Energy concerns come and go. At times, it feels like we on the brink of a complete depletion of energy-producing resources like oil and gas. Then huge discoveries are made or big shifts in technology occur and those concerns disappear. A few years ago, natural gas scarcity was a concern. Today, thanks to shale, those fears are diminished for now.
At Cambridge House International's Montreal Investment Conference on November 18 and 19, we spoke to Jim Letourneau, founder of investment newsletter The Big Picture Speculator, is a well-known geologist and investment writer who lives in Calgary Canada.
He gave us a quick overview of the natural gas situation, plus we discussed other resource companies.
We started by getting a quick intro to what he was doing at the conference: "I'm going to talk mostly about small cap mining companies I like but I'll also talk a lot about natural gas because Quebec has the Utica Shale, which is a big gas resource that they may choose to develop in the future. According to Natural Resources Canada, the Utica Shale in Quebec contains between 18-40 trillion cubic feet of natural gas with a market value of between $70-140 billion.
Then Mr. Letourneau gave us an overview of natural gas. "It's very good for supply," he said. "Five years ago, we were worried that we would have to import it and it was becoming a very serious issue."
This supply has a predictable (but sometimes forgotten) impact on price: "The critical thing most people don't realize in North America is: Right now we have the cheapest natural gas in the world. The bad news – for producers – is it's hard to envision a scenario where prices of natural gas increase dramatically. There still could be some seasonal swings." But the supply is there, he said. "We know where the gas is, we know how to extract it… I believe we'll get a lot better at producing shale gas. We've got a pretty good supply right now."
That led into a brief discussion about how long the current discoveries will last. Mr. Letourneau replied: "The numbers flop around a lot. The US Geological Survey put out one number and then a few years later they put out another number that is maybe half as much. It's so early in shale gas production that it's really hard to come up with absolute numbers. However, six months ago, the president of Encana said that they used to struggle to find a two year drilling inventory. Now they easily have a 30 year inventory of locations. That kind of increase in places to drill means that we're not going to run out of natural gas any time soon."
Next, we spoke about ecological concerns, jurisdictions and the different types of shale deposits.
"Most of the ecological problems people worry about are quite easily solvable and in many jurisdictions – like Texas, Oklahoma, Saskatchewan, Alberta, British Columbia – there's a pretty strong regulatory framework. So companies know exactly what is expected of them – what they can and cannot do. They follow their regulations or if they don't, they lose their ability to do business in that jurisdiction," said Mr. Letourneau.
As for the different shale deposits, Mr. Letourneau said: "Every single kind of shale performs differently. The decline rates are different. Initial production rates are different. Technology requirements are different. And it's so early in shale development that they are still finding out."
Lastly, we spoke about some of the companies he will be discussing at the conference. He planned to present some small cap iron ore companies, small cap rare earth companies, and "I always throw in biotechnology companies as well," he said.
Since most of our conversation was about petroleum, he told us about one related company: "One of my favorite companies on the oil and gas side is a company called Wavefront Technology Solutions (TSX: WEE). They do enhanced oil recovery. If you use their technology in a water flood, you can increase production from 30-200% They're just at a tipping point where they're starting to get a lot more customers. They have numerous case studies with production graphs from a third party clients showing increased production and increased oil cuts. that shows that."
For a rare earth company, he told us about one that doesn't get a lot of headlines: "I like Pacific Wildcat Resources (TSX: PAW)," he said. "They're in Africa. Their original resource estimate was all from holes that were 30 meters or less and they've drilled deeper and they're finding more niobium. It's a pretty neat company. Rare earths have been beaten up a little but so they might have some upside in them."
Then we asked him about precious metals since that is on everyone's mind right now: "Precious metals – there's so much uncertainty. Silver could take off. Everyone is so worried about the economy and they all seem to flock to US dollars and they don’t want to own anything other than that. But ultimately, economic uncertainty is usually bullish for precious metals. That should help some of the junior companies. Some of them are doing well, if they've had big discoveries. Silver is a great place to be looking for ideas right now."
And, although we spoke mostly about mineral and mining stocks, Mr. Letourneau couldn't resist telling us about a medical device stock that is having a lot of success in skin cancer detection: Verisante Technology Inc. (TSX-V: VRS). His reason – "I don't want to be 100% into resources," he said – makes sense for investors whose portfolio might be a little too heavily weighted in metals.
REFERENCES
Jim Letourneau's site: http://www.jimletourneau.com/
Cambridge House International's Montreal Investment Conference: http://cambridgehouse.com/conference-details/montreal-investment-conference-2011/59
Wavefront Technology Solutions: http://www.onthewavefront.com/
Pacific Wildcat Resources: http://www.pacificwildcat.com/
Verisante Technology Inc. http://www.verisante.com/