–––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview The Daily Crux: Marin, when most people think of oil production in South America, they probably think of Venezuela or Ecuador. But earlier this year, you told your subscribers that Colombia could be the next up-and-coming oil exploration center. Can you tell us a little more about this?
Dear Daily Crux reader,
Our colleague Marin Katusa is one of the world's best energy investors. His track record over the past few years is unparalleled.
As the senior energy analyst for Casey Research, Marin has flown around the world researching the best energy opportunities for his subscribers. There are few places he hasn't been, so when he gets really excited about a country, it gets our attention.
Marin recently returned from an out-of-favor South American country and is as bullish as we've ever seen. He thinks it's one of the top two or three energy investment opportunities on the continent right now... and the sector is just getting warmed up.
To learn why he's so excited and get two of his favorite ways to profit from this country's energy boom, read on...
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com
The world's best energy investors
are flocking to this country
Marin Katusa: Sure... You're right. Most people are more likely to associate Colombia with coffee or drug cartels than oil. But a lot of money has begun flowing into oil projects there... and this isn't just any money, this is some of the best financiers in the resource sector. Guys like Frank Guistra and Sam Magid. The fact that they're backing projects there tells you something about the potential.
Crux: What is it about Colombia that's drawing so much interest right now?
Katusa: Well, you can sum it up in four big reasons.
First, while the country isn't as oil-rich as most of its neighbors, it definitely has some significant deposits. Colombia has 1.4 billion barrels of oil in reserves. That's not enough to get the big oil companies interested in exploring there, but it's enough to draw big interest from smaller exploration companies.
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And it's still relatively unexplored. To put it in perspective, in 2008 the total investment in the oil sector in Colombia was $3.6 billion, while companies spent over $16 billion in the Canadian oil sands. So there's a lot of potential there, and the fact that the big companies aren't involved makes it very attractive to the small and mid-sized companies.
The second big reason is the current tax environment. A series of reforms over the past decade have greatly improved the situation. Before that, Colombia had some pretty tough rules for oil companies... a fixed royalty rate of 20%, an income tax of 35%, and a carried interest of 50%.
That didn't encourage a whole lot of investment interest in the country.
But now the royalties are a little more reasonable – ranging from 8% to 25% – and are combined with an income tax of 33%. There's also a windfall income tax that's tax-deductible and is no longer fixed as it used to be.
So with these changes, Colombia now has one of the best tax and royalty structures in the world... about as good as those in the UK's North Sea.
Next, the country has greatly improved security since 2002.
There's a reason people associate Colombia with drug cartels and violence. For much of its history it has dealt with conflict and instability, and that's given the country a terrible reputation internationally.
But improvements began with the election of President Alvaro Uribe. He really pushed an aggressive security strategy, and it paid off. Between 2002 and 2007, homicides decreased by 44%, kidnappings by 85%, and terrorist attacks by 79%.
Finally, unlike many South American countries, its government is relatively pro-business and pro-American.
President Uribe went to Harvard. He was a supporter of the U.S. in Afghanistan and Iraq. So he's had a pretty good relationship with recent administrations. And that's led to increased trade between the two countries, so American companies face even lower risk these days than they did just a few years ago.
And unlike countries like Venezuela and Ecuador, Colombia welcomes foreign investment and actually takes steps to make it easier for companies to do business there. It now ranks 37th in ease of doing business, compared to 49th last year. That actually puts it above countries like Chile, Spain, and Italy... and far above Venezuela and Ecuador.
When you consider these four facts, it's not surprising that the country is drawing big interest from oil and gas companies.
It's just a great place to be geologically and politically. I must say I was a little bit wary at first, but when I went there, each day that I was there I became more and more bullish about the country.
Crux: Sounds good. Has anything about the story changed since you originally recommended it?
Katusa: Since then, they've had an election that went very smoothly, so the political environment is still looking good. The numbers are showing that companies believe that. Foreign investment in the country's oil and gas industry hit $2.66 billion last year. To put that in perspective, that's almost 800% higher than the $312 million in foreign investment that Ecuador received in all industries. That's incredible, considering Ecuador is the world's fifth-largest oil producer.
And those investments are paying off. The latest figures from July show the country's oil output rose 20% to 786,000 barrels a day.
I think what you're going to see happen is a consolidation of the resource sector in the country. In fact, there's a rumor going around that it's already started. It could start on the mining side or it could start on the energy side, but once it happens, watch out. The resource sector is already so hot and on the radar of so many people, you'll see many more professional investors come into the sector. That's the next near-term catalyst.
I am telling you, everything about the place is just buzzing. I really liked it there. I do a lot of traveling and go on a lot of site tours, and most of the places that have world-class deposits or production aren't the kinds of places most people want to visit.
Colombia's the one place where I actually look forward to going, because it's such a great place. That's a place that I'm willing to jump on a plane any day and go and check out projects because it's so fun. And it's just getting better and better. It's opening up now. The country's moving forward in the right direction.
Crux: How big of a role do those factors actually play in a company's decision to invest or explore?
Katusa: Huge. Look what happened to Venezuela... they've got world-class deposits and they just get slaughtered. The government takes it away.
Ecuador's the same type of thing. I wouldn't touch it with a 10-foot pole. The geology's fantastic. The people there are fantastic. But the politics just makes it a stranglehold. You can't succeed.
But Colombia's moving the other way. They want business there. They want to work. It's not a socialist-minded government. That's a huge factor.
Even the location can play a big role.
For example, because Colombia is so close to Venezuela, many of the people who were trained and worked in Venezuela have moved to Colombia. These are some world-class geologists and engineers who basically built up the Venezuelan fields. Now they're working to do the same in Colombia, because it's right there and the culture is very similar. So having this kind of local expertise is a huge draw for companies.
On the other hand, if you look at the Canadian oil sands, it's very difficult to get the expertise up there, so it ends up being a huge cost for the companies.
Crux: Difficult because of the terrain or just because it's so far away?
Katusa: Both. It's a terrible place to live and work. If you're a highly-qualified individual who could work anywhere you'd like, why would you want to take your family up there?
What you typically see is people will go there for short periods at a time. Three weeks on, three weeks off type of thing. That's very expensive. And you're probably not getting the best people in the world.
But it's the opposite situation in Colombia. You can get some of the best people in South America because it's such a great place to live, the pay is great, and unlike neighboring countries the government is supportive of the industry.
I was with Frank Guistra and Frank Holmes on my last visit there. These are some of the smartest guys in the business, and Frank Holmes is looking to buy an apartment there. He's the largest fund manager in the U.S. for resource stocks, and he just loved it. And this is a guy who flies around the world nonstop. He wouldn't be buying places there if he didn't see a big future.
Crux: Can you give us a couple of stocks you like there?
Katusa: I think you have to start with Pacific Rubiales. The symbol is PRE on the Toronto Stock Exchange.
That's a great story. It's been a great success. It's a larger market cap company with good production and cash flow. It's a more conservative, lower-risk play on the region that should do very well going forward. Ideally, I'd wait for a pullback to buy, but it's been shockingly strong. It's as strong a stock as I've seen.
If you're looking for a more speculative play, I think one of the best buys right now is Petro Vista. The ticker symbol on this one is PTV on the TSX Venture exchange. I'm very excited about that one, actually.
Those are two of my favorites right now that you can take a look at, depending on what your risk tolerance is.
Crux: Any closing thoughts?
Katusa: I believe that the stars have aligned for investing in Colombia. It has the rare combination of exploration expertise, positive political momentum, and the beginnings of major consolidation, that could take these stocks much higher. It's one of the top two or three energy opportunities in all of South America.
But you must be patient, wait for pullbacks, and buy only the very best of sector stocks. That's what we work hard to find for our subscribers, and I think our track record speaks for itself. By the way, those two stocks I just mentioned are in that group.
Crux: Thanks, Marin.
Katusa: My pleasure. Thanks for having me.
Editor's Note: If you're interested in profiting from the world's best opportunities in the energy sector, consider a 100% risk-free trial to Marin's letter, Casey's Energy Report. Around our offices, it's considered required reading on the energy sector. You can learn more here.
Sunday, 12 September 2010
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