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    Why the deep freeze is good for your portfolio

    car in the snow21 150x150 Why the deep freeze is good for your portfolioApart from the Olympics, the most popular shared experience these days is talk about the weather. To be specific, the bitter cold that has hit most of Canada – and given rise to the new and now popular term, ‘polar vortex.’ However, there is a silver lining to these snow-filled clouds – and not just for those who enjoy winter sports.

    Demand for natural gas has risen appreciably with the decline in temperatures. And that’s good for investors like ourselves who took a contrary view back in 2011 when the commodity was deeply out of favour. At the time, in North America, natural gas was trading at approximately $1.80 per one million British Thermal Units (BTUs) and producers’ stock prices were depressed.

    But for investors who took a longer-term view, a different picture was emerging. One that held the potential for significant profit.

    That’s because natural gas enjoys attractive qualities as a clean, abundant and (relative to alternatives) cheap form of energy. In recent years, technological advancements and readiness of supply have increased its application for power generation, industrial use, transportation, drilling rigs, etc. In fact in 2013 and 2014 there are more than 350 projects completed or underway in North America that will create demand for more than 1 trillion cubic feet of supply per year.

    The wide and cheap availability of natural gas in North America has led to a mini-manufacturing boom or ‘re-shoring’ of manufacturing facilities back to the U.S. That’s because, unlike oil which is subject to global pricing, natural gas prices have regional differences. In Europe, for example, natural gas trades at approximately $11 per one million BTUs, and $16 in Asia.

    Not surprisingly, industry is moving to fill this void. In 2015, the U.S. will begin exporting LNG (liquefied natural gas) to Asia and Canada will have its program underway by 2017. The LNG export projects approved amount to 25% of annual supply in North America. It’s logical to expect increased demand and reduced supply will have a positive effect on pricing.

    It’s already being played out – with prices having moved up to their current level of $5 in North America. Many in the gas industry claim that to recover all the costs of buying land, drilling, building production facilities, etc. the industry needs a $5+ gas price. Clearly with gas in the $3 to $4 range over the past two years the number of rigs drilling for gas in the U.S. has remained depressed (down 60% from the peak). Industry has not yet allocated additional capital to drill more wells. We will see if the now $5 gas price leads to increased drilling in the year to come.

    Our approach since 2011 has been to overweight natural gas investments in our Newport North American Equity Fund, with our largest holding being Tourmaline (TSX:TOU), also the subject of previous blogs. Tourmaline has grown its gas production 50% a year for six straight years. Its share price has risen over this time reflecting this growth. To date, our thesis has played out as we had hoped and we believe there are a number of years of strong growth to come – albeit with likely some volatility along the way and we manage for that with a diversified portfolio of stable investments.

     

    Tourmaline Oil hit 2012 production target

    TOU Overview 2012 Kdean Tourmaline Oil hit 2012 production targetFor those who are regular readers of our blog, the name Tourmaline Oil Corp. should be well known. We participated in Tourmaline’s initial capital raise in 2008 and continued to invest through IPO in November 2010 (see our earlier blog posts). Tourmaline is our single largest holding in the Newport Canadian Equity Fund today.

    Tourmaline released their corporate overview presentation last week and it shows a continued path of impressive growth in production levels. Already this year, in the last week of January, Tourmaline achieved its 2012 average daily production target — well ahead of schedule.

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    Tourmaline began trading today

    No matter how long you’ve been in this business, it’s a feeling that never gets old: the satisfaction of identifying, analyzing, investing and then watching a private company come to fruition with an IPO and significant value creation for shareholders.

    i ec93482f497fc94ab65185184c09cac9 oil well for blog(1) Tourmaline began trading today

    Which explains why there was an especially upbeat mood in our office this morning as Tourmaline Oil Corp. began its first day of trading today on the TSX. As we’ve referenced in earlier blog posts, (The
    titan nobody knows
    and Mike Rose: positioned to profit from the great recession) we were participants in Tourmaline’s first capital raise in 2008, along with several follow on private placements.

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    The titan nobody knows

    This morning’s Report on Business in the Globe & Mail has a two-page spread on Mike Rose, the oil patch entrepreneur and CEO of Tourmaline Oil Co. who, according to the article, is “the hottest star in the energy business”.

    Though Rose is anything but a household name, readers of this blog and clients of Newport Partners may remember his name from our blog post last March, Mike Rose: positioned to profit from the great recession.  Rose is an entrepreneur we have been backing for several years as we participated in Tourmaline’s first private placement and subsequent offerings.

    With a two-page spread in the Globe & Mail, our ‘private’ investment is certainly becoming more public — with an IPO likely down the road.

    Here is a link to the article, An oil patch pitching ace.

     

    Mike Rose: positioned to profit from the great recession

    I blogged a couple of weeks ago about the entrepreneurial thinking of money manager, Tye Bousada in my post, How entrepreneurs — and smart investors – really succeed. I was inspired by a New Yorker article written by Malcolm Gladwell, entitled The Sure Thing.

    The premise of the article being that successful entrepreneurs are not really risk takers, as the conventional view suggests. Rather, an entrepreneur’s strength is in “occupying a ‘structural hole’”, a niche that gives him a unique perspective on a particular market” and acting decisively to take advantage of it.

    Here’s a related story of a seasoned entrepreneur who stands to profit from this great recession – not in spite of challenging economic times, but rather because of the turmoil and his ability to take advantage of it.

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