The Energy Report: In the current environment, do catalysts matter?
Jocelyn August: They do matter. At first glance, last quarter was negative for a lot of stocks. I recently got my 401(k), and it didn't look so good. But we did see a lot of stock movement in Q2/12 in the natural resources realm. We actually recorded 14 double-digit stock price moves, including eight in the energy sector. Some are positive and some of them are negative, obviously.
TER: What trends are you seeing in catalysts versus share price movement?
JA: For the most part, the catalysts that move energy stocks the most are those that can show how well a prospect is going to perform for a company. Drilling announcements, especially if they are for test or exploratory wells, have an effect. A start or a completion of drilling is also important.
TER: What are some examples?
JA: The largest one-day move we saw recently was a 22% negative move for Samson Oil & Gas Ltd. (SSN:ASX) following its announcement of the start of production at its Gretel II 12 KA 3 well at its Roosevelt oil project in Montana. You would think that a production start announcement would yield a positive stock price, but if you actually look at the announcement, we noted that the well yielded much lower oil production than expected. That's why the move was downward.
But we did also see some very large, positive, one-day moves. GMX Resources Inc. (GMXR:NYSE) announced the completion of fracture stimulation at one of its wells in the Williston Basin of North Dakota. With this announcement, we saw a one-day upward move of 18%.
TER: GMX is up 6% over the past four weeks, but down 39% over the past 12 weeks. What is your take on this? Are you positive on this company?
JA: I am pretty positive on GMX. It has had some very large, event-driven moves recently. It has a really small market cap of $62 million (M), and it has a lot of projects that it's working on right now. The Williston Basin is really hot right now. I think that in terms of volatility and market movement, GMX is a good stock to go with.
TER: What's the next catalyst for GMX?
JA: The company has several coming up in the next quarter. It has multiple wells in the Williston Basin. It has Joliet 1-18H. It has Wilson 31-6H. It has fracture stimulation at Fairfield State.
TER: Is it your investment theory here that GMX is a small-cap company for which really good news would yield a good lift in share prices? Is that it?
JA: Yes, absolutely. I think when you're looking at small-cap companies that have a smaller list of projects that they are working on, announcements from the company with regard to the success or failure of certain projects are obviously going to have a much bigger effect on their stock prices than, say, a larger company that has a lot of projects going on.
TER: Another one you wanted to talk about?
JA: Last time we spoke, we talked a little bit about ATP Oil and Gas Corp. (ATPG:NASDAQ) and the Shimshon project it's working on in Israel. Recently, it announced that it had started drilling there, and it gave some preliminary results. After this announcement, its stock jumped 25% but if you look at it now, it has pretty much come back to the level it was at before. I think investors realized this company has a lot of other problems, like a pretty high debt load. While Shimshon may be a really great thing for it, even if it can be shown to be as successful as the Noble Energy Inc. (NBL:NYSE) project that's in Israel, it's still not going to be a complete solution to all of ATP's problems. After the stock jumped 25%, everybody said, wait, let's really look at what's going on with this company.
ATP is expecting to announce further results on the Shimshon well in this quarter, which we highlighted in our CatalystTracker Natural Resources Q3 Outlook report. This announcement could have a pretty good effect on the stock if it announces positive results, or it could be negative if it were to announce that it actually didn't yield as much as the company expected.
TER: The market has really punished ATP. It is down 84% over the past 12 months, down 62% over the past three months and down 35% over the past four weeks. The Shimshon project is a gas well, but margins on natural gas can be very good in Southwest Asia.
JA: I think in that part of the world, the margins would actually be pretty good, so the prospect for that well and for the exploration in general in that area is very good. I think that the punishment of ATP's stock is probably more related to the high debt load. The fear is that it has $1.5 billion (B) of debt coming due in a couple of years with the potential that its cash flows aren't going to be able to cover that.
TER: Does this low stock price represent value? Is your opinion favorable on ATP?
JA: I would say I'm neutral. If ATP can get something going at Shimshon and if it can achieve more success in the Gulf of Mexico, it could turn out to be a very undervalued company. But I think we need to wait for more results from Shimshon.
TER: Go ahead with your next one.
JA: Uranium Energy Corp. (UEC:NYSE.A) is a U.S.-based producer. I have seen a lot of downward moves over the past year despite the fact that it has had a lot of good announcements. It is moving its projects along. It started producing more from its Palangana project in Texas, and again, that was met with more downward moves. I think that the political environment for uranium has been pretty negative since March 2011 with the Fukushima Daiichi nuclear disaster in Japan. I also think the political environment in the U.S. has something to do with it. Given that Japan has made some announcements that it will be starting up some more reactors, I'm hopeful the environment for uranium is going to become a little bit more positive. Also, given that, the stock price of Uranium Energy is fairly low, if the political environment becomes more positive, and if it keeps making positive announcements about exploration and about what it's working on in Texas, I think that those announcements and the company are going to get noticed.
TER: What catalysts should investors know about?
JA: The biggest one that it has upcoming is for Goliad. Goliad's measured and indicated resource estimate is 5.4 million pounds (Mlb) uranium, which is four times larger than that of Palangana. We are projecting that Palangana is currently producing around $10M worth of annual revenues with approximately 175,000–200,000 pounds annually. Uranium Energy is expecting Goliad to be on-line and producing by March 2013. At that point, that's going to mean a much larger revenue stream for the company.
TER: It is my understanding that total U.S. uranium production is only 4 Mlb/year and that we import more than 90% of our needs. Next year or the year after Uranium Energy could be producing 2 Mlb by itself. Are there a lot of catalysts coming up?
JA: There are.
TER: Would Japan starting up reactors lift all boats?
JA: I think that would definitely lift all boats but, again, I think Goliad is going to be something that will be very positive. It also is waiting for an exploration permit for its new project, the Channen project, which is near Goliad.
TER: Are you positive on Uranium Energy?
JA: Yes.
TER: Another one?
JA: We had previously talked about McMoRan Exploration Co. (MMR:NYSE), and we're still waiting on Davy Jones. I wanted to highlight it again because it consistently has news coming out for this project. It has experienced significant delays, but I think it's on the road to near-term production. We're probably looking at August, but again, we're waiting for an announcement from McMoRan on the flow rates.
TER: Why has McMoRan been such a fantastic performer? Over the past 12 weeks, it's up 62%. That looks like an inverse image of others in the industry. Over the past four weeks, it's up 18%.
JA: Despite the fact that it continues to have these delays, which at face value would seem not to be a good thing for the company, McMoRan is revolutionizing the industry and it is working on several other ultra-deep wells as well as Davy Jones. The reason it has experienced so many delays is because it has had to innovate all of this on its own. It has had to come up with the equipment. It has had to figure out how to engineer these wells for this very deepwater drilling. That's something that nobody has done before. So if it is successful with Davy Jones and some of its other ultra-deep wells, then it will become a leader. It will be the company that everyone else looks to for this type of drilling, and it will be able to capitalize on the fact that it has the experience to be able to get to this gas, which previously has been unavailable.
TER: This is such a tough project considering the depth, the necessary engineering and the associated risk. Could the performance here portend good performance for other gas-well drillers?
JA: I would think so. The political environment for gas right now is pretty good; it's seen as a more environmentally friendly form of energy. If companies are able to get more of it from places where it was previously unavailable, then obviously that's going to be a positive for a lot of other gas companies.
Speaking of gas in other areas besides the U.S., we are also looking at FX Energy Inc. (FXEN:NASDAQ). It is doing a lot of gas drilling in Poland.
TER: FX Energy is up 19% over the past four weeks and up 23% over the past six months.
JA: It's definitely interesting, and it's one that we highlighted in our Outlook report. Poland is an attractive market because it has significant hydrocarbon potential, which is very largely unexplored, and right now current domestic production in Poland is not enough to meet demand in that area. So, if these projects are economically viable, FX Energy would be in a very favorable position. It is drilling multiple wells in that area that are targeting the Rotliegend formation.
We are looking at a lot of different catalysts that are approaching this quarter, particularly in the Fences area where FX has been drilling multiple wells. It has made several announcements recently regarding these wells, including the conclusion of casing at the Kutno well in July when it also announced results from one of its Komorze wells. It is expecting results from multiple wells this quarter. These could mean some very positive moves for the company.
TER: Which would be the major catalyst?
JA: Kutno is a new area that it is working on and it has not been proven yet, so positive results from this area could be very favorable.
TER: Jocelyn, you follow Liberty Star Uranium & Metals Corp. (LBSR:OTCBB). It has an $18.75M market cap. What's going on there?
JA: It is working on some projects in Alaska, Mexico and Arizona. It has a couple of catalysts that we're looking at for this quarter for Tombstone, including a permit approval and potentially a surveying start. We saw some other catalysts from this project in May when it had an announcement of some sample test results. It actually moved the stock price up by 11%. Yes, it has a very small market cap/share price. Again, I think the small market cap and low price may have to do with the uranium situation overall.
TER: Are you positive on Liberty Star?
JA: I'd say neutral.
TER: Are its best prospects in uranium or in metals?
JA: It seems like it has mostly metals. It does have a uranium property in Arizona, but it doesn't look like it has a lot of catalysts for that right now.
TER: We talked about Ivanhoe Energy Inc. (IE:TSX; IVAN:NASDAQ) the last time we spoke. Can you update me on it?
JA: We're looking at some drilling results that are expected this quarter for the Hollin IP-17 well in the Pungarayacu field in Ecuador. It is in the business of heavy oil and uses heavy-to-light technology to improve and convert heavy oil to lighter oil, which is more valuable and can be more easily transported via pipeline. So we're expecting that it is going to continue drilling through Q3/12 and announce results before the quarter ends for this Hollin field. It actually announced on July 12 that it had drilled Hollin to approximately 10,500 feet and it had some evidence of hydrocarbon. So we're looking at some more detailed results as this drilling continues this quarter.
TER: And you still bullish on Ivanhoe?
JA: Yes.
TER: What about Apco Oil & Gas International Inc. (APAGF:NASDAQ)? Do you follow that one?
JA: Yes, we do follow Apco. We had a big catalyst for it last quarter. It was a negative catalyst. It is doing a lot of drilling in Colombia where it's hard to figure out what is going to happen because of the political environment. It seems to be doing pretty well, but it can be hard when you have natural resources in Colombia.
TER: What about catalysts affecting Gran Tierra Energy Inc. (GTE:NYSE; GTE:TSX)?
JA: That is another one that we expect will have a lot of drilling catalysts in Brazil and Argentina this quarter. We have one for Azar, which is actually expected to reach total depth in early August, and then we'll have some results.
TER: You follow Endeavour International (END:NYSE.A).Tell us about that company.
JA: That one actually saw a large move last quarter as well. It is interesting because it has a lot of projects in the United Kingdom's North Sea. It has been in that area for a long time, but its large-mover catalyst last quarter was actually in the Heath shale in Montana. It had a 19% upward move with well results for that one. Endeavour seems to be diversifying and getting into other areas besides the North Sea.
TER: What's the next catalyst for Endeavour?
JA: We have several catalysts this quarter. We have catalysts for Bacchus, where we will see a second well begin production this quarter. We're also waiting on a project sanctioning for Columbus.
TER: What about Noble Energy?
JA: It also has a large project in the North Sea called the Bream project. We're waiting on the project sanction for that by year-end.
TER: Are you positive on Noble?
JA: Yes, we are. It has a much larger market cap.
TER: Thank you, Jocelyn.
Learn more about Sagient's CatalystTracker here.
Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new natural resource industry product within the CatalystTracker product line with the publication of the Catalyst Impact Study: Natural Resources Sector. Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a Master of Business Administration from the Rady School of Management at the University of California, San Diego and graduated cum laude from UC San Diego with a Bachelor of Arts degree in sociology.
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DISCLOSURE:
1) George S. Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Uranium Energy Corp. and FX Energy Inc. Interviews are edited for clarity.
3) Jocelyn August: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
