Economics professor and newsletter writer Kal Kotecha says to obtain superior results, you cannot do what everyone else is doing. He maintains that much of the risk associated with junior resource equities has been beaten out by the herd mentality and that selectively buying what's left presents mindboggling opportunity. Kotecha shares some of those names in this interview with The Mining Report.
The Mining Report: You're the editor of Junior Gold Report, but you also follow similar-sized companies in the energy sector. Please give our readers an overview of the energy space.
Kal Kotecha: I've been involved in the space since 2002 and I've never witnessed anything like what is currently happening. In the energy sector, I see the price of uranium increasing, but to see price appreciation across energy stocks, the price of oil must remain near $100 per barrel ($100/bbl). That $100/bbl benchmark could prove challenging, given the growing supply of shale oil in the U.S. Texas produces as much oil as Iraq or about 3 million barrels of oil per day (3 MMbbl/d).
Most of it comes from two sources: the Eagle Ford Shale in southwest Texas and the Permian Basin in west Texas. Chris Guith, senior vice-president of policy for the U.S. Chamber of Commerce's Institute for 21st Century Energy, estimates that recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand levels.
Fracking has lowered the price of natural gas by about 70% over the previous seven years or so. The price of oil, especially in the U.S, should decrease to $60–70/bbl on average because of shale oil. U.S. dependency on imported oil should lessen, too.
TMR: You said that the ready availability of shale oil could eventually push crude prices to $60–70/bbl. Is that a near- or medium-term forecast?
KK: That's a medium- to longer-term forecast. I don't believe in peak oil theory. The U.S.' savior in the oil industry is going to be shale oil, and there is a lot of it. Ultimately, that's going enhance the U.S. economy. Basically everything runs on oil. The U.S. won't have to import as much oil from Saudi Arabia or even Canada.
TMR: What are some companies that you're following in the shale oil space?
KK: A primary region of U.S. shale oil production is the Bakken Shale in South Dakota. Quantum Energy Inc. boasts good upside potential for investors. Quantum Energy proposes to develop five "21st Century Energy Centers" throughout the Bakken field with each to include a 20 Mbbl/d diesel refinery and a separate adjacent processing plant to strip the crude of natural gas liquids (NGL) for barrel value enhancement and regional production of NGL byproducts. Quantum Energy is green-friendly, too. The centers will use the latest CO2-capture technology to reduce emissions, while providing an injection-ready supply of CO2 for enhanced oil recovery.
The centerpiece of each energy center is a 20 Mbbl/d diesel refinery modeled on a refinery currently under construction in Dickinson, North Dakota, that will produce 7 Mbbl/d of low-sulfur diesel. The western North Dakota and eastern Montana region consumes 75 Mbbl/d diesel, providing more than enough demand for Quantum's five proposed energy centers. Quantum will also make money by refining other companies' oil.
TMR: Quantum will be essentially toll-refining oil. How does $60–70/bbl oil affect that business model?
KK: I don't think the price is going to affect the company. Investors will be rewarded once it is up and running.
TMR: What's your price forecast for natural gas?
KK: Natural should stay between $4–6/thousand cubic feet ($4–6/Mcf). It's more expensive in Europe, but in North America the floor should remain around $4/Mcf. I don't think it's going to go back up to $12 or down to $3.
TMR: Much of your recent writing on Junior Gold Report has either focused or touched on China. Chinese e-commerce firm, Alibaba Group Holding Ltd., recently conducted a record-setting initial public offering (IPO) and has a $220 billion ($220B) market cap. What should that tell investors about the Chinese economy and its growing influence on the Western market?
KK: That's a great question. I believe the Chinese economy is not as weak as reported, though it is probably not as strong as it had been in recent years. China will likely undergo a modest recession due to the growing debt of Chinese consumers. Japan went through something similar in the 1980s and 1990s. I don't think we will see double-digit growth for China any time soon. To support that, the Chinese government said recently that it will not provide any stimulus to the economy. That is a good thing in the long term.
China and India are going to be the next dominant global economies. Corruption is an issue in India and socialism is a challenge in China, but I believe both countries can live up to their billing as the next economic super powers.