July 2016

July 2016 Issue

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The Calm Before the Oil Storm:

The Good, the Bad, and the Natural Gas Resurgence

I wanted to try something a little different this month.

After receiving a lot of emails from you over the last few weeks, I’d like to kick-start your July issue with a few of those questions, including one that will lead to some trading action on our part.

So let’s jump right into the mix...

Keith, could you give us an update on TPLM and its bankruptcy? Do you see this

stock recovering? Will the price rebound?

Chris

Unfortunately, there’s no good way to put it, so we’ll begin with the latest news.

In late June, Triangle Petroleum announced that it was seeking protection under Chapter 11 of the U.S. Bankruptcy Code.

Even though this isn’t the first time a small E&P company has gone under, it’s much more painful for us since it’s a trade we’ve been following for several years, ever since it first entered the Bakken area. The weight of volatile oil prices finally took their toll, and it’s time we moved on.

Today, we’re exiting our position in Triangle Petroleum and saving the capital loss for the taxman.

Action to take: sell Triangle Petroleum.

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Hey Keith, do you see any LNG companies to buy for now? The gas

storage is going higher in the next six months. Do you think it’s still

a good opportunity to invest in LNG... companies like GST? Do you

foresee a short term or medium term profit to be made?

Cheers, DZ

With the bad TPLM news out of the way, we can move on to greener pastures — natural

gas.

As you may know, the low price environment that has plagued the natural gas market here in the United States was mostly due to the supply/demand imbalance.

It took years for that imbalance to start working itself out — and it’s still not resolved!

But while we still have some time before we see natural gas prices truly recover from the huge increase in Marcellus production, our positions with exposure to natural gas have been rewarded over the last five months.

As you can see, natural gas prices have shot higher since March, jumping by more than 80% higher:

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That’s not too shabby for a commodity that’s been beaten to a pulp, right alongside crude oil.

All I can say is, “It’s about damn time!”

One of my biggest concerns about the shale gas boom was that it singlehandedly pushed U.S. domestic gas output from 18.9 trillion cubic feet in 2005 to around 29 trillion cubic feet today!

With that said, it’s easy to see that natural gas drillers have been screaming higher this year.

One of my favorite natural gas players in the Energy Investor portfolio is Range Resources, and considering it’s a pure natural gas play, I’m pretty sure you can guess how the stock has performed lately:

It’s not just the drillers, either.

The same thing happened to our LNG export play, Cheniere Energy Partners:

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Of course, the extreme heat and humidity that has gripped the nation this summer has prevented natural gas prices from falling.

But despite the weather’s bullish effect on natural gas prices, we’re not ready to jump into the deep end just yet. Couple this with the fact that the EIA reported a smaller-than-expected build in U.S. stockpiles of natural gas, which pushed prices even higher this week.

So is this it? Are we finally going to see the bear market for natural gas disappear?

As much as I want to tell you that’s the case, it’s not. Remember, U.S. stockpiles of natural gas are still well above the five-year average.

Let’s call it a case of cautious optimism.

Personally, my outlook on natural gas investments has always been geared toward the long term.

And I become more bullish with each passing day.

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I’ll expand on the bullish catalysts that will carry natural gas into its next bull market in the coming weeks, but I can give you a little hint: part of it involves the death of a huge yet very dirty source of energy that we’ve relied on for centuries.

I just saw that Dajin shares sold off recently, is this the time for us to

jump back in?

Regards, Adam

For the sake of our newer readers, I should give a little background with our Dajin Resources trade.

Dajin was a tiny energy metals company that I instantly became bullish on the moment I realized that it was flying well below Wall Street’s radar.

In late May of 2015, we pounced, scooping up shares for around $0.06 CAD. By the time we decided to take our 200% gains off the table in early March of 2016, the company was making solid progress in its lithium projects in Nevada. I’ll admit I pulled the trigger on that sell recommendation a little too soon, because shares moved even higher, trading at nearly $0.28 CAD only a few weeks later.

Again, I reiterated our sell recommendation, and many of our readers flooded me with some of the most incredible trading stories I’ve seen.

The sell-off that Adam is referring to actually took place over the course of a few months, with share prices now down to around $0.16 today. The sell-off, however, still hasn’t lowered the price to below our last buy limit of $0.15 CAD.

Although we aren’t prepared to jump back in today, I certainly plan on keeping Dajin on my radar going forward, so don’t be surprised if you see a second buy alert in the near future.

Now let’s move on to one of our plays that remains a strong buy for us...

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Monthly Spotlight: Diamondback Energy

Ticker Symbol: NASDAQ: FANG

Market Capitalization: $6.5 Billion

Outstanding Shares: 71.7 Million

52-Week Range: $55.48–$96.01

Many of you will recognize Diamondback Energy as one of the recent additions to the Energy Investor portfolio.

The company is focused on the acquisition, development, exploration, and exploitation of oil and natural gas in the Permian Basin. Specifically, Diamondback is targeting the Clearfork, Spraberry, Wolfcamp, Cline, Strawn, and Atoka (known as the Wolfberry) formations.

You can read the full recommendation from last month here.

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On Wednesday, July 13th, the company announced its entrance into the Delaware Basin for approximately $560 million. According to the deal, Diamondback will gain 19,180 net surface acres in Reeves and Ward counties, as well as approximately 1,000 boepd of net production from the seller.

Moreover, Diamondback will also gain net proved developed reserves amounting to 2.2 million barrels of oil equivalent, as well as 290 net identified potential horizontal drilling locations across four zones, with additional upside potential in other zones.

Along with news of this acquisition, we learned that Diamondback had adjusted its 2016 production guidance. The company now expects production to average between 38,000 and 40,000 boepd — an 11% increase over its previous guidance projections.

In fact, Diamondback is now running run an additional rig, bringing the total to four horizontal rigs and two completion crews, with plans to complete between 60 and 75 gross horizontal wells in 2016. This represents a 30% increase over previous estimates.

Along with news of the acquisition, the company also provided us with an update on its operations.

Diamondback recently competed two Wolfcamp A wells in Spanish Trail, with an average lateral length of 10,800 feet. During the first two weeks on production, these wells produced an average of 1,665 boepd (92% weighted towards oil). Daily production during the quarter averaged 36,841 boepd (72% weighted towards oil).

In addition to this news, the company also announced the pricing of an underwritten public offering of 5.5 million shares of its common stock. According to the release, the underwriter intends to offer the shares from time to time in one or more transactions on the NASDAQ Global Select Market, in the over-the-counter market, through negotiated transactions or otherwise via market prices prevailing at the time of sale.

The total gross proceeds from the offering will be approximately $491 million. For Diamondback’s part, the company will allocate its net proceeds (along with cash on

“We believe our recently added fourth rig will put us in a position of strength exiting the year, and enable us to have double-digit production growth in 2017...”

— Travis Stice, CEO of Diamondback.

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hand) to fund its recently announced acquisition.

Unsurprisingly, Diamondback’s shares have held up well since we rang in the New Year, gaining roughly 38% so far in 2016.

And if you want to boost your long-term confidence in your position, consider the fact that unlike the severe toll low oil prices took on oil companies, shares of Diamondback have not only held their ground, but have essentially gained back all of their losses since the

summer of 2014!

You can see it for yourself in the chart below:

Now imagine where this stock could be headed once the real oil recovery gains momentum!

And unlike the rest of the E&P sector, where you have to strain your eyes to find a company in the green, analysts believe this company will post solid earnings growth throughout the next two years.

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The bottom line for us here is simple...

Diamondback is not only operating in one of the most prolific oil regions in the world, but the company is expected to increase earnings for the next seven consecutive quarters!

Again, we’re not going to settle for the slight gain we’ve made on this trade so far. I think Diamondback is in too good of a position to sell, and the company is in a perfect position for when oil prices rally.

Diamondback is rated a strong buy under $98.

Rankings and Portfolio

July’s Top 10 List:

1. Matador Resources

2. Cheniere Energy Partners LP

3. Cypress Energy Partners LP

4. Orocobre Resources

5. Approach Resources

6. Gastar Exploration

7. Oasis Petroleum

8. Range Resources

9. Scorpio Tankers

10. Abraxas Petroleum

There are no changes to this month’s Top 10 list, so let’s get right to the updates...

Abraxas Petroleum (NASDAQ: AXAS)

Abraxas is one of our independent oil and natural gas players that is focused on developing

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its assets in the Bakken, Eagle Ford, and Permian Basin. Currently, the company has approximately 43.2 million barrels of oil equivalent in proved reserves, about 56% of which is crude oil.

Here’s a better look at where the company’s assets are located:

The last time we checked in with Abraxas, the company had just spud its first well targeting the Austin Chalk at Jourdanton. We can expect the well, which is expected to cost about $5.8 million, to be placed on production at some point in September.

We also learned in June that the company’s capital expenditures in 2016 should come in between $30 and $40 million. Now, despite this adjustment, it will not have an effect on the company’s output, which is projected to be between 6,000 and 6,4000 boepd this year.

Although there hasn’t been any additional news regarding the company’s operations since our last update, it hasn’t been completely quiet.

On June 30th, the company filed a universal shelf registration statement on Form S-3, and an acquisition shelf Registration Statement on Form S-4 with the SEC. I understand

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that’s quite a mouthful, especially for individual investors like us.

To put it simply, shelf registration is an SEC procedure that allows a company to register new stock offerings without having to issue them immediately. In fact, Abraxas’s CEO, Bob Watson, assured us that the company has neither plans to immediately raise capital under the Form S-3, nor utilize the shelf Form S-4 for an acquisition transaction.

The shelf registration gives Abraxas the ability to issue up to 25 million shares of common stock in one or more acquisition transactions targets.

Don’t expect the company to go on a buying spree. Keep in mind that these registrations have to be updated once every three years... the last time Abraxas filed its registration statement was back in June 2013.

On a final note, make sure to mark August 10th on your calendars. This is the day Abraxas is expected to release its second-quarter results.

Now, for those of you that haven’t listened in on one of these conference calls before, I highly recommend you do so. I can’t begin to tell you how valuable these calls can be sometimes, and more often than not, you’ll be able to glean some very interesting info on the company that may not have made its rounds through the financial media.

It’s easier than you think, too.

In the case of Abraxas, the call is set to be made on August 10th at 11 a.m. (EST), and you can access the conference call by dialing 844-778-4143 and entering the following code: 49485067. There will also be a live webcast of the conference call that you can access directly through the “Investors Relations” section of the company website.

Don’t worry if you miss these live events, because you can hear a replay of the call, which will be available through September 10th and can be accessed by dialing 855-859-2056 and entering the code: 49485067.

Abraxas is currently rated a buy.

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Apache Corp. (NYSE: APA)

Apache Corp. is another independent energy company engaged in the exploration, development, and production of crude oil, natural gas, and natural gas liquids.

There hasn’t been any recent news released by the company, so I’d like to take a moment to give the newer members of our investment community a brief rundown of this position. I also want to note that you can read my write-up on the company’s Q1 2016 results in your June issue, which you can access directly here.

Like every other smart player in the beaten-down oil sector, Apache has adopted a conservative approach to weather this period of volatility.

First, I’ll point out that Apache’s net debt is expected to remain unchanged or be lowered this year. In fact, the company only has approximately $700 million of debt maturing through 2020, while maintaining a liquidity position of $4.5 billion ($1 billion in cash, and $3.5 billion through its credit facility).

More important, however, is that the company is spending within its cash flows. Apache has set its capital spending in 2016 between $1.4 and $1.8 billion, only about one-third of which will be used for development drilling activities.

The company has also set its North American 2016 production guidance between 268,000 and 278,000 boepd. Another 170,000 to 180,000 boepd of production is expected to come from Apache’s international and offshore areas.

Here’s a good breakdown of the company’s first-quarter drilling activity in North America:

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During the first quarter of 2016, the company drilled and completed 32 gross (28 net) wells from about six rigs. Remember, the Permian Basin is one of the company’s core areas, with production from the area averaging 171,041 boepd during the first quarter.

Internationally, the company drilled 10 wells, four in the North Sea and six in Egypt. Let me give you a better look at how these wells performed initially:

I know there’s a lot of concern over the future of oil prices lately, especially between the Brexit decision and new OPEC supply building in countries like Iran. Both of those factors have put a lot of downward pressure on oil prices.

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But no matter how shaky and bearish investors have been on oil companies since the summer of 2014, I want to show you proof that they’re wrong to stay that way.

I told you in February that the bears were cashing in, hinting that their sentiment was slowly turning bullish.

Well, Apache is proof that investors like us — who saw the bottom in the oil market for what it was — were about to have their patience rewarded.

Just take a look at this:

As you can see, our shares in Apache have surged 108% since mid-February.

In fact, Apache has even managed to sustain its dividend throughout the volatility. Apache actually increased its annual dividend every year from 2011 to 2015. The company’s annual dividend of $1.00 yields approximately 1.7% as I write this.

Apache is a buy under $60.

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Approach Resources (NASDAQ: AREX)

Approach Resources is an independent energy company that is focused on the acquisition, exploration, development, and production of oil and natural gas in the Permian Basin.

Although there hasn’t been any recent news, I hope to have more for you on the company’s operations when it reports its second-quarter results on August 8th.

Approach is rated a buy for us under $7.50.

Aqua America (NYSE: WTR)

Aqua America is our most recent addition to the Energy Investor portfolio. As you know, the company operates regulated utilities that provide water or wastewater services in the United States. Moreover, the company offers water and wastewater services through operating and maintenance contracts with municipal authorities.

The company completed three acquisitions during the second quarter of 2016.

Let’s take a brief look at each from a recent press release:

1. Crystal Clear Water Company, Inc. serves 293 customer connections in unincorporated McHenry County, Illinois, adjacent to the City of Crystal Lake. The system was acquired under the provisions of the Illinois Water Systems Viability Act, which promoted the acquisition of smaller, troubled utilities by larger, more efficient utilities.

2. Assets acquired from Byram Homeowners Association Water Company, Inc. serve 151 customer connections in a portion of Byram Township, which is located in Sussex County, New Jersey.

3. Twin Cedars public water systems serves 30 customer connections in Caroline County, Virginia.

So far this year, the company has made 10 acquisitions, totaling approximately 5,395 customer connections.

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You can find my complete write-up on this recommendation by accessing its report here (LINK to WATER REPORT.

Aqua America is a buy at current prices.

Cheniere Energy Partners LP (NYSE: CQP)

Earlier, I mentioned that Cheniere was our long-term investment on U.S. LNG exports.

The company operates two segments: the LNG Terminal Business and the Natural Gas Market Business. Furthermore, the company owns and operates the Sabine Pass LNG terminal in western Cameron Parish, Louisiana, and also the Corpus Christi LNG terminal near Corpus Christi, Texas.

In addition to these interests, the company also owns the Creole Trail Pipeline — a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with several interstate pipelines.

And even though we plan on cultivating this investment over the long term, it was great to see this stock make some strong gains recently.

In just the past four weeks, our position has jumped nearly 20%.

Before we celebrate too much, keep in mind that the market has turned bearish on LNG over the short and medium term. The problem boils down to the fact that global LNG supplies are growing.

Australia and the U.S. are expected to add another 135 million metric tons to global supply between now and 2020. To put a little perspective on that, that amount would represent a 50% boost to global LNG supplies.

Putting even more pressure on LNG is concern that worldwide natural gas demand simply isn’t there, particularly in Europe, a market U.S. LNG companies have been eying greedily for nearly a decade.

Cheniere is currently a buy for us under $35.

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Egdon Resources (LSE: EDR)

Egdon Resources is an exploration and production company with a stake in the United Kingdom’s shale industry.

Despite hydraulic fracturing being such a contentious subject in the energy sector, there’s absolutely no question that it plays an enormous role in the United States’ energy production.

Don’t forget that no matter how much you despise the practice, the cold, bitter pill of reality that every American needs to swallow is that we consume a massive amount of oil — more than 19 million barrels of petroleum and petroleum products every single day!

Yet the scarier stat that everyone seems to conveniently forget when taking a side against hydraulic fracturing is that roughly nine out of every 10 wells in the U.S. need some form of fracture stimulation.

I don’t want to be the bearer of bad news, but we can’t simply ban it without having catastrophic consequences ripple throughout U.S.

In the United Kingdom, however, we’re still in the very early stages of a potential boom in hydraulic fracturing... and the reason may surprise you a little.

Look, we’ve all heard or read about the fallout of the Brexit decision.

One of the more pronounced effects was watching the pound crash and the U.S. dollar soar to record highs. I think it’s safe to say that most of you might’ve seen how much the pound fell versus the U.S. dollar that day:

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So how does that relate to the UK’s possible boom in hydraulic fracturing? Well, some analysts have speculated that the weakness in the pound will weigh heavily on British imports. Simply put, that weakness means it will cost more for the country to import the oil and natural gas it so heavily relies upon.

But, wait... what about the North Sea, you ask?

Well, let’s assume the Brexit decision doesn’t lead to another Scottish referendum on independence. If Scotland breaks free, the UK would suffer incredibly heavy losses as the Scots take their North Sea oil reserves with them.

Even pushing that potential disaster aside, the North Sea is already on its last legs. Over the next 30 years, a massive amount of infrastructure, including hundreds of platforms, thousands of wells, and tens of thousands of pipelines and concrete blocks, will be removed.

The cost will be outrageous, too. The total cost for decommissioning North Sea oil fields between now and 2050 is expected to top roughly £30 billion.

And let’s be clear, that doesn’t need to happen for the UK to become more open to

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tapping its shale resources — and particularly its massive shale gas plays.

This year alone will see nearly 50 oil and natural gas fields halting production.

Production decline is certainly nothing new for the North Sea, either. Since the year 2000, North Sea oil and gas output has plummeted by nearly 66%!

But I want to point out something else... Egdon will not be alone.

In fact, Egdon’s Managing Director, Mark Abbott, recently explained that Egdon will never have the cash to properly develop its shale assets. What it can do, however, is be one of the early players, then help de-risk the area.

You can bet that Big Oil — which does have the money to take operations to the next level — will swoop in and help develop those resources.

Of course, Egdon will be there waiting with open arms.

Egdon Resources is rated a buy for us.

Enbridge Inc. (NYSE: ENB)

Last Friday, the National Energy Board dealt a harsh blow to Enbridge after suspending a review of the company’s request to extend its permit for the proposed Northern Gateway crude oil pipeline project.

If you recall, the Northern Gateway pipeline was going to link up Alberta’s oil industry to the Pacific Ocean, essentially opening the door for Canadian oil exports to China.

While this decision has turned short-term investors against Enbridge, it does nothing more than create a buying opportunity for those investors with an eye for the long term.

Enbridge is currently a buy under $48.

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Encana Corp. (NYSE: ECA)

Encana Corp. recently announced that will sell off approximately 51,000 net acres in the DJ Basin to Crestone. The deal is expected to close by the end of the month and comes right on the heels of another Encana sale.

Back in June, Encana struck an agreement to sell Gordondale assets in northwestern Alberta to Birchcliff Energy for approximately $25 million.

It should be easy to see what Encana is doing. By divesting these assets, Encana will be able to focus on its more attractive assets in areas like the Montney.

The Montney may turn out to be a huge source of production growth for the company, too. Encana believes that it can boost its daily output to 50,000 barrels over the next two and a half years. And once the sale is complete, Encana will have access to more than 9,000 potential drilling locations in the Montney play.

Encana is still a buy under $20.

Magellan Petroleum Corp (NASDAQ: MPET)

Magellan is an independent oil and gas E&P company that is engaged in CO2-enhanced recovery projects in the Rocky Mountain region.

Although we haven’t heard any news on the Horse Hill-1 well itself, Magellan did announce in June that it was selling 50% of its interests in the PEDL 234, which as you know is located in the Weald Basin. Along with this news, the company also reported it reached a settlement in its litigation with Celtique Energie Weald Limited for approximately $1.8 million.

According to the release, Magellan entered into an asset transfer agreement relating to the sale of PEDLs 231, 234, and 243 to UK Oil and Gas Investments, as well as an asset transfer agreement relating to the sale to UKOG of Magellan Petroleum (UK) Ltd.’s (MPUK) 22.5% interests in the Offshore Petroleum License P1916. MPUK is a wholly owned subsidiary of Magellan Petroleum.

As much as we don’t want to see Magellan lose its interest in the Weald Basin (some

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estimates suggest the Basin could hold as much as 15.7 billion barrels of oil), I think this was a good move for Magellan.

After all, the company does have its remaining 35% in the Horse-Hill-1 well.

What you may not have known was that the PEDL 234 was due to expire at the end of June. Just as important, however, is that Magellan will emerge a debt-free company without a cloud of litigation over its head.

This also lets the company use the proceeds to help unburden itself from its short-term liquidity needs, as well as bolster Magellan’s cash position.

Magellan is a buy under $3.

Oasis Petroleum (NYSE: OAS)

Oasis Petroleum is a Bakken oil play that I’ve been covering for several years.

Look, I know it’s been a rocky slide since June of 2014, but our position may have finally righted the ship in 2016. Watching one of the premiere oil drillers in the Bakken fall that hard isn’t easy for anyone holding onto their shares.

But take a look at this three-year chart for Oasis:

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Right around the beginning of April, it appears that Oasis Petroleum finally broke out of its long, bearish downtrend. In fact, shares of Oasis bottomed out around $4 during trading on February 11th.

Since then, we’ve seen our shares surge as much as 187%!

We’re also not the only investors with high hopes for Oasis’ future. Analysts at Ladenburg Thalmann rated Oasis a “Buy” this past week.

Although we were given a good look at the company’s quarterly results in last month’s issue, we’re only a few weeks away from Oasis releasing its next round of quarterly results in early August.

Unfortunately, we’re not out of the woods yet. Some of the lingering concerns need to be addressed before we really see Oasis recover to pre-crash price levels. A few things we’ll be on the lookout for in this next report are growth catalysts, stronger cash flow, and declining revenue.

Oasis is rated a buy at current prices.

Orocobre Ltd. (TSX: ORL) (OTC: OROCF)

If King Midas were alive today, he would beg Dionysus to change his powers so that all he touched turned into lithium. If he couldn’t convince the god of wine to do it, I imagine he’d do the next best thing: buy Orocobre.

You and I know he’d be much better off, too.

But inane Greek references aside, it’s impossible not to recognize Orocobre for its performance over the last year.

This time, I’ll let the chart do the talking...

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This is how profitable the lithium boom is for investors like us that got in early!

There haven’t been any new developments since our last issue, but you may be interested to read the transcript of an interview that Orocobre’s Managing Director and CEO did recently. The pair sat down with Carolyn Herbert from Finance News Network and discussed everything from the company’s projects and future path to the lithium market and pricing.

It’s a great read, especially for our newer members.

You can read the transcript in full by simply clicking here (you will be directed to Orocobre’s press release).

Orocobre is a hold for us currently. For newer members looking to establish your first position in

this runaway lithium stock, be sure you don’t go chasing the stock price higher. Wait, be patient,

and bide your time for the right time to strike. Going forward, I will be adjusting our buy limit

price to better reflect the 258% jump in share prices over the last eight months.

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On the Radar

Before I head out, I wanted to give you a more detailed list of the upcoming earnings announcements that are right around the corner. I mentioned earlier that these conference calls often yield some very useful pieces of information that you normally would not have uncovered elsewhere.

With that in mind, I suggest you keep the following dates handy:

• July 26th

: Range Resources

• August 1st

: Atwood Oceanics, Scorpio Tankers

• August 2nd

: Aqua America, ONEOK Partners, Trinidad Drilling

• August 8th

: Apache Corp, Approach Resources, Diamondback Energy,

Matador Resources, Oasis Petroleum

• August 10th

: Abraxas Petroleum, EnerSys,

• August 12th

: Ring Energy

• August 16th

: Cypress Energy Partners

• August 25th

: SeaDrill Ltd, Tsakos Energy Navigation Ltd.

Good investing,

Keith Kohl Energy Investor

The Energy Investor Copyright © 2016, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the

securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. The Energy Investor does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment

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