Casey's Energy Guru: Today's Hottest Energy Plays
Marin Katusa, interviewed by Louis James, Casey’s Energy Report
September 19th, 2010
Marin Katusa, an accomplished investment analyst, is the senior editor of Casey’s Energy Opportunities, Casey’s Energy Confidential, and Casey’s Energy Report. He left a successful teaching career to pursue analyzing and investing in junior resource companies. In addition, he is a regular commentator on BNN and a member of the Vancouver Angel Forum where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects. Using advanced mathematical skills, he has created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver.
L: Today, we turn to one of the more interesting – and colorful – characters on our team, Marin Katusa. Marin’s bio neglects to mention that he is also the lead singer of a rock band called Era Flair. Why should investors listen to a guy who wears leather pants and plays an electric guitar? Because he’s a bloody genius, that’s why – and he’s dialed into these markets like no one else. So, Marin, what’s hot and how do you make money on energy today?
Marin: First, you have to realize that the energy sector is different from the metals and mining you focus on, Louis. Anywhere in the world, the copper you mine is just copper, and the gold you refine is gold. But take coal as an example. It’s not just coal – there are many different types: premium metallurgical coal; semi-hard coking coal; semi-soft coking coal; and even among the thermal coals – the cheap stuff you burn to make electricity – there are different categories that produce different amounts of ash, among other variables.
So, just because you have a coal deposit, that doesn’t mean you have a buyer who can use your coal.
L: Ah. Someone may have a power station nearby, but it’s not designed to burn the specific kind of coal you have… And the power station that can use it is too far away to make it economic to ship the coal there?
Marin: Exactly. Copper costs dollars per pound, but coal costs dollars per ton, so if you don’t have cheap rail nearby, or a user on site, you got nothin’. There are similar constraints on the natural gas business. You can’t just study the commodities, you have to study the markets from top to bottom, and often that means understanding the local users and forecasting their probable demand.
L: Even oil isn’t just one thing, right?
Marin: Right. There’s heavy and light, and refineries designed to process one type cannot handle the other. Proximity to pipelines and shipping is important too. So you really have to understand the characteristics of each type of each energy commodity, the logistics of getting these commodities to market, and the various end users’ differing needs.
L: A quick aside – are you looking at thorium plays? There seems to be some buzz on the street these days about thorium.
Marin: We’ve been following the thorium markets for five years now, and there is some buzz going around, so we’re working on a special report on the subject that should be out soon.
L: Can you give us a sneak preview?
Marin: It’s even more like what I was saying about the coal markets than uranium. You have to know who your end user is going to be. There was a Bloomberg article recently that suggested that the Obama administration could switch from uranium to thorium. But it’s not so easy; they are not the same thing, and there are trillions of dollars of infrastructure that would have to be changed over. Who’s the end user who’s ready to use your thorium? You have to know, or you have no project, whatever today’s price per pound might be.
Marin: By being very careful. Not only do you have a lot of homework to do--
L: When you were a professor, were you one of the ones who gave kids a lot of homework?
Marin: Hey, I didn’t make the markets this way, I’m just telling you what you have to do if you want to make money in them. And you can’t just let yourself get swept away by whatever the flavor of the day is, be it thorium, or coal, or what-have-you.
Now, I do like coal, in the right company with the right market. The U.S. currently gets 50% of its power from coal-fired plants, so companies with deposits that can feed those plants are very interesting. But some of those metallurgical coal companies – they produce coal for making steel – were trading at over 25 x earnings. They were good companies, but that P/E implies an expectation of doubled production, or a three-fold increase in earnings, and that would be very difficult to deliver in short order.
L: Those are pretty high expectations.
Marin: The market really likes energy commodities right now. Money is flowing and wants to land in stocks of companies that are doing the right things. But I said to stay away from these stocks, even though the companies were good companies, because the market was simply overvaluing them. And in the last few months, they’ve corrected 40%.
L: Good call.
Marin: The show’s host knows me, so he knew I wasn’t just looking for things to stay away from. He asked what my top pick at the time was, and I answered Cline Mining (T.CMK) but said that I hadn’t done my due diligence on the ground yet. Unfortunately, the stock shot up 80% after I mentioned it, so we didn’t end up recommending it. That just goes to show you how bullish the markets really want to be right now. If there’s any kind of good reason to expect a stock to do well, it’ll take off. So, I’ve narrowed things down to “best of breed” within each sector – that’s all I’m interested in right now. I think I’ve got such picks staked out in geothermal power, coal, and uranium. That’s what we’re going to be focusing on over the next two months in Casey’s Energy Report, especially in coal.
L: If you were right about those specific companies correcting, and they dropped 40%, did you make money shorting them?
Marin: Someone else might have, but not us. We don’t recommend shorting in the newsletter – it’s for retail investors, many of whom are not prepared to make short trades, nor to deal with the extra risks associated with them. When you short, you have to be right about more than which way a stock is headed; you have to time it right. If you make the right call, but your timing is off…
L: You still lose money.
L: So, there’s no one sector of the overall energy market that really floats your boat these days; it’s all about picking the gems out from the gravel?
Marin: Yes, that’s what I’m focusing on, not just for the newsletters, but for the funds I manage as well. I believe that if you invest in “best of sector” companies, you’ll be rewarded very handsomely, come what may in volatility along the way.
L: Can you give us an example? Or would that be giving too much away?
Marin: No problem. In the geothermal sector, there’s one stock I think is almost a textbook example of a great energy speculation. I’ve been out to inspect their operations in the field, I’ve met with management numerous times over the years, and now I’m making a big, big investment in it. The company is Nevada Geothermal Power (V.NGP, OB.NGLPF).
L: I remember covering them before we split the energy newsletter from the metals newsletter. It was always a good story, but the stock never seemed to take off. Why do you think it will now?
Marin: They’ve spent the last ten years building their plant – the largest geothermal plant built in the U.S. in the last ten years, and in Nevada, 25 years. They get tax credits for green energy and have power purchase agreements (PPAs) in place that give the project quantifiable value. This thing is so undervalued now, even by Graham & Dodd type analysis. It should be trading at about 94 cents a share, just for the existing assets and cash, but it’s trading around 50 cents. It could almost double, and you’d still get all the company’s exploration upside for free.
L: Sounds like a gem to me.
Marin: It is – it’s the only geothermal company we own in our fund. Do you remember the Casey conference last September, in Denver, when Ross Beaty was plugging his geothermal company, Magma Energy (T.MXY), and I said that it was a great company, but that it was overvalued at the C$2.00 price range it was trading at, at the time?
L: I remember. You had Ross and Rick Rule and Bob Bishop and Lukas Lundin there.
Marin: Yep. I told the audience to be patient and they’d be able to buy the stock under C$1.50, and they all said I was wrong, that the company was adding value and heading higher, but it did drop below C$1.50.
L: It’s close to a buck now, Canadian.
Marin: Right – so people need to be cautious. You can’t rush in, even when the story is great and has someone as phenomenally successful as Ross Beaty behind it. There are lots of fund managers out there who get paid based on realized gains, which means they get in and get out very quickly. Those are big positions, so this can put selling pressure on even the best stories. If you’re patient and really do your due diligence to determine what price it makes sense to buy at, and then wait for the market to come to you, you’ll do well.
L: Sounds good. But what would you say to our readers who’ve been seeing Doug calling for The Greater Depression and all our other bearish calls on the economy, and who agree with our analysis, but who’ve seen energy commodities decline when the economy slows down? They might be reluctant to invest in energy now, and how could anyone who thinks the global economy’s in trouble blame them?
Marin: Generally speaking, that caution is bang on target. Oil in particular is ripe for correction, as there are huge speculative positions in that market.
L: What do you mean?
Marin: Right now, in the U.S., China, and in certain countries in Europe, supplies are at all-time highs. Production is still going great, the pipelines are running at capacity, and not only are the onshore storage facilities running at capacity, the offshore tankers and such are as well. There’s even something Dr. Bustin and I discovered that we call the “invisible U.S. gas supply.”
L: How’s that?
Marin: Because of the way the new fracking technology works, there are thousands of wells that are basically being used as storage facilities. These resources don’t need to be put into production when they are tapped – they can be brought online in just a couple of days, so the companies can sit on them until they need them. It’s like a giant natural storage facility.
Meanwhile, all these funds looking for good investments have figured out that oil is one of them – and it is, but they’ve driven the prices higher than the supply and demand justify. We’ve calculated that the current price of a barrel of oil includes about $15 to $20 due to speculation alone.
L: So, the price of oil could drop by that much in a day or two, if the winds changed and these speculators decided to exit the market?
Marin: Yes. Think about what happened in the aftermath of the Deepwater Horizon disaster in the Gulf of Mexico. There went 25% of the U.S.’s domestic oil supply – boom, offline in a day. Now, normally, you’d expect to see the price of oil to increase, right? The supply drops, so the price rises. Basic economics. But it didn’t – it corrected almost 20% in that week. That tells me there were a lot of speculators in the field, and they panicked and got out. There’s just no other reason for the price to drop when supply became constrained.
L: So… How do you pick oil companies in such an environment?
Marin: We use $45 oil. If a company can’t make solid profits at $45 a barrel, we stay away. There are a lot of companies making good net-backs – the difference between their cost of production and the realized price per barrel – at $80 oil, but those margins dwindle, or turn negative, at lower prices. So, to see the true strength and value of an oil company, we use a much lower oil price. We’ve done very well in the newsletter, even on the bigger companies, using $45 oil as our yardstick for best of sector.
L: And if there is a big correction in the energy sector, you average down?
Marin: Right. The need for energy isn’t going away, and profitable companies on sale will make for spectacular investments at that time. For example, our oil-sands pick is definitely the best of sector. It’s not only the lowest-cost producer in the sector – oil sands being the largest source of unconventional oil in the world right now – but it has excellent growth potential. But we recommended waiting for a correction, telling subscribers to buy only under a certain price.
L: I imagine the company loved that.
Marin: We get a lot of heat for our “buy under” recommendations, just as you do, but we don’t work for the companies, we work for our subscribers. And in this case, we had to wait four months for our price guidance to be met, but the market did come to us, and our subscribers got in at much lower prices. That’s the beauty of it – it really works.
I like to tell investors that if they feel like they’ve missed the boat, they’ve missed the boat. You don’t buy a ticket after the boat’s left shore, you wait for the next one.
L: [Laughs] If you miss the boat, there’s no point in jumping; you’ll just get wet.
Marin: [Laughs] That’s right. You’ll just drown.
L: Anything new and exciting in the business?
Marin: I think tapping into new sources of unconventional oil and gas will continue spreading, especially into India and Asia. You know, we were the first research team to write about European shale gas. That’s become a big story now, but we beat the Merrill Lynches of the world to it. I think we’ll see more of that. Closer to home, depending on how the elections go in the U.S., I think American geothermal plays could become very hot.
I see a big consolidation coming in the geothermal sector. There are big players here, multi-billion-dollar companies, but they’re all private. You can’t play that way, but you can buy the up-and-coming companies they are likely to take over, like NGP and the others we follow.
Just remember to be very careful. These are speculative markets – the only money you should have in them is your high-risk money. And when you see solid gains, take profits and reduce your risk. To stay in this game, you need to recover your initial capital and add to it as you go, not risk it on dangerous “double or nothing” type bets.
L: Understood. Well, thanks a lot – some great insight into how to play the energy sector in today’s market environment.
Marin Katusa, interviewed by Louis James, Casey’s Energy Report
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