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.

But the renewed interest in ethanol proved to be short-lived, as oil retreated below $20 a barrel just four months later. As a result, many of those smaller ethanol companies couldn’t survive as profitable alternative energy investments.

Flash forward to today, where we’ve seen crude oil prices double in just the past four months. Worldwide oil demand has soared, particularly from fast-growing countries like China and India, and although the global downturn has seen the pace of demand slow, when the global economy gets back on track, it should prove even more bullish for oil.

But there’s another sector that should rise, too…

Rising Oil Prices Spark Interest In Alternative Energy

With oil prices rising again recently, it’s sparked yet another conversation about the viability of certain alternative energies.

One ETF that tracks the performance of clean energy firms is the PowerShares WilderHill Clean Energy (NYSE: PBW) – a widely traded vehicle that gives you exposure to this still-growing sector in a safer way than investing in individual companies.

While firms like Exxon Mobil (NYSE: XOM) rake in billions of dollars per quarter from oil, PBW invests almost entirely in experimental, technology-focused “green” companies. And while these guys stand to benefit from higher oil prices just like specific oil companies, their success depends more on regulatory changes, subsidies and a global recognition of the need for alternative energy solutions.

The Alternative Energy Market Gets More Attention

When it comes to the alternative energy market, wind power, solar, hydroelectric, geothermal and nuclear power have all received attention over the past couple of years.

But when the oil market first began its march towards record high prices, it was the ethanol industry that took center stage and triggered the wider debate over cleaner energy resources.

However, the ethanol market faces a battle. Despite the government’s intervention and subsidies for the industry, newer technologies are needed in order to make ethanol more viable – and the industry’s companies profitable. A good example is Pacific Ethanol (Nasdaq: PEIX) – a company that Bill Gates invested in heavily a few years ago, paying $12 a share. Today, the stock trades for just $0.40.

Below is a daily chart of PowerShares WilderHill Clean Energy (NYSE: PBW), which is currently at a critical juncture:

Chart: http://www.investmentu.com/images/iu063009chart.gif

Three Scenarios for the Clean Energy Fund

As you can see, when the stock market bottomed out in March and oil prices retested their lows, PBW’s Clean Energy Fund did the same.

Since then, however, PBW has doubled off those lows to the June 10 high of $11.37. This is right around the swing high of $11.40 that it tested back in November, before it pulled back to the trendline drawn off the March lows.

In addition, the 50-day and 200-day moving averages are very close to crossing one another – a development that sometimes indicates a short-term top.

So what we have here is a relatively clear-cut conclusion…

• A close above $11.40 would be bullish and should lead to higher prices.
• However, a close below the trendline, currently around $10, would be bearish over the short-term.
• A close or two below the 50-day and 200-day moving averages, which are currently around $9.50, could lead to a move down to $8 or lower.

Source: Alternative Energy Investments: Three Scenarios For Clean Energy

Alternative energy is hot stuff. Sure energy demand is waning during the economic downturn and crude prices have dropped to a third of their all-time highs, but we all know the bears will eventually fill their stomachs and move on.

At least that is what the folks investing in solar, wind, biofuels and geothermal technology are betting on.

There is a report out this week stirring their ambition. According to research released yesterday by Clean Edge, worldwide alternative energy revenues soared by 53% in 2008 to $116 billion. Not bad, but it pales in comparison to the $477 billion in revenues Exxon Mobil (NYSE:XOM) recorded during the same period.

Fortunately, the industry is expected to grow, but we will have to wait at least a year or so. The current recession has created a nasty speed bump for the “green” economy. Even with Obama’s massive spending efforts, it will be at least a decade until alternative-energy revenues double. Clean Edge estimates the industry’s revenues at about $325 billion by 2018.

Lots of risk, little reward

That is steady growth, but does not come anywhere close to matching the ambition held by so many investors that are planning to get rich overnight thanks to “green” growth.

Looking forward, we cannot be fooled into hoping for too much change. Five years ago investors (or was it politicians?) were claiming clean coal technology was going to power the nation in the near future. We all see how that industry is still lacking its formal introduction to the world.

Read the full article here: In-and-out strategies for alternative investment profits

It’s boring because it can be repetitive and not really offer any excitement (other than making money). It’s profitable because it’s really easy to figure out when you’re wrong and get out at a small loss (the hope is that it doesn’t happen the first time you trade the stock!).

One recent example of a range-trading stock is ExxonMobil (NYSE:XOM).

Over the past three months, Exxon has traded within a roughly ten percent range. Every time it hits $74, it begins to rally back up to around $81, and then it falls back down to $74.

The way to play this pattern is simple. Every time the stock drops to around $74, buy shares in it (or buy a call option on it). When it reaches around $81, sell your shares and short the stock (or buy a put option) and stay in your position until it hits $74 again.

You should always position stop-losses in case you are wrong. If you buy at $74, a stop-loss at $72 would be good. That way you keep any potential losses small.

You see, there’s nothing too exciting about this pattern. In fact, it bores me to tears. But at least you can make money from it hand over fist.

GM and the other big-three Detroit automakers have feasted on the fast-growing market for pickup trucks and SUVs for years. But with gas now above US$4 a gallon and climbing fast, big-rig drivers are mailing their keys back to the auto finance companies today.

I’ve talked to a half-dozen people in just the past few weeks who are ALL trying to unload their big gas-guzzling trucks or SUVs. One friend of mine drives a Chevy Suburban: GM’s top-of-the-line road hog. She’s had it for sale over a month now…No takers. In fact, even the local Chevy dealer won’t take it!

Anyway, back to the GM shareholder meeting…In its quest to stop bleeding red-ink, GM is backing-up its entire business plan. The company is shuttering four U.S. production plants – all of which built trucks or SUVs.

“Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix,” says CEO Rick Wagoner. Imagine that!

Now that US$2 gas is gone forever, GM has very high-hopes for its plug-in electric hybrids. GM should have made that switch years ago, rather than being asleep at the wheel and building Hummers instead.

You may not find these battle-ready Hummers on GM car lots much longer – but be sure to look for sleek new plug-ins coming to a dealer near you for the 2010 model year.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR’S NOTE: The days of $2 a gallon gas may be gone forever. As this crude-reality sinks in, you’ll see a major switch toward hybrid cars, and other alternative energy investments. In fact, it’s already started. Read our special report: How to Profit from the Great Fuel Revolution to find out where this investment money is headed now.

Source: No More Hummers in America – Shocker!

• From 2005 to 2010 alone, worldwide wealth will soar from $118 trillion to more than $200 trillion — with the newly capitalist markets of Asia and Europe accounting for the biggest share.
• Over the next 25 years, America’s share of the worldwide economic pie will slip from 28% to 24%…
• While during that same stretch Asia’s share of the global market will almost double — meaning it will account for a whopping 55% of the global economy by 2030.

Money Morning managing editor William Patalon III has put together are 10 that hottest profit opportunities in the global capital markets at different times over the next 12 months or more.

1) Cash in on the Cash Barons: Sovereign wealth funds from China and the Middle East are pouring billions into stocks too many investors would rather ignore.

2) Energize With Energy: Energy will be a recurrent theme in the months to come – and not just in terms of oil and gasoline. Crude oil will remain in the forefront of the profit plays to come. But that’s not all: Alternative energy opportunities such as uranium and so-called “green energy” investments will benefit from soaring prices for conventional energy sources. When it comes to these profit plays, it will pay to keep all your bases covered.

3) Buy into Buyouts: Mergers and acquisitions, management buyouts and private-equity deals helped fuel the record run in the U.S. stocks in the first half of 2007. The subprime-mortgage mess and ensuing credit crisis will make it tougher to do deals in the next 12 months, but the choicest buyouts still will get done.

4) Build With Biotech: This isn’t your father’s biotech sector. No longer are we talking only about the “Big Pharma” drug-development firms. Some of the biggest players are now trying to solve the world’s food and fuel shortages – with some notable successes. With special, more-environmentally friendly herbicides and higher-yielding, genetically engineered crop seeds, these companies have already engineered big increases in sales and profits – and there’s a lot more to come.

5) Home in on Housing: Housing’s down, but it’ll never be out. The turnaround is still some time off, but this sector isn’t going to go away. It’ll take careful and patient investing to profit here, but keep the sector on your radar screen – if for no other reason than to use it as a barometer for the rest of the currently moribund U.S. economy.

6) Invest in Income: Studies show time and again that income is key to any portfolio’s success. And those same studies show that if you call the dividend play during a bearish market, your portfolio will easily beat “the spread” – in this case, the market averages as measured by the Standard & Poor’s 500 Index and Dow Jones Industrial Average. And if you can’t decide between stocks or bonds for income, don’t flip – our report covers both sides of the coin.

7) Hit the “BRICs:” BRIC is a Goldman Sachs Group Inc. (GS) acronym for “Brazil, Russia, India and China.” Three of the four – Brazil, India and China – are not to be ignored in the months to come. After the wild ride Chinese stocks have provided in recent months, too many U.S. investors are ready to give up on the Red Dragon. Don’t make that mistake. We’ve seen some life in China’s stock market in recent days, and there will be plenty of ways to profit from that emerging economic colossus, some of which involve only moderate risk. [To find out how you can obtain a free copy of investing guru Jim Roger’s new bestseller, “A Bull in China,” which details investing strategies for that burgeoning market, please click here].

Go for Gold: The yellow metal has enjoyed a record run. And it’s subsequently dropped back. But don’t let that disappoint you: With global demand for commodities of all kinds soaring, there’s plenty of yardage left on this play. Besides, if inflation escalates as many experts expect, gold will provide a terrific portfolio hedge.

9) Couple up With Commodities: The gangbusters global growth that’s causing gold and crude oil prices to “go long” is having the same effect on such commodities as wheat, corn and soybeans. Even Jim Rogers says the global demand for commodities is only going to escalate, meaning this is a play you can call now with a high degree of confidence and score again and again.

10) Don’t Give up on the Greenback: The U.S. dollar has been sinking against virtually every other major currency, a trend that could well continue for some time to come. That doesn’t mean you should ignore the greenback. Run a reverse and look for ways to profit on its pain. Not only will you score now, you’ll be focused in and ready to profit when playing field changes and the U.S. greenback reverses course on its own run for the end zone.