The Nuclear Option

In this January interview, Exploration Insights Author Brent Cook took us to Canada’s revered Athabasca Basin to talk about one of the most-hated commodities. “Uranium is a long-term play. When I first started working with Rick Rule back in 1997, it was quite a few years before his contrarian thesis was proven right. But when it was, share prices of the few legitimate uranium companies increased tenfold or more. I suspect that his thesis will be proven right again. I would agree that the uranium sector is a place to intelligently deploy some money into the good deposits and the good companies.”

In this January interview, Outsider Club founder Nick Hodge seconded the position of uranium as “a good contrarian bet.” He called nuclear energy “by far the safest form of baseload energy, and it is carbon free.” He pointed to China’s pollution problem and new commitment to clean energy. “It is looking for threefold nuclear growth by 2020 to 50 gigawatts (50 GW), and then tripling that again by 2030 to more than 150 GW.

“And it’s not just China betting on nuclear,” he continued. “Saudi Arabia has committed to 16 nuclear reactors over the next 20 years at a cost of $80 billion ($80B). The United Arab Emirates is building four reactors at a cost of $20B, with the help of a South Korean consortium. India has six reactors under construction and is planning on building 35. Germany has said it plans to phase out its reactors, but the reality is the country will have those reactors until 2022. Meanwhile Japan, where Fukushima took place, is restarting its reactor fleet.”

Hodge also suggested considering solar power as a growth area. “Alternative energies are already growing faster than conventional sources. The U.S. solar market became an $800 million ($800M) industry in 2007–2008. Now it’s a $15B industry. U.S. solar installations for 2014 are projected to be 70 times more than in 2006. The U.S. installed 20 GW of solar power over the past 40 years. We’re now doing 20 GW every two years.”

He suggested making alternative energy part of a diversified portfolio. “I would advise investors to make safe, long-term, yield-producing investments in conventional forms of energy, and then to invest in medium- to long-term plays in quality midsize and small-cap renewable companies. The International Energy Agency says solar will be the world’s largest source of electricity by 2050. Given that, I would want the best-of-breed solar companies in my portfolio for the next 30 years.”

No discussion of uranium would be complete without a trip to Australia. In this April interview, Patersons Securities’ Simon Tonkin shared the reasons he thinks there will be a shortfall in the international uranium supply over the next couple of years. Primary among them: “China is the most important factor driving demand—and that simple fact is reason enough to buy cheap stock in Australia-based uranium miners. However, investors need to be selective and cautious as there are numerous junior uranium companies that require further funding.”

Katusa Research Founder Marin Katusa positioned development of domestic uranium sources as a matter of national security in this November interview. “The U.S. consumes just under 50 million pounds (50 Mlb) of uranium annually, and it produces less than 5 Mlb. So it’s importing over 90% of what it consumes. When one in five homes in the U.S. is powered by nuclear energy, that’s not a good formula for national safety. Half the uranium in the U.S. came from Russia for the last 20 years. Now only 25% can come from Russia by U.S. federal law. Sadly for the U.S., the difference is being made up not from Canada, not from Australia, not from U.S. production, but from Kazakhstan. That is going from a bad situation to an even worse one. In 2014 alone, the U.S. increased the Kazakh imports of uranium by over 80%. I think the U.S. has positioned itself in a tough situation here. The U.S. is still the largest consumer of uranium globally, and that’s not going to change. We are going to have a rude awakening shortly. Will it change in the next few months? No. But this is something that you’ll see getting a lot of media attention by 2019.”

Economic Warfare

321energy.com Cofounder Bob Moriarty was blunt in this February interview, when he warned the drop in oil prices could trigger World War III. “The United States is the biggest oil producer in the world today, and Russia is number two. Russia’s economy is based on oil priced at $110 per barrel ($110/bbl). They are very angry at the U.S. and Saudi Arabia for the games that have been played in oil. Oil at $45/bbl is not sustainable. It could bring down the world’s financial system all by itself.”

It was not all bad news, however. Moriarty saw the low prices as an opportunity for companies and investors with money to invest in fire sale assets. “You want to have a lot of cash on hand when people are giving assets away just because they are uneconomic. A company with $91M in cash can double, triple, quadruple its total assets. This is a wonderful time to have cash and be in the oil business.”

ROTH Capital Partners’ John White focused attention on the Permian Basin in this February interview. Because it was the latest basin to shift to drilling horizontal wells, White saw it as a new area to explore. He cautioned against broad-brushing estimates on breakeven prices for shale plays. “The Bakken is different from the Eagle Ford, and the Eagle Ford is different from the Permian. Within each basin, there’s a large variation in the quality of the shale formations. You can have excellent results in the western part of one county, and then go over to the eastern part, say 10–20 miles away, and not experience the same results. The quality of the shale formations is very localized.”

In this March interview, AlphaNorth Asset Management Founder Steve Palmer called negative investor sentiment around the oil and gas space “shortsighted.” His secret is to focus on names with company-specific catalysts that are not dependent exclusively on the commodity price. He has found those opportunities in places as close as the Montney Shale in Canada and as far afield as Colombia and the East China Sea. “It is a good time to be contrarian. As a long-term investor, I actively search the space for opportunities,” he said.

In this April interview, Chen Lin, author of What Is Chen Buying? What Is Chen Selling?, also lauded the opportunities created by low oil prices. “The gap [between Brent and West Texas Intermediate (WTI)] may widen sharply this summer if oil storage in North America continues to fill up,” he predicted. “That will be a perfect buying opportunity, a once-in-a-lifetime buying opportunity for domestic energy stocks, because WTI will go back up. You see, this is not a global supply/demand imbalance. We have all this oil in storage because the United States forbids raw oil from being exported. That artificially depresses the prices. And it will have consequences. If oil goes to $30 or $20/bbl, that will basically bankrupt the U.S. domestic oil industry. And it will put pressure on the president and on Congress to lift the ban on oil exports.”

He continued, “Many analysts are looking for a V-type or U-shape recovery, but I see it as more of a reverse-J pattern. Prices will recover some, maybe halfway, and then stay around $60 or $70/bbl for an extended period of time. If we go above that level, the North American fracking factory will start running too high again. That will keep the top of the oil price for a pretty long time unless some geopolitical event occurs like Saudi Arabia getting attacked. That is why I am looking for international oil plays that can make money at around $60/bbl oil.”

Some were more optimistic about the scale of a possible recovery. In this April interview, RBC Analyst John Ragozzino said he expected a V-shaped oil price trajectory and spelled opportunity MLP (master limited partnership).

“Our thesis on crude oil is largely predicated upon a deceleration of non-OPEC supply growth, as we’ve seen the U.S. onshore rig count drop by more than half over the last five or six months,” he said. “Additionally, we are seeing a growing inventory of uncompleted unconventional wells, as operators defer completions to an environment of better pricing and higher returns. When you combine these two factors with a global demand picture that calls for roughly 1.0–1.1 million barrels (1.0–1.1 MMbbl) of annual demand growth over the 2015–2016 time frame, it doesn’t take long before the global oversupply situation is largely eroded and we find ourselves back in a state of equilibrium. I think that will be the meaningful catalyst that gets us to higher prices in 2016.”

Ragozzino said it was time to revisit the master limited partnership space. “Today, upstream MLPs are looking healthier after cutting distributions and making meaningful reductions in spending plans for 2015.”

Oil service companies also got a nod this year. In this July interview, S&A Resource Editor Matt Badiali explained the long-term strategy in a low oil price environment. “I like companies that supply fracking equipment and material. I think there is an opportunity now to buy assets that are going to be useful forever at very low prices. For instance, I like the frack sand producers. Engineers have discovered that more sand per well is more economical. They are, in a sense, trading the sand cost for better oil production. That is an easy trade to make.”

Other pockets of opportunity exist in the fuel space regardless of gas prices. In this October interview, Piper Jaffray Analyst Brett Wong shared the under-the-radar opportunities in biofuels, and the engine that will keep pushing them regardless of the price of a barrel of oil. “Depressed energy prices are hurting a lot of the energy players. The macroeconomic cycle in energy is going to be important. But even without a turnaround in the energy construct, the biodiesel industry works because it is mandated by the government.”

Battle for the Future

In this April interview, Chris Berry, author of Disruptive Discoveries Journal, suggested shifting to energy metals as a way to take advantage of changing supply-and-demand trends during a period of disinflation. “The global economy is dealing with the excess capacity built up during the commodity supercycle in the last decade. This excess capacity will eventually be consumed, but it’s going to take time, and it’s going to vary from metal to metal. Some of the energy metals—any metal or mineral used in the generation or storage of electricity—are growing well above global gross domestic product (GDP) and aren’t flooding their respective markets in the way that iron ore is. Examples include lithium, cobalt, vanadium, scandium, rare earth elements, uranium and copper. I think this value chain is going to be an enormously profitable sector in the coming years. There is overcapacity in some energy metals today, but pricing, while soft, has seemed to stabilize.”

Lithium was a popular investing sector this year, as all eyes were on the demand that could be created by the opening of Tesla Motors Inc.’s (TSLA:NASDAQ) Gigafactory. In this June interview, VSA Capital Analyst Paul Renken explained it this way: “If the growth in battery usage—particularly in large-scale batteries for things like electric vehicles, but also in the stationary storage market for storing power from alternative energy sources—scales up according to projections, then essentially all the known lithium deposits in the world will have to be put into production just to feed that market. In other words, the demand for lithium in 10 years’ time will have at least doubled. All the current lithium projects will be needed at some point.”

Along with lithium, battery manufacturers will also need a secure supply of graphite. In this September interview, Gold Stock Trades Founder Jeb Handwerger pointed out that “This is just the beginning. We’re in the early stages of a revolution in powering transportation and homes. This really is disruptive technology. Annual growth in the battery space could be around 20%, which means that demand could double every five years.”

Timing is important when investing in these emerging spaces, Handwerger added. “Right now, [graphite] prices are extremely cheap because most of it is controlled by the Chinese, and the global economy has slowed down. But in the next three to five years, I expect more demand from the graphite sector in North America. The key to success will be processing the graphite to meet the needs of the battery manufacturers,” he said.

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