Sprott---
AN INTERVIEW WITH ERIC SPROTT
OF SPROTT ASSET MANAGEMENT
(From November 10, 2006)
David Pescod: One of the big questions out West here, is
with income trusts almost as good as gone, you’ve astutely
avoided that sector. And it might destroy some of the liquidity
in the oil and gas sector. Any thoughts on that?
Eric Sprott: I think it will affect liquidity. One of the things I
was always a little bit skeptical of with income trusts and the
majority of trusts (if you will) are that you start out with a
company that’s worth “X” and you dress it up in income
trusts clothing and it’s worth “1.5 X”. I was always a little
skeptical of that and that’s pretty tough to create that value
into believing it’s sustainable and even if you do change it
from “X” to “1.5 X”, you probably don’t have the growth characteristics
that you might have had if you still traded like “X”
because now you are paying out all your cash flows. So I
haven’t been a big believer in trusts lately and I fully believe
the whole unwinding process that we have to go through here
(you have to go from 1.5 X back down to 1 X).
D.P: For following the oil and gas sector, we’ve certainly
learned in the last year that natural gas prices are almost totally
changed by weather forecasts. The gas sector has been
hurt. What are your thoughts as we look forward to next
year?
E.S: We are very keen on natural gas, because I see what’s
going on, out in the field. And what I mean by that is we have
rig counts in Canada that are way down, we’ve got a number
of major producers that have said they are going to cut back
on their Cap Ex. A very usual thing with the natural gas market
is that the production rates of the first year are so important
or the corollary of that is that the reduction after the first
year is so important. If all of a sudden you stop drilling wells,
your production is going to fall. In fact, I saw a piece by First
Energy and it said that if we went back to let’s say drilling the
same number of wells we drilled in 2000 in North America,
that gas production would fall by 30%! Because the first
years production becomes so important, so you are on this
tread mill where you have to keep drilling just to stay still. I
use the analogy in Canada that we drill 20% more wells, we
spend 20% more per well, but we never get any production
increase.
That’s a formula for disaster, sooner or later because
you can’t keep spending 40% more on something
every year and not get more output. I think we are
going to see a decline in gas production which of
course then affects our exports, which then will help
to resolve this supposed surplus of natural gas that
we have in storage.
D.P: What would your crystal ball say for oil and gas
prices for Christmas of 2007?
E.S: I would just say higher. I would guess that gas
has a little more in it than the oil does, simply because
gas got beaten up here and maybe the whole
Amaranth thing over-extended the decline. Plus of
course, we had an incredibly mild winter last year. I
always hope for just normal weather. If we get normal
weather then these products, these hydrocarbon
products will go where they all should go. We are
upbeat on hydocarbons, we think we are at peak production
here for oil in the world, so I suspect that
prices will be higher and do I think oil could be $80 to
$100? Sure it could be, by December of 2007. Could
gas be in double digit numbers again? Yes, I certainly
would think so.
D.P: Your Fund has been one of the top performing
funds in Canada if not the world over the last while,
mainly because of your faith in commodities
(uranium, gold and the like). If you had to pick your
favorite commodities right now, which would they be?
E.S: Obviously, we’ve been very well rewarded with
gold and silver over the last six years. We still love
the precious metal but for totally different reasons
than we would like for example, uranium and gas and
oil. There’s hardly any commodity that we are not
involved in. The one I can think of is aluminum, but
most of the metals we look at pretty positively on. We
also think we might be in a bit of a Malthusian situation
in the world where we have all these new consumers
coming into the world who have more money
(China and India) and the resources are limited. I
would think that a lot of metals will do well here. I
think everything will do well.
D.P: Regarding this boom, the question is, how much
longer it can go. Jimmy Rogers is figuring about 15
years. What would be your estimate?
E.S: That’s a tough one. I define the world into two
parts now. There’s North America, which is going to
be in downtrend for sure. I just see the U.S. economy
slowing down remarkably. If you look at what’s happening
with housing and autos, even on the active
retail level, it really is slowing down.
Delta Petroleum
www.deltapetro.com
Corridor Resources
www.corridor.ns.ca
Falcon Oil & Gas
www.falconoilandgas.com
Whereas the rest of the world seems to be going to its own
beat here and of course its own beat in the case of many countries
is a very strong increase in GDP, whether it’s Russia or
South American countries, India or China – there’s a lot of
growth going on. I think the trend will continue until there is
some sort of collapse that goes on in the world, which we
don’t foresee. We see a problem in the U.S., but I think the
world might be able to deal with it and take it in stride now.
D.P: Of your picks in the last interview we did, Delta Petroleum
is up almost 66% in just a few months. We are very appreciative
of that, but there hasn’t been a lot of news out on
the company.
E.S: There’s a lot of chatter going on if one looks at some of
the chat lines here. They are involved in three major hydrocarbon
plays. The one that we invested in initially was for the
Columbia River Basin in Washington. Encana has completed
the first well, they are currently testing it and the beauty of the
basin-centered gas plays is that if you hit on the first well, you
can almost imagine that you can hit on the whole play. It’s just
gas that’s in rocks, so it’s called an “unconventional play” and
we will be able to jump to some conclusions very quickly as to
how effective it could be for everyone. Another play is what
they call the Paradox Basin and where they announced a blow
out because the downhole pressure was too high. There was
no damage fortunately, but it looks like they might have a
pretty significant gas discovery. In the third play they are just
starting to drill called the Utah Hingeline and I believe they
spudded their well down there and I think it could drill in something
like 45 days. So we could have a lot of company-making
news come out in the next three months.
D.P: Another gas story that has surprised some people that
you’ve done quite well on and we are glad we followed it is
Corridor. Natural gas in New Brunswick of all things! Pretty
exciting well starting in about a week…
E.S: Most people think that all the oil and gas is in Western
Canada, but there has been some significant plays all along
the East Coast. Talisman has big operations in New York State
and then you move up into New Brunswick and Corridor has
some very interesting properties there. They hope to bring a
new pipeline I believe in early 2007. It’s been a great win for us
and I think there is a lot more gas to discover. Some have suggested
they might have recoverable gas in place of around 1
Trillion cubic feet. In today’s world that is worth about $1 billion.
With that kind of reserve base it would allow lots of upside
from where it is. They are drilling a deeper well to a new
zone called the Dawson Settlement. They could get 5 T’s of
gas. Now that is huge, but these are things that can dramatically
change the perception of a company with one major success.
D.P: Another story that hasn’t gone quite straight forward has
been Falcon Oil and Gas, half a billion shares outstanding and not
one well completed yet.
E.S: They completed the well but they haven’t tested the well yet
and I gather they should begin testing probably soon, I believe the
end of November. So we are not that far away. From all reports
that we have been able to get, it looks like they should have some
dynamite wells there. It’s a new company and people shouldn’t
rush into believing all the stories, particularly because there are
no official results, but I think when the official results come out,
people are going to stand back and be (I hope) very impressed by
the test results. Again, there were some estimates done by a
group suggesting that the recoverable could be something like 40
Trillion cubic feet of gas. That would be worth a lot of money to
the shareholders of Falcon Oil and Gas.
D.P: Now this is a bit of an awkward question, but it tends to focus
on things…if you could buy only one stock today, what would
it be?
E.S: I would probably buy Delta Petroleum. I just think there is so
much upside here. I am not buying the stock today, because I
bought it a couple of years ago, and I’m happily long, but I do believe
they have three world-class plays going on and any one of
them, could cause the share value to change quite dramatically.
D.P: Are there any other favorite stories you’ve got that you
should mention?
E.S: I can tell you that we are looking into some of these strategic
metals like molybdenum and tungsten and a few others, but there
is nothing I can suggest that is new and exciting there yet.
D.P: Where do you think the stock market is going as a result of
the recent election?
E.S: I’ve been a bear for a long time in the U.S. market and I
would think with the Republicans having lost the election and
watching what the dollar is doing here (it’s almost literally in free
fall these last couple of days) if that continues, we should all be
monitoring that dollar very carefully here. We had somebody
from the Central Bank of China talking about diversifying out of
the U.S. dollar – well, we all can’t diversify out of it and not have it
go down a lot. So, that would be the one thing I would really be
watching – the U.S. dollar and the U.S. stocks if people lose confidence
in where they are going, we could have a bit of an issue.
D.P: That would be good for gold?
E.S: That should be good for gold, yes.
D.P: Thank you very much, Mr. Sprott!
Disclosures: EnCana Corporation: Canaccord Capital covers this stock and has a Buy rating on it. (Buy: The stock is expected to generate riskadjusted
returns of over 10% during the next 12 months.)
Canaccord has recently participated in a financing for Corridor Resources.
Deb’s Ditty:
Dawn is nature’s way of telling you to go to bed.!
AI
