Investors Having No Exposure to Energy Risk is Risky
Commodities / Energy Resources Jan 16, 2014 - 07:32 PM GMTBy: Marin_Katusa
Because Marin Katusa is the foremost expert on all things energy, I’ve been eager to pick his brain for our subscribers. Marin, an accomplished investment analyst, is the senior editor of Casey Energy Dividends, Casey Energy Confidential, and the Casey Energy Report. He is also a regular commentator on BNN and other major media outlets.
Dennis Miller: Marin, welcome. Thank you for taking the time to share your knowledge with our subscribers.
Marin Katusa: Thanks for having me. It’s my pleasure.
Dennis: I know you are aware that our subscribers are mostly baby boomers and investors on either side of the cusp of retirement. We focus a lot on diversifying among sectors and minimizing risk within each sector. Can you explain where energy opportunities should fit in to our subscribers’ portfolios, including both low- and higher-risk investments?
Marin: It’s a Catch-22 for the mature investor today. Everyone is chasing yield, thereby propping up the prices of yield plays. Dominant companies in the energy sector pay a good dividend and have appreciated very nicely.
Now, I can’t emphasize enough how important it is to lock in gains by putting in Casey profit stops. 25-40% gains on big energy companies are equivalent to double and triple gains in the junior market. Don’t be scared to sell.
For your subscribers, only invest in juniors – which are high-risk investments – with money you can afford to lose. That means no more than 10% of your portfolio. Now personally, I don’t follow that advice, but I’m nowhere near the age of your audience. The younger you are, the more time you have to build your non-risk portfolio. While the juniors can make you tremendous wealth, they are also the riskiest investments in the world.
Every investor should also think about the percentage of his portfolio exposed to the energy sector. It’s mind-blowing to me that investors in your age bracket often have 10% of their portfolio in gold stocks, but very little to none in the energy sector. Globally, the energy sector dwarfs the gold sector, and I believe 10% of everyone’s portfolio – including your readers’ – should have exposure to energy investments. For your audience, 90% of that 10% should be invested in less risky energy companies, and 10% should be in riskier junior energy stocks. Nothing is more pleasing to a portfolio than investing in a company at under US $0.25, and having the stock run to over US $7 (an over 2,500% gain).
Dennis: When I talk about speculative picks, I like to use an analogy. When it comes to pharmaceutical stocks, they usually have a lot of intellectual capital. When their research moves along the FDA approval process, a larger company will often buy them out and bring their product to market. In effect, speculative companies are like a research and development arm for the industry. The same is true in junior mining. Once they discover and have provable reserves, a larger company generally buys them out and mines those reserves.
I know big oil companies do most of their own exploration, but a uranium company might not have the ability or capital to build a mine. Can you explain the nuances of the energy sector in this regard and the investment implications for us?
Marin: Let’s start with oil. My publication was the first to publish on the potential of the East African Rift and Africa Oil (V.AOI). It was on no one’s radar, and no majors were in the area at the time we first started writing and recommending stocks in the area. Essentially, the oil and gas play for juniors is to get in early and prove up a new concept, locking up a PSC and getting the license to actually do some exploration work. Africa Oil is a perfect example of that, and AOI was able to attract a much bigger company to fund the risk. That stock had over a 1,000% gain.
There’s a similar game plan with shale gas: get in early, and stake up large blocks of land based on a geological concept that the majors are not looking at. Cuadrilla is a perfect case study in that game plan. It staked up some land for very little, proved a concept, and delivered exceptional returns for its shareholders.
In the energy sector, majors are attracted to juniors that have large sections of land with large, previously unrealized potential. The early days of the Eagle Ford oil shales are a good example of this. Smart companies were buying up land for $100 per acre, and in a few years the same land was going for $25,000 per acre.
Profiting from Energy Now
Dennis: I know you have had some phenomenal success in smaller energy picks in the past. At the Casey conferences, many subscribers have told me you made them a lot of money. Do you see any good opportunities on the horizon? If an investor wanted to take advantage of these opportunities, are they better off with an individual company or with an ETF or mutual fund in that sector?
Marin: I’ve never been a fan of ETFs. Also, I don’t like public mutual funds because few ever beat the indices, and investors pay ridiculous fees.
I think there are some excellent energy investments to be made today. But first, a potential investor has to ask himself: “What is my risk tolerance, and what is my time frame?” Africa Oil, Cuadrilla, and Uranium Energy Corp. were all major successes, but they were all very high risk, and it took over 18 months for each success to be realized.
If you do your homework, investing in an individual company will deliver superior gains than an ETF or mutual fund.
Dennis: I know you spend a tremendous amount of time in the field evaluating opportunities. Do you use a process for evaluation similar to Doug Casey’s Eight Ps?
Marin: The most important P to me is “People.” Actually, average people will screw up the best company, and if you invest in the right people, they can turn around the worst company.
The Projects and Politics are also on the top of my list. All the 8Ps are important, but those are the top three in my book.
American Nuclear Power Dependence
Dennis: I recently watched a webinar you did with some real experts on nuclear power and uranium. You cited some surprising statistics I had never heard before, about the number of homes in the US that rely on nuclear power and the number that rely on uranium from Russia. Can you share some of that information for our readers, as well as the investment and security implications?
Marin: Here is another startling fact that, if you are an American, I’m sure you will have a major issue with. In 2012, more uranium was produced by a Russian company on American soil than by all American producers combined on American soil. I’m sure Russians like that fact, but not so much Americans.
Also, the US imports over 90% of the uranium it consumes annually. It is by far the most contrarian investment in energy today globally.
The only solution for the security issues is to pay a higher price for uranium… or 20% of the homes in the US could go without electricity. Talk about creating a chaotic event. The sector and commodity are cheap, and producers cannot make money at current prices.
Dennis: Once a utility has gone through the long, expensive process of building a uranium facility, it is pretty much committed to that one type of fuel. It doesn’t seem to have the latitude to convert, like a lot of utilities did from coal-fired plants to gas. Is that correct?
Marin: There is a misconception that thorium can be substituted for uranium in the reactors. Nothing can substitute for uranium in the existing reactors. In fact, even if the price of uranium doubled or tripled, the increased costs to creating nuclear electricity would be negligible. Once the plant is built, the big costs are paid for.
I think your real concern is this. If the price of uranium rises – as I believe it will – the US utilities will pay whatever it takes to buy their fuel, and that cost will be passed on to the American consumer. There is no realistic Plan B.
Dennis: Is uranium where you see the next best opportunity for huge investment gains? And if so, what caution would you offer to those subscribers who may be close to retirement and do not have the benefit of a do-over with their investment dollars?
Marin: Every investor needs to know his time frame for investing. If an investor is looking to earn yield from uranium, then he should invest in the larger producers. The way to invest in uranium with the lowest risk is to actually buy uranium. There’s no political, production, exploration, or management risk involved. However, you can’t exactly buy uranium and store it beside your gold and silver coins.
We recently put together a special report in which we discuss exactly how investors can get exposure to the lowest-risk uranium investment in the world, which actually owns uranium (U3O8) and also uranium hexafluoride (UF6).
If you’re looking for higher-risk exposure, we’ve had some great success with Fission, which we recently sold for over 100% gains, but it doesn’t pay out a dividend, and produces no uranium. The company explores for uranium.
The Future of Oil
Dennis: We see the price of oil fluctuate regularly. In the long run, how much effect does that really have on the price of energy? You make a great case for uranium; since demand is going to far outpace supply, prices should rapidly escalate.
Marin: The reality is, most oil reserves are in countries that are not friendly to the US, and that oil is produced and managed by national oil companies.
Take Venezuela for example, which has some amazing oil deposits. The US imports almost as much oil from Venezuela as it does from the Canadian oil sands, and yet it pays almost twice as much for Venezuela’s oil as it does Canada’s oil.
Now, is Venezuela reinvesting the profits back into exploration and replacing produced oil? No. Venezuela is actually decreasing oil production, and yet domestic demand is increasing. This is what we call “the big pinch.” Thus, the only solution for Venezuela is to sell less oil, but for a much higher price.
Venezuela is not alone in this problem. Most of OPEC has this problem. Oil will go higher in the years to come. Porter Stansberry bet me 100 ounces of silver on my oil price prediction, and he lost. I offered him double or nothing, and he refused. And it’s not just oil; all energy fuels are going higher.
Dennis: One final question. Energy stocks have been somewhat out of favor over the last few years. What do you anticipate for the next couple of years?
Marin: That is a good thing. You buy when things are unpopular and sell when they become popular again.
The world will need more oil, uranium, and natural gas to keep the global economy going. Higher prices for uranium will result in increased attention by the hedge funds chasing gains. And because the sector is so small, those who are positioned early will make incredible gains only if they sell when it becomes popular – which we will definitely do when it’s time.
Companies bringing North American technologies to old, proven, producing deposits to enhance production will also see considerable gains. For example, there are areas of Europe that produced oil before the first oil well was ever drilled in Texas. Those areas have never seen modern, North American technology, and the projects are de-risked because we already know the oil is there. These areas have produced in the past, and the infrastructure is in place, which means lower costs for implementing enhanced oil recoveries.
Not to mention, Europe depends on Russia for so much of its energy needs, and it pays a premium for that dependence. I think in the coming years, the European energy renaissance will be an area from which to profit.
Dennis: Marin, it looks like we are on the verge of some major changes here in the US. Not only will nuclear energy prices climb, but our electricity bills will also. I really appreciate you taking the time to teach our subscribers about the energy sector. If we have to pay higher electric bills, we need to profit too. Thanks for taking the time to help us.
Marin: My pleasure, Dennis; thanks for having me.
As the editor of Miller's Money Forever, I often have the pleasure of interviewing my colleagues on a variety of topics to give our subscribers even greater exposure to different investing sectors. Recent interviews include:
- Maximizing Your IRA with Terry Coxon, senior economist and editor at Casey Research;
- The Ultimate Layer of Financial Protection with Nick Giambruno, editor of International Man;
- Juniors for Seniors with Louis James, globe-trotting senior editor of Casey Research's metals and mining publications; and
- Other esteemed colleagues.
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