Build Profits with Deep-Value Energy Stocks: Chen Lin

07/12/12
By The Energy Report Editors
www.theenergyreport.com

Chen Lin is the ultimate do-it-yourself investor, and uses his know-how to add value to his own portfolio. He's up yet again this quarter, a feat he attributes to gains in some of his top energy holdings. In this exclusive interview with The Energy Report, the What Is Chen Buying? author profiles his favorite picks and explains why dividends are pivotal in a risk-averse market.

The Energy Report: Chen, you have had some real successes. Are you going to remain a family office, or will you branch out into hedge-fund management?


Chen Lin: I don't have any plans to start a hedge fund. My own portfolios are growing at very rapid pace in the past decade. I'd rather focus on investing my own money or some money from my family. I feel it is more rewarding and more fun this way.


TER: Do you have a theme right now?


CL: I am quite cautious about the general market. As I mentioned in my newsletter over a month ago, I saw a significant slowdown from China. In addition, the EU is back in a recession and the U.S. is slowing down. However, a lot of people and fund managers I know are holding large cash positions. Everyone is expecting a repeat of 2008 and it may not happen. A lot of companies I own have excellent balance sheets and great cash flow. Their downside is very limited. In general, investors may be holding too much cash and they are creating a huge bubble in U.S. government bonds. That's why I am still close to fully invested.


TER: I understand that your portfolio was up 27% in the first three months of 2012. How did you do in Q2/12?
CL: My portfolio is up nicely again this quarter, thanks largely to nice appreciations in some of my top positions, including Mart Resources Inc. (MMT:TSX.V), Pan Orient Energy Corp. (POE:TSX.V) and Petaquilla Minerals Ltd. (PTQ:TSX; PTQMF:OTCBB; P7Z:FSE). I am up about 40–50% for the year.


TER: We have been in a prolonged period where investors have ignored good news and hammered stocks on bad news. You've found some stocks that have reacted positively to news. Was it just a matter of time before the situation changed? Has it changed?

"The market has once again failed to calculate risk-reward benfits. That could create good opportunities for investors who are willing to take on risk."

CL: The market was and continues to be difficult. However, my stocks were so cheap for so long, and it has been really nice to see them moving up with good news against the market downtrend. I am glad both Mart and Pan Orient started to move up with positive news. However, they are both still extremely cheap. Mart, for example, is still paying a double-digit sustainable dividend with possible increases in the next 12 months. Pan Orient is still trading at cash levels; the market is pricing all its other assets at zero even after the management demonstrated its capability to monetize those assets. These are real companies with real assets, and they are still screaming "BUY" even at their current prices. If they don't move up, I don't know what stocks would.


TER: It's amazing to see good performance in such a weak, risk-averse energy market. What industries have been strong in 2012? Which have been weak?
CL: So far, only fixed-income-related stocks have been strong—almost every other sector has been weak. That's why Mart and Pan Orient started to pay dividends, at which point the market started to pay attention. There is a lot of cash on the sidelines collecting zero interest and subsidizing the U.S. deficit. Once investors see a stock yield in the double digits, they rush to it, just as they did with Mart.


TER: How are you weighting and underweighting now?
CL: I am still overweighting selected energy stocks and underweighting everything else, including gold miners, agricultural stocks and biotech. For 2012, I think it is a stock picker's market. You need to consider each stock on an individual basis. I have plans to use the dividends from Mart and Pan Orient to buy cheap stocks in a few sectors, including gold mining.


TER: Mart investors are looking forward to a dividend. When might that occur?
CL: It looks like the company is going to pay a 10c dividend in July and followed by 5c-per-quarter regular dividend.


TER: Capital investment is so hard to come by in these dislocated markets. Aren't there better ways to use cash than to pay it out? Why not buy new assets in a lower-priced energy market?

"My stocks were so cheap for so long; it has been really nice to see them moving up with good news."

CL: Mart is looking for other assets in Nigeria. However, the Umusadege field is generating huge after-tax cash flow and the capital requirements for other new assets are not high. Mart is still accumulating a lot of cash even after the double-digit dividend payouts. Plus, it is expecting to double or triple cash flow after a new pipeline is built, supposedly sometime next year. I wouldn't be surprised to see higher and higher dividends in the next year or so.


TER: Mart is a very low-cost producer now, but could average cash costs increase if it purchased new assets?
CL: Mart's Umusadege field is one of kind. The company saw no significant oil production decline from the wells over the past three years. I am not sure anyone can find another field like this, even in Nigeria. So it would be hard to duplicate the same success. As a shareholder, I really hope Mart focuses on Umusadege while maybe picking up some other fields nearby.


TER: The company just inked a new pipeline deal with Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). What kind of leverage does this new capacity give the company? What does this mean for investors?
CL: It can double, triple or even quadruple current production, which will leave room for significant dividend increases down the road. Personally, it is still my largest position and I haven't sold a single share since its huge run-up after the dividend announcement.


TER: Shifting gears to Pan Orient, you recently spoke to some investors earlier this summer who were surprised when you told them the company had a producing field that could be scaled up in a short period of time, significantly mitigating cash burn. Why is this development flying under the radar?
CL: Pan Orient's stock had a lot of wild swings in the past a few years, and it doesn't have a strong shareholder base, much like Mart's earlier days. This means a small rumor could crush the share price and there are all kinds of false perceptions about the company. However, I believe as the management continues to execute, much of the misperception will gradually go away.


TER: On May 23, Pan Orient agreed to sell its 60% interest in its Thailand concessions, from which it would net about $162M. The stock rebounded dramatically, and has held its gains. What does this asset sale mean for the company?
CL: It means that the company is trading at the cash level. All the rest of the assets, which the company has been accumulating for the past five years, are "free" to investors. That includes Batu Gajah, the crown jewel of the company. Pan Orient holds 50% of the concession. PetroChina holds the other 50%, currently producing about 50,000–60,000 barrels of oil equivalent per day, with pipelines and all the other infrastructure in place. The company is planning to start drilling Batu Gajah in two to three months.
It is amazing how cheap Pan Orient is right now. It will also be drilling about 10 wells in the next 12 months. Each well costs a few million dollars to drill, but the upside is it would add $2–3 to the dividend if successful. In terms of risk-reward, there are no other companies like Pan Orient. It is still one of my largest positions.


TER: On May 24, Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) said it had entered into a deal with an unnamed Mongolian buyer for its iron manufacturing plant to purchase 22 thousand tons (22 Kt) of coal this year. What is your impression of this news?
CL: I think it is creditable. I went to the mines over a month ago. It has a lot of coal ready to mine. There is a huge amount of energy demand in Mongolia, so I wouldn't be surprised if the company continues to find more buyers. The key is the selling price. Prophecy has been selling to local buyers at cost to show good will. However, this deal looks like it could have a nice margin.


TER: Chen, Mongolia has not been friendly to mining in the past, but it is now a fledgling democracy and it seems open to Prophecy. Does Mongolia present high hurdles to other companies wanting to enter the market?
CL: Yes, the hurdle is high for newcomers to Mongolia. Prophecy has already been operating there for a while and has the advantage of knowing the country and the people. Mongolia is a huge country and there are a lot of opportunities there, and like many companies I own, Prophecy Coal is deeply undervalued. Now I am waiting to see the company's progress before I decide when to buy more. If there is no significant news and the market doesn't improve for the rest of the year, then tax-loss selling later this year could present a bargain-hunting opportunity.


TER: Do you own shares in Harvest Natural Resources (HNR:NYSE)?
CL: Yes. I am holding, though I am tempted to add to my position on weakness.


TER: On June 21, the company announced that it had agreed to sell its 32% stake in its Venezuelan operation, Petrodelta for $725M, on which it will net approximately $525M. The share price nearly doubled on that news. What's your take on this?
CL: It was a very smart move indeed. The deal was worth more than $12 per share but the stock is still trading at $8–9.


TER: Harvest Natural Resources has fairly advanced exploration programs in Indonesia, Gabon and Oman that it brought to the drilling stage last year. Any one of these could be worth, at minimum, half of the company's current market cap of $326M. What is the market waiting for?
CL: Harvest will need to close the deal first. That would require government approval from Venezuela and Indonesia. If one of the governments doesn't approve, the deal is dead. I think the market is fearing this outcome. However, I believe the market has once again failed to calculate the risk-reward benfits. That could create good opportunities for investors who are willing to take on a little risk.


TER: Thank you for sharing your strategies with us.

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

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DISCLOSURE:
1) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Resources Inc., Pan Orient Energy Corp., Prophecy Coal Corp., Petaquilla Minerals Ltd. and Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
2) Chen Lin: I personally and/or my family own shares of all companies mentioned in this interview. 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.

( Companies Mentioned: HNR:NYSE, MMT:TSX.V, POE:TSX.V, PTQ:TSX; PTQMF:OTCBB; 7Z:FSE,
PCY:TSX; PRPCF:OTCQX; 1P2:FSE, RDS.A:NYSE; RDS.B:NYSE, )

Source: Build Profits with Deep-Value Energy Stocks: Chen Lin:

Coal Analysis and Recommendations

April 9, 2012

By Patrick Vail, Contributing Writer, Money Morning

http://moneymorning.com/2012/04/09/coal-stocks-are-historically-cheap-heres-what-you-need-to-know-wlt-btu-arlp/

 

The U.S. coal industry is facing a perfect storm and has taken a beating recently, bringing coal stocks down with it. According to the Energy Information Administration (EIA), electricity generated by coal was down more than 20% in 2011. So it's no surprise that U.S. coal producers have been hit, and their valuations stand at 15-year lows.  With a torrent of factors dragging the industry down - from a bad reputation to dirt-cheap alternatives -can coal make a comeback? Let's look at what's the matter with coal, why it doesn't matter in the big picture, and how you can make some money on the rebound.

What's the Matter with Coal Stocks?

There are three big reasons why coal has been beaten down:

First, a mild winter has curbed earnings of U.S. coal producers. Fourth-quarter earnings from both Peabody Energy Corp. (NYSE: BTU) and Arch Coal Inc. (NYSE: ACI) came in well below analyst expectations. Unseasonable warmth forced many producers to cut production, including ACI, Alpha Natural Resources Inc. (NYSE: ANR), and Patriot Coal Corp. (NYSE: PCX).

Second, domestic coal consumption has taken a huge hit due to increased regulation. Just days ago, the Environmental Protection Agency (EPA) unveiled new Clean Air Act regulations limiting carbon emissions from newly built power plants, essentially banning new coal-fired power plants in the U.S. While older power plants are exempt from the new regulations, many coal-fired power plants are being converted to run on cleaner natural gas, or even cleaner alternatives like biomass.

Third, hydraulic fracturing ("fracking") technologies have advanced over the past decade, making it very easy to extract large amounts of natural gas right here in North America. These new techniques work so well, in fact, that there is now an overabundance of natural gas in the marketplace. The production has far outpaced demand, and that's driving down the price. The low price of natgas, in turn, is pushing down demand for coal, pushing down the price of coal, and pushing down the stock price of American coal producers.

But there's reason to believe the industry will rebound.

Here's Why It Doesn't Matter

While earnings have taken a hit over the mild winter, most producers have contracts to help them through leaner times without too much damage. As more natgas power plants come online, and natgas exports increase (as they are set to), demand for natgas is going to rise, and the price will climb accordingly. That will leave coal once again as the cheaper alternative. Peabody Chairman and CEO Gregory Boyce recently noted that, "coal has been the fastest-growing major global fuel and is expected to become the world's largest energy source."

Emerging markets in Asia are also set to provide a huge boost to the coal industry. According to Money Morning Global Resource Specialist Peter Krauth, Editor of Real Asset Returns, "Global coal demand is likely to increase by over 200% in the next couple decades. That's not going to come from the developed world unless some technological breakthrough allows for much cleaner and more efficient burning of coal." Among the world's top coal importers are countries like China, India, South Korea, and Taiwan.

As a result, U.S. coal producers are shifting more production to exports. In 2011, exports accounted for about 10% of U.S. coal production. This year production for export is already outpacing last year by 5% and that number is expected to climb steadily the next few years. That trend will continue as American producers' ability to export coal to needy markets in Asia improves drastically over the next five years. Ports are already being developed on the West Coast to handle the increased volume. Once the infrastructure is improved and production has shifted, American coal producers will benefit from increased global coal demand.

Three Ways to Play Coal Stocks (WLT, BTU, ARLP)

At historic lows, coal producers are a bargain.

While there's some risk in coal right now, Krauth thinks the stocks are financially sound. He says that, while coal stocks are languishing as a group, "most of them are profitable, and consensus earnings estimates the next couple of years are nearly 25% to 50% higher." He cautions that investors might want to wait for an uptrend or other catalyst to make a move. Here are stocks that will undoubtedly benefit when the industry rises.

Walter Energy Inc. (NYSE: WLT): Headquartered in Birmingham, AL, Walter Energy Inc. is one of the top metallurgical coal producers in the United States. In 2010, it sold 6 million metric tons and plans to expand sales to 8.5 million metric tons in 2013. Unlike thermal coal, "met coal" isn't subject to pressures brought on by a mild winter. It typically escapes the ire of most environmental groups as a somewhat necessary evil and there's no viable alternative. Without met coal there is no other practical way to make the steel that emerging markets like China and India are using to build skyscrapers and improve their infrastructure at an incredible pace. Currently trading at 60% off its 52-week high of $143.76, WLT will grow in tandem with emerging economies, not to mention the recovering economy here in the U.S. It's currently sporting a healthy P/E ratio of 10.25, and a one-year target price of around $79, which would be a 38% increase from where it's trading today.

Peabody Energy Corp. (NYSE: BTU): With a market cap of $8.05 billion, Peabody Energy Corp. is "the world's largest private sector coal company and the only global pure-play coal investment," according to Boyce. BTU is also the largest producer in the U.S. based on revenue. Its Australian operations give it great exposure to Asian demand, and it produces both thermal and met coal. Rumors of a possible takeover have recently surfaced.The company has a PEG of 0.93, which means it's undervalued given its expected growth. According to the company, that growth will be significant as the demand for steel and electricity generation in China and India continues to climb. BTU is trading right around its 52-week low of $28.18, so there's plenty of room for the stock to run toward its target of around $47. BTU took a hit last week with the news out of the EPA, but with excellent financials and a global reach, BTU looks to move up.

Alliance Resource Partners LP (NASDAQ: ARLP) touts itself as the third largest coal producer in the Eastern U.S., with mining operations in Kentucky, Indiana, Illinois, West Virginia, and Maryland. By year end 2011, the company had $1.7 billion in assets and had generated $1.8 billion in total revenue. The picture for ARLP looks much the same as it does for WLT and BTU: A solid P/E, a PEG below 1.0, and a one-year target price of about $84, which is 40% above where it's currently trading. The big difference is that ARLP is a Master Limited Partnership (MLP), which means it avoids the corporate income tax at both the state and federal levels. The majority of its earnings are kicked back to limited partners (investors) in the form of quarterly required distributions (QRD).

The upshot is ARLP is yielding above 6%, earning investors a $3.96 dividend.

[Editors Note:As Peter Krauth explains in his latest report, "Thirty years of research in this market tells me one thing: Strategic resources are heading higher. People are going to become quite rich." In fact, most of the things we take for granted are about to become enormously expensive. Things like copper and aluminum... Silver and "rare Earth elements"... Molybdenum, chromium, manganese, zinc and nickel...just to name a few.

But as he details in his new research report, "The Last Five Minutes," investors who ready themselves now "will have the opportunity to become outrageously rich." If you would like to learn more, just click here.]