Editor's Note: Our colleague Chris Mayer, editor of Mayer's Special Situations and Capital & Crisis, is back to tell you about a small-cap oil company poised to take advantage of the coming resource rally. Enjoy… $400 Oil! Get Ready for the Coming Rally in Resource Stocks…
By Chris Mayer
November 13, 2008
Question: Where is the price of petroleum going?
Eric Sprott: Long term, up… I can see it hitting $200 or $300 or $400 a barrel.
— Barron's, Aug. 18, 2008
Eric Sprott runs the Sprott Offshore Fund, a fund that's delivered sizzling returns of 32% per year since 2002. Certainly, timing is important, as 2002 was the last great bottom. Even so, it's not so easy. Lots of people have done a lot worse than average 32% since 2002. Sprott, a 63-year-old billionaire, has been on the money when it comes to calling the resource markets. That's his meal ticket, and his fund is loaded with resource names. Of course, with oil down more than 40% off its July high and the whole resource market in the tank, it seems outrageous to think that oil could hit $400 per barrel, as Sprott says in his Barron's interview. I choked on my bagel as I was reading it one Saturday morning. **************************************** Bloody New "Backlash" Set to Rocket Oil Past $200...and Send Gas Soaring to Over $8 per Gallon I want you to imagine this: You've just left a café. A sickly 19-year-old steps out behind you, pulls a gun and fires five shots into a passing sedan. You would have had no way of knowing, in that instant, that four years later, nine million soldiers would be dead...four royal families would disappear...or that a mountain of debts and destruction would collapse a 300-year legacy of European hegemony. All because of that event, the assassination in Sarajevo that sparked World War I… Fast-forward to Feb. 14, 2005. You've just stepped out of the luxury St. George Hotel. A caravan of black cars passes. Suddenly, there's an explosion and one of the cars is thrown off the road. Inside, an extremely popular multibillionaire is dead. Like other isolated events, maybe you read the headlines and forgot about it… But what I'm about to show you is that this event — an assassination of an already retired, very wealthy politician — will also mark the beginning of a history-making crisis... **************************************** The point, though, is not really what anyone thinks the price of oil may or may not hit. The point is that the fundamentals of the resource markets still look good on a long-term basis. Sprott points to the continuing depletion of big oil fields and the difficulty increasing production. "We spend more and more every year and get no more net production," he says. He continues: "And the list of countries whose oil production has peaked keeps growing, including Russia, which for eight consecutive months has had year-over-year declines. Companies have the same problem. The latest results from Exxon showed that its production was down about 3%."
Oil is still immensely profitable to produce. If producers could economically up production, they would. In fact, many resource companies are making good money. They've got good balance sheets. They own things that are hard to find and reproduce. I think we've got to stick with the names even though the price action in the last few months has been horrible. **************************************** You Only Have Until Midnight Tonight to Claim Your "30-Day Retirement Plan"… One Month and… Three "Flash Action" Market Moves Could Be… Your Chance to Turn $500 into $14 Million… It's happened before... It could happen again… But hurry, you only have a few hours left to cash in before it's too late… **************************************** It's a tough market right now. There is no way around that. Even those of us who stayed away from the imploding financial firms and avoided housing bubble stocks still got hurt. Even as we stuck with companies loaded with tangible assets at cheap prices, we've watched many of them just get even cheaper. But we can't give up the quest. Mostly, because getting through the valley will mean making a lot of money on the next ascent. I keep thinking how we'll look back on this time one day and marvel at the prices some stocks traded at. We'll wonder why we didn't pick up some of Stock X when it was trading for one-fifth of the price. That's the sheer greed part of it all. But the quest is built on firmer ground. We hold to the theory that value wins out. Wide gaps between stock market prices and business values eventually close. We take it as a given that we won't be able to time the tops and bottoms. So we play a probability game. We bet on probable winners in the full knowledge that some won't work out. But we choose to stick with them as long as our essential theses remain intact… Until next time,
Chris Mayer P.S.: I recently found a small-cap oil company whose share price has fallen to around $1 in recent months, despite the fact that it has growing production and has an owner-operator at the helm with a large stake in the company. You can join us at Mayer's Special Situations, and find out more about this company here… Editor's Note: As always, send any questions or concerns to us at jim@pennysleuth.com.
| 
