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Global
Resource Investments Founder
and Chairman Rick Rule is
a self-described energy
bull. In this special Energy Report from
his latest web broadcast, he highlights the global macro-trends that
will drive energy prices—oil, natural gas, uranium and
alternative energy—way
up in the coming years.
Long-time followers
of Global Resource Investments Founder
and Chairman Rick Rule know he
is an energy bull. He sees increasing demand as an inevitable outcome of global mathematical
formulas. "Around the world, in emerging and frontier markets, 3.5 billion people aspire to your
lifestyle, but haven't
been able to compete with
you for the last 150 years
because they haven't had any
money," he explains
in a recent webcast.
"As those people become
more free, they become
more rich and increasingly
they are able to compete with you. In the process, these 3.5 billion
people will increase their per-capita consumption of
energy. The demand curve in energy relative to GDP
is breathtaking. As
people on the bottom of the economic
pyramid get more money, what they do with it is
very energy-intensive.
So, GDP gains at the bottom
of the demographic pyramid
lead to disproportionately high
gains in energy consumption."
Rick sees inverse trends on the supply
side. "Energy trades on a worldwide basis are
led by oil, the supply of which is declining as a function of peak oil—which is partly a scientific
and partly an economic calculation—and, more importantly,
by a reduction in sustaining
capital expenditures by national oil companies. Mexico,
Venezuela, Ecuador, Peru,
Indonesia and Iran are large petroleum
exporters that may not be exporting
any oil at all in five years. When you have worldwide import demand growing at 1.5% or 2%, compounding a supply that is declining
by 25% or 30%, the potential intersection of those two facts
in the market could be explosive to the upside."
He acknowledges some
possible supply variables in the world, but believes the overwhelming equation stands. "A million barrels a day of Libyan crude back on the market would provide some moderation of the supply shortfalls. And a return
of Iraqi crude on the market
would also be useful. But my own personal
belief is that neither of those two sources of supply can mitigate
the supply shortfalls that we're going
to see from the national oil companies."
Rule's bullish oil price outlook
extends to liquefied natural gas (LNG). "LNG is, increasingly, a substitute
for oil. In light of a combination
of the reduction in the Japanese
nuclear generating capabilities and South American supplies going off line, we expect worldwide LNG supplies
to be fairly tight on a going forward basis." That is
good news, he says, for North America, which has a robust domestic natural gas industry. "The consequence of the pricing umbrella led by oil and import substitution of gas
molecules will return gas to profitability in the next two years,"
he predicts.
Rick is not predicting a
direct ascent in natural gas prices. The theme of the webcast is volatility. That painful reality goes for the overall market as well as the energy sector. "I think gas will trade
in a band between about $3.00/MMBtu
on the low side and
$7.00/MMBtu on the high side. Any dollar north of $5.50/MMBtu and these gas producers
start making real money."
Rule is also bullish on opportunities on the service side
in the oil and gas
business. "We are going
to need to do an awful
lot of drilling worldwide
to keep up with our demand for oil and gas. Increasingly, the places that produce oil—places like Libya and Iraq—don't have the expertise and services to develop and produce their reserves. Large service companies are beginning to act like mini-majors, providing contract services to
national oil companies or
multi-national oil companies. Therefore, we are bullish about some of the service companies."
What isn't appealing to Rick in the sector?
"We wouldn't be so attracted
to companies that have
large exposure to North
American or Western European refining
and marketing because we expect those margins to be continually constrained. But, companies that are leveraged to upside production we like a
lot. We particularly like the juniors and we particularly like the Canadian
juniors because Canadian institutions are on strike in terms of buying companies producing less than 5,000 barrels a day with market capitalizations
less than $500
million." Rule points to a matrix of valuation measures that changes markedly when companies get to a certain size, reevaluating
them as they get larger and eventually making big companies out of them, which can
yield takeover premiums.
"This market cap arbitrage is
going to be an important theme on a going forward basis," he says.
Rule is beginning to see uranium stocks
return to levels where he thinks they
are safe to buy again. Global got into the uranium sector starting back in 1999. "We were spectacularly
right," he recalls.
"Then, in 2005/2006,
when the uranium sector experienced its, sorry for the pun—boom, we were out of the way." Now he sees the tables turning again. "Uranium seems to be a four-letter word now.
People's expectations from
'05 and '06 were impossibly
high and as a consequence,
they were disappointed. That disappointment
was exasperated by the events in Japan." Rule sees four or five uranium
juniors that he thinks are quite attractive. He
may not be alone. Apparently Cameco Corp. (TSX:CCO; NYSE:CCJ) agrees
as evidenced by its recent hostile takeover offer for Hathor Exploration Ltd. (TSX.V:HAT). "We think this
is the first of several
consolidations on a worldwide basis in the uranium
business," he predicts.
"Now is the time to begin to establish positions in
the uranium sector." In Rule's
crystal ball, uranium energy will contribute
a growing share of worldwide electrical generation, not because people
are less afraid of it, but simply because when they flip a switch, they want the light to go on.
And without uranium, the light won't
go on in many parts of the world.
Rick also continues to be
attracted to some
alternative energy sectors—run-of-river, hydro and geothermal.
"People ask me at conferences, 'Rick, what is wrong with
the geothermal sector?'
The answer is nothing. There is nothing wrong with the sector. What has been wrong with the sector's performance is that the management teams who have entered the sector have been, let's say, challenged—implementation-challenged." Rick sees
three issues plaguing geothermal: long lead time to production,
capital-intensive preparation and implementation. Rule sees a light on the horizon for all three
of these problems. A number of geothermal projects are already five years into their
seven-year development
cycles. That is two-thirds
to three-quarters of the way
to completion. At some of these companies, the capital has already
been spent and they are selling at discounts to book.
That suggests that the cost of capital is extraordinarily low on a going forward basis because it's already been spent. That leaves implementation and
management. After a 20-year bear
market in energy, precious few alternative energy
management teams were left
to handle the investments
that have been made in the last 10 years. "All other things considered, if you have lost faith in the sector, are disgusted and looking to exit
for tax losses, I strongly suggest that you do it
now. But, do it with the knowledge that I will be
the buyer," he jokes.
Regardless of the sector,
Rule sees timing as one
of the deciding factors
in successful portfolio management. "I would encourage people who have
portfolio companies with substantial losses, but other portfolio gains this year, who are going to do tax loss selling, to do it now. Beat the rush," he advises. "The tax loss selling
we are going to see in November and December of this year—particularly if we experience more volatility between now and then, which I think is inevitable—is going to be
extreme. If you bought a stock for $2.00 and the stock is at $0.50 now
and you think you are going to want to sell it, you might
want to sell it now because
you might only get $0.30 or $0.35 if you sell it
later." Of course, the inverse applies on the buy side. "If there are companies that you are attracted to that have gone down in price this year, the existing shareholders of those companies may very well
be taking tax losses in November and December. So, build yourself a shopping list—or borrow our shopping list—and
look for names that you would like
to buy in November or December."
Global Resource Investments (GRI) founder
and CEO, Rick Rule began
his career in the securities business in 1974 and
has been principally involved
in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water
utilities, forest products
and agriculture. Rule's company
has built a sterling reputation
for its specialist
expertise in taking advantage
of global opportunities in the resources
industries. Last month, Rule
closed a landmark deal with Eric Sprott, another famous powerhouse in the arena. With GRI now a wholly owned subsidiary, Sprott Inc. manages
a portfolio of small-cap resource
investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S. This article is based on Rule's
August 31 Global Resource Investments webcast.
The
Energy Report
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