TER: We recently published an interview with T. Boone Pickens, and he is very optimistic about the shale oil space and the possibility of oil independence for America. Do you share his optimism?
BH: We sure do. I'm not quite sure about energy independence, but we are certainly making inroads in that direction. Within our portfolio, we are investing heavily in the shales through upstream oil and gas companies, oil services companies and equipment companies. Shale is transformational; it is really changing the energy landscape. Almost overnight, companies are developing resources that are long-lived and repeatable. Remember, only five years ago we were talking about peak oil. Now, we're producing roughly 8.4 million barrels per day. That's the highest we've seen since the mid-'80s. It is a trend that is going to continue.
At present, the Permian Basin is developing just as the Bakken and the Eagle Ford did a few years ago. The Delaware Basin, in particular, could be larger than what we've seen in the Bakken and Eagle Ford combined. It looks like we will be able to unlock millions of barrels of reserves, and increase production from that historic base. The Delaware is a very exciting example of how technology, innovation and investment have changed the conversation over the last five or six years.
TER: With all that oil and gas coming out of the shales, do you see an opportunity for money to be made in refiners?
BH: We have already had success investing in refiners. San Antonio is home to two of the largest independent refining companies in the country, so we follow that area closely. We also see opportunities for Gulf Coast refiners, such as Valero Energy Corp. (NYSE:VLO). If inventory levels continue to rise, you're going to see a discount between Louisiana light sweet oil, WTI and Brent. With that spread, refiners with Gulf Coast exposure are able to source lower feedstock costs for crude oil, refine it into gasoline and diesel, then sell it at competitive global prices. That is very good for margins. And it could be sustainable.
TER: What about the majors versus the junior explorers and producers? Which has better upside?
BH: I think there are opportunities in all of the above. Some majors have tremendous resources. Suncor Energy Inc. (NYSE:SU), in the Canadian oil sands, is going to be producing for the next 40 years or so. The company has put a lot of money into infrastructure to grow production. And it pays a nice dividend yield. It looks attractive on just about any metric.
Juniors are investing in shales domestically and internationally. There are opportunities throughout the market cap spectrum. That is why we take a diversified approach, and look to invest within all those areas.
FH: I love many of the royalty companies, such as San Juan Basin Royalty Trust (NYSE:SJT) and BP Prudhoe Bay Royalty Trust (NYSE:BPT), which offer attractive high yields, growth and rising oil and gas prices.
TER: What companies in the junior oil and gas exploration and production space are poised to take advantage of these trends?
BH: We have some junior companies that have grown so much they aren't very junior anymore. Pacific Rubiales Energy Corp. (PRE:TSX) is now more of a small- to mid-cap company trading in the $6–7 billion ($6–7B) range. But we still see it as extremely cheap.
Other operators in Columbia, such as Gran Tierra Energy Inc. (GTE:TSX), look attractive to us as well. In Europe, Petromanas Energy Inc. (PMI:TSX.V) looks very attractive to us. Frank recently returned from a Petromanas site visit, where he checked out a well being drilled in Albania that looks like it has a lot of potential.
PetroAmerica Oil Corp. (PTA:TSX) also looks very inexpensive, with a lot of potential upside via further exploratory drilling and joint venture development.
FH: PetroAmerica is going through an acquisition, and when the dust settles, it will be an attractive company on all key metrics, with growth in reserves, production and cash flow on a per share basis.
BH: Other areas, such as Kurdistan, have more oil and more proven reserves than Mexico. It's a huge resource space. Gulf Keystone Petroleum Ltd. (LSE:GKP) is drilling for oil in an area with huge reserves. It has the potential to eventually produce as much as 100,000 barrels per day. We think there's tremendous opportunity there.