Our in-house geologist and resource analyst, Matt Badiali, has just returned from the New Orleans Investment Conference. This is where most of the junior resource industry meets each year. Longtime readers know we consider attendance numbers at major investment conferences to be a great contrarian indicator...
Back in 2006, when commodities were all the rage, the New Orleans conference was packed. Resource guru Rick Rule was mobbed in between his presentations. As I wrote at the time: "Everywhere Rick walked, more than a dozen investors crowded around him. It was as if they were trying to touch the hem of his robe." After seeing all this, I knew a wipeout in the commodities market was inevitable. Rick reminds us, "You're either a contrarian or a victim."
So... Matt... how was the conference? How was attendance? Was Rick Rule still being mobbed?
The biggest news (in terms of investor sentiment) from New Orleans was the empty halls. It's a toss up for the reason, either it's a franchise in decline or the spanking that retail investors took in junior mining last fall is still too fresh a memory. Either way, this conference had maybe 300 retail investors who weren't speakers, newsletter writers, brokers, or company folks. Even the mining panel moderated by Rick Rule only filled two thirds of the room – whose capacity is about 430 people. It was dead.
Our recommendation: Stay long inflation. Stay long commodity producers. On this theme, Matt offers four more insights...
The big mining story here in New Orleans is Ventana Gold Corp. (VEN.TO) in Colombia. The company went from four cents last November to a recent high of $9.50. It's up 500% since May. La Bodega, the gold discovery, sits right next to an 11.5 million-ounce deposit and could be its twin. It's a spectacular discovery and the market responded in a big way. Colombia is the next big frontier in gold exploration. It's just getting safe enough to attract juniors, and Ventana's unbelievable La Bodega will be a powerful lure.
If you have any doubt about the direction oil prices are headed, just take a look at ExxonMobil's latest deal. The world's largest oil company spent $4 billion to buy a 23.5% stake in the Jubilee field offshore of Ghana in West Africa. The companies developing Jubilee – Tullow and Anadarko – estimate the field will cost $4 billion to complete. That puts Exxon on the hook for at least another billion – reflecting its one-quarter stake in the project.
All told, Exxon will sink $5 billion into a field currently expected to produce between 600 million and 2 billion barrels of oil. Even at 2 billion barrels, Exxon's share is just 500 million barrels. That means it's paying $10 per barrel for that oil. If Jubilee yields just 600 million barrels, Exxon's paying $30 per barrel.
That's an astounding price for Exxon to pay for new oil. Over the past three years, the company has spent on average less than $1 per barrel to buy oil in the ground. Now, the company is going to pay at least 10 times that much on a single deposit. Clearly, Exxon either thinks Jubilee is much larger or it believes oil prices will average higher over the next few years.
On the coming wave of resource mergers:
ExxonMobil's Jubilee deal may also set off a new wave of mergers and acquisitions in the oil sector. Judging by the price Exxon paid for the oil in Jubilee, many of the small-cap junior oil companies listed in London, Toronto, and the U.S. are undervalued. Even giant independent Anadarko ($32 billion market cap), a co-owner of Jubilee, appears undervalued.
Even before Exxon bought into Jubilee, I expected oil and gas mergers and acquisitions to increase this year, as strong companies pick off their weakened peers. When oil fell to $35 a barrel, investors responded by dumping every stock in the sector. All the while, oil majors dialed back on exploration spending and built large cash hoards. So combine cheap assets with flush majors, and you have a recipe for a merger-and-acquisition spree.
For instance, the giant Chinese company Sinopec scooped up startup oil company Addax, which had an excellent portfolio offshore Nigeria and Iraq. I wrote about Addax in the S&A Resource Report before the Sinopec deal came out. Readers made 55% on that deal.
On the best way to play higher oil prices:
Investors love Petrobras, Brazil's national oil company, for its headline-grabbing deep-sea discoveries – like its 8 billion-barrel finds, Tupi and Jupiter. Those fields represent enormous windfalls for the company. The oil they hold will bring in hundreds of billions of dollars for Petrobras.
But consider what Petrobras spent to find that oil. The company is spending $174 billion over five years in its offshore exploration budget. Offshore exploration is a high-stakes game. When those projects don't pan out, the companies and their investors can be devastated.
Meantime, Petrobras just announced a modest $140 million program that I expect will be far more important to its efforts to replenish its reserves. It's a low-risk/high-reward initiative that oil companies around the world will replicate... Next month, Petrobras will begin injecting carbon dioxide into its fading Miranga onshore oilfield in the Bahia state. Petrobras will spend that money because it knows successful carbon-dioxide injection will recover another 20% of the oil in place. The oil will begin to flow in December, just a month after the injection begins.
You see, conventional oil drilling can extract up to 40% of the oil in a deposit. That means 60% – the majority – of a deposit's oil remains in the ground after the industry deems the field depleted. In other words, billions of barrels of oil are sitting in the ground around the world in deposits the industry views as dead, tapped out. Carbon-dioxide injection, like Petrobras is doing, is an attempt to recover some of that petroleum. I'm a huge fan of this technique, called enhanced oil recovery (EOR). Pumping a million cubic feet of carbon dioxide into the ground is a lot cheaper than building oil rigs in the middle of the ocean and plunging drill bits three miles below the surface.
More important, the risks are much lower. Rather than poking around where we think oil is, we're going where we know the oil is. Costs run around $25 to $30 per barrel, which makes this a great business when oil is around $65 to $70 per barrel. It's far cheaper than tar sands, which produce bitumen, a thick tar-like oil that must be refined before it even resembles oil. EOR produces the same easy-to-refine light, sweet crude pumped from the field originally.
I recently wrote about how a handful of domestic oil producers are using EOR to revive long-dead oilfields. These companies are buying up 100-year-old fields to recover the remaining oil. In my last issue of the S&A Resource Report, I recommended three companies that will recover millions of barrels of oil. Those barrels are completely ignored in their market values. We're buying oil for around $7 per barrel because the market doesn't understand EOR yet. I don't expect this window to last long, and the first big field will come online soon.
To get all of Matt's research on these ideas with the S&A Resource Report, click here.
New highs: Morgan Stanley Emerging Markets (EDD), Central Europe & Russia Fund (CEE), Longleaf Partners (LLPFX), EnCana (ECA), Sprott Resources (SCP.TO), Silver Wheaton (SLW), Jinshan (JIN.TO), Rex Energy (REXX), Encore Acquisition (EAC).
In the mailbag... I stand corrected. Yes, that's right. Don't miss it. Send your thoughts here: feedback@stansberryresearch.com.
"Thanks for spelling out why Obama is a fitting recipient for the Nobel Peace Prize – although to date he's really killed far too few to qualify. But he's got plenty of time left! But one small point – Lincoln holds the 'honor' of the most senseless U.S. deaths – at least according to the numbers: WWI and WWII combined – about 500,000 deaths. American Civil War – about 600,000 deaths. The above numbers also don't include Lincoln's role in the slaughter of thousands of Native Americans. Lincoln also made Bush look like a girl scout in terms of raping the constitution as well as squelching any dissenting voices. He actually ran his primary opponent and voice of opposition out of the country – Clement Vallandigham. When I discuss past presidents with my children, I describe Lincoln as 'The most vile sack of human flesh to every walk the North American continent.' Although I must admit, he's had some pretty good competition." – Paid-up subscriber Ed
Porter comment: Ed is right. Lincoln has Wilson beat in terms of senseless deaths, which is probably the most important category for winners of the Nobel "Peace" Prize. On the other hand, it was Wilson who signed the Federal Reserve Act, which gave future presidents the ability to fund their wars without Congress. So I could argue the point...
"I've never written before, but for you to say you are grateful that anyone, in this case President Roosevelt, should die young shows you to be a venal, malevolent, and hateful person, someone who's advice I would never take and should be considered utterly worthless." – Paid-up subscriber Irwin
Porter comment: Funny... I've never killed anyone. Nor ordered thousands of people to die. Nor made up the pretext for an invasion. Nor stolen a large landmass from another sovereign country... nor attacked private property as the "bane" of civilization. Roosevelt did all of these things and admitted he enjoyed himself immensely doing them. What's more hateful, being glad a guy like that died young... or doing those things? I'll never understand the human urge to lick the boots of our oppressors.
"Our entry into World War I was doubtless a huge mistake. On the other hand, had we not entered World War II, we might be speaking Japanese or German right now..." – Paid-up subscriber George Holloway
Porter comment: That's my favorite historical canard of all-time: "Without the U.S., the war in Europe would have been lost." It's absurd. The war was over for Germany by June 1941. That's when Hitler invaded Russia – a fight he could have never won. By the time U.S. troops reached the European theater (1943), the war with Germany had already been won – by the Russians.
It would only take a few years for the government to convince us it was actually the Russians, not the Germans, who were really our enemies... and then we got to send our sons and fathers off to places like Korea and Vietnam to die for nothing. People will believe anything...
Regards,
Porter Stansberry
Baltimore, Maryland
October 12, 2009