By: The Energy Report and Marin Katusa
Source: Karen Roche of The Energy Report
You don't have to be a geologist or a workaholic fund manager to spot deals in the natural resources space—although it helps if you know a good one. Focus on the people behind the company, find out if they have skin in the game, and wait until you can get in at a lower price than their price. Then be patient. In this interview with The Energy Report, Marin Katusa, founder of Katusa Research, shares some insight in the uranium and oil and gas space that could add up to future profit for any investor.
The Energy Report: You recently launched Katusa Research after years of working with Doug Casey. How do you see your new company expanding on what you achieved at Casey Research?
Marin Katusa: My time at Casey Research was fun and a great platform to spread my wings. Doug and I are still very close. We're partners in a hedge fund and we talk regularly. Katusa Research is going to be much more focused on just publishing research. There will not be any upsells, and I am not a publishing company. I run an investment fund, and my focus is making money on investments, not selling newsletters. Everybody will be able to get free access to all my research and thoughts on my website and monthly newsletter, all available for free at katusaresearch.com.
I have no axe to grind with the publishing model; it's just not for me. I've made all of my money from my investments, and the cash flow I received from the newsletters was a very small part of my income. So, I want to focus on the great opportunity I see currently in the resource industry. And, I plan structuring deals that in five years are going to add a significant impact to my funds' portfolios.
TER: What do you hope to achieve by publishing this for free that you were not getting when you were at Casey Research?
MK: Therapy and deal flow. I've done eight flights in the last week and visited six countries in the last 30 days. I spend a lot of time on airplanes, so I try to optimize my time, and writing is therapeutic. I don't pretend that I'm the best writer, but I am a fast writer, and jotting down my thoughts helps my stock analysis and research. My output is up there with the best of the writers in the industry. I can create spreadsheets, but when I write it out in plain language, it helps my analysis. Moving forward, since my research will be free, I don't have to worry about the marketing side of the publishing business.
I am busy running one of the largest funds in the junior resource sector. I'm an investor and speculator. That's my focus. I'm not going to be hitting people's emails 10 times a day to tell them about the best investment theme of their lives. If people are interested, they can come to my website. Time will tell if my model will work.
TER: You also recently published a book called "The Colder War: How the Global Energy Trade Slipped from America's Grasp." You summarized how Putin has leveraged Russia's greatest assets, its energy resources, to rebuild the Russian economy. And you noted that Putin did this by establishing trade relationships with countries like China, Brazil and Iran and that he did all of this outside the U.S. dollar. What's the next battle in the Colder War?
MK: About 120 pages of the original manuscript got cut out—and it covered the importance of China and the emerging markets. The battle of the petrodollar will take many decades to play out, and China and the emerging markets will be essential for the bull market in resources to get going again. This will be the basis of my next book, along with specifically how to position your portfolio to profit over the next decade.
A lot of people don't realize that the yuan is the second largest currency in the world today; it overtook the euro in Q4/14. China and Russia are already working closer together. The "stans" are rallying together to create their own critical mass. This is a multi-decade battle with a lot of players. Japan and Europe are in their own battle to the bottom, devaluing their currencies to try and stimulate growth. Meanwhile, about a half a trillion fewer U.S. dollars are pouring into the Middle East because of the success of the U.S. shale sector and the slowing global economy.
People are chasing yield. You don't get yield in speculative growth economies; you get rise of net asset value. When Federal Reserve Chair Janet Yellen raises rates, that further establishes the U.S. dollar as the dominant currency with the yuan pegged to it by default. No one knows how this will play out. Will China's export market weaken if the currency is too strong? Will that increase social unrest? If it devalues too much, that could stimulate the economy, but then it will cause currency wars with other Asian countries. We are living through an interesting flux point here, and the petrodollar is still the main thing to watch.
TER: Are we getting creative at finding new uranium sources?
MK: I recently spoke at the World Nuclear Fuel Market conference in Paris and I have visited most, if not all, of the major uranium projects in the world, including in Eastern Europe, and for my money, the low-hanging, easy fruit is in the Athabasca Basin in Canada and the U.S. The U.S. imports 94% of what it consumes. One in every 10 homes in America is being powered by Russian nuclear fuel. Everyone is focused on investing in the things that China needs. But with 99 operating reactors, 20% of U.S. baseload power is nuclear; that makes uranium a strategic metal and, by definition, valuable. Plus, it is a lower risk to invest in a North American uranium project where you know the rule of law, you know your government take, you know your taxes, you know your process and you are not going to have to compete with a major Chinese conglomerate that doesn't care about the North American Securities Exchange rules. I'm not saying that they're doing anything illegal. I'm just saying it's different. If you look at my portfolio track record of which stocks are doing really well, it's exactly those ones. That's what I'm sticking with because it's working.
TER: Is there enough uranium in North America to supply our needs, but it just isn't built out yet?
MK: Yes, there is enough resource in the ground, but it has to be developed and that takes a long time—at a minimum, 10 years to develop, permit and build an operating uranium mine in the U.S. Eventually the big money will recognize this when the geopolitical tensions rise and the colder war heats up even more. Then they will have to pay a price to the people who were smart enough to get in early.
TER: Has human ingenuity been too effective when it comes to the oil and gas space? Has fracking resulted in too much supply?
MK: After a year of sub-$100 barrel ($100/bbl) oil prices, North American rigs are drilling faster and more efficiently. Companies evolve or die. But even in a global economy with slower growth, there is still increasing demand for essential commodities, and where there is demand, people will figure out how to deliver product.
A big opportunity exists in the oil and gas sector in South America. The Cantarell Field went from 3 million barrels a day to less than 500,000 barrels a day because it didn't reinvest in the oil fields and prevent the big production declines. This negligence was also true in the past in many other countries and other commodities.
Eventually, there will be a turning point where the reserves are depleted. Again, human ingenuity will solve those problems, but there will have to be an increase in price. That is the opportunity I am positioning our funds to take advantage of. You have to be in the right commodities, with the right people, and you also have to have patience. The resource sector is cyclical. But if you understand that and you invest with the right people, you will do well.
TER: Can you give us some examples?
MK: Mexico has world-class potential, but it hasn't seen any modern technology. Fewer than 30 horizontal wells have been drilled there. PEMEX, the national oil company, has seen a huge decrease in production because instead of investing profits in the company, they are used to subsidize social programs. That is why the country opened up its oil patch to North American drillers. Right now, Mexico is importing condensates from the U.S. The game has changed. Ten years ago, everyone thought the U.S. would be importing liquefied natural gas (LNG). Now, it's planning on becoming a major exporter of LNG. So you have to adapt, evolve. And it is happening faster than we ever could have imagined.
TER: You have made the point that not all shale formations are the same. What are the two or three data points I should be looking at when I'm looking at a shale oil opportunity?
MK: It's like saying all gold deposits are the same. That's absurd. I recently wrote a piece called "Why David Einhorn is Wrong on the Big Oil Short" to debunk some of the myths about fracking. The problem is that the production of shale oil is so new that a lot of people just don't understand it yet.
Investors should start examining possible shale investing by determining the type of production. The Bakken has a different type of production than the Eagle Ford or the Montney in Canada. Take the time to understand the formations, the depths, the infrastructure, the government take, the state tax, the provincial tax and all the wellhead prices. The price you get in Canada is different than the price you get in the Bakken, and it's different than the price you're going to get in the Eagle Ford because of variances in demand and the cost of transportation.
TER: Thank you for sharing your tips.
Marin Katusa is the author of the New York Times bestseller, "The Colder War." Over the last decade, he has become one of the most successful portfolio managers in the resource sector, such as his 2009 Fund Partnership (KC50 Fund LLC), which has outperformed the comparable index, the TSX.V by over 500% post fees. Katusa has been involved in raising over $1 billion in financing for resource companies. He has visited over 400 resource projects in over 100 countries. Katusa publishes his thoughts and research at www.katusaresearch.com.
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