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The Dawn of the Natural Gas Era

Commodities / Natural Gas Mar 02, 2012 - 07:49 AM GMT

By: The_Energy_Report

Commodities Best Financial Markets Analysis ArticleNew oil harvesting technologies first perfected in the Bakken are opening up production around the world. Stephen Taylor, portfolio manager of The Taylor Fund and founder of Taylor Asset Management, is excited about the prospects for several New Zealand-based efforts. He's also optimistic about the dawning of a new age for natural gas as the chemical sector steps in to prop up slumping prices in this exclusive interview with The Energy Report.


The Energy Report: There's some escalating tension in the Gulf of Hormuz between Iran, the U.S. and Israel. Do you think that this will be a catalyst for oil prices in 2012?

Stephen Taylor: It may well be. It underscores the need for and the value of assets in politically stable areas. It also bodes well for energy assets in North America and places like Australia and New Zealand. The Middle East has always been a volatile place, but this issue certainly focuses investor attention on the risk in that area.

TER: What themes in energy are you positioning for?

ST: We like smaller emerging companies that are heavily focused on oil, as well as companies that are benefiting from the application of new technologies. Technologies that were pioneered in the Bakken in North Dakota have spread to similar geologic formations around the world, and there are going to be tremendous opportunities arising.

One of our largest positions, New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX), is applying some of those same technologies in New Zealand and is announcing terrific results. In fact, just recently the company announced terrific results from its Moki-2 well at 1,000 (K) barrels a day (bbl/d) of production. We think the company has tremendous potential ahead of it.

TER: New Zealand Energy seems to be one of the darling plays right now. Beyond its results, why do you think that is?

ST: New Zealand Energy and Tag Oil Ltd. (TAO:TSX.V) are really the only pure plays onshore in New Zealand. Of the two, New Zealand Energy is more focused on oil versus gas production. It's a country that requires 150K bbl/d in oil yet produces only 55K bbl/d. The domestic demand is there.

The company also has tremendous land positions that potentially could mean billions of barrels of oil. It's a question of what sort of recovery rate applies. The increasing level of exploration and drilling technology may just push that number higher in the years ahead.

We have found the company's management team to be very solid and straightforward. We were early investors in New Zealand Energy and participated in the first private round last year. It's a company that seems to under-promise and over-deliver, which we like.

TER: You said you prefer oil-focused plays, but you have a position in domestic oil and gas company Saratoga Resources Inc. (SARA:NYSE.A), which is a little heavier on gas. Are you concerned about Saratoga's oil:gas ratio?

ST: Saratoga was recently listed on the NYSE Amex stock exchange. It was a great day for the company and we were there with management for the bell ringing ceremony. Tom Cooke and his team have done a terrific job turning that company around. It was in Chapter 11 in 2010. He and his team brought the company through bankruptcy without any shareholder dilution, which is quite an accomplishment.

Saratoga's properties are focused on the offshore Louisiana Gulf Coast area. Importantly, they are all within state as opposed to federal waters, which means they are within three miles of the transitional coastline. Its leases are in shallow water, typically less than 20 feet deep. This affords significant cost savings when drilling wells. A company can get away with leasing cheaper, less sophisticated equipment than that required for drilling in deeper depths. Being able to drill cheaper wells is always a good thing.

Recent exploration activity is focusing investors' attention on the potential for ultra-deep gas in that area. The Davey Jones well, drilled by McMoRan Exploration Co. (MMR:NYSE) is in the process of bringing a flow-testing unit online over the next few weeks. It's becoming increasingly obvious that the deep gas may now be accessible from shallow water. A company could drill into the same formations, but only be drilling in 20 feet or less of water as opposed to 200 or more feet.

On that point, Saratoga is in discussions with McMoRan about forming a joint venture on one of its key leases. That process is continuing. We'll see what happens, but I would expect some news over the next several weeks. Saratoga has a very valuable collection of assets and we think the stock is a good buy.

Saratoga may be about 50% to 60% in gas versus oil, but it has a number of oil-rich targets that it could drill as well. The production profile for that area is very long lived and many of its wells have been in production for 40-plus years.

I also believe that further downside to gas prices could be limited. There could be a return and rebirth of the U.S. chemicals industry over the next several years based largely on cheap and reliable supplies of natural gas in the U.S. Huntsman Corp. (HUN:NYSE) recently said it plans to expand and enlarge its U.S. capacity.

There is reemerging demand for natural gas that many investors may be underestimating. That demand will come from traditional users, like the chemical industries, but also increasingly from transportation uses, too. Energy policies like the Pickens Plan, and similar offshoots that push U.S energy independence, will target commercial vehicles and transportation fleets. That's going to begin to use more natural gas more quickly than a lot of people are currently thinking. That's good for the country and good for natural gas producers.

So, the long-term outlook in this case may not take quite as long as some people think.

TER: What's your biggest regret so far in managing the fund?

ST: I'm not one to dwell on regrets. When I was on the Chicago Board of Options Exchange (CBOE) trading floor, we had an expression: "Next trade." If you made a bad trade, you had to forget about it, get back to business and move on to the next trade without consuming yourself with regrets.

TER: What advice would you give to retail investors looking to gain further exposure to energy?

ST: Look for quality management teams. Find teams that have a track record of generating shareholder value and taking care of their shareholders. That is the most important quality—before a project or anything like that. The wrong person in charge of a good asset will not get good results. Look for teams that have skin in the game. Tom Cooke at Saratoga owns 20-30% of the company. That's a substantial portion of his net worth tied up in the same investment as the regular shareholders.

TER: Thanks, Steve.

Steve Taylor is chairman and CEO of Taylor Asset Management, a Chicago-based investment management firm focusing on small-cap domestic equities and emerging markets. He also serves as a portfolio manager for the Taylor International Fund Ltd., a small-cap equity fund. In addition to emerging markets, Taylor's area of expertise includes private equity, restructuring and turnaround situations and both small- and mid-cap companies. He has considerable experience in the natural resources and finance industries in Canada and China.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: New Zealand Energy Corp. and Saratoga Resources Inc. Streetwise does not accept stock in exchange for services.
3) Stephen Taylor: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.

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