Why energy firms may want Iran's sanctions in place... How to choose stocks in contrarian markets...
Editor's note: While the S&A Digest team returns from our annual Spring Editors Conference, we're finishing up our weeklong series from S&A Global Contrarian editor Kim Iskyan.
Kim was generous enough to allow us to excerpt from his March issue, where he recalls his "boots on the ground" experience in Iran. (You can read the previous installments here, here, and here.)
Today, he concludes the series by explaining why the sanctions in Iran may actually be good for energy companies...
As I explained yesterday, one of the "hot button" issues in Iran is the country's sanctions, which prevent it from doing business with many of the world's biggest economies.
These sanctions are hurting Iran's citizens and businesses alike. But global oil and gas companies might also not want sanctions lifted.
Iran has the world's fourth-largest proven oil reserves.
And as you can see in the chart below, it also has the world's second-largest proven gas reserves.
If sanctions are lifted and Iran attracts investments to significantly increase oil production, the price of oil might suffer... since more supply usually leads to lower prices.
A top oil analyst I know in Washington told me, "There are going to be huge opportunities [if sanctions are lifted]... there are still undeveloped or underdeveloped production resources which are much lower in cost than the 'marginal barrel' from shale, oil sands, or deepwater."
Large, easy-to-access oil reserves in a country that wants to generate as much revenue as possible isn't something that will go down well with big Western oil and gas companies... even if they are able to secure a few big oil fields in Iran.
Then there's the politics of lifting sanctions.
In the U.S. – which is the key player in the sanctions game – there are rumblings in Congress for slapping Iran with even more stringent sanctions. Israel, which has a strong lobby in the U.S. congress, feels threatened by the potential of a nuclear Iran.
But President Obama's list of recent foreign policy victories is looking pretty short these days... and a breakthrough with Iran would help the final years of his presidency.
The other members of the P5+1 – the United Kingdom, Russia, China, France, and Germany – have their own agendas. Following Russia's annexation of Crimea, Europe is increasingly concerned about the reliability of Russia as an energy supplier. It currently provides around a quarter of Europe's gas needs. Iran is looking attractive as an alternate supplier. Also, consumer demand from an unleashed Iran could provide a powerful jolt to the EU's flatlining manufacturing sector.
More important, the world is waking up to Iran's promise. Recently, large trade delegations from France and Germany visited Iran to develop relationships and lay the groundwork for when sanctions are lifted.
If economic growth at home is weak and big business in Europe can point to a compelling opportunity that would generate jobs domestically, but which is closed off because of political considerations... it might not be long before, say, France decides that it wants to be the first in the door to Iran.
That process is well underway. Sam Barden, an old friend from Moscow, who was later a commodities trader in Dubai, joined me in Tehran. For the past three years, he has been involved in helping businesses and the government at home in Australia understand the potential of Iran. "The genie's out of the bottle," Sam told me. "It just makes so much sense for things to come together for Iran... and for sanctions to be lifted."
In short, there are more reasons for sanctions to be lifted than there are for sanctions to remain intact. The pressure of economics and the Iranian people are the two big reasons why I think sanctions will be lifted soon.
If – and when – sanctions are lifted, a lot of people are going to get rich selling things to Iranians. They will finally be able to buy the items the rest of the world already has. The country's economy will also blossom. And while lifting sanctions won't be a cure-all for the rest of Iran's problems, it will help fight inflation and promote economic growth.
Summing it all up, Iran doesn't just fit the bill for a contrarian market with enormous potential gains. It defines the notion of contrarian investing.
You have to be much more careful when investing in these types of markets than when you would simply buy U.S. stocks. That's why I want to explain my process for finding a suitable stock to recommend to you.
When I consider what market or country to visit, I look at a number of factors – like sentiment, valuation, and catalysts.
But maybe the most important consideration – at least from an investment perspective – is how to access the market. What can you buy to reap the potential rewards of a great contrarian opportunity?
Sometimes, there's an obvious and easy solution... there's an easily investible, liquid (meaning there's a lot of buying and selling going on) stock that you can buy relatively easily.
But other times, a market might be difficult for Western investors to access. Maybe liquidity in the market is low (there isn't much trading going on). Maybe you have to open a local brokerage account to buy a stock I recommend. Or maybe there just aren't any appropriate stocks that have a large enough market capitalization.
This month, I faced a unique challenge: It's illegal for most of us (anyone in the U.S. or the EU) to buy Iranian stocks. That's unfortunate, as it's where it would be easiest to find the big beneficiaries of sanctions being lifted.
So I had to look for companies with publicly traded shares on other exchanges that stand to benefit from doing business in Iran.
That's where I faced the next challenge: There aren't many publicly traded companies outside of Iran that do business in the country. And Iran isn't all that significant to the overall business of most of the companies that do sell their products there. In any case, the companies that are already operating in Iran aren't going to benefit that much from sanctions being lifted.
So I focused on companies that stand to benefit in the future from accessing the Iranian market. But that's still a bit of a challenge. After sanctions are lifted, ExxonMobil and BP may invest in oilfields in Iran, and McDonald's may open some restaurants. But relative to the size of these companies' global operations, Iran won't be a game-changer.
So I searched for a publicly traded company that would see a significant difference in business when sanctions are lifted. This could be in terms of margins, growth opportunities, or any other dimension.
And while it's highly likely that sanctions will be lifted in the coming months, I didn't want the stock I recommend to plummet if they aren't. I wanted to recommend a stock that is attractive for its own merits now – even if sanctions aren't lifted in July.
Editor's note: Out of fairness to Kim's S&A Global Contrarian subscribers, we can't share the name of his newest recommendation in today's Digest. But we hope you enjoyed Kim's perspective on Iran, and maybe learned a thing or two. If you'd like to learn about a subscription – and how to gain access to Kim's Iranian recommendation – you can click here.
New 52-week highs (as of 4/24/14): Chesapeake Energy (CHK), Callon Petroleum (CPE), Comstock Resources (CRK), Carrizo Oil & Gas (CRZO), Devon Energy (DVN), Cambria Foreign Shareholder Yield Fund (FYLD), AllianzGI Equity & Convertible Income Fund (NIE), Penn Virginia (PVA), Range Resources (RRC), Skyworks Solutions (SWKS), and U.S. Community Index Fund (USCI).
As we end the weeklong discussion of Iran, our feedback inbox is filled to the brim from subscribers debating whether simply discussing the possibility of investing in Iran is immoral. Send us your thoughts at feedback@stansberryresearch.com.
"Two thoughts. Those who don't realize that America is also 'one of the biggest and deadliest sponsors of terrorism in the world' need to look deeper into their investments. One man's Iran is another man's Walmart or Monsanto when it comes to, 'At what point do you stop chasing the almighty dollar and take a moral stand.'" – Paid-up subscriber Ed
"While I am not interested in investments in Iran (I like to stick with Dan's Extreme Value and Doc's strong portfolio), I do understand why Mr. Iskyan reviewed Iran as a contrarian investment. Just like Russia, Brazil and any number of other locales that meet the criteria of 'when things go from bad to less bad' approach (Sjuggerud), he is simply covering what Stansberry is all about... where to place our investments and how to select what suits us as subscribers for the safest output.
"Just because it is written doesn't mean we as subscribers need to make a move that way, but it is an avenue that must be revealed as this is Stansberry's commitment. Thus, I'm not quite sure why the mailbag was filled with hostile email about this writing. I saw 'unpatriotic' and the like in 3 pieces. I didn't see it with China, Russia or anyone else. Let us not forget what we as subscribers have signed on for... to become educated and to make money. Thank you." – Anonymous
"Read email from Dan Moore and Ram about investing in Iran. Looks like they feel it's immoral to invest in Iran and make profit from it because 'Iran is a country developing a rogue nuclear weapon with the sole purpose of dropping it on Israel.' Really???? So how about investing in a country:
"1. Which is the only country in the entire world of 200+ nations who has ever used nuclear weapon (twice!) and have killed millions of innocent people (while still being aware of the 'effects')?
"2. Which feels only it (and probably its friends) should have rights to hold nuclear weapons, but none else.
"3. Which has destroyed Iraq claiming possession of weapons of mass destruction which never existed (and many other countries without reason).
"I'll ask the same simple question – 'Where is your morality? At what point do you stop chasing the almighty dollar and take a moral stand?'" – Paid-up subscriber D.D.
Regards,
Kim Iskyan and Sean Goldsmith
Nassau, Bahamas
April 25, 2014
Demand for these energy firms is set to explode higher...
The U.S. is literally burning off trillions of cubic feet of natural gas into the atmosphere.
In today's Digest Premium, S&A Resource Report editor Matt Badiali explains how certain energy companies are working to drastically increase drilling production and lower costs.
Plus, he shares the name of one firm set to benefit from the massive growth opportunities...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Demand for these energy firms is set to explode higher...
Editor's note: In today's Digest Premium, adapted from Episode No. 232 of S&A Investor Radio, Matt Badiali, editor of the S&A Resource Report, discusses why demand for natural gas services companies will spike higher. He also shares the name of one company that could benefit from the massive growth opportunities...
There are two natural gas production numbers that are really important to pay attention to. One is gross withdrawal and the other is marketed production.
In 2013, the gross withdrawal for the U.S. was 30 trillion cubic feet of natural gas. The marketed production was 26 trillion cubic feet. That means there's a loss in there of around 4 trillion cubic feet, which goes into a couple different places. Sometimes it's pumped back into an oil field or burned off into the atmosphere.
But what we know is that most of that 4 trillion cubic feet is waste. If there was an economic way to sell that gas, drillers probably wouldn't be pumping it back into an oil field or burning it off. But in places like North Dakota, where we have this massive new development in the Bakken Shale producing all this oil, it's just not economic to keep the excess gas. There just aren't enough people in North Dakota to use that gas. Putting a line in to Chicago or Los Angeles or some other densely populated area is just not economic. So they get rid of it.
I (Matt Badiali) was shocked at the amount of natural gas being burned ("flared") off into the atmosphere. In 2012, that number was 212 billion cubic feet. That's an enormous volume that was being burned just because there was no use for it and they couldn't sell it because it wasn't economic.
People are talking about how natural gas prices could go up to $10 per thousand cubic feet if we get another winter like the one we just had. But I'm a natural gas bear. I think the price of natural gas hit $6.50 because there weren't enough pipes to get the gas out of storage.
Remember... we pump natural gas out of the ground. The stuff that we find "economic" – where existing pipes can transport it somewhere – is pumped into salt taverns to store it for the summer in preparation for the winter. The pipes that take it from storage to the consumers just aren't big enough. Over the last two years, we've seen an enormous amount of natural gas demand, but we don't have the infrastructure in place.
Keep an eye on the numbers we're seeing from the natural gas service companies. Horizontal drilling and "fracking" techniques have opened up the wells. When you first drill a well, the most oil you'll get out of it is in the first production. These wells fizzle out quickly.
But one of the things that companies have spent the last five or so years working on is figuring out how to improve the production value and efficiency of these wells. They want to make them produce more oil faster and for longer periods of time. And the shift toward using new drilling techniques is taking place right now.
I was just in New York for the Independent Petroleum Association of America (IPAA) conference. Company after company got up and showed how their initial wells performed versus the new wells that they're drilling now. They have almost always increased production by 30%-50% and decreased the cost of drilling each well from 30%-70%.
We're going to see a lot more demand from the service companies, and a lot more drilling from the drilling companies. Southeast Texas is a prolific oil shale. It stores some of the world's largest oilfields and contains an enormous amount of oil and gas. The Eagle Ford Shale is one of my favorite places there.
One of the companies in the Eagle Ford that I think will benefit from the growth from this new kind of economic paradigm shift is Sanchez Energy (SN). It's in the Eagle Ford and its production looks really exciting.
– Matt Badiali
Demand for these energy firms is set to explode higher...
The U.S. is literally burning off trillions of cubic feet of natural gas into the atmosphere.
In today's Digest Premium, S&A Resource Report editor Matt Badiali explains how certain energy companies are working to drastically increase drilling production and lower costs.
Plus, he shares the name of one firm set to benefit from the massive growth opportunities...
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 04/24/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 338.4% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 289.3% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 274.1% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 226.7% | True Wealth | Sjuggerud |
| Ultra Health Care | RXL | 01/04/12 | 185.9% | True Wealth Sys | Sjuggerud |
| Altria | MO | 11/19/08 | 185.5% | The 12% Letter | Dyson |
| McDonald's | MCD | 11/28/06 | 181.7% | The 12% Letter | Dyson |
| Penn Virginia | PVA | 10/01/13 | 164.2% | Resource Report | Badiali |
| Hershey | HSY | 12/06/07 | 158.7% | SIA | Stansberry |
| Fluidigm | FLDM | 08/04/11 | 158.2% | Phase 1 | Curzio |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 2 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 1 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | Resource Report | Badiali |
| 1 | SIA | Stansberry |
| 1 | Phase 1 | Curzio |
Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)
| Investment | Sym | Holding Period | Gain | Publication | Editor |
| Seabridge Gold | SA | 4 years, 73 days | 995% | Sjug Conf. | Sjuggerud |
| Rite Aid 8.5% bond | 4 years, 356 days | 773% | True Income | Williams | |
| ATAC Resources | ATC | 313 days | 597% | Phase 1 | Badiali |
| JDS Uniphase | JDSU | 1 year, 266 days | 592% | SIA | Stansberry |
| Silver Wheaton | SLW | 1 year, 185 days | 345% | Resource Rpt | Badiali |
| Jinshan Gold Mines | JIN | 290 days | 339% | Resource Rpt | Badiali |
| Medis Tech | MDTL | 4 years, 110 days | 333% | Diligence | Ferris |
| ID Biomedical | IDBE | 5 years, 38 days | 331% | Diligence | Lashmet |
| Northern Dynasty | NAK | 1 year, 343 days | 322% | Resource Rpt | Badiali |
| Texas Instr. | TXN | 270 days | 301% | SIA | Stansberry |