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Despite
the risks and unfavorable public opinion associated with offshore drilling,
the truth remains that the keys to unlock the planet's vast remaining oil
resources lie beneath ocean floors, in places like the Gulf of Mexico, Brazil
and even the Arctic. In this exclusive interview with The Energy Report,
noted commodities expert Amine Bouchentouf tells us why he likes the
prospects for oil explorers and producers and how the potash business is
fueling food production for a growing world.
Companies Mentioned: Allana Potash Corp. - Cairn Energy Plc. -
Diamond Offshore Drilling Inc. - Enbridge
Energy Partners, L.P. - Exxon Mobil Corp. - Hercules
Offshore Inc. - Karnalyte
Resources Inc. - Noble Energy, Inc. - Petrobras - Potash
Corp. - Rosneft Oil - Royal Dutch
Shell Plc - Teekay LNG
Partners, L.P. - Transocean Ltd. - Verde
Potash
The Energy Report: Thank you for joining us this afternoon
Amine. You wrote Commodities for Dummies and are a partner in
Commodities Investors LLC, an advisory firm. What prompted you to reach out
to a non-expert audience?
Amine Bouchentouf: I started investing in commodities around the year
2000, and in 2005 we saw an explosion of products for retail and
institutional investors covering the commodities markets. In conjunction with
that, I also noticed a lack of information for investors about commodities.
That's how Commodities for Dummies was born; it's a one-stop guide for
investors looking to get exposure to commodities. Why the "For
Dummies" series? I felt it's the Walt Disney of guide books: helpful,
easy-to-understand and trusted by everyone. Since I wanted to provide
investors with insightful, unbiased and trustworthy advice on different
commodities, it made a lot of sense to partner with the series. Oil, natural
gas, coal and fertilizers are all part of the commodities that I cover
in-depth in my book.
The first edition came out in 2007 and a second
edition this year. The book has done extremely well and is really a testament
to the growing demand for our industry and for hard assets in general.
TER: Concerns about global population growth and demand for
higher-quality food in developing economies have made the fertilizer market a
hot topic. What should the average retail investor know about this sector?
AB: The fertilizer space is extremely interesting. If you want to get
the broadest exposure to agribusiness then you have got to look at the
fertilizer space, which gives you exposure to everything from coffee and
orange juice to cattle and corn. The United Nations is predicting a
population explosion between now and 2050. With that comes a natural rise in
food demand. As we're increasing available acreage to produce grains and
livestock, we need fertilizers to increase yields and make larger-scale
agriculture possible in hard-to-farm climates. The fertilizer market was
relatively weak 10 years ago, but we've since seen prices start to go
sky-high in response to increased demand.
If you want a long-term play in hard assets, the fertilizer market is a great
way to get exposure to the commodity and agribusiness story. I've been looking
at the space for a long time and I first recommended Potash
Corp. (POT:TSX; POT:NYSE) when it was $12 a share. Had you followed my
recommendation you would be sitting on returns of 420%. Now I'm in the
process of looking for the next Potash Corp. Which company is going to
provide me with that kind of explosive growth? There are certainly a few
candidates out there. Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX) is very
interesting. The company has operations in Ethiopia, which gives you a unique
access point to Africa, the Middle East and Southeast Asia—some of the
world's fastest growing economic blocks. You'd be surprised to know that the
infrastructure in Ethiopia is world-class, with modern port, railway and road
infrastructure. In addition, the mining laws are very friendly. Finally, the
operating costs are low since the potash deposits in Ethiopia are near the surface,
only about 100 meters (m) from the surface.
Another company worth a look is Karnalyte
Resources Inc. (KRN:TSX). This is an exploration and development company
that has potential to build a 2 Mt./year potash
facility. It has very strong industry fundamentals and an experienced
management team. It can provide you with a good solid exposure to this space.
TER: Where are they located?
AB: They're up in Saskatchewan with over 85,000 acres of property.
Their Wynard Carnallite project is an exploration and early stage
pre-development property with a main zone of carnallite and sylvinite, which
are minerals containing potassium. The attractive thing about this project is
that they will be using what is called "solution mining," which
involves pumping a fluid into the mineral deposit through a
drilled well. The carnallite mineral containing the potassium dissolves in
this fluid to form a brine solution, which is pumped back to the surface. The
potassium and magnesium minerals are then recovered from the solution and
processed. Compared to conventional mining methods, this mining process has
lower capital costs, shorter time to production, and lower environmental
impact.
TER: Have any other companies in that field caught your eye?
AB: One of the best places for agribusiness in the world is Brazil.
Brazil is essentially the "Saudi Arabia" of food since it has
tremendous water resources and fertile land. I've been spending quite a lot
of time in Brazil and it's really a spectacular country to invest in. Brazil
is currently the world's second-largest importer of nitrogen, phosphates and
potassium, the three principal chemicals used as fertilizers. The internal
demand market is there and the deposits are there, so it makes sense for
companies to exploit the potash resources inside the country.
There are a couple of companies in the Brazilian fertilizer space that are
worth looking at. Verde Potash (NPK:TSX.V) is an interesting play. Verde
has both conventional potash and thermo-potash projects in the state of Minas
Gerais, the greenbelt of Brazil's fertilizer market. They also have developed
a new technology in association with Cambridge University in the U.K. to
combine potassium with a mixture of salts to create water-soluble potash. If
the technology is proven to be economically viable it could create a lot of
upside for investors.
Another interesting company is Potassio do Brasil, which is still in pre-IPO
mode. It has large reserves in the Amazon region, which shares similar potash
characteristics to the world-renowned Saskatchewan basin of Canada. It has
mineral rights along 400km in the Amazon basin, close to the 1.1 billion ton
(Bt.) Petrobras property, and it also has an active drilling and exploration
program. This is a company I'm keeping an eye on.
TER: Oil has been bouncing around in the $80-$100/barrel range for the
past year. Where do you think oil is headed, and what opportunities do you
see in this space?
AB: Oil is one of my favorite commodities because it is such a global
business and it is such a challenging business.
Right now I want to see how the situation in Europe develops. At the same
time, it's important to look at the demand side. If Europe blows up, what
happens to demand from Europe and what are the spillover effects in the
United States and China? The demand picture is still robust in emerging
markets. China has become one of the big drivers of oil demand growth along
with India and the United States. The United States is still the largest consumer of oil in the world. That's an important fact to
keep in mind. Supply-side disruption, whether in Nigeria or Libya or wherever
else, can really send prices forward. On a macro level, I do think OPEC has
done a terrific job of managing expectations and has been able to meet demand
in a steady and consistent manner.
As far as specific plays, I'm always looking in the energy/equity space for
oil companies that can provide good exposure. The offshore exploration
companies offer interesting opportunities. Brazil, for example, announced
major discoveries by Petrobras (PBR:NYSE) in its pre-salt basins. This has the
potential to catapult Brazil into the top-three holders of oil reserves in
the world. The exploration upside can be tremendous. Companies such as Transocean
Ltd. (RIG:NYSE; RIGN:SIX), Noble
Energy, Inc. (NBL:NYSE), Diamond
Offshore Drilling Inc. (DO:NYSE) and Hercules
Offshore Inc. (HERO:NASDAQ) can provide significant upside. Noble, for
example, is already growing and its day rates are increasing. If you want to
get more regional exposure, you can always look at Hercules Offshore, which
provides Gulf of Mexico exposure. After the BP Plc. (BP:NYSE; BP:LSE) oil
spill, we saw permitting essentially grind to a halt. The federal government
had a public relations and environmental nightmare on its hands. So it was
not going to move forward with permitting drilling activity in the Gulf of
Mexico at that time. Now we're seeing permitting come back to normal levels.
It's not quite to pre-BP oil spill levels but it's getting close. A company
such as Hercules Offshore, which had made some solid acquisitions in that
region, gives you exposure as regulations relax.
Another area that is off the radar screen of investors is the Arctic, which
can provide tremendous upside. The U.S. Geological Survey estimates that
there may be up to 450 bbl. of oil equivalent in the Arctic, which is like
discovering two Saudi Arabias of oil! We saw in September Exxon Mobil
Corp. (XOM:NYSE) and Rosneft Oil (ROSNS:RTS), one of Russia's biggest oil
companies and one of the top majors in the world, sign an exploration
agreement to go up to the Arctic and start a $2.2B exploration campaign.
They're expecting to find very, very large reserves up in the Arctic, close
to 50 billion barrels (bbl.) of crude, which is just a gigantic
number—that's the equivalent of bringing another Libya into the market.
Royal
Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) has been present in the Arctic
for three decades and has some interesting activities there; in fact Shell is
set to begin an extensive drilling program in the Alaskan Arctic that could
yield some large discoveries.
Another company I like that can give you pure Arctic exposure is Cairn
Energy Plc. (CNE.L:LSE). Cairn is a Scottish company that has been active
in Southeast Asia for a long time and has had tremendous success there.
They've discovered offshore wells near Bangladesh and India and have a proven
track record of creating shareholder value. Cairn has now shifted its focus
towards the Arctic. This is another exploration and production company that
can get that upside Arctic exposure you're looking for.
TER: Are there any other spaces in the market you're watching?
AB: I think the MLP (master limited partnership) space is very
interesting. It's not a space that a lot of people understand. As an
investor, I like MLPs because they provide you with two things: physical
commodity exposure and high yields. An MLP will distribute all of its cash
back to its shareholders. It's not uncommon to see MLPs that have yields of
8%, 10% and in some unusual cases as high as 18%. I believe a company such as
Enbridge
Energy Partners, L.P. (EEP/EEQ:NYSE) is a good way to get MLP exposure.
They're in crude oil and natural gas as well as transportation and storage,
with really great exposure to the energy basin of North America. I think the
company is going to deploy a lot of capital to grow a lot of different
projects, especially in the Bakken Shale, which is an area that you have to
be in as an investor. I highly recommend investors take a look at Enbridge as
an MLP with some solid yields.
Another area I like is the LNG space. I think Teekay LNG
Partners, L.P. (TGP:NYSE) is a world-class LNG company. We saw them
provide a large cash distribution in the second quarter.
Their yield right now is at about 7½%. In addition, it's acquiring
four more LNG carriers between now and 2012. I think these capital
expenditure investments are going to generate a lot of cash-flow for the
company going forward. Teekay and Enbridge are both solid companies.
TER: What final thoughts do you have that our readers can take away as
far as the whole commodity sector and energy in particular?
AB: The energy space is wide and vast. You have to be very selective
as to which type of assets you want to be in. You can find some tremendous
upside in the mid-cap space as well as in the small caps and the offshore
drillers. But, you have to be very, very selective. That said, my forecast
for energy, particularly oil, is upward. The supply situation remains very
tight and the demand from Asia and emerging markets is rising. If you want to
benefit, you have to invest in specific companies.
TER: Thanks for your time, Amine, and the valuable insights you're
provided for our readers.
AB: Thanks for having me.
Amine Bouchentouf is a best-selling author and globally
recognized expert in the commodities markets. He is the author of the
best-seller Commodities for Dummies, (Wiley), which provides factual insight
and analysis on energy, metals and agribusiness. Amine's market reports and
recommendations are read by over 42,000 investors each month. He is also a
founder of Commodities Investors LLC, an advisory firm that advises investors
on investment allocations into natural resources. He is fluent in English,
French, Arabic and Portuguese and graduated from Middlebury College with a
degree in economics. You can follow him on www.commodities-investors.com,
www.hardassetsinvestor.com/the-commodity-investor and www.twitter.com/commodityinvst.
Please feel free to email him with any inquiries at: amine@commodities-investors.com.
The
Energy Report
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