|
-- Posted Tuesday, 21 September 2010 | | Source: GoldSeek.com
Alexander Montano, managing director of the Corporate Finance Group with California-based C. K. Cooper & Co., puts a lot of faith in technology when it comes to making oil and gas plays pay. Alex sees major opportunities for new technology in old oil basins in this exclusive interview with The Energy Report.
The Energy Report: Alex, oil traders seem to be showing a growing confidence that U.S. economic growth will rebound next year. This is evidenced by the fact that they're taking advantage of the gaps between the current prices for crude and the six-month contracts, which are due early next year. Is C. K. Copper seeing similarly bullish prospects for the U.S. economy and oil prices in general in 2011? What's your outlook?
Alexander Montano: Well, we understand that oil prices are to some extent linked directly to economic growth. But we think that more and more the outlook for oil prices is going to be less dependent upon U.S. economic growth and is going to become more a factor of global growth. We are not extremely bullish on the U.S. economy in 2011. We believe the recovery is happening, but we expect it to be slow and drawn out. We don't think it's going to be much fun.
But we believe that global demand is growing. We believe that the macroeconomic picture looks very strong. We remain bullish on oil into 2011 with a price between $70 and $85 a barrel.
TER: In which regions of the world do you see growth occurring?
AM: We think that it's going to continue to come from China and India. We think Latin America is going to remain pretty strong. We think that a lot of the emerging players are whetting their appetite on oil and that appetite is going to continue to grow.
TER: Along those lines, OPEC, the Organization of Petroleum Exporting Countries, turned 50 last week. Its control of the oil market is obviously less substantial than it used to be. What impact is OPEC having on the market now?
AM: Well, I think you correctly said that its direct impact in the supply/demand equation has been watered down over the last couple of decades. But I think that from a market leadership standpoint, they are still the clearest voice out there. I think that when OPEC establishes what they believe the oil price should be, whether it's directly a result of their production or not, the oil markets generally adapt to that. As far as short-term swings in production and the ability to fill necessary gaps go, OPEC remains the primary supplier. It's an organization that's been up and down, but I think they continue to be the leader as far as sentiment on world oil prices. I think people still respect that position.
TER: OPEC leaders are on record saying that they consider the current oil price "ideal" and that they will try to keep the oil price where it is. Do you think that they still hold enough influence to keep oil in the $80 range?
AM: I do. We're believers that demand growth is going to continue. I think if you couple demand growth with OPEC's willingness to basically manage supply better than they have historically, then we think that that price target is doable. If you could have a relatively defined price range and the commodities stay within that range, it is a win-win. It's a win for the industry. It's a win for the consumer. We understand that and believe in what they're trying to accomplish.
TER: What's your investment philosophy when it comes to oil and gas?
AM: We focus on technology. We believe that this is a much more technology-driven industry than anything else. Here in California there's a lot of heavy oil. Heavy oil has become a very fundamental piece of the supply picture in the United States. You take a look at what's happening with the heavy oil from the oil sands in Canada. Technology is revolutionizing the economic threshold there. We believe that there are lots of known reserves that will have a meaningful impact on the market in the future. It'll be technology that will make those resources work.
We generally try to target companies that are going to apply proven technology in areas that have not been subjected to that technology before. We believe that as these companies are successful, they become an attractive target for larger companies.
We tend to focus on companies with a market cap of $1.5 billion or less that we believe have some core thesis that's going to drive their share price. We believe there are companies working in certain geological plays that are hopefully bringing a proven technology to unlock the value there.
TER: Are you talking about things like old oil basins that are no longer economic with vertical wells, but that could perhaps be economic again through horizontal drilling and other newer extraction methods?
AM: Yes, horizontal fracking, water floods and tertiary recovery. The amount of knowledge in the industry is increasing quickly. A lot of times it's just a question of applying the right technology.
TER: Alex, you talked earlier about the global market for oil. Are there some companies that C. K. Cooper likes that are not based primarily in the United States?
AM: Yes, there are, although we try to shy away from political risk. We think that's a risk that cannot be quantified or that you can't factor into a model.
TER: Well, you can use a steeper discount.
AM: Yes, but how do you discount what Hugo Chavez might do in Venezuela next month? We're basically looking for plays in what we believe are politically stable regions with strong markets. TER: Moving over to natural gas, the U.S. Department of Energy expects total natural gas consumption to increase 4% this year. That means an extra 65 billion cubic feet of gas per day. What's that telling us about the natural gas market, and should investors be taking long-term positions there?
AM: We think that natural gas is the fuel of the future for the United States. You can't look at the abundance of it, the infrastructure that's generally in place and reach any other conclusion. I think in the long term, you absolutely need to have a position in natural gas. The problem is that there's been such an advancement in technology in developing gas out of unconventional plays that there's an oversupply of gas in the market. And there probably will be for the next 12 or 18 months. While we favor oil in the short term, we believe that you can selectively add natural gas companies to your portfolio and you'll do well. But in the meantime, there's going to be a rough period as the market adjusts to the new supplies.
TER: Are there some predominantly natural gas plays that our readers might be interested in?
AM: We really don't have any that are at the top of our list. We like particular plays. We think that the Eagle Ford Shale is going to make sense. The Marcellus obviously is going to make sense. There are a lot of companies that are positioned there, but there's nobody near the top of our recommendation list that is really gas focused.
TER: But are you recommending that investors should be cautious when it comes to plays in the Marcellus, given that there's a moratorium on fracking in New York and there's growing concern about a similar ban in Pennsylvania?
AM: Yes, absolutely. But I think that in the long term, economic necessity is going to outweigh those issues and technology will continue to improve.
A lot of gas development, in my opinion, is about a land grab. I mentioned that none of the companies near the top of our list are focused on gas. That doesn't mean they don't have gas or don't have exposure to gas. They're just not putting a lot of money into it.
If you've got companies that have large acreage positions in places like the Marcellus, but aren't being forced to drill it to defend those acreage positions, it's like having a long-term annuity. Those positions are going to be worth something in the future.
TER: But we will likely see some consolidation because companies may have to take writedowns on those acreages, and that will result in shrinking share prices.
AM: Well, it either makes them targets or it drives them to go out and acquire assets elsewhere where they can do something over the next two or three years. I think that a lot of companies that maybe made a push into the Haynesville or the Marcellus have their acreage positions and can manage that land. The question becomes: Where can I go and buy something that I can sell to the Street for the next two or three years? To us, the opportunity lies in these more proven oil basins.
TER: Do you have some parting thoughts on the sector today?
AM: Well, we would say that technology is the key. With lots of plays, when capital is relatively tough to come by, you want to be able to manage your capital budget. Most of the time that means long-term lease positions—acreage held by production. If you have that, then you can wait. You can let technology develop. You can let guys with deeper pockets develop new completion or fracking techniques. You basically benefit through serendipity. Those are the companies we target.
TER: Alexander, this has been great. Thanks.
Alexander G. Montano is managing director of the Corporate Finance Group for C. K. Cooper & Company, a full-service investment bank. Montano has been responsible for the development of the firm's investment banking practice, including cultivating client relationships, strategic planning and transaction management and execution. Prior to joining C.K. Cooper, since 1991, Montano was an equity analyst, and focused on smaller exploration and production companies starting in 1995. His comments and analysis have been quoted in such publications as Hart's Oil & Gas Investor, CNNfn, Forbes, BuySide magazine, Standard & Poor's Platts Oilgram News and various regional newspapers. In addition, Mr. Montano was rated a 5-Star, All-Star Analyst by Zacks Investment Research in 2002 and top oil analyst by The Wall Street Journal in May of 2003. Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
-- Posted Tuesday, 21 September 2010 | Digg This Article | Source: GoldSeek.com
Previous Articles
|
