking at
right now.
TER: What are you expecting to happen over the summer and through the
rest of the year as far as price outlook and market performance? And, what
kinds of things should investors be considering in making decisions at this
point?
FC: When it comes to oil and natural gas I think it's important to
think in terms of the long term. Short term, it's going to be rough. I mean
almost every stock that I mention here has been trading in a
40% trading range over the past two to three months. So, if you're going to
buy into some of these companies, and say you want to buy 1,000 shares of a
company, don't buy the whole 1,000 shares at once. Try to scale into these
positions. Take advantage of volatility. So you buy 200 here, 200 there, even
if it takes you six to nine months to establish a full position. If you
really have a three- to five-year outlook, or even
longer, you can look back and say, wow I was buying these natural gas
companies below $5. Westport at $22, $23 would be a fantastic buy. The short
term is going to be extremely volatile. But longer term, I think those
tailwinds for natural gas and oil are still behind these companies and I
think they're going to do very, very well.
TER: Do you see anything particular on the horizon that could either
make the market go up drastically or down drastically if a particular thing
happens?
FC: In terms of the market, definitely focus on the stimulus package.
There's going to be a QE3. No one wants it, but from a
market and political perspective, we will get more stimulus. I think we could
see a rebound in the markets if this happens. We will also see a rebound in
economic statistics. If GDP estimates pick up, we will see a rally behind
many stocks. So, it's something to focus on with oil, natural gas and
gasoline prices off their highs. If we do see another stimulus
package—it's going to be very good for stocks in the short term.
TER: What could happen on the negative side that could blow things up?
FC: We continue to see negative data on the job market. We continue to
see GDP numbers come down. Anything showing that economy is slowing will be
terrible for the markets. We could see gasoline prices move considerably
higher. I think that would hurt consumer spending.
But, right now it's the economy. If we see economic statistics pick up a
little with some improvement in housing numbers—that will be great for
the stocks. On the flip side, if we still see weak unemployment numbers,
stocks will fall from these levels and it's a big risk.
TER: But, generally, you feel reasonably confident that this is
probably a pretty good buying opportunity and people should be accumulating
those stocks that they think are undervalued?
FC: Yes. Accumulate the stocks that you think are undervalued. Every
stock that I gave you today is a buy. Some small caps have gotten nailed 20%
or 30%. Start picking away at some of the ones that insiders are buying. Buy
companies that have beat estimates over the past couple of quarters and have
pulled back along with the rest of the market. These are some of the areas
I'm looking at for new ideas right now.
TER: That certainly sounds like good solid information. We greatly
appreciate your time and insights and look forward to checking in with you
again in the future.
FC: Thank you.
Frank Curzio is the editor of Penny Stock
Specialist—an investment advisory that focuses on stocks trading
under $10—and its exclusive Phase 1
Investor advisory. With more than 15 years of investing experience,
Frank is the latest addition to the Stansberry and Associates team.
Before joining Stansberry, Frank wrote a newsletter
on under-$10 stocks for The Street. He's also been a guest on various
programs, including Fox Business News and CNBC's The Kudlow Report and
The Call and is a featured guest on CNN Radio. He's also been quoted
in financial publications—both online and off—and has enjoyed
numerous mentions on Jim Cramer's Mad Money. Frank's "S&A Investor
Radio" is one of the most widely followed financial broadcasts in the
country, and his investment strategies—value, growth, top-down and
technical analysis—have regularly produced 200%–500% winners for
his subscribers over the past 15 years.
The
Energy Report
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