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New
oil harvesting technologies first perfected in the Bakken
are opening up production around the world. Stephen Taylor, portfolio manager
of The Taylor Fund and founder of Taylor Asset Management, is excited about
the prospects for several New Zealand-based efforts. He's also optimistic
about the dawning of a new age for natural gas as the chemical sector steps
in to prop up slumping prices in this exclusive interview with The
Energy Report.
The Energy Report: There's some
escalating tension in the Gulf of Hormuz between Iran, the U.S. and Israel.
Do you think that this will be a catalyst for oil prices in 2012?
Stephen Taylor: It may well be. It underscores the need for and the
value of assets in politically stable areas. It also bodes well for energy
assets in North America and places like Australia and New Zealand. The Middle
East has always been a volatile place, but this issue certainly focuses
investor attention on the risk in that area.
TER: What themes in energy are you positioning for?
ST: We like smaller emerging companies that are heavily focused on
oil, as well as companies that are benefiting from the application of new
technologies. Technologies that were pioneered in the Bakken
in North Dakota have spread to similar geologic formations around the world,
and there are going to be tremendous opportunities arising.
One of our largest positions, New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX), is applying
some of those same technologies in New Zealand and is announcing terrific
results. In fact, just recently the company announced terrific results from
its Moki-2 well at 1,000 (K) barrels a day (bbl/d)
of production. We think the company has tremendous potential ahead of it.
TER: New Zealand Energy seems to be one of the darling plays right
now. Beyond its results, why do you think that is?
ST: New Zealand Energy and Tag Oil Ltd. (TAO:TSX.V) are really the
only pure plays onshore in New Zealand. Of the two, New Zealand Energy is
more focused on oil versus gas production. It's a country that requires 150K bbl/d in oil yet produces only 55K bbl/d.
The domestic demand is there.
The company also has tremendous land positions that potentially could mean
billions of barrels of oil. It's a question of what sort of recovery rate
applies. The increasing level of exploration and drilling technology may just
push that number higher in the years ahead.
We have found the company's management team to be very solid and
straightforward. We were early investors in New Zealand Energy and
participated in the first private round last year. It's a company that seems
to under-promise and over-deliver, which we like.
TER: You said you prefer oil-focused plays, but you have a position in
domestic oil and gas company Saratoga Resources Inc. (SARA:NYSE.A), which is a
little heavier on gas. Are you concerned about Saratoga's oil:gas ratio?
ST: Saratoga was recently listed on the NYSE Amex stock exchange. It
was a great day for the company and we were there with management for the
bell ringing ceremony. Tom Cooke and his team have done a terrific job
turning that company around. It was in Chapter 11 in 2010. He and his team
brought the company through bankruptcy without any shareholder dilution,
which is quite an accomplishment.
Saratoga's properties are focused on the offshore Louisiana Gulf Coast area.
Importantly, they are all within state as opposed to federal waters, which
means they are within three miles of the transitional coastline. Its leases
are in shallow water, typically less than 20 feet deep. This affords
significant cost savings when drilling wells. A company can get away with
leasing cheaper, less sophisticated equipment than that required for drilling
in deeper depths. Being able to drill cheaper wells is always a good thing.
Recent exploration activity is focusing investors' attention on the potential
for ultra-deep gas in that area. The Davey Jones well, drilled by McMoRan Exploration Co. (MMR:NYSE) is in the process of bringing a
flow-testing unit online over the next few weeks. It's becoming increasingly
obvious that the deep gas may now be accessible from shallow water. A company
could drill into the same formations, but only be drilling in 20 feet or less
of water as opposed to 200 or more feet.
On that point, Saratoga is in discussions with McMoRan
about forming a joint venture on one of its key leases. That process is
continuing. We'll see what happens, but I would expect some news over the
next several weeks. Saratoga has a very valuable collection of assets and we
think the stock is a good buy.
Saratoga may be about 50% to 60% in gas versus oil, but it has a number of
oil-rich targets that it could drill as well. The production profile for that
area is very long lived and many of its wells have been in production for
40-plus years.
I also believe that further downside to gas prices could be limited. There
could be a return and rebirth of the U.S. chemicals industry over the next
several years based largely on cheap and reliable supplies of natural gas in
the U.S. Huntsman Corp. (HUN:NYSE)
recently said it plans to expand and enlarge its U.S. capacity.
There is reemerging demand for natural gas that many investors may be
underestimating. That demand will come from traditional users, like the
chemical industries, but also increasingly from transportation uses, too.
Energy policies like the Pickens Plan, and similar offshoots that push U.S
energy independence, will target commercial vehicles and transportation
fleets. That's going to begin to use more natural gas more quickly than a lot
of people are currently thinking. That's good for the country and good for
natural gas producers.
So, the long-term outlook in this case may not take quite as long as some
people think.
TER: What's your biggest regret so far in managing the fund?
ST: I'm not one to dwell on regrets. When I was on the Chicago Board
of Options Exchange (CBOE) trading floor, we had an expression: "Next
trade." If you made a bad trade, you had to forget about it, get back to
business and move on to the next trade without consuming yourself with
regrets.
TER: What advice would you give to retail investors looking to gain
further exposure to energy?
ST: Look for quality management teams. Find teams that have a track
record of generating shareholder value and taking care of their shareholders.
That is the most important quality—before a project or anything like
that. The wrong person in charge of a good asset will not get good results.
Look for teams that have skin in the game. Tom Cooke at Saratoga owns 20-30%
of the company. That's a substantial portion of his net worth tied up in the
same investment as the regular shareholders.
TER: Thanks, Steve.
Steve Taylor is
chairman and CEO of Taylor Asset Management, a Chicago-based investment
management firm focusing on small-cap domestic equities and emerging markets.
He also serves as a portfolio manager for the Taylor International Fund Ltd.,
a small-cap equity fund. In addition to emerging markets, Taylor's area of
expertise includes private equity, restructuring and turnaround situations
and both small- and mid-cap companies. He has considerable experience in the
natural resources and finance industries in Canada and China.
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DISCLOSURE:
1) Brian Sylvester 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: New Zealand Energy Corp. and Saratoga Resources Inc.
Streetwise does not accept stock in exchange for
services.
3) Stephen Taylor: I personally and/or my family own shares of the following
companies mentioned in this interview: New Zealand Energy, Tag oil, Saratoga
and McMoran Exploration Co. I personally and/or my
family am paid by the following companies mentioned
in this interview: None. I was not paid by Streetwise for participating in
this story.
The Energy
Report
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