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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, 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




Market Notes
U.S. dollar sets a new high against the British pound.
 
Water-pipe specialist Insituform Technologies at new 52-week high.
 
Housing still in crash mode... S&P/Case-Shiller Home Index down 18% in last 12 months.
 
Volatility continues to decline... VIX at three-month low.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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