The Energy Report: In an interview with The Energy Report in 2013, you predicted the oil
price decline that has burdened junior oil investors this year. What are you
seeing now?
Chen Lin: I'm seeing capitulation. I see a lot of energy companies,
especially those high-cost, highly leveraged companies, going out of
business. I expect that to continue. However, I also see a bright future for
energy companies that can survive the downturn, as we move out of this phase
of the cycle.
TER: What are the indicators you're watching? Are you looking at
rig counts, storage levels, news headlines from China?
CL: I'm watching everything. Rig counts are at a bottom. Storage is
high. Our friends at Goldman Sachs are predicting $20 per barrel ($20/bbl)
oil. Remember, less than 10 years ago, they were predicting $200/bbl oil.
That is quite a difference. A dip that low could wash out all the weaker
hands. Actually, I would love to see that happen. If oil really goes to the
$20s, that would be a great bargain-hunting opportunity.
I'm also watching China very closely. China could be in deep trouble. That
keeps me up at night. Investing is hard work. There is a lot to watch, and I
have to constantly be talking to people and asking questions. However, there
is a very well-defined energy cycle. Last year, I saw the oil peak coming
down. When oil was $100/bbl, I told my subscribers that it was the top and we
got out of a lot of energy positions. This year, I see great opportunity
ahead. I hope Goldman Sachs is right. If oil really goes to $20/bbl, that
will be the bargain of a lifetime.
TER: Once it goes down to $20/bbl, how quickly could it go up, and
how high could it go?
CL: We all need to drive our cars, and consumption in the U.S. has
been going gangbusters in the past year. Oil production in the U.S.—and at a
lot of high-cost production projects globally—is going down fast. I can give
you one example—a company in Colombia I know well. Management told me it's
really not economical to drill oil wells there any more. Those wells have a
sharp decline, similar to the performance of fracked shale wells. The company
is not getting its capital investment back from drilling, so it has stopped
drilling. The existing wells are declining by 50%, 70% a year. That is an
opportunity because it means dwindling supply.
The sharper the drop, the sharper the rebound and the better the
opportunity. The worst case would be if the price of oil continues to sink
slowly. That actually makes it hard for investors to try to pick the bottom.
TER: Based on this pending opportunity, how are you adjusting your
portfolio for the rest of the year?
CL: Right now, it's a risk-off, conservative mode in the energy
industry. The bottom line is return on capital. Drilling costs have come down
significantly, so companies that maintain cash flow can be very profitable.
I'm looking for a few good companies that can do well in this downturn, and
then be consolidators.
It's the same in the gold business. In the beginning it was discretionary
selling. For the first couple of years, people were just selling like crazy.
Now, some gold companies are doing very well, double or tripling share prices
despite the suffering in the sector. In energy, we are at the beginning of
the phase, year one of a downturn. Investors are looking for the companies
that can generate real cash flow in this environment, and those are going to
be the winners with the next upturn.
I also like the natural gas business outside of the U.S., because pricing
is regional. In Asia, natural gas is much more expensive, $6–8 per thousand
cubic feet ($6–8/Mcf), which can result in very high margins.
TER: Could you give us some examples of companies you like in the
oil or natural gas sectors?
CL: I'm holding companies that have great balance sheets, like Pan Orient
Energy Corp. (POE:TSX.V). It is trading at below cash, so the downside is
limited and the upside is very good.
The company has exposure to both oil and natural gas. It is mostly in
Asia. Test results are not in yet, but initial indications show Pan Orient
hit some good oil and gas in Indonesia, where the gas price has been very
high. Pan Orient spent $50 million ($50M), and because of the tax situation
in Indonesia, when it reaches production, it will get the $50M back. It has
close to $60M cash, even without that reimbursement, and a $50M market cap.
It is a great risk/reward story, but no one is looking. In the old days, when
you hit oil, the stock could double. Now, it has no impact on the share
price. It's up a little bit in this down market, which is not bad, but very
little. Still, value is being created. That's what I like.
Pan Orient also has plans to drill in Thailand later this year, depending
on the rainy season. It also has a heavy oil project in Canada that can
easily be worth a lot of money when oil prices recover. This is a company
with a lot of ways to be successful, and it is now selling at a rock-bottom
price.
The next catalyst will be those official test results in the next two to
three weeks. Next year, the company is going to have a very big target paid
by its partner. Pan Orient is a company where you can see the valuation very
clearly. That is why I am happy to hold on to the company through the
downturn.
TER: Is another company you like on sale right now?
CL: Canacol Energy Ltd. (CNE:TSX; CNNEF:OTCQX) is reinventing
itself as a natural gas company in Colombia. Natural gas is selling for
$5–6/Mcf there, twice the going rate in the U.S. When the company turns on
the valves in December, it will start generating a lot of cash flow. That's a
very simple story. Shareholders just have to be patient and wait for the cash
to start coming in. Eventually, the market will wake up and see who can make
money in this market. I believe Canacol will be one of those.
I feel very comfortable holding Pan Orient and Canacol into next year. I
have large positions in both.
I think tax-loss selling this year could be fantastic, a once-in-lifetime
opportunity, because there are a lot of people may just want to get out of
energy. If you have dry powder, you will have a lot of buying opportunities.
TER: How do you differentiate between a stock that's been beaten
down and is a bargain and a zombie company that is probably going to go away?
CL: Look at the balance sheet and cash flow to see if the company
has staying power. A lot of companies are like dead men walking. It's just a
matter of time before they file for bankruptcy. If you buy at $0.10, and it
goes to $0, you lost 100%. But if the oil price rebounds—or goes down sharply
and rebounds—a lot of quality companies could perform really well. There will
be some fantastic investment opportunities in energy in the next six to 12
months.
TER: What words of wisdom do you have for investors who are trying
to hold on through this?
CL: I would say be selective. Stay with companies that can survive
this downturn. Look for opportunities when the oil price turns. I'm very
excited right now.
TER: Thank you for your time, Chen.
Chen Lin 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.
1) JT Long conducted this interview for Streetwise Reports
LLC, publisher of and and provides services to Streetwise Reports as an
employee. She owns, or her family owns, shares of the following companies
mentioned in this interview: None. 2) The following companies mentioned in
the interview are sponsors of Streetwise Reports: Pan Orient Energy Corp. The
companies mentioned in this interview were not involved in any aspect of the
interview preparation or post-interview editing so the expert could speak
independently about the sector. Streetwise Reports does not accept stock in
exchange for its services. 3) Chen Lin: I own, or my family owns, shares of
the following companies mentioned in this interview: Pan Orient Energy Corp.
and Canacol Energy Ltd. I personally am, or my family is, paid by the
following companies mentioned in this interview: None. My company has a
financial relationship with the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in
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