It's Time to Buy More
Energy is entirely a different market from mining even though both revolve around resources. Energy demand is large and consistent. If the price of iron doubles, demand drops a lot. If the price of Natural Gas is cut in half, demand is about the same. A different use for resources reflects different demand curves. So you have to do a lot more forward thinking with energy. Your biggest cost is in drilling and most holes are blanks.
Once you have developed an energy resource, you can easily control supply. If the price gets too low, you just shut a tap, you don’t have to fire 300 miners and put a facility on care and maintenance.
We are at a very unusual time for Natural Gas. The West Texas price for NG is now at record levels in comparison to prices for crude. On strictly a calorie basis, crude should be a ratio of 6 contracts of NG to one contract of crude. So if crude is $60, NG “should” be in the $10 range. But the ratio is standing at an awesome 24 to 1. West Texas NG is being quoted at under $3 while West Texas crude is going for $71.66.
The West Texas price only reflects demand and supply within the US and to a smaller extent Canada but can give you an idea of relative values. It’s as if Cheerios are selling for $.30 an ounce and Wheaties are selling for $1.20 an ounce. Something is dead wrong in the valuation. Natural Gas is a lot cheaper than it “should” be.
I wrote about a company drilling for Coal Bed Methane (CBM) in Indonesia in December of 2008. The price of CBM Asia (TCF.V) was $.46 and I thought it was high. It was in hindsight. I wrote about them again in April when the price was $.23. I thought it was pretty cheap and it was.
CBM Asia is going to spud their first Coal Bed Methane well in Indonesia this weekend. They are targeting three coal seams totaling over 90 feet. This is a great time to buy; the wells are twins of existing holes. They have a pretty good idea of what they will find. Results of the thickness of the coal will be out within a week.
With coal bed methane projects, there are several issues. One is the thickness of the coal but it’s entirely possible to have coal without recoverable gas. So the other issues are both gas content and saturation. TCF will know the thickness of the coal seams in a week but it will take a few weeks to know about the technical issues.
The company is well cashed up with over $3 million in cash. Drilling CBM is cheap in comparison to natural gas wells because they are shallow. Success in the first well will immediately result in more wells being drilled. There will be a steady flow of news for months.
CBM Asia has the potential for putting Indonesia on the map for CBM. Because of how the government classified CBM, it was neither in the coal category nor the NG category and as a result sat dormant for years. Asia needs gas. There is a CBM liquidification plant nearby and TCF is drilling now.
What I read and saw convinced me to buy TCF in a placement over a year ago at $.60 and to load up the truck in the $.20 range. I have bought more recently. The risk is lower than it has ever been and reward potential higher. This could be a $10 stock or it could go away entirely. I’m betting on the former.
CBM Asia is an advertiser. I really like the concept, the country and the management. We are biased and since we don’t share in your rewards or losses, we encourage you to do your own due diligence.
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April 8th, 2020
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