HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hey everybody, welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today we will be talking about the energy markets with my guest, Jerry Mikolajczyk, who’s here from Xun Energy; that’s X-U-N. Jerry, welcome to the show.

Jerry Mikolajczyk, CEO, Xun Energy (Mikolajczyk): Thank you very much, Mike, for having me on the show.

Norman: Now actually, you also have a background in mining. And you’ve been in mining for many years. But now you're moving your activities into the energy markets. Tell us a little bit about why you're making that transition.

Mikolajczyk: Well, I believe that moving into the energy side right now is very lucrative.

Norman: What’s wrong with mining?

Mikolajczyk: Mining is a very expensive, capital-intensive. We were focusing in mining in different parts of the world. The last project that I was involved with was in Madagascar. It was very good. We were moving ahead. And then, March 17, 2009, there was a political coup. And we lost everything. Everything collapsed. We regrouped. And I started looking at the energy side. And it’s been going really good the last five years. And I believe that it’s going to continue on, for probably the next five, 10, 15 years.

Norman: Now you're talking about what? Oil? Natural gas?

Mikolajczyk: Oil is really good right now, with great margins. The price of oil is, and the cost — the net back to the operator — is extremely high. A good producing well should give, after royalties to the landowner and operating costs, probably about a 65 percent net back to the operator.

Norman: But doesn’t that mean you're going to see more people like yourself come into that sector, and more production? Won't that equate to lower prices down the road?

Mikolajczyk: It should. But our demand is increasing all the time. In the United States, in Canada, worldwide, it’s emerging countries, big demand for fuel. And that is going to absorb all that extra oil.

Norman: Yes, I think emerging countries mainly, because we’re seeing, actually, demand come down in the United States.

Mikolajczyk: Correct.

Norman: And more production.

Mikolajczyk: More production. And that’ll be good for the country, because that would mean exporting.

Norman: OK. And you're focused where now? I think in Texas, right?

Mikolajczyk: We’re just going through having our first acquisition of a producing property in Crockett County. It’s 2,300 acres. We’re closing in the next 60 days. And what we like about it is that it’s already producing, but it has a high development side to it. There's 2,300 acres, 10 acre spacings. We can basically put up to 230 wells. There are 16 wells producing.

Norman: Texas has been the oil story in America for the last 100 years. What about all these people who are talking about peak oil, that we’re running out. You’d think, like, Texas, now, would be running dry. That’s not the case?

Mikolajczyk: That’s not the case; not in my opinion. There is still a lot of land. There is still a lot of development left in Texas. I think Texas is nowhere near its peak. And then you have other areas, like the Bakken coming onboard. Huge deposits are being discovered in the Bakken, which is …

Norman: North Dakota, that’s the Bakken shale.

Mikolajczyk: Correct.

Norman: That’s with new technologies, how to extract that, right, with the fracking?

Mikolajczyk: Correct, exactly.

Norman: That’s a very big new source of production.

Mikolajczyk: Exactly. With some of those deep wells, and especially with the horizontal drilling, you could very easily produce 1,000-2,000 barrels a day from one of those wells. They're very capital-intensive. Those wells cost $10-15 million. But your payback is in three months.

Norman: Now, what about natural gas? This country is sometimes called “the Saudi Arabia of natural gas.” We have a lot of it. In fact, we have so much that prices are very, very low right now. How long do you think they’ll stay low?

Mikolajczyk: I think they’ll stay low like this, and again — my opinion — probably for the next three to five years. I think the price of gas will go back up. And it’ll go back up big time. And the reason is that natural gas is going to be used to fuel power generation, producing electricity. These plants take three to five years to build. So, once they come online, they are going to use a lot of natural gas. So, of course, the investors that are investing, the operators for the power companies, will start buying gas and buying 30-, 40-, 50-year contracts to supply gas.

Norman: What about the use in vehicles, like we hear these proposals about fleet vehicles, like for municipalities or the government, using natural gas to power buses or fleet vehicles? And I know Boone Pickens has been pushing the Pickens Plan for a long time, which uses natural gas to power vehicles.

Mikolajczyk: That’s a very good point you brought up. It’s already happening. I just came from an assignment where I was the interim CFO for Santa Clara Valley Transportation Authority in San Jose [Calif.]. And that was one of the things that I had to look at. And we always had a lot of proposals come in for natural gas for use on the buses.

Norman: Are they using it there?

Mikolajczyk: No.

Norman: They're not?

Mikolajczyk: Some vehicles are. And we have to look at, first of all, that it’s a municipality. In the case of VTAs, a special district. Their operations are funded through the use of the buses through taxes. Taxpayers are subsidizing all of that. So they have to be wise and look at what is the most economical way to spend the taxpayers’ dollars in running their transit. It’s still cheaper to buy diesel.

Norman: Is it really?

Mikolajczyk: It is.

Norman: Oh, so I see that it’s going to be probably a slow transition to natural gas if we get there.

Mikolajczyk: If the economics are there, it’ll move that way. But most municipalities are very fiscal-responsible. And they have to look at getting the best dollar for their taxpayers. And they're going to stay with diesel.

Norman: Now, how does this whole theme of alternative energy factor into the long term outlook?  We’re seeing, now, more electric vehicles, which I guess would be a factor in the natural gas, which is a power generation, right? But is that part of the reason why we’re seeing some of the demand trail off now for petroleum? Is it because of alternatives?

Mikolajczyk: Well, the alternatives that are in play right now are wind and solar. Solar is very expensive. Its peak is only just a certain part of the daytime. With wind, the peak is at night. But the consumption is during the daytime. I think what will come into greater use of alternative energy; especially wind, which comes in storage of electricity. And a big talk in the industry is that the reason for electric cars is that the cars can be charged at night and used during the day. So the cars become the storage for electricity. So then, wind power will get better pricing because power will be consumed to be stored in cars, which is used during the daytime.

Norman: Let’s talk a little bit about the geopolitical outlook. A lot of news about Iran these days, possibly hostilities, talk of blocking the Strait of Hormuz or an attack there. What do you think would happen to the oil price if we actually saw something break out in that nature? You talking $200 a barrel? $250 a barrel?

Mikolajczyk: I don’t think that high, but I would say higher than $150 a barrel. But it would be short-lived, maybe a month or two, and then it’ll come back down again once things are resolved in the Middle East.

Norman: Are these prices that we see now pretty much the prices that we’re going to see for some time, do you think?

Mikolajczyk: I believe so. I think they may go up a little more and then come back down. But they’ll play around this.

Norman: So we’re basically in a range, a stable range that will probably endure for a while?

Mikolajczyk: I suspect. I think, also, that it will come back down.

Norman: You do?

Mikolajczyk: I’m doing all my budgets around $90 a barrel oil, again for the investors, and, just to be prudent. It could fall back, very easily, back to $90.

Norman: Now, for investors, what’s the best way to play this? Should they buy oil-related stocks, companies, in the industry?

Mikolajczyk: Depends on whether they're going in for the short or for the long. I think going in for the short, right now oil and gas would be great. Long as well, it will be great. I think natural gas is going to come back up. I would be going long for natural gas.

Norman: Long natural gas, with a fairly long time frame?

Mikolajczyk: Fairly long, three to five years. I think you will see a big comeback in natural gas upward into the $9 range in five to 10 years.

Norman: All right, great. Jerry Mikolajczyk. Xun Energy, X-N-R-G, correct?

Mikolajczyk: Correct.

Norman: X-N-R-G. That’s it for now, folks. This is Mike Norman. We’ll see you here next time. Bye-bye.