The Commodity Investor Q&A
With Matt Badiali
December 31, 2008
Q: I made a lot of money over the years with some of the smaller independent oil companies. They are now as cheap as I've ever seen them. Do you think it's time to buy these oil producers again? – A.H.
A: I'd say a qualified yes. You have to be willing to do your homework.
You see, some small oil producers (under $15 billion in market value) did exceptionally well over the last couple of years. Others let the success go to their heads and borrowed way too much money...
Quicksilver Resources is a good example. This company's shares traded as high as $45, but sell for about $5 now. In July, at the top of natural gas prices, Quicksilver bought reserves for $3.70 per thousand cubic feet (mcf). Today, gas prices are around $5.80 per mcf. That doesn't leave the company much money to drill the wells and build the pipes to get the gas out of the ground.
To finance that acquisition and others, Quicksilver borrowed big. Today, the $835 million company owes $2.5 billion. And it's not the only independent producer that has strangled itself with debt.
On the other hand, plenty of oil producers have responsible management. If you want to test the waters, focus on companies that have low debt and low production costs. Take a look at Devon Energy (DVN), Occidental Energy (OXY), Comstock Resources (CRK), and Cimarex Energy (XEC) to start.
Q: What about uranium? – C.F.
A: The uranium sector remains gripped by its post-bubble hangover. Way back in 2000, uranium sold for $6.95 a pound. By 2007, it had risen to $138 per pound. This explosive price growth encouraged all sorts of fortune seekers to become uranium "miners."
My favorite example is Hoopsoft Development. The company, which began trading over the counter in November 2006, designed sports exercise videos and Internet software. In 2007, it found a better business idea... uranium mining. It changed its name to Yellowcake Mining in May 2007.
The stock hit a high of $3.55 later that month and went into a two-year death spiral. Shares trade at 3¢ today.
It was a classic bubble, and it left the sector cluttered with useless junior explorers. Right now, the only investment in uranium production I'd consider is Cameco (CCJ).
Cameco is a $6 billion company. It has a few warts, like $1.3 billion in debt. And its share price fell from $54 back in June 2007 to around $15 today.
Cameco gives you exposure to uranium production, a 21.5% profit margin, and a stakes in three Canadian-listed junior uranium explorers. (That last part is great for uranium investors. Cameco's experts can do a more thorough vetting of those companies than most individual investors.) Cameco also owns 53% of Centerra Gold, a Canadian-listed international gold explorer.
I think uranium will be an integral part of our energy infrastructure forever. If you are careful, this post-bubble market should be a good time to buy assets for long-term investing.
Good investing,
Matt
P.S. To submit questions for the Commodity Q&A, send me an e-mail and look for answers every Wednesday. |
