An interview with Marin Katusa, Casey Research

In the past three years, Marin Katusa, senior energy analyst at Casey Research, has become one of the most respected and listened-to authorities in the investment advisory business. He spends the bulk of his time on airplanes and in far-off places studying the future of energy… and the best ways to make money from it.

Brian Hunt, editor in chief of Stansberry’s free online investment digest, The Daily Crux, interviewed Marin to get his take on where oil prices are headed for the long-term… the regions where investors and traders should focus their dollars… and some of his favorite energy companies with massive upside.

The Daily Crux: Marin… we noticed you guys at Casey Research are bullish on energy. Can you explain to us why?

Marin Katusa: Well, as we’ve mentioned in our Casey Energy letters, we’re short-term bears but long-term bulls.

I think there’s a very good chance oil will be knocked back down along with other markets in the short term, but I’d consider that a rare opportunity to buy the best companies at a steep discount. Long term, I’m very bullish on oil because I think the supply of cheap oil is running out.

The days of cheap and easy oil are over. Oil is getting harder and harder to extract because most of the easy-to-find deposits have already been found and extracted.

The best remaining deposits are deep underwater like in the Gulf of Mexico or offshore of Brazil, in state-controlled or politically unstable areas like Iran and Venezuela, or experiencing dramatically falling production like Mexico. There are also huge oil-sands deposits in Canada, but these are more expensive to extract – anywhere from $35-$40 per barrel for existing production, up to $65 or more for new production.

The simple fact is oil prices will eventually rise due to the increased costs involved in meeting existing demand.

On top of that, you’ve got developing countries beginning to significantly increase their own demand. Right now, you’ve got just 30 or so of the world’s most developed countries, known as the OECD, that consume about half of all the oil produced.

As emerging countries like China and India begin to increase their standard of living, they’ll start using a lot more oil. As you guys know, oil consumption per capita is tied very closely to GDP per capita of the country. So this means these emerging countries could be using multiples of the oil that they use now.

Today, China uses just under six barrels of oil per day for every thousand people. In India, it’s about two and a half barrels for every thousand. In the U.S., it’s just under 70 barrels for every thousand. Even if you figure just a 20% increase in China and India per person – those are huge, huge numbers. China alone has over a billion people. This is going to add tremendous upward pressure on prices.

And of course, I’m sure your readers are aware of the long-term threats to the U.S. dollar. Dollar depreciation will only make the problems I just mentioned that much worse.

That said, in the short term, I think oil is very vulnerable to pullbacks in the general stock market. So we’ve been telling our subscribers to be very cautious. In fact, a year ago, I decided to use $40 oil as the basis for all of our analyses for our newsletter. If a company we were looking at wouldn’t be profitable at $40 oil, then we wouldn’t go any further. The logic behind $40 was to provide a real margin of safety should we get the correction in oil I’m expecting.

But it also pushed me to look a lot deeper and be more selective, and it’s really paid off in our results – over 90% of my recommendations over the last year have delivered significant profits for our subscribers.

The funny thing is that by not using $70 or $80 oil, I started getting hate mail from people, saying, “Don’t you know oil’s at $73 and you’re using $40?” It was hilarious, but that’s exactly my point. If a company cannot be profitable at $40 per barrel of oil, it will underperform its peers even when oil is higher. When I use $40 oil and I like the financials – it’s gold.

A good example of this is what we did with Nexen. When I first wrote it up, it was trading at C$23 per share. After doing my analysis, I thought its intrinsic value was less. I said, “Buy under C$16 per share.” Of course, I got people writing in saying I was out of my mind for setting the buy price so low. Just over a month later, it was trading down below C$16 per share, and my subscribers ended up making about 50% within four months on a low-risk company.

So by using $40 oil, I get my true value, rather than the market value. There’s a difference between intrinsic value and the market value, and I go with intrinsic value. I don’t care what people are paying in the market right now. You might not get it today, you might not get it next week. You have to be patient. It’s what I call “stink bid investing.”

Crux: What else do you look for?

Katusa: Another factor I like to look at is what I call game changers. An example of a game changer is what has recently happened to the natural gas sector in the United States. Companies were victims of their own success, because they were so successful in using new technologies to retrieve gas from the shales, they drove the natural gas price down.

Using advanced technologies to discover big offshore deposits is an example of a game changer in oil. But what you’re going to see is a lot of the big finds are going to be drilled by the major oil companies – what I call the super majors – because it’s just so expensive to drill these targets.

Crux: Nobody else has the money.

Katusa: That’s right. So the only frontiers left for conventional oil production that can be extracted easily and cheaply, like I mentioned before, are in politically unstable countries like Iran, Iraq, Libya.

These countries are fully aware of the potential of their resources locked within their borders. They’re increasing the royalties they charge, including the gradual increase in the use of service fee contracts.

We spent a whole issue talking about this in our Casey Energy Report, in the October issue. In countries where the governments hold the ownership of the oil – such as south central Iraq, Kuwait, even potentially Mexico – these are places that you want to watch out for, because they are constitutionally barred from giving foreign oil companies ownership of the oil in the ground. They’re not as positive as people think they are.

A reliable and friendly oil source to the United States, such as the Alberta oil sands, is not cheap to produce. The oil sands require at least $35-$40 per barrel at the very minimum to extract, compared to less than $5 per barrel in places like Saudi Arabia, Iraq, and Kuwait.

Proven reserves in politically stable parts of the world unfortunately will cost the U.S. consumer a lot more money per barrel. We spent a lot of time in our latest issue of Casey’s Energy Opportunities looking at all of the national oil companies. Of those, you’ve really only got three you can possibly invest in, if you dare.

Crux: How about your take on the likelihood of big takeovers and buyouts? Do you see oil-hungry nations like China coming in to buy up a lot of reserves?

Katusa: Absolutely, but it’s not just going to be the Chinese, it’s also going to be big oil companies who want to replace their production with proven reserves in the ground.

An advantage the Chinese companies will have over the Western oil companies is the Chinese ability to leverage their political and economic muscle in places such as Africa, Venezuela, and Bolivia.

These countries potentially hold world-class oil deposits, but it’s much riskier for a Western company to explore these regions than the powerful Chinese oil companies.

Crux: China is already in a bidding war with ExxonMobil for African oil…

Katusa: Right. What our angle is, if you’re looking to invest in Africa, you’re looking for elephant-size deposits – what they call “world class deposits.”

The company needs to go in with a crew able to maneuver in politically unstable parts of the world. We had a big and fast win on a company called Tanganyika Oil, using just that concept. They went in, they built up production, then sold the company to the Chinese.

We’re doing it again right now on a company called Africa Oil – ticker symbol is AOI on the Toronto Venture Exchange – that’s partnering with the Chinese.

The man behind AOI is the same person behind Tanganyika Oil, Lukas Lundin.

Lukas Lundin, like his father before him, has a long record of going into politically unstable parts of the world and succeeding in developing world-class deposits and selling them at huge gains for the investors. So you’re going to see a lot of this type of partnering going on where the Chinese want the North American expertise, and in return, the Chinese add value by political clout and financial clout, helping to pay the costs of development.

We wrote up Africa Oil as a buy under C$1, and when it popped up to about C$1.50, we told our subscribers to take a Casey Free Ride [a profit-taking strategy] when the stock was trading above C$1.30, and it subsequently went as high as C$1.70. Currently we have AOI as a buy under C$1, and it’s trading at C$0.87, which we view as a very cheap cost for this stock.

Crux: Are there any other countries you’re interested in right now? Are you interested in Iraq?

Katusa: In northern Iraq in the Kurdistan region, there are some good onshore blocks with decent royalty rates.

A company called ShaMaran (ticker symbol is SNM on the Venture Exchange) we think has huge potential. It’s totally cashed up. I wrote it up as a buy under C$0.20 and put two buy signals on it. It’s trading at C$0.57 now. It went as high as C$0.80.

And they’ve got about C$0.25 in cash per share. This was a company that was trading less than cash – they had more cash than the market cap. Our shareholders bought millions of shares, because we were the only ones writing it up. And it had zero interest – there was nothing going on with it. And they’re now in northern Iraq in the area of Kurdistan, which has huge, huge potential.

I’ve also been looking at Colombia. I think that’s a country that people have to pay attention to. In the last month, a lot of the smart money, the big, big players in Vancouver – Frank Giustra and Sam Magid – have been putting huge money, their own personal money, into a bunch of oil plays in Colombia. I would recommend your readers take a look at some Colombia plays. One that I really like is Petroamerica, symbol PTA on the Venture Exchange.

Crux: Great. Any parting thoughts?

Katusa: I think what you have to emphasize to people is to buy at a discount to intrinsic value when it’s unpopular, and sell at market value when it’s popular.

That’s not just being a contrarian. A contrarian is just buying something that’s unpopular. Buy something unpopular that has a great discount to its intrinsic value, and when you sell, sell when it’s popular and trading at the market value, not at its intrinsic value. So those are the two rules that I have.

Crux: Thanks for your time.

Katusa: My pleasure.

As mentioned above, Marin’s track record for profiting in resources like crude oil, natural gas, and uranium is unmatched in the industry.

If you’re interested in reading a monthly analysis on the trends and stocks Marin likes, you can get on board as a Casey Energy Opportunities subscriber for only $39 per year. It’s an incredible deal and completely risk-free, with our 3-month, 100% money-back guarantee. You can learn more about a subscription here.

I hear it a lot from inexperienced Wall Street analysts, bloggers, and money managers who spend little time living in the “real world”.

Here’s what they’re saying: “Gold is way too popular now… It’s near the end of its bull market.” The recommended “action to take” is to cash in your gold profits and move on to something different.

I can tell you that taking this advice is a big mistake. Anyone who believes gold is too popular with the mainstream public simply doesn’t know who the mainstream public is… and they don’t understand how bull markets end.

Sure… gold is up big since it broke out to a new high in September. In just over two months, it has climbed from $950 an ounce to $1,100 an ounce.

Click here to read the rest of Brian Hunt’s analysis of the state of gold, published online at Fleet Street Invest.

David’s argument for a rally in gold shares boils down to this: After years of digesting the costs (hiring workers, buying new equipment, and upgrading facilities) associated with getting a mothballed industry back into fighting shape, big gold producers are finally enjoying lots of cash flow.

Add the increasing price of gold, and you’ve got the ingredients for a big bull market in gold miners. It’s a solid thesis… but let’s check with old man market to see what he thinks. Have a look at Goldcorp (NYSE:GG).

Goldcorp is one of the “flagships” of the gold-mining industry. It is one of the few gold miners with a market cap over $10 billion… and widely considered one of the best-managed mining companies on the planet.

As today’s chart shows, the market likes the bull case for gold shares. Goldcorp is showing classic bull-market behavior… the tendency to make “higher highs and higher lows.” Shares reached an all-time high this week. Thesis proved.

Source: Goldcorp Weighs in: It’s a Bull Markert in a Gold Stocks

Investors looked for a safe haven after the greenback hit a record low versus the euro. Gold prices reached $989.60 an ounce and fell back to $978.70 after a sharp drop crude oil prices.

Gold is not the only precious metal gaining ground, says Brian Hunt. Silver has gained 27 percent this year, against gold’s 17 percent. As long as the US government insists on bailing out the likes of IndyMac (IMB), Fannie Mae (FNM) and Freddie Mac (FRE), investors will turn to precious metals to protect themselves.

Catastrophe insurance is getting more expensive this week. We’re big fans of gold and silver at DailyWealth. We don’t think the world is coming to an end… We simply see precious metals as excellent catastrophe insurance – assets that soar when stocks and bonds are sinking.

Last week’s destruction in Fannie Mae and Freddie Mac counts as a catastrophe… and silver is making good on its “claims.” After trading around $17 per ounce since March, the precious metal has broken out to $19. The chart of gold looks much the same.

Here’s the reason for the strength in gold and silver: Precious metals rise when investors smell serious risks to the financial system. They rise when the government spends too much money and extends too much credit, which stokes inflation. Silver’s breakout is a response to the huge liabilities our government is assuming with Fannie and Freddie.

In “market speak,” silver is telling our officials in Washington, “You’re going to spend all that taxpayer money on a big bailout? This could be bad… and I’m heading higher.”

Source: A New Bull Market in Silver is Starting 

Discovering lots of oil and gas is great. There is one hitch, though. You have to get it to market. You have to bring it to the consumers. Hence, we are experiencing a boom in getting oil and gas from Point A to Point B. That means lots of pipelines. Miles and miles of pipelines.

Big pipeline projects are in the works all over North America. Recently, oil behemoths ConocoPhillips (NYSE:COP) and BP approved a $25 billion project to build a pipeline from Alaska to Canada and the lower 48. It will be the largest private-sector pipeline built in North America.

In the southeastern U.S., over 25 pipeline projects are in the works. In the Rockies, a group of companies plans a 1,678-mile pipeline – the longest ever.

Such a beehive of projects and ambition led Phil Wright, president of the Gas Pipeline division of Williams (NYSE:WMB), to say “[Pipeline construction] is at the highest level I’ve seen in 30 years.” One energy observer said: “What we are seeing is the biggest global boom in steel pipes for at least 40 years.” Bentek Energy, a consulting firm, topped ‘em both, writing that it’s the busiest time for pipelines since the 1950s. When you’ve got the graybeards trying to top each other for how far back you have to go to find an equivalent, you know you’re onto something special.

But it all makes sense. As we venture out to more remote areas, we have to build the infrastructure to follow. New sources of supply drive the need for pipelines. Pipelines are like the roads and highways of the energy world.

That’s why I like investments in the companies that own and build pipelines. They pay high yields, based on a growing stream of fees earned from their pipeline assets. They’re like toll operators, collecting cash as oil and gas flow through their pipelines.

Chris says a correction in Master Limited Partnerships (MLP) stocks means they could rally soon, making them a bargain at the current price:

An MLP allows a company to avoid paying income taxes as long as it pays out the bulk of its earnings to its shareholders (unitholders). MLPs are like lesser-known cousins of real estate investment trusts (REITs).

MLPs, as a group, were hit hard in the credit crisis. The Alerian MLP Index – a common benchmark for this species of financial fish – fell 20% off its high. The 7% fall in March was the worst monthly decline the index has ever suffered (it’s still near those sell off levels).

Since MLPs pay out most of their earnings in cash, they depend on access to the credit and equity markets to fund any large expansion efforts. So, the market reasons, since the credit markets shut down, it will be harder for MLPs to grow.

Of course, some MLPs are in better shape than others. And in the grand scheme of things, I think the credit markets will look more favorably toward financing the tangible assets and cash flow of pipelines than funky mortgages. Besides the credit crisis concerns, a lot of new MLPs have been hitting the market. It will take some time for the market to digest all that supply – probably six months or so.

In any event, the selloff creates a rare opportunity to grab them cheap. The yield on the Alerian MLP Index went over 7% recently. That’s nearly four points above the 10-year Treasury. The widest gap ever was 4.25 points, back in November 2002. After that, they doubled over the next five years while paying higher and higher distributions.

They were great investments then… And thanks to the recent credit problems, they’re great investments now. If you’re looking to add some energy to your income portfolio, it’s a good time to check out MLPs.

Brian Hunt adds the chart for the Alerian MLP Index, and says the movement towards natural gas in the US will ensure plenty of pipeline building ahead…

MLPs enjoyed a big rally last year. They got a little “ahead of themselves”… so the credit crunch served up a 20% correction in these boring stocks. Given the bullish case here, this correction is offering income investors a gift.

Most U.S. pipelines transport natural gas – the “clean cousin” of coal and crude oil. We guess the rising green movement will provide a strong tailwind for this fuel and the infrastructure that goes with it… a tailwind that will boost cash flows and asset prices for MLPs.

Source: An Extraordinary Income Opportunity in the Energy Market

Bullish news from biotech: One of the market’s most speculative sectors is “acting well.” Biotech stocks are a lot like mining stocks. Most of them have no earnings and no real assets… They’re just wild dreams with stock tickers. But every five years or so, the public goes crazy for miracle cures and cancer drugs… to the tune of hundreds, even thousands of percent rallies. The busts that follow are just as spectacular (so trailing stops are vital).

The broad market’s destruction began in mid-May. The S&P 500 is down 13% since then. Now, here’s where the biotech story gets interesting…

One of the best ways to own biotech is the PowerShares Biotech ETF . This fund is loaded with the best companies whose names include “bio,” “genics,” or “ceuticals.” During the gigantic selloff of the past two months, shares in PBE have held like a rock. When a speculative asset refuses to sink in a bear market, it’s “acting well.” That’s an incredibly bullish sign.

We can’t know when stocks in general will get on with a new bull market… But we can look at the action here and say, “When stocks get going again, you’ll want to own some biotech.”

Source:  You’ll Want to Own these Stocks when the Market Recovers

Marty is a saint in most investing circles… for good reason. His Third Avenue Value Fund (TAVFX) has averaged 14.4% per year for the past 18 years. Not many folks can come close to that kind of sustained investment return for five years, let alone 18.

Problem is, Marty’s fund has been taken behind the woodshed this year. It has a lot of exposure to China and financial shares. Both are disaster areas… and they’ve helped send the fund down about 30% since November.

As you can see from today’s chart, it’s tough out there… even for a saint. In one of the perversions of investing, right now is likely the best time to hire a manager like Marty. This is when most investors will start searching for the “hot fund of 2008″ and abandon an old winner.

Our take? Marty has piled into Asian stocks and real estate lately. His Third Avenue team is among the best in the business at finding great bargains. When Asia gets back into an uptrend, you’ll be a lot better off with Marty than “Mr. Hot Fund.”

Source:  Even the Saintly Investors are Going Through Hell

The cockroaches are starting to cover the floor.

Back in November, we ran a chart of the iShares Financial ETF (IYF). This basket of Wall Street banks was down from its peak around $120 a share to $100. A few cockroaches had crawled out of the mortgage mess and into mainstream headlines. I forecasted more would crawl out of the heap before it was all done.

Today’s chart confirms that forecast. This fund is loaded with the likes of Lehman Brothers (LEH), Citigroup (C), American Express (AMX), and all those on the hook for thousands upon thousands of silly loans. The cockroaches have arrived, and IYF’s chart resembles the last second of a javelin toss.

The IYF has been sliced in half in one year. There is a crisis in Big Finance right now… and crisis leads to fantastic asset bargains. But damage like this takes a long time to repair. My advice? Check back on Big Finance in a few years.

Source: As Predicted, the Cockroaches have Arrived

Bleak headlines for America’s third largest supplier of foreign oil: Production at Mexico’s giant Cantarell field fell 34% from May 2007 to May 2008. This is a huge problem for Mexico. Cantarell is one of the three largest oil fields in the world. Mexico’s state-owned Pemex gets 37% of its production from it. The Mexican government gets 40% of its revenue from Pemex.

Cantarell’s massive decline also pulls together a number of themes we cover regularly in DailyWealth: 1) Never trust a government to operate so much as a hot dog stand. 2) There are no easy barrels left. 3) The world needs to spend billions and billions on new oil exploration, which will drive a bull market in oil services. And lastly, 4) Invest in Canadian oil production.

Canada is one of the ABCs of resource investment. It is home to the largest safe oil deposit… a deposit that is increasing production. The world’s largest gas-guzzler is Canada’s next-door neighbor. And most importantly, caribou aren’t interested in suicide bombing.

All of these attributes will produce a slew of stock charts like today’s. Suncor Energy (SU) is the poster child of the Canadian oil boom. As you can see, what’s bad for Cantarell is good for Canadian oil investments.

Source: HORRIBLE NEWS FOR MEXICO, GREAT NEWS FOR CANADA

If you’ve spent some time in the investing world, you have probably heard the terms “triple witching” and “quadruple witching.” But that doesn’t mean you know what they are or why they should concern you as an investor.

A triple witching day is when stock options, stock index options, and stock index futures all expire on the same day. A quadruple witching day is when stock options, stock index options, stock index futures, and single stock futures all expire on the same day.

These days happen on a quarterly basis, and the financial media usually makes a big deal out of it. Why? Because the expiration of these derivatives can, and will, cause increased volatility in the market.

If you are a short-term trader, you certainly need to be aware of witching days. They occur on the third Friday of March, June, September, and December. If you are a long-term investor, triple witching and quadruple witching days will have little impact on you. Just be aware that when they happen, the market may get a little crazy. When you’re prepared for some volatility, you won’t overreact.

Source: Too Many Witches