After more than 12 hours of travel, we're here in Vancouver for the Agora Financial Investment Symposium... Unfortunately, we weren't able to catch any presentations yesterday. I've asked Matt Badiali, who arrived on Monday, to update us on Rick Rule's presentations (which you'll see below). And we'll let you know about any other great ideas we discover while we're in town. Considering we're in the resource finance capital of the world, today's Digest will be largely resource-centric...
Last week, the same day oil services giant Halliburton announced earnings, the Financial Times ran the headline "Halliburton Hit by Oil Crackdown." Halliburton was the first of several companies involved in the Gulf spill to announce second-quarter earnings. And given the headline in the FT, you'd think the company was in trouble.
In reality, Halliburton announced huge numbers... Earnings jumped 83% since last year to $480 million. Revenues jumped 26% to $4.4 billion. The only dark spot in the announcement (and coincidentally the lead paragraph for the FT article) is the deepwater drilling suspension will cost Halliburton up to $72.4 million per quarter for the rest of the year. The company isn't worried. That's a small fraction of its earnings. And the rush for U.S. natural gas meant Halliburton's land-based exploration more than made up for the losses. The market shrugged off the "bad" news... Halliburton shares jumped 5%.
Shares of BP have soared since the beginning of the month (up from $29 to $36). And Anadarko, which owned an interest in the Macondo well, is up big, too. Porter recommended Anadarko last month in his Put Strategy Report as a way to play the spill without exposing yourself to the uncertainties surrounding BP:
When looking at Anadarko, I see a stock that's unlikely to trade at a substantially lower price even if it suffers serious liability from the Gulf oil disaster. (The stock is now trading for 20% less than book value.) And I don't think Anadarko will suffer any losses, as BP should indemnify it from all potential liability. This gives us the chance to buy one of the world's best oil exploration firms at a significant discount, on the eve of what I believe will be a major oil discovery off the coast of Brazil. – Porter Stansberry, June 11, 2010, Put Strategy Report
Thanks to the increase in Anadarko shares, Porter's subscribers will close their options trade today for a 40% gain in six weeks.
Our friend Whitney Tilson, a well-respected hedge-fund manager, took a large position in BP. And another hedge-fund manager, David Einhorn, took a large position in the beaten-down offshore drilling sector. Einhorn, famous for his short call on Lehman Brothers, bought 5.2% of Ensco – a London-based driller – after its shares sold off following the BP disaster. The selloff pushed Ensco shares to ridiculous levels. In today's Growth Stock Wire, Matt Badiali wrote of Ensco:
It's pretty easy to see what Einhorn likes in Ensco. The $5.8 billion company has nearly $1 billion cash above its long-term debt. That's about 15% of its market cap in extra cash in the bank. It also generates about 20% of its market cap in operating cash flow every year.
I recommend you read Matt's full essay (completely free), here. And take note... Some of the world's best investors are pouring into oil stocks after the major selloff. After 50%-60% declines, most of the bad news is probably priced in... And these stocks have already recovered 10%-20% from the bottom. The BP bears say the muckraking during the court trials will drive BP's shares down even more. Truthfully, can BP's image be much worse? It looks like the bulls have already established a floor for these stocks. And they'll likely add to their positions on any dips.
We promised Matt's notes from the presentation by renowned resource investor, Rick Rule. Here's what Matt sent us:
Rick Rule says he likes to speak to "motivated" speculators. His favorite technique is to schedule talks at 7 a.m. – figuring anyone who attends at that hour must be motivated. And this crowd is motivated... two-thirds of the attendees showed up to see him.
The people who made it heard Rick explain why he believes energy is a fantastic investment for the next five years. He based his outlook on basic supply and demand. We're mostly living off discoveries from the 1950s and earlier. Look at this table:
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The relative newbie is Cantarell – and it's 34 years old. This oil has fueled our daily commutes for the last half century. It was cheap oil... but those days are over.
World oil consumption, according to Rick, grows at a 1.5% compounded annual rate. Twenty-five years ago, Westerners got all the oil because those countries could afford to use it. That's changing. As countries like India and China become richer, they will demand ever-larger shares of the oil supply.
At the same time demand is rising, supply is dwindling. Most of our oil comes from the national oil companies of Iran, Venezuela, Mexico, Nigeria, etc... These are countries where free cash flow from the oil production goes either in someone's pocket or into political boondoggles.
Unfortunately, oil fields require reinvestment to keep flowing. Since many of these governments would rather pocket the cash... the critical reinvestment isn't happening. Rick believes potentially 25% of the world's oil exports could go dry. According to Rick, the price moves in oil over the next five years could be stunning.
Don't mistake that for a Peak Oil stance. Rick sees Peak Oil as an economic problem. Once demand is high enough and supplies are low enough, the price will spike. He points out that, at $200 per barrel, there's an awful lot of oil that can be recovered and sold for a profit – from sources that aren't economic to tap at lower prices.
He proposed that $200 oil isn't out of the question. It's simple supply and demand.
He urged everyone in the room to own tar sands – specifically Canadian Oil Sands Trust – as insurance.
I've been covering a lot these same issues in the S&A Resource Report. Much of my coverage has focused on global resource plays – gold, oil, natural gas – that will rocket higher thanks to the support of the Chinese government. This is a long-term story that's only begun to develop. And one of my favorite resource stocks right now is a "Gold Bank" in Colorado. To learn more about the Resource Report. click here.
New highs: Enterprise Products (EPD), Kinder Morgan Energy Partners (KMP), AmeriGas Partners (APU), EV Energy Partners (EVEP).
In today's mailbag... a subscriber who actually supports our political commentary. Anyone else losing faith in OBAMA!?: feedback@stansberryresearch.com.
"As an employer of 175 people who is also constantly searching for additional qualified employees I have to weigh in on this debate about the extension of benefits to the long term unemployed. Our company has had many (literally dozens) of long term unemployed applicants turn down our offers of a good paying job, depending on the position being offered these jobs pay between $35K and $55K per year, and many of those who have turned down our job offers clearly state 'my unemployment benefits haven't run out yet.' So although the system requires them to be searching for employment many don't really want a job because sitting at home has become so comfortable.
"To offer some balance to this discussion I also know some highly qualified professionals who really are looking, want to be employed in their professional field and are unable to find suitable work. Those folks normally have the ambition and ability to do something to be gainfully employed even if not in their chosen profession.
"My heart goes out to those who are diligently searching and can not find work but if those who could work would do so I believe our economy might see some uptick in activity without any additional stimulus from Princess Nancy. As you well know the trickle down effect of that would be very helpful. This entitlement attitude that our government fosters with the constant giveaways will eventually doom our society." – Paid-up subscriber Richard
Goldsmith comment: Thanks for the real-life example, Richard.
"In todays S&A you mentioned 1.54 trillions as our deficit.
"Last I read it was above 13 trill and climbing! Thats some difference. Am I interpreting what U say wrongly?" – Paid-up subscriber Jay Bayless
Goldsmith comment: The $1.54 trillion figure is the U.S. government's 2010 deficit. In other words, so far this year, the government has spent $1.54 trillion more than it has taken in. The $13 trillion figure you mention is our government's total debt. And as long as the annual deficit continues growing, so will our debt.
"'[Y]ou do not show respect for our president.' Respect earned, not granted based on government job position!
"'What is this OBAMA!' It's an adjective equivalent to FUBAR.
"'corporate America is sitting on $1.8 trillion of cash' Obama/FUBAR changes the 'rules' ie Healthcare, Financial Regulation, Cap and Tax and deep sea drilling.and corporations changed their behavior. Now, that is 'change you can believe in.'
"Had I known how great and accurate the political diatribe was I would have paid more!" – Paid-up subscriber W.
Regards,
Sean Goldsmith
Vancouver, British Columbia
July 21, 2010