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.

The about-face article, which appeared in today’s edition, was written by Kate Galbraith – one of the three new green correspondents the Times has been trumpeting.

The Times reports that wind and solar energy are suffering from the credit crisis and “economic downturn.” These market realities are our core argument against alternative energy for the present time and foreseeable future. You see, the green contingent engages in a dangerous group-think that says if we all hold hands and click our heels, the financial argument for green will make sense in a world of cheap oil and high unemployment.

Apparently, the “feel-good finances” that we’ve been railing against simply aren’t working.

The Times reports “Factories building parts for these industries have announced a wave of layoffs in recent weeks, and trade groups are projecting 30 to 50 percent declines this year in installation of new equipment, barring more help from the government.”

The article quotes Mayor Richard Mattern of Fargo, ND who fell under the green spell. He told Ms. Gailbraith, “I thought if there was any industry that was bulletproof, it was that industry,” he said referring to the wind-turbine factory in his home town, which recently 20% of its workforce.

We take no delight in dancing on the pink slips of the unemployed. Our gripe is with Mayor Mattern himself, who espouses the same claptrap as the Obama administration. The difference is that when the edict comes from Washington, it falls into the category subsidized energy rather than viable business model.

The wind and solar industries are apparently hopeful that President Obama’s green thumb will help them flourish, according to the Times. But as the article states, these renewable energy plans “will take time, and in the interim they [wind and solar companies] are making plans for a dry spell.”

Even tax credits don’t seem to be working. According to the Times, “Banks have invested in renewable energy, lured by the tax credits. But with banks tightly controlling their money and profits, the main task for the companies is to find new sources of investment capital. Wind and solar companies have urged Congress to adopt measures that could help revive the market. But even if a favorable stimulus bill passes, nobody is predicting a swift recovery.”

Again, we do believe that alternative energy is viable – inevitable.  Unfortunately, it’s not the place to put your money today.

I was standing outside of the supermarket, jostling with the bell-ringing Salvation Army guy for attention, telling shoppers, “Buy gold, silver and oil! The governments of the world are insanely creating too much money and credit to try and alleviate the inflationary ravages of all the previous decades of too much money and credit, and the result will be the tragedy of terrifying inflation and all its miseries and suffering for everyone! We’re freaking doomed, you morons, so save yourselves at least!”

Of course, the whole idea of gold and silver as a store of value is completely alien to these ignorant Earthling boobs, and I don’t bother trying to explain Peak Oil or how oil is a finite resource and how it looks like we have reached the peak of oil extraction, because it is such a long explanation that before you get a chance to explain it to them, somebody from the store always comes out and tells you that they are calling the cops unless you leave right now and stop harassing the customers, and everybody cheers.

But I now find that I can save a lot of time by just showing them an article from the Financial Times newspaper, which plainly states that “Output from the world’s oilfields is declining faster than previously thought.”

In fact, the Times said that the International Energy Agency’s annual report, the World Energy Outlook, declares that “Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent.” Yikes!

Not surprisingly, the Times says, “The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand.” Demand will be higher than supply!

Interestingly enough, they figure that even with the forecasts of China, India and other developing countries ramping up oil-related investments totaling $360 billion every year until 2030, it will not be enough, and “even with investment, the annual rate of output decline is 6.4 per cent.” Yikes again!

And beyond this huge decline in supply, Byron King of WhiskeyandGunpowder.com notes that “According to the International Monetary Fund, Iran, Venezuela and Nigeria need oil prices above $95 per barrel just to cover their respective national budgets. Saudi Arabia requires oil prices above $75 to cover its budget. Well over half of the revenues of the Russian Federation come from taxes on hydrocarbons. Mexico gets over 40% of its federal revenues from taxes on Petroleos Mexicanos (Pemex), the national oil company.”

He concludes that “low oil prices are causing problems for the oil-exporting states of the world”, which is probably why the Financial Times reports that “The Opec oil cartel yesterday cut its forecast for demand growth next year to 500,000 barrels a day, down from 800,000 b/d.”

And if that is not enough, since speculators in futures seem to be routinely slaughtered by the commercial traders, the FT also reported, “Data on hedge fund positioning from the Commodities Futures Trading Commission showed that speculators on Nymex had made their most aggressive bet on falling oil prices since November 2005.”

And, as the news just keeps getting worse, Iran just asked OPEC to cut production by a further 1.5 million barrels per day, which comes just after OPEC cut production by 1.5 million barrels last month! Yikes!

So, reanimated with a renewed sense of urgency, I go back to the supermarket, jostle the Salvation Army bell-ringer aside, and loudly reiterate my Mogambo Message To The Masses (MMTTM) “Buy oil, you morons! Buy oil! Look at this Financial Times piece if you don’t believe me, you jerks!”

Alas, I encountered the same indifference and hostility from the same shoppers, matching the sameness of the little store manager and his same tired “I’ll call the cops” refrain. Then I went home, continuing the apparent motif, the same as I always do.

But I bought more oil, which was different than usual, which is still cheap thanks to the ignorance of everyone else not buying it! Whee! This investing stuff is easy!

Source: Salvation in the Cheap Oil Army

The Masters of the World at Goldman Sachs repeated their claim that a ’super spike’ in the oil price could drive it to US$200, on the back of red-hot demand in the developing world and the “non-recession” in the U.S. Supply bottlenecks won’t help.

Take a look at the oil price chart below from Gabriel Andre.

What does it mean? Reading an oil price chart is not like reading a star chart. But it does require a little interpretation. Here’s ours: the increase in the oil price between 2001 and 2006 was a structural revaluation of oil’s value to the global economy. You had the Iraq war driving the geopolitical premium.

Since 2003, you’ve had production peaks/declines in large fields in Mexico and Russia, persistent disruptions to Nigerian production (Nigeria is the world’s eighth largest oil exporter at just over 2 million barrels per day, nearly half of which goes to the U.S.), and gradually increasing demand from emerging markets.

But what happened in 2006? The oil price chart shows that prior to 2006, the world had come to grips with the idea that the era of cheap oil was over. In May of 2006, commodities as an asset class suffered a large correction and investors worldwide reconsidered how long the resource boom would last.

It’s possible-although it would just be a guess-to attribute oil’s meteoric rise since early 2007 to rampant financial speculation. In a recent article, William Engdahl suggests that as much as 60% of the current oil price is speculation. On the other hand, a research note from Citigroup predicts oil prices of US$40/barrel within two years? Who’s right?

Frankly, the oil price is hostage to a number of variables, many of which are not quantifiable. A fear premium definitely exists. Then there is the declining U.S. dollar. And there is the matter of investors treating oil as an asset class and as a “safe-haven” from inflation. The creation of sector funds and ETFs correlated to the oil price has made this possible.

And now? Well, like iron ore and coal, the oil price indicates that the emergence of China and India as productive industrial economies with an emerging consumer class is a lot more resource intensive than any of us imagined.

The oil price chart above suggests there’s a bubble and that it has to correct soon. But by “correct” we mean oil between $95 and $105. In 2003, $40 became the new $20. In 2005, $60 became the new $40. And in 2008… $100 becomes the new $60.

Dan Denning
The Daily Reckoning Australia

It was here in Manchester, England, that Europeans stole a march on the rest of the world. The Industrial Revolution made it possible for people to produce more wealth, more quickly.But now, two things are happening:

First, the planet seems to be running low on easily obtainable energy. Cheap oil fired the furnaces, filled the pistons, and greased the gears of the whole machine. Now, oil is not so cheap… In fact, it hit a new record high last week.

Second, the non-Europeans have caught on to the magic of the Industrial Revolution. They’re building newer and better factories – and staffing them with cheaper, harder working labor. What’s more, they’re competing with the West for the raw materials to feed their factories. And, perhaps most important, they’ve got money – mountains of it. While Europeans – led by Anglo–Saxons – squandered their wealth on pointless wars and frivolous spending, the non-Europeans have been saving and investing. The Chinese, for example, are said to save more than 25% of their incomes.

And now, a kind of financial war seems to have broken out. We have opined that this is not merely a war between inflation and deflation…but a war of Total Liquidation…in which the huge debts built up during the expansion phase of the credit cycle – roughly, 1980-2007 – mostly in the West, especially in America and Britain, will be written down, written off, and inflated away.

Neither inflation nor deflation will be a clear winner, in other words. Instead, like WWI, both will do damage…and in the end, very few people will be better off. Some possible exceptions – gold miners, commodity producers, and emerging markets.

No one will benefit much from deflation. But commodities and gold will reap some gain from inflation.

On Friday, for example, we saw both in action. The Dow tumbled 256 points – after GE proved that it could was vulnerable too. Its shares lost 13% of their value in a single day. What provoked the run on GE was disappointing earnings – particularly, you guessed it, in its finance division.

Finance was the big winner in the expansion of 2002-2007; it will be the big loser in the contraction phase.

While deflation was battering investors’ wealth…inflation was aiming its wallops at consumers’ budgets. Rice and oil hit record highs. Corn and tin too.

Interestingly, $6 corn is too much for the ethanol business. The industry was a fraud from the get-go, requiring taxpayers’ money to justify turning corn into fuel. But now, even with subsidies, corn is too expensive and the ethanol producers are going bust.

They deserved it. But pity the poor people who have to eat. A handy chart on this weekend’s edition of El Pais shows what has happened to basic food prices. In the last two years, corn, wheat and rice have all more than doubled. And get this, in 2007, stockpiles of these grains fell to their lowest level in 25 years.

No wonder there are food riots breaking out all over the place.

But let’s return to our big picture view.

Inflation and deflation only appear to be “at war” with one another. Sometimes inflation has the upper hand. Sometimes, deflation. But over the next few years they will make common cause in the destruction of wealth in America, Britain and a few other economies.

Why do we single out the Anglo-Saxon economies? Because they were the ones that most feverishly embraced what became known as the “Anglo-Saxon model” of economic growth, what our friend Kurt Richebächer used to call “late, degenerate capitalism,” marked by a freewheeling financial industry, widespread securitization of debt, and overall debt at breathtaking levels.

One awkward feature of this model was the fact that the rich got a lot richer…while the poor stayed about where they were.

The Financial Times explains:

“After decades of ‘financialisation’ in the US and other Anglophone economies, whereby financial services have increased their share of gross domestic product, banks are being bailed out – using public money…

“From a political perspective the notable feature of the inegalitarian, free-market era that began in the 1980s is how little backlash there has been against the stagnation of ordinary people’s earnings in such a large portion of the developed world economy. …This is potentially dangerous territory…

“Between 1979 and 2005 the pre-tax income for the poorest households grew by 1.3 per cent a year, middle incomes before tax grew by less than 1 per cent a year, while those of households in the top 1 per cent grew by 200 per cent pre-tax and, more strikingly, 228 per cent post-tax.

“The result of this lopsided distribution of income growth was that by 2005 the average after-tax income for the bottom fifth of households was $15,300, for the middle fifth $50,200 and for the top 1 per cent just over $1m.

“Looked at from another perspective, in 1979 the post-tax income of the top 1 per cent was 8 times higher than that of middle income families and 23 times higher than the lowest fifth. By 2005 those ratios grew respectively to 21 and 70. The process reached its extreme point with US President George W. Bush’s tax cuts. Emmanuel Saez of the University of California at Berkeley estimates that in the economic expansion of 2002-06 the plutocratic top 1 per cent captured almost three-quarters of income growth.

“Figures for wealth, derived from the Federal Reserve Board’s Survey of Consumer Finances, are less up-to-date but the picture is similar. The share of US wealth owned by the top 1 per cent of households rose steadily from 20 per cent in 1976 to 38 per cent in 1998.”