|
Marshall Berol and Craig Valdes are concentrating
their focus on resource stocks in their Encompass Fund portfolio. In this
exclusive interview with The Energy Report, they share their current
thinking regarding the energy sector and give us the names of some stocks
that are attractively priced now and that could do well as global energy
demand grows. They remain very positive on the prospects for nuclear and see
oil demand growing.
Companies Mentioned: BHP Billiton Ltd. - Cameco Corp. - Crosshair Exploration & Mining Corp. -
Estrella International Energy Services - Forbes
Coal - GeoPetro Resources Company -
Gran Tierra Energy Inc. - L&L Energy, Inc. - NiMin
Energy Corp. - Occidental Petroleum Corp. - Paladin Energy Ltd. - Passport Potash Inc. -
Peabody Energy Corp. - PetroDorado Energy Ltd. - PotashCorp - Rio Tinto - SouthGobi
Energy Resources Ltd. - The Mosaic Company - Tournigan
Energy Ltd. - Ur-Energy Inc. - Uranium Energy Corp - Verde Potash -
Western Potash Corp. - Zodiac Exploration Inc.
The Energy Report: Your Encompass Fund has had some
pretty spectacular returns over the past three years. How have you been able
to do this and what are your selection criteria?
Marshall Berol: Malcolm Gissen and I started
Encompass Fund five years ago. We've been very ably assisted by Craig Valdes
and Kevin Puil. Our concept was to invest globally
in any market cap size company, utilizing both a top-down and bottom-up
approach. That results in us looking at sectors we find to be attractive
going forward, and then selecting companies within that segment that could
experience long-term capital appreciation, which is the objective of the
Encompass Fund. We also look at individual companies regardless of industry,
where we like the company's fundamentals.
We have liked resource companies for the past decade. When we started
Encompass Fund in 2006, we had already been invested on behalf of individual
private client accounts in various sectors of the resources industries,
including energy, primarily oil and gas. We have continued to be invested in
those industries because they have had some excellent growth and we expect
that to continue in the future. So, that's what led to the Encompass Fund
performing very well in the last several years.
The end of 2008 is very painful to recall, as I'm sure it is for all of your
readers. But, in late 2008 and the beginning of 2009, we eliminated some
companies in the portfolio that we didn't feel were as strong as some of the
others and added to the companies that we thought were particularly strong,
but suffering from the general stock market problems. That led to a 137% gain
for Encompass Fund in 2009 and a further 60% gain in 2010. For the trailing
one-year and three-year periods, Encompass Fund ranks as the top
International Mutual Fund, according to Morningstar.
TER: In reviewing your portfolio, nine of the 10 largest holdings are
resource companies. Is that the approach you'll likely be following in the
future?
MB: At this point, the outlook is bright for resource companies,
including precious and base metals as well as oil, natural gas, coal and
uranium. At some point in the future, one or more of these sectors will be
less attractive for investment opportunities and we'll adjust accordingly.
TER: What is your current thinking on where the various energy areas
are headed now, in light of the changes since our last interview here in May 2010?
Craig Valdes: We like natural gas as a commodity and as an energy
supply. But, because of advanced technologies such as "fracking" and horizontal drilling, you've seen an
abundance of supply. And so, we might not be as positive on the direction of
the price, meaning that it's probably going to stay in the $4 to $5 Mcf. (thousand cubic feet) range in the near-term. But,
as an energy component, we strongly believe that over the longer-term our
energy policies will lean more toward natural gas.
Oil has backed off from its recent highs, but the oil price is really a
function of how well the global economy is doing. As long as we have an
environment with even slow to expanded growth in emerging economies, there's
going to be a continued demand for energy. So, we like oil for the near and
long term.
TER: Do you expect any sort of a stabilized price range for oil, or
are we going to see big moves up and down?
CV: I think that has a lot to do with energy policy. It also has to do
with global growth and the emerging growth economies. We believe that prices
on the low end may trade somewhere in the $70-$80/barrel (bbl.) range and at
the high end it could be as much as $100-$120/bbl. I think oil stays in a
reasonable trading range over the near-term and the next couple of years. The
only thing that could easily change that are the
Saudis and the Middle East geopolitics, which could affect pricing and
supply. We believe that pricing is not going to change that much over the
next couple of years.
MB: Certainly, geopolitical issues will have a large bearing in the
short-term. We take a nine- to 12-month view in any of these industries.
Short-term you get a lot more volatility. For example, when it was announced
they were going to release 60 Mbbl. of oil from
strategic reserves around the world, including 30 Mbbl.
from the U.S. strategic reserve, the WTI oil price went down about 10% from
around $100-$90/bbl. Now it's back up to near $100/bbl. So, in the short-term
it had some affect. In the long term it doesn't. Overall demand continues and
overall supplies are basically tight. Some particular situations could lead
to a larger decline or, more likely, a larger spike.
TER: Can you tell us about some oil and gas situations you
particularly like at this time?
MB: One company that is a major holding in Encompass Fund and has been
for some time, is a smaller low-priced stock, GeoPetro Resources Company
(NYSE.A:GPR). GeoPetro has five
different projects, any one of which could be a real company maker. We have
participated in private placements with the company, as well as buying the
stock in the open market. The company has an operating natural gas plant and
some natural gas wells in Texas. It has a very interesting project in the San
Joaquin Basin area in south-central California. It sold a couple of large
land positions it held in Alaska to Linc Energy
Ltd. (ASX: LNC; OTCQX: LNCGY) of Australia and retained an attractive royalty
interest. It is also one-third partner in a project in Canada with PetroBakken Energy Ltd. (TSX:PBN).
That is less likely to be acted upon in the near future, but it's got some
very good promise.
GeoPetro has a minority interest in a project in
Indonesia with the majority interest held by Chinese companies. The Chinese
are actively doing seismic work and plan on drilling later this year. Any one
of those projects with drilling success could be extremely beneficial for the
company's stock. GeoPetro has contracted to sell
some excess equipment this September that will bring in more than $9M. That
would be used to increase production from the Madisonville, Texas, wells and
improve the natural gas processing. Those improvements should take the
company to at least a positive cash-flow situation, which would be very
attractive also. It's a low-priced stock and there aren't hundreds of
millions of shares outstanding, as you sometimes see.
TER: What else do you like?
CV: We're very bullish on the San Joaquin Basin in south-central
California. NiMin Energy Corp. (TSX:NNN) is
in the San Joaquin Basin. There are some big players down there like Occidental Petroleum Corp.
(NYSE:OXY) with its huge find in 2009. NiMin
is just a stone's-throw away from some of that production. It's heavy oil and
NiMin has an enhanced oil recovery process called
CMD, (Combustion Miscible Drive) on which they have applied for a patent. The
company creates steam using a kind of soapy oxygen and injects this into the
well reservoir. That heats up the heavy oil and it
comes to the surface at a faster rate. The first well they demonstrated this
on was producing about 30 bpd (barrels per day) of oil. Now it's up to about
250 bpd. NiMin has identified a number of heavy oil
opportunities in old existing wells in the U.S., which they can pursue. The
company has a nice land package in the San Joaquin Basin (Santa Margarita
Reservoir) and it is going to drill two additional wells in the second half
of this year. Secondly, it may joint venture this enhanced oil recovery
process with some larger oil companies. We think that's a great opportunity,
which only enhances the company's other primary exploration and production
focus in Wyoming.
Another company we like that has a large land package in the San Joaquin area
is called Zodiac Exploration Inc.
(TSX.V:ZEX). It is actually targeting light oil in the Kings
County region, and drilling very deep wells. It just started drilling a
horizontal well and we look for some updates on that in the next few weeks.
When the company finished its first vertical test well to 14,000 feet a few
months ago, it found between 500 and 1,000 feet of actual pay in about four
different zones. We think Zodiac has a great opportunity long term in the
Southern California oil sector.
MB: One of the things we look at in junior companies is the
management, because it's extremely important that management has been in the
industry for a number of years and has achieved past successes. That's the
case with Zodiac, NiMin and GeoPetro.
These smaller companies will often seek out a larger joint venture industry
partner or partners with technical expertise, knowledge and the ability to handle
financials. Then the junior will have an ongoing interest in any of the
production that comes out of that well and any succeeding wells.
TER: A lot of oil and gas exploration is going on in South America
these days. We don't hear that much about it, but there have been some big
finds down there. Can you bring us up to date on what's going on?
CV: Obviously the interest has been spurred by the big find by Petrobras in Brazil (NYSE:PBR) in the last year or two.
There's oil and gas all over South America but we've focused on companies in
Colombia because of the way it is regulated, much like the way the U.S. and
Canadian governments operate. So, many of your Canadian and U.S. operators
have gone to Colombia. We presently own three oil and gas companies in
Colombia. One is actually a mid-tier company, Gran Tierra
Energy Inc. (NYSE:GTE; TSX:GTE). It's a larger
company with current production of approximately 18,000 barrels of oil equivalent
per day. One of the smaller exploration companies in our portfolio is PetroDorado Energy Ltd.
(TSX.V:PDQ). PetroDorado, has working interests in a number of different blocks in
Columbia and Peru. It has a 30% working interest in one block called CPO-5
that it would like to increase, but its partners are reluctant to sell any
additional interest based on the recent seismic work completed. The company
is going to be drilling that later this year. We're looking for excellent
results from this exploration region.
Another company that we like in the area is a service company called Estrella International Energy Services
(TSX.V:EEN) working in Colombia, Peru and Argentina. Management
was working for Schlumberger Ltd. (NYSE:SLB) and left a few years ago and
formed Estrella. It's a full-service oil and gas
service company consolidating a fragmented industry in South America.
Obviously the exploration companies and producing companies are looking for
teams that have expertise and these guys have a great reputation. We think
there's a great opportunity just on the service side for Estrella.
The company has demonstrated over the last couple of years that it is able to
bid and win good contracts with top-tier companies, including some of the
large ones such as Pacific Rubiales Energy Corp.
(TSX:PRE; BVC:PREC), Petrobras (NYSE:PBR) and Canacol Energy Ltd. (TSX:CNE). That's another company
that we like on a long-term basis.
MB: Colombia has come a long way in the past decade. There is a lot of
growth there and a lot of industry. A number of mining projects and
energy-consuming industries are located there. With increased stability in
the region, there has been far more activity. We think it has led to some
significant oil and gas discoveries and a bright future for some companies.
TER: Moving on to uranium; it's seen some turbulence since Fukushima.
What are your thoughts on that market?
MB: There has been a lot of turbulence. But, long term we're very
bullish on uranium and the companies that are exploring for and producing
uranium. Approximately 440 nuclear energy plants operate today around the
world. Maybe half a dozen will be taken out of operation in Japan and another
half dozen in Germany in the near future. The overwhelming majority of the
440 plants are continuing to operate.
As many as 50 new nuclear energy plants are still being built around the
world. South Korea, France, Slovakia and even the United States, have said
they intend to continue on the road to increased nuclear energy. There will
be increased safety precautions. New designs have been developed for reactors
over the last several decades and put in place subsequent to the reactors
that were built at Fukushima. Nuclear energy provides 15% to 20% of the
world's growing electricity needs.
While 180 million pounds (Mlb.) of uranium is
currently being used around the world to fuel nuclear energy plants, only
about 110 Mlb. to 120 Mlb.
is currently being produced. The balances come from inventories above ground
and from the deactivation of the Soviet Nuclear Arms Agreement. This
agreement ends in 2013 and Russia has stated it does not intend to renew it.
So, somewhere between 25 Mlb. and 30 Mlb./year will need to be
replaced. We think it's going to cause an increase in the price of uranium in
the years to come. The companies that are either producing it or exploring
for it and will be producing it are very attractive and we remain very
bullish.
Solar and wind are fine, but it's a minuscule output now and probably for
many years to come. Geothermal and hydro are also fine, but they're extremely
limited in production and location. Other difficulties emerge with increasing
electricity generation from oil or gas or coal. So, nuclear energy plants
have a definite long-term positive outlook.
It's strange, but in the investment business, people don't want to buy things
that are on sale. The uranium companies are currently on sale. We were in
uranium companies prior to Fukushima. We have increased some of those
holdings and added new ones. People should pay attention to the uranium
industry and what's actually going on in the nuclear energy industry, rather
than merely drawing conclusions from headlines.
TER: Can you tell us about some of the ones you like that are in your
portfolio?
MB: One of the top holdings for some time has been Uranium Energy Corp (NYSE.A:UEC).
The company's primary projects are in South Texas. It started production in
November 2010 using in-situ recovery (ISR). It's a far less costly and far
more environmentally friendly method than either open pit mining or
underground mining. Uranium Energy Corp also has other projects they are
bringing into production in South Texas. The company recently made an
acquisition of a very large land package in Paraguay. It also owns additional
exploration properties in Arizona, Colorado, Utah and Wyoming. It just
recently signed its first long-term contract to sell some production.
Another current producer we find attractive is an Australian company, Paladin Energy Ltd. (TSX:PDN;
ASX:PDN) with projects in Australia, Malawi and Namibia. It
also acquired a project in Labrador and Newfoundland that looks very
attractive.
A company that is near production is Ur-Energy Inc. (NYSE.A:URG;
TSX:URE), which has some advanced projects in Wyoming and
should be in production within the next year.
Tournigan Energy Ltd. (TSX.V:TVC,
FSE:TGP), which is in Slovakia, is an interesting situation.
More than 50% of Slovakia's energy is generated from the four nuclear energy
reactors currently operating in that country. The country is currently
building two additional reactors. Tournigan is in
advanced stages of exploration and prefeasibility on its Kuriskova
project in Slovakia, which will be able to provide uranium for all the
European Union countries.
A company we think is attractive and is earlier stage, is Crosshair Exploration & Mining
Corp. (TSX:CXX). It has uranium projects in Wyoming, Labrador and
Newfoundland along with some other commodities. Currently, the major uranium
producer in the world is Cameco Corp. (TSX:CCO; NYSE:CCJ). BHP Billiton Ltd. (NYSE:BHP;
OTCPK:BHPLF) and Rio Tinto (NYSE:RIO; ASX:RIO) are
major multi-metal and multi-commodity miners that are also involved in
uranium production.
TER: Do you have any thoughts on coal?
MB: We think coal is also attractive. While it has some environmental
and safety problems depending on where the coal is being mined, 50% of the
electricity in the United States comes from coal. It's a higher percentage in
China. That's not going to change dramatically for quite some time. We are
invested in several coal companies, one of which is operating in Mongolia, 20
miles from the Chinese border. Every bit of coal that is being produced by SouthGobi Energy Resources Ltd.
(TSX:SGQ) in Mongolia is being purchased and used in China. SouthGobi has been in production for several years and is
increasing production every year. We think it's a very attractive company and
very attractively priced because the price is down, for whatever reasons.
A large quality coal company is Peabody Energy Corp. (NYSE:BTU). We
have holdings in Forbes Coal (TSX:FMC),
which is in production in South Africa, and in L&L
Energy Inc. (NASDAQ:LLEN). L&L is a U.S. company that
has acquired several coal mines and coal washing projects in China and is
producing and selling coal in China. We think coal is a very attractive
industry now and going forward.
TER: Do you follow the potash industry? What are your thoughts there?
MB: We do and we like it because the growth of the population and
economies in the emerging markets means that more people have more money and
can afford, and want, better food. There's a tremendous ongoing need for
potash and the other types of fertilizers.
Over the years we've been in and out of PotashCorp (TSX:POT; NYSE:POT).
While we are not traders, sometimes the price of a company gets bid up and we
believe it's time to either sell some or all of a position depending on
valuation. That has been the case with PotashCorp.
The Mosaic Company (NYSE:MOS) is
another very attractive large fertilizer company. A smaller one that we have
invested in is Verde Potash (TSX.V:NPK),
which is developing a large potash project in Brazil. There is enough demand
from Brazilian agricultural industries that the company will probably sell
the majority of its production in Brazil.
Passport Potash Inc. (TSX.V:PPI,
OTCQX:PPRTF) is an early stage company with a very large land
package in Arizona that likely will be brought into production. Another
smaller company is Western Potash Corp. (TSX.V:WPX),
which is using the ISR process in Canada's Athabasca region.
TER: Can you to summarize your overall view of where the energy
industry is going?
MB: As should be apparent, we are positive on the energy industry and
the various components of it. Oil, coal and uranium are very attractive and
there are a number of companies in those industries that we believe will do
well. The Encompass Fund is focused on the long term and not day-to-day
trading. When you look at the long-term factors involved in supply and demand
for the various segments of the energy industry, they are very positive.
Natural gas is in a somewhat different situation, but as evidenced by BHP's
proposed $12.1B acquisition of Petrohawk, natural
gas is also valuable.
TER: We greatly appreciate your time today.
MB: We appreciate it. We've enjoyed it. And, if your readers are
interested in more information about the Encompass Fund, we would refer them
to the website, www.encompassfund.com.
The ticker is ENCPX.
CV: Thank you.
Marshall
Berol has been involved since 1982 as an
investment manager in San Francisco, CA. He and Malcolm Gissen
co-founded and co-manage the Encompass Fund, a no-load mutual fund. Also
since 2000, he has been the chief investment officer of Malcolm H. Gissen & Associates, Inc. Mr. Berol did his
undergraduate work at the University of California (Berkeley) and received a
JD degree from the University of San Francisco School of Law.
Craig Valdes has
been an investment manager in the San Francisco Bay Area since 1982. Since
2006, he has been the director of research and trading at Malcolm H. Gissen & Associates Inc. He previously was a partner
and portfolio manager at Genesis Capital Management and Hutchinson Richardson
Investment Management in San Francisco, CA.
Want to read more exclusive Energy Report interviews like this? Sign up for
our free e-newsletter, and you'll learn when new articles have been
published. To see a list of recent interviews with industry analysts and
commentators, visit our Exclusive
Interviews page.
DISCLOSURE:
1) Zig Lambo of The
Energy Report conducted this interview. He personally and/or his family
owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Energy Report: GeoPetro Resources Company,
Uranium Energy Corp., Ur-Energy Inc., Verde Potash and Passport Potash Inc.
3) Marshall Berol: I personally and/or my family own shares of the following
companies mentioned in this interview: Encompass Fund, Geo Petro Resources,
Uranium Energy Corp., Crosshair Exploration, L&L Energy and Mosaic
Company. I personally and/or my family am paid by
the following companies mentioned in this interview: None.
4) Craig Valdes: I personally and/or my family own shares of the following
companies mentioned in this interview: NiMin
Energy, Zodiac Exploration, Petrodorado Energy,
Uranium Energy Corp., U-R Energy, Tournigan Energy,
Estrella International, GeoPetro
Resources, and Gran Tierra Energy. I personally and/or my family am paid by the following companies mentioned in this
interview: None.
The
Energy Report
|
|