Right now, one Billionaire is smiling ear to ear. His grin is bigger than a Cheshire cat… he knows he just struck the “motherload”… and is on the verge of making billions more.
He invested heavily in a very unique area of the market.
It’s a part of the energy market most investors have shunned for the last few years. While prices were falling, he was buying. When others looked for “new” investment areas, he stuck to what he knew.
And now it’s paying off in spades!
So who is this savvy billionaire investor? What area of the market is he so focused on? And more importantly, how can we grab our fair share?
These are all great questions, but before I get to those details, let’s take a step back. Think for a moment about one of the most important industries in the world.
It’s an industry that touches your lives every day. And every other industry and business relies – in one way or another – on it.
We couldn’t function without it…
If you’re thinking about the energy industry, pat yourself on the back… you’re absolutely right.
The energy industry powers the world. And without energy, our lives would be very – very different.
Now energy is available in a multitude of forms. It’s found in oil and natural gas as well as coal. These are known as fossil fuels. Energy is also found in more natural forms like sunlight, wind, and even tidal power. These are known as alternative energy sources.
Now, I’m not going any further with the energy lecture, because I don’t want to bore you.
All you really need to know is… the majority of the world runs on energy powered by fossil fuels.
According to the US Energy Information Administration, oil makes up over 35% of the US energy supply… with a huge portion being used in the transportation industry.
Here’s the problem…
The global supply of oil is being stretched thin, and much of the oil is supplied by unstable regions of the world. Want proof? Just look at the recent turmoil in Libya, and the social unrest spreading throughout the Middle East.
A political upheaval in Saudi Arabia, the world’s largest supplier of oil, could create serious problems. Can you imagine how life would grind to a halt if we didn’t have any gasoline for our cars?
Remember the US imports 70% of our oil from abroad.
Oil prices have responded by doing one thing, and one thing only… moving higher.
Chart courtesy of StockCharts.com
As a result, the importance of finding alternatives to oil is taking on a renewed importance. How important is it? Politicians for years have talked about “energy independence.” But recently President Obama threw his support behind a plan designed to shift the consumption of energy away from oil.
The plan is called “The Natural Gas Act”, and billionaire investor T. Boone Pickens developed it. Good old T. Boone is worth about $1.4 billion and his fortune is about to grow even more.
His plan calls for using natural gas to power our transportation vehicles. The Government will kick it all off by adopting natural gas as the fuel of choice for their vehicles.
It’s a simple idea, but it could create a huge change in our demand for oil!
For the last few years natural gas has been steadily falling in value. We have too much supply and not enough demand… and that’s a good thing. It’s a cheap source of energy we can rely on.
Best of all, we have huge supplies of natural gas right here in the United States.
Clearly, as this idea gains traction, and as the Natural Gas Act comes even closer to being adopted by Congress…. any company working in the natural gas industry should explode in value!
I recently stumbled across one company with a very bright future. The company has land holdings in some of the most exciting US based natural gas producing areas.
And this gives us a great opportunity to profit right along with Pickens – who as you’ve probably figured out by now – is heavily tied to the future of the natural gas industry. So without further delay, let me introduce my latest hot stock pick…
COMPANY DESCRIPTION
Cubic Energy (QBC) is a growing All-American energy company. They own crude oil and natural gas wells throughout Texas and Louisiana.
The company has a simple focused approach to growing the business.
First they’ve spent a good deal of time and effort acquiring and developing producing wells. Many of these have been developed with partners and currently provide a nice level of cash flow. Their wells are in the Cotton Valley, but also in the upper and lower Hosston, Pettet and Rodessa formations.
The producing wells are already pumping natural gas… and best of all, it creates a nice revenue stream for the company.
That’s not all however… Management is also focused on getting new wells drilled and producing. Their focus is on the Bossier/Haynesville Shale formation in Louisiana. This is where the real money is at! Now I’m not going to go into a whole lot of detail on these deposits.
If you want to know more just Google “Haynesville Shale” and you can spend the next 6 years reading all the great news about the area.
All you need to know is this… the area holds a lot of natural gas!
The company estimates their natural gas resource potential of 309 Bcf in Haynesville, and 60 Bcf in cotton valley. And management hasn’t yet determined the reserves held in the Bossier Shale!
Remember the more natural gas they find and are able to extract, the more valuable the company becomes.
So let’s dig a little deeper on this business…
BUSINESS OVERVIEW
Taking a closer look at QBC’s business, you’ll uncover something very interesting… their business model is simple. Drill wells, strike natural gas, pump it out, and sell it.
But the company has refined their efforts in a number of these areas.
For example, they don’t fly solo on a lot of these wells. It’s too risky, so they partner up with some of the “best in class” players in the industry. Guys like EXCO, BG Group, Chesapeake Energy, Goodrich Petroleum, and El Paso. QBC of course gives up a piece of production to these partners, but that’s a small price to pay to partner with some of the most successful companies in the industry.
These other firms actually drill and operate the wells. And they send a check to QBC with a cut of their proceeds. Not a bad deal if you ask me!
They’ve positioned themselves nicely. QBC owns the rights to drill on the property and other people extract the gas for them. In fact they don’t have to worry about competition on the shale formation. Other companies are clamoring for the opportunity to work on QBC deposits.
Now here’s where the future gets really exciting…
New wells are coming on-line all the time. According to the last earnings call by management, they have 19 producing wells, and they expect that number to grow to 23 to 24 producing wells by the middle of the year!
Management is also looking at a number of new properties for acquisition. If they find a big strike, these properties could be another gold mine for them!
And here’s the best part… QBC doesn’t have to develop the properties… they can partner with a bigger firm with much deeper pockets and let them drill away!
Of course doing these deals in the right way can generate huge amounts of cash. So let’s take a moment and look at the QBC financials…
QBC FINANCIALS
QBC financials are looking strong, and I’d expect them to get stronger in the coming months and years. Keep in mind, the company operates on a fiscal year-end of June 30. That means when management talks about their year-end numbers, they are referring to the 12 months ending June, not December.
Look, to keep this review simple, I’m going to focus on the most recent quarterly data… that’s where all the excitement is.
Hold onto your hats… QBC revenue jumped 124% to just over $1.3 million in the most recent quarter. Why? Management is executing on their strategy. They brought on more producing wells and sold more natural gas!
Now, the actual price they received for their natural gas fell a bit to an average of $3.69 per Mcf. But that’s ok… in the long run, as natural gas prices are expected to rise, so too should QBC’s revenue!
Now a close look at the expenses show production and depreciation costs increased too. That’s ok. Remember production costs move up as they sell more natural gas, and the depreciation expenses increase as they drill more wells. These are both activities we want to encourage.
The key is… revenue is increasing at a faster rate than expenses. That means as the revenue line item grows, the potential for future profits is looking very bright! The company is able to see solid margins even with natural gas selling at these low levels.
All in, despite showing a loss for the quarter, the numbers look to be improving.
At some point down the line we’ll see the company reach profitability, and that will be a big day for the stock!
Remember, QBC is all about the future of natural gas!
CUBIC ENERGY’S VALUATION
Want to see something interesting?
Take a quick look at QBC natural gas production. Just last quarter, natural gas production jumped an astounding 148%. They went from shipping out 141,123 Mcf to delivering 349,461 Mcf of natural gas.
That’s a fantastic growth rate any way you slice it.
Remember, management is working hard to bring on more wells, and many investors expect natural gas prices to start moving higher. Remember big investors like Wilbur Ross and T. Boone Pickens are already active in the industry.
Since the company isn’t profitable, we need a slightly different way of looking at their valuation. Let’s take a closer look at their 10-K filings.
Deep in the company’s annual report is a section titled Oil and Gas Reserves. It shows how much oil and natural gas the company’s discovered, and the accountants attempt to value the asset.
Looking at QBC you’ll see something very interesting.
The accountants estimate total future cash flows from the proved reserves to be over $90 million. Remember, the market cap of this company is a paltry $50 million.
That alone would justify the stock price doubling.
Best of all, this estimate doesn’t take into account the future. They don’t look at new wells being drilled, commodity prices increasing, or the potential for a big find. The analysis seems to me to be a simple look at a base case… and it’s conservative at that.
As the company brings new wells on line, improves production and sees the price of natural gas rise, we’ll see the value of this company head one direction – UP!
ANALYSIS OF QBC’S STOCK
Just looking at this stock you can see the opportunity. At the beginning of the year, the stock was trading for almost $1.20 a share. Since then it’s off by almost 50% giving us a phenomenal opportunity to grab a piece of a company highly leveraged to the natural gas story.
Just look at the chart…
Chart courtesy of StockCharts.com
I believe we could see this stock price double, if not triple in the near future.
The tide is shifting in the natural gas industry. Powerful people are coming together (like T. Boone Pickens and President Obama). The Government is close to backing a national plan to accelerate the use of natural gas. Prices are poised to rise, and companies leveraged to the industry should see their stock prices explode higher when that happens.
A perfect way to play this confluence of trends is with small explorers and developers… and one I happen to like is QBC.
ACTION TO TAKE
If you like what you’ve read, do your own research… then Buy QBC up to $0.75 a share.
Prices as of April 14, 2011