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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

How to Find Massively Undervalued Energy Stocks in Today's Irrational Market

Commodities / Energy Resources Sep 19, 2012 - 02:19 AM GMT

By: The_Energy_Report


Best Financial Markets Analysis ArticleBob Moriarty knows his own mind, and his frank, no-nonsense commentary has won him a large following of devoted fans—not to mention a track record of outstanding returns on investment. In this exclusive interview with The Energy Report, the irreverent, irrepressible founder shares his take on energy markets. Although he describes today's markets as the most irrational he's ever witnessed, he asserts that energy stocks—many of them massively undervalued—are bound to reward long-haul investors like himself. "You don't have to pick stocks in this environment," he advises. "Just take a dart and throw it."

The Energy Report: Assuming you watched, would you care to share some of your thoughts about the Republican National Convention and the Democratic National Convention?


Bob Moriarty: Are you kidding? We have this bizarre situation where every four years we pretend we have elections and pretend that two different parties offer different alternatives. It's one snake with two heads. I wouldn't waste my time watching two seconds of either fiasco. Whoever wins the presidential election is based on two things: one, how much money he can spend and, two, how big the lies he can tell. These guys are in Never Never Land.


TER: What forces really matter in the worldwide economic picture?


BM: The global financial crisis that started in 2007 hasn't ended. It's not even in the middle. It's going to get far worse. The dollar will crash, either through hyperinflation or deflation. The euro is hopeless. To hear adults talk about the euro continuing—a five-year-old could do the math. The euro can't go on. We're in a situation where we've been taught everything is good and wonderful, the government's here to help you, and doesn't want you to feel any pain. But postponing pain now will magnify it down the road. We need to bite the bullet, default on our debts, lower taxes and decrease the size of government.


TER: What, if anything, will drive oil prices?


BM: The price of oil is driven by peak oil. Everything else is meaningless. The decrease in 2008 was a result of the depression starting. The scary thing is we're still in the depression. Demand is still very weak. Despite increased supply from the Bakken, prices are going up. Unfortunately, $100 per barrel (/bbl) oil and $4 per gallon (gal) gas is the new normal. Peak oil is the only factor that matters.


TER: Peak oil or peak cheap oil?


BM: Peak oil means we've used up all the cheap oil. There's plenty of oil around. It's just going to get expensive from here. The oil and the natural gas coming from the Bakken depends on $80 or $90/bbl oil. So we can increase the supply of oil in the U.S., but only at higher cost.


TER: Does the fact that the price of gas has doubled matter if we get twice as much mileage with hybrid cars and more fuel-efficient engines on airplanes and trucks?


BM: The hybrid cars are a total waste of energy. Hybrid cars are a 3% solution. They cost far more to make; they consume more fuel over the life of the car due to what it costs to make them. You haven't mentioned ethanol, but ethanol takes 81,000 calories (cal) to generate 75,000 cal. Everything you do—when you grow corn, wheat, soybeans, anything else, build a car, build a washing machine—takes energy to produce. It takes more energy to produce a gallon of ethanol than the gallon of ethanol produces. So it's a net loss.


TER: What will it take to get a positive resolution to the Keystone Pipeline debate?


BM: Probably a revolution. We're already seeing riots in Greece, Italy, Spain, Portugal, France and even England. We're going to have them here. Both energy prices and food prices have a causal relationship to social unrest. The cost of food always has been relatively low in the U.S. because we have an excellent distribution system. Americans take cheap food for granted, but when we start paying $6–7/gal for gasoline and $5 for a loaf of bread, they'll wake up. Any supply disruption could drive up energy costs substantially.


TER: In a recent article in The Telegraph, two Goldman Sachs analysts talked about an emerging pattern in which each tentative step toward recovery in the world economy sets off an oil price jump that in turn aborts the recovery. In effect, the price of oil acts as a stabilizing factor, keeping the world economy in a perma-slump. What's your take?


BM: That's absolutely correct. People my age have always taken cheap oil for granted. Those in their 20s had better get used to higher prices, because they'll never see cheap oil again under any circumstances. Peak oil will affect every person; it will be the biggest factor in economies from now to forever.


TER: You say from now to forever. You don't see advances in transportation technology—extending battery life and more efficient cars—offsetting increases in oil prices?


BM: No, because cheap oil actually is its own enemy. We squandered energy for the last 150 years because it was so cheap. We squandered it. We're deeper in debt than any country has ever been, so there's been no advantage to having all this cheap technology, cheap energy, cheap washing machines, cheap automobiles and beautiful roads. People are not better off; they're actually worse off.


TER: Many people point to China's economic growth as a source of demand for a variety of things, including oil. Do you see that demand driving up the price of oil? Or because it's not cheap anymore, is it more likely to impede China's growth?


BM: China determines the price of everything on the earth, from gold and silver to oil to soybeans and wheat. Even under communism, China is a nation of entrepreneurs. China has grown like crazy for the last 20–30 years. The Chinese know how to build and create things consumers want. And China's 1.3–1.5 billion people want the good life. Unfortunately, there just aren't enough resources for them to do that.


TER: When we talked late last year, you said, "If you're not investing in something real, you're going to wake up and find yourself poor." How do you define real assets?


BM: If you invest in the shares of a gold exploration company, that company is looking for real assets. Gold, silver, palladium, rhodium, diamonds, food, water, land—those are all very real assets. You have to separate real assets from paper assets. If you invest in a T-bill, you're investing in a paper asset. There are $648 trillion in derivatives. Those are paper assets.


If you own shares in a producing gold mine or even a good exploration company, you have something real. It will be real regardless of the status of the economy. If you own U.S. T-bills or Greek bonds, you're going to wake up poor.


TER: If you're investing in explorers, though, the vast majority won't find an economic project. Aren't you really rolling the dice unless you focus on producers?


BM: That term is very apt. You are indeed rolling the dice. Don't think for a minute you aren't gambling. Of course you're gambling. What you need to do is gamble at five or 10 different companies. One will go up 100-fold, which will more than make up for the others.


If you look at the history of mining over the last 50 years, the majors don't do any exploration anymore. I mean zero. All they do is buy juniors that find the deposits or the projects. The majors are consuming their young and guaranteeing a lot of mergers and acquisitions over the next two, three or five years. Otherwise, the majors are going to be minors. It's that simple. I would never in a million years recommend investing in only one company. I say, spread the risk—and understand, absolutely, that you are gambling.


TER: So if investors are looking for safe assets because they want to go to bed rich and wake up rich, is the safer bet to go into a producing company versus an explorer?


BM: You need a mix. The shares that will go up the most are the ones that are apparently the riskiest. There are producing miners that you can do well in, but if you want a real perfect example, look at Kinross Gold Corp. (K:TSX; KGC:NYSE) or Great Basin Gold Ltd. (GBG:TSX; GBG:NYSE.A). Great Basin Gold runs the Hollister mine in Nevada. It's the highest-grade gold mine in the world, but it's losing money. If people are determined, they can always screw it up. The same tenets apply to oil and gas investment.


TER: What are some explorers that might minimize the risk of the gamble and produce viable projects?


BM: To be fair, you have to understand where we are in the cycle. Energy stocks, like gold and silver stocks, have been hammered over the last year to an incredible degree, and it's created an opportunity in that you can invest in any of them now and make money over the next year or two. It's the most irrational market I've ever seen, heard of or read about. I have no idea what created it, but you could throw money at resource stocks now, any kind whatsoever—potash companies, oil, gas, methane, nuclear and coal companies, food companies, water companies—and have a reasonable chance of making money. Find the stocks that have been hammered the most. Actually, you don't have to pick stocks in this environment. Just take a dart and throw it.


TER: Who are the stars in your portfolio?


BM: I have gone to hundreds of companies. I've talked to thousands of people who run energy, gold and silver companies. I invest in about 15 companies, and I invest for the long term. The short term is meaningless to me. I try to find good projects and good management.


TER: Do you like certain geographic areas better than others?


BM: You should be asking whether there are any countries to avoid. We're in an era in which governments are getting greedy. The new finance minister in Mongolia hates foreign investment and thinks all Mongolia's resources should be nationalized. Argentina recently nationalized its biggest oil and gas company. Peru has political issues. So Mongolia, Argentina and Peru are places to avoid. Tanzania and Ghana are talking about raising taxes.


The climate has deteriorated in the last year, and it's crazy because while the prices of the stocks are getting hammered, the countries are getting greedier. It's a difficult climate to invest in. However, if a company has three deposits, two might be in countries you'd want to avoid, but the third could succeed. It's a difficult time because the traditional rules of investing don't apply anymore. We're in a place the world has never been. Nobody knows where to go. It's a good time to be conservative.


TER: Any energy company investments you'd recommend?


BM: Natural gas, which has dropped to $2.20 per thousand cubic feet (Mcf) in the U.S. and Canada, probably represents one of the best opportunities for investment in energy history. It costs more than $2.20/Mcf to produce. Demand for natural gas, the cleanest and best form of energy, can only increase and it can only get more valuable. If you compare British thermal units (BTUs) in natural gas to BTUs in gasoline or oil, natural gas sells for one-quarter or one-third the price of 1 BTU of heating oil. That's irrational, and it's not going to last.


I happen to have a lot of money in a coal bed methane company in Indonesia, CBM Asia Development Corp. (TCF:TSX.V; CBMDF:OTCBB), and natural gas there is about $10/Mcf. It will do very well over the long term.


TER: Any Canadian companies you like?


BM: I like all the Canadian ones. Because they produce natural gas, they're selling at irrationally low prices, but I expect them to recover. The new normal is much higher prices for energy. If you accept that, you can buy them at any price, hold them five or 10 years, and take your profits.


TER: What will it take to push Aroway Energy Inc. (ARW:TSX.V; ARWJF:OTCQX) up to the $1–1.20 range, where you've indicated it should be trading?


BM: Aroway has done very well, and done everything it said it would do in terms of adding resources, but the market clobbered it because it was skewed to natural gas. It's a good company, it's well run, it's increasing its production 50% per year. It went up to $0.90+ but then back down. I was buying Aroway at $0.30/share. I don't think you could go wrong where it is now, $0.55–0.60/share, either.


TER: In our last interview, you talked about potash companies being hammered as much as gold and other resource stocks.


BM: They've been hammered more, and it doesn't make sense. Passport Potash Inc. (PPI:TSX.V; PPRTF:OTCQX) is trading below $0.20 today, the lowest it's been in five years. It was $1.50–2/share a couple of years ago. Eighty percent of the U.S. is in a drought. Australia's in a drought. Russia's in a drought. Corn went up 10% in July, soybeans 17%, wheat 25%—in one month. Passport's stock is down more than 90%, yet the conditions for greater demand for potash have never been better. People are writing about how we won't have any beef or pork 10 years from now because it takes 8 kilograms (kg) of wheat to make 1 kg of beef, and it takes 4 kg of corn to make 1 kg of pork. We can have wheat and corn or we can have beef and pork, but we can't have both. This drought absolutely will increase the value of things that improve agricultural efficiency. Fertilizer increases the efficiency of agriculture, and potash is the leader in fertilizer.


I think you can invest in any five energy companies or any five potash companies and be highly assured of a profit in one, two, five, 10 or 15 years. It isn't just the drought. The demand for potash will go up on a permanent basis, and the people who control potash will be in better shape. If you were going to look for a slam-dunk investment for the next 15 years, it would be anything related to energy—that includes agricultural stocks, which is an analog of the energy markets in that as the cost of energy calories increases, the cost of food calories rise too.


TER: So you think the potash companies could see a bump up in the next six months or so?


BM: More like an explosion. I wouldn't be surprised to see Passport at $1/share, and that would be up 450%. It would be cheap at $1/share. Verde Potash (NPK:TSX) in Brazil is another one. It was $9/share in January and $4-and-change now. It has a big potash deposit it's going to put into production. It's moving forward. Nothing's changed except demand for potash should be higher, yet the stock is down 60%. Verde is definitely one of those slam-dunk stocks. There's simply no alternative. Brazil is growing rapidly, needs agriculture and is committed to developing it. It makes no sense to import potash. Verde will go higher because it's right there.


TER: But by the same token, U.S. potash companies are exporting a big part of their production.


BM: The U.S. has always been a big producer of potash, like Canada. Canada isn't a big agricultural country other than wheat, and you don't particularly need potash for wheat. The U.S. doesn't need it either. China does.


TER: What's the best advice you ever received for investing in energy?


BM: I ignore everybody. Why would I pay attention to other people? I have access to the same facts, and I need to make up my own mind. That sounds egotistical, but people need to understand that they must learn to think for themselves. I'm just a well-read guy who travels a lot, does some research and long ago learned to think for myself. I am not a guru. There are no gurus.


TER: How about the best advice you've ever given yourself?


BM: I talk to myself, but I don't listen. It's not a sign of insanity to talk to yourself—only to listen to yourself.


TER: Thank you for your time, Bob.


BM: Thank you.


Convinced that gold and silver were as low as they were likely to go, and wanting to give other investors a foundation for adding resource stocks to their portfolios, Bob and Barb Moriarty brought to the Internet 10 years ago, and later added to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on relevant current events. Before his Internet career, Moriarty was a Marine F-4B pilot and O-1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war's most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower's pillars "just for fun."


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.


1) Karen Roche of The Energy Report conducted this interview. She personally and/or her 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: Aroway Energy Inc., Verde Potash and Passport Potash Inc. Streetwise Reports does not accept stock in exchange for services.
3) Bob Moriarty: 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 Reports for participating in this story.


Streetwise – The Energy Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.


The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.


From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.


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