-- Posted Friday, 27 May 2011 | | Disqus

Platform Advisors Founder Adam Michael searches the globe for oil and gas discovery stories with established cash flows that support share value in reasonably secure political environments. Adam talks to The Energy Report about the economic pressures on oil prices in this exclusive interview.

The Energy Report: We've had a 10% correction in Brent crude since the end of April, and oil has been a bit weak as we're starting to see some real signs of improvement in the U.S. economy where it really counts—employment. What factors are putting downward pressure on oil?

Adam Michael: I think the biggest factor over the last year has been quantitative easing (QE), which has led to speculators entering into the crude futures market in proportions that I haven't seen before. For instance, the net long in crude oil futures by speculators is more than twice as high as it was back in 2008. This has gotten the attention of Congress, and recently we've seen the Chicago Mercantile Exchange begin to raise margin requirements for crude futures. I think the goal is to get some of the speculative money out of crude futures, and that's one of the reasons we've seen a decline over the last month.

TER: Sounds like a healthy thing that could dampen the potential for a bubble.

AM: I think so. Crude oil dropped $20 in a matter of a couple of weeks. That's a pretty sharp correction, but I think it was healthy because it helped wipe out some of the excess speculation. There could be some more downside to go but, historically, crude kind of tops out sometime during the summer and maybe late June and early July. I don't see any reason why that wouldn't play out this year. We're still in a kind of historically strong period for crude oil. I'm not sure how much downside there is from here.

TER: In terms of oil price per barrel, is there a sweet spot where the macroeconomy can remain vigorous? What is the upside price-per-barrel limit on commodity oil?

AM: Well, I have read various opinions on this and I have to think that a good price for oil right now would be somewhere in that $90–$100/bbl range. That would allow the economy to keep taking steps and provide for improvement in global industrial production and gross domestic product (GDP) without choking off too much demand. So, I think $90–$100 is a great price for crude oil, and that is kind of a sweet spot. The kind of volatility we could see is $80–$120/bbl. I don't know how long it will remain there at those swing points. So, I think $90–100 is the right price.

TER: Do you have a forecast for oil?

AM: I don't really have a forecast, but for the longer term I use $90/bbl crude in my models and for my sensitivity analysis. I look at what kind of cash flow a company can generate with $100 or $80 oil. I think $90 is a good, safe number to use.

TER: Do you feel that $90 oil is a conservative enough estimate to build your models for the next 12 months? The next 24 months?

AM: Well, I think it is a good number through the end of 2011. As global demand continues to creep higher, eventually, we're going to soak up that spare capacity that OPEC has, and that's when things will get a little more interesting. That's probably a 2012 event, but then we're talking $110–$120/bbl oil. At some point, the price will get high enough that it will support some demand destruction—but we're not there yet.

TER: The U.S. just ran up against the federal debt ceiling of $14.3 trillion back on May 16, and the credit and equity markets really want that ceiling to be exceeded (at least temporarily). But it seems pretty obvious that something must be done to reduce debt to a lower percentage of GDP. What impact would this kind of austerity have on the economy? Will it strengthen the U.S. dollar? Will it hurt oil? Will it hurt energy companies?

AM: Obviously, the debt ceiling is a hot topic right now. I am guessing that Congress will probably negotiate with the president, and the negotiations might go all the way up to the deadline on August 2. I'm not sure how big of an effect it's going to have, and one of the reasons is that there seems to be a shortage of bonds because investors are having a tough time finding yield. So, there's a really healthy credit market out there right now.

Clearly, a default by the U.S. Treasury on government bonds would be a very bad thing, but I think there's about a 0% chance of that happening. There will be much talk over the summer as it's negotiating. Cooler heads will prevail, and I'm sure we will do what needs to be done on the debt ceiling with a combination of austerity measures; but the bottom line is that there's a healthy economy out there. If it weren't, credit spreads would not be this tight. So, I'm actually pretty positive on the economy right now. This summer could be a little tricky as we hear more about the debt ceiling and, as you know, investors can be short-term minded sometimes. Ultimately, I think this plays out well for the economy. The dollar is probably due for a rally, but it doesn't necessarily mean that commodity prices will go down. Sometimes they go up with a stronger dollar; it doesn't happen often, but it can. So, the bottom line is I am positive on the global economy. I think we will get our debt ceiling figured out and we will just keep humming along.

TER: Aside from buying small caps for your portfolios, what is your general investment thesis?

AM: I like to look at companies that have a proven reserve, cash flow or something else that I can get my hands around for a base-case evaluation. In addition to that, I like to see some kind of embedded call option in the form of a large land package—that is at the top of the learning curve where there's a lot of leverage for upside.

TER: Is it hard to find stable cash flows and rising production, especially in politically stable jurisdictions?

AM: I don't think so. Domestically, in this latest cycle, we've seen the emergence of unconventional oil through the development of the Bakken Shale, which is probably the most widely known unconventional oil play. But other plays are developing now that have a lot of upside running room. And it's very much analogous to what we saw in the last cycle with the emergence of unconventional shale gas. Now, I think we're just seeing the same thing as history repeats—or let me say, 'as history rhymes'—this time it's the emergence of unconventional oil, where I think there's a lot of running room. And there are other sources out there besides the Bakken that are starting to emerge, which also have good running room.

TER: Where are you finding these characteristics right now?

AM: Not to be confused with the Bakken Shale in North Dakota, there's an emerging play called the Alberta Bakken that stretches through Montana and into Southern Alberta. I think it's going to see a lot of drilling and appraisal work done over the summer. You can't do much over the winter. In Alberta, a lot of the roads are closed for spring break up, and now we're just getting on the other side of that.

TER: It's been a pleasure speaking with you today, Adam.

AM: Thank you.

Adam R. Michael, 36, founded Platform Advisors, a California registered investment advisor that manages the Platform Energy Fund. Mr. Michael has over 10 years of experience in the energy industry in various capacities. With the majority of his career based in Houston, Texas, he is able to use his energy background and industry contacts alongside his investment experience to identify energy investment opportunities in geopolitically stable countries with attractive geological prospects and fiscal regimes. Mr. Michael has a bachelor's degree in industrial distribution from Texas A&M University (1997) and an MBA from Rice University (2004).

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-- Posted Friday, 27 May 2011 | Digg This Article | Source: GoldSeek.com

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