U.S. Global's Brian Hicks Shares His Summer Plans For Creating The Ultimate Resource Fund

In a new energy cycle, the stocks that typically move first out of the trough are the larger caps. We made investments in some major integrated oil stocks, some of which were paying dividend yields as high as 6%, which really helped buffer the portfolio from excess volatility. We were able to pick up some income in the meantime. Historically, when you can buy large companies with high dividend yields, that's a signal of the value to be had.

One of the companies we added to the portfolio is Royal Dutch Shell Plc (RDS-A:NYSE; RDS-B:NYSE). When we purchased the stock, it was yielding over a 6% dividend, and the acquisition of BG Group Plc (BRGYY:OTCQX; BG:LSE) was a nice bonus. We're very encouraged by that acquisition. We feel it strategically places the company very well. BG Group puts Shell in regions of the world that look interesting from a growth standpoint, namely in Brazil and Australia. We feel like that's going to be a good platform for Shell, and for a company of its size, to get more growth.

TER: Are you expecting more merger and acquisition (M&A) activity as we move through this phase of the cycle?

BH: I think we are going to see the cream rise to the top, and companies that have high quality assets or are strapped with excess debt will become targets. In many cases, at this time in the cycle, you can buy oil reserves in the ground for less than the price of drilling for new reserves. Many market upswings begin with an M&A cycle, similar to the late '90s, when Exxon's $80 billion acquisition of Mobil Oil marked a bottom in the energy cycle.

"We believe that we are in the early innings of a recovery in this energy cycle."

We recently saw Noble Energy Inc. (NBL:NYSE) buy Rosetta Resources Inc. (ROSE:NASDAQ). That gives Noble exposure to new, prolific oil and gas basins of the Eagle Ford Shale and the Permian Basin. I think this is a trend that will continue, as companies look to reduce costs and for strategic bargains. I think we'll see more M&A activity into the summer—perhaps a takeout of a larger independent by a major oil company—which would highlight the long-term value embedded in energy shares at this point in the cycle.

TER: Your fund's sweet spot has always been the juniors. Are you finding bargains in the junior space? What are you adding to the portfolio right now?

BH: That has been our core historically. The junior names that look interesting to us are those that, despite cutting capex, are still managing to grow through the drill bit. Other names look attractive simply because their assets are burdened by debt or undercapitalized. On the whole, we're seeing very attractive valuations on a full-cycle basis, which make us quite optimistic.

TER: Can you name some of the companies that you're optimistic about?

BH: They are primarily in Canada. The first name is Legacy Oil + Gas Inc. (LEG:TSX). This company has significant value. It's not a name that most folks are looking at because it has excessive debt on the balance sheet and is actively trying to manage that debt and still grow production. But it has high-quality oil assets, and a lot of operational and financial leverage to the price of crude oil.

"The junior names that look interesting to us are are still managing to grow through the drill bit."

We think, on a sum-of-the-parts basis, Legacy looks very interesting at current prices. If you look at the proven reserves in the ground and you discount them over the reserve life, and then net out the value of long-term debt, the stock could double from current levels based on a normal full-cycle oil price.

In addition, it looks as though there are some large institutional shareholders that are trying to unlock more immediate value by breaking up the company, divesting assets or perhaps even replacing management. That could offer additional catalysts.

TER: Is there another company that reported Q1/15 results you like?

BH: We're always intrigued by companies that are able to grow through the drill bit with low capex spending. One name we like is RMP Energy Inc. (RMP:TSX), also in Canada. It has very interesting oil assets and plans to grow production 10–15% this year despite a capital cutback. At current oil prices, the company should be generating some free cash flow, which could be used to lower its debt, although its balance sheet is relatively strong. There are a lot of options for the company and we expect to hear further good news on improved well completion techniques that could unlock further value. We also are encouraged by the robust wells being drilled at its Ante Creek project. When we come out of this low period, it's this type of company that will thrive. It's a company that can increase shareholder value above and beyond just an increase in crude oil prices.

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1) JT Long conducted this interview for Streetwise Reports LLC, publisher of  more

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