Just ran across this interesting interview between Brian Hunt of The Daily Crux and Marin Katusa of Casey Research on the future of Energy around the planet.The direct link is here for those of you wanting to read the entire transcript is here:
The Best Energy Investments in the World
Here are some of my favorite gems from the interview. I will highlight those words which especially should be used by you to form a sharper macro-economic view of the world going forward.
I am cutting out any specific mention of companies which Casey Research is recommending. I am simply reprinting the macro-economic views expressed in this interview to help you understand that cheap oil is a thing of our past and as Jim Kunstler would say, the days of "Happy Motoring" . . . making suburbs and exburbs affordable to masses working in the cities . . . are ebbing because of Peak Oil:
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. . .
An interview with Marin Katusa, Casey Research
November 25th, 2009
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