Inkling of an Investment Idea: Coal Bed Methane

A few years ago, I made a bet that some coal companies would attempt to beat changing market and political conditions by reinventing themselves as something besides coal companies. Given the amount of real estate some of these outfits control such a change in behavior seemed likely.

What does a coal company reinvent itself as if it chooses to do so? With all the hype about "dirty old king coal" and snappy propaganda about "the clean, blue fuel", it was not an unreasConsol Energy, Inconable assumption that some coal companies would attempt to reinvent themselves as gas companies. Accordingly, I opened positions in CNX Gas Corporation (CXG) and Geomet, Inc. (GMET). These two companies are unconventional North American gas plays but what I was interested in was their exposure to Coalbed Methane (CBM).

After a couple of years, I must confess that I am losing in Geomet, Inc. but recently the bet in general paid off: . Consol Energy (CNX) started buying shares of CNX Gas Corp. that it did not already own. I took the opportunity to cash out of CXG at a profit but now I am interested in pursuing the reinvention and/or CBM theme further. After all, lightning has been known to repeatedly strike the same place!

CNX Gas Corp. and Geomet, Inc. operate mostly--but not exclusively--in the Appalachian Basin and the Illinois Basin. However, North American coal production has been shifting Westward and that is where I have been investing and looking for more.

Looking forward along the lines of the Coalbed Methane theme, there are two things I am contemplating. First, energy production activities in the East are under economic and political pressure (e.g. mountain top removal). Secondly, the Energy Information Agency was kind enough to provide this map of North American Coalbed Methane fields:


(Click here for original image.)

Based on these two facts, I am keenly interested in CBM opportunities in the Powder River Basin and the San Juan Basin. I have a sneaky suspicion that the future of North American methane production is unconventional onshore rather than offshore production despite recent, promising headlines in favor of the latter.

DISCLOSURE: In the East: have recently taken profits in CNX Gas Corp. and Patriot Coal Corp. In the Powder River Basin: I have long positions in Peabody Energy and Arch Coal, Inc..

Chinese Perspective on the F35 Lightning II

As someone interested and invested in the aerospace/defense industry, I am always glad to get an observation from outside of the fishbowl.

Yesterday, the Global Times, a Chinese Communist Party news outlet, published a piece in their opinion section "F35 Fighter Has Become Clumsy White Elephant". The article is essentially an interview with one Chen Hu, some sort of military affairs expert.



The F35 Lighting II, a Lockheed-Martin product, is really quite an impressive piece of military hardware and technology. However, the F35 is also horrendously over budget and behind schedule. Mr. Hu offers some opinions in the Global Times piece:

"GT: What will the impact be after the sudden hike in the price tag from $50 million to as much as $120 million?

Chen: After the increase, it will be difficult to buy the aircraft in the quantities expected, so the US Air Force is likely to start evaluating alternative projects soon. The British armed forces are also likely to purchase fewer F-35s than they originally planned.

The crisis in the design of the F-35, the most advanced fourth-generation fighter in the world, throws a shadow on the future of aircraft development and deployment in the US and elsewhere. The chief lesson this teaches us is that making new equipment affordable has become a major problem in the research and development (R&D) process of any major new piece of military hardware. All R&D institutions should be concerned about this."

NOTE: Mr. Chen refers to the F35 as a "fourth generation fighter" but Lockheed bills it as a fifth generation fighter. Of course, there are those who insist the F35 is a fourth generation fighter as articulated at the Air Power Australia website. I am really not to concerned with the pedantic debate of jet fighter taxonomy, just thought I would point it out.

Back to Mr. Hu:

"GT: What can we do to ensure the new equipment is affordable?

Chen: First, a prior feasibility study is necessary. This process should be a standard form of R&D for any large piece of military hardware. In other words, how the new equipment will be used and what criteria are suitable to evaluate them needs to be carefully considered to reach a balance of costs and effectiveness.

During the R&D process for the US fourth-generation fighters, this process was carried out intensely. But, the biggest problem for these new fighters is that the initial hypothetical battlefield environment into which they may be deployed has tremendously changed.

They were originally developed for the battlefield environment during the Cold War, where they would encounter strong opponents in air combat.

Due to such high-risk combat environment, the new generation of combat aircraft had to be excellent.

This has substantially increased the difficulty of R&D, led to soaring R&D costs, and finally threatened the progress of the whole project.

There have been many cases of military hardware failing because of problems in feasibility studies, such as the case of the F-104 second-generation fighter in the US.

At the time, there was a push for high speed and the ability to climb to high altitudes, but these were not needed in the real battlefield environment. Soon afterward, the F-104 was withdrawn from service and became a typical case of an advanced aircraft failing due to R&D problems.

Now the F-35 is suffering from the same problems, but this time the difficulty is not in technical performance, but in R&D costs.

Therefore, accurately understand the changing of battlefield environment and reflecting that in early studies of new equipment is a key issue for effective R&D."

Mr. Hu continues:

"GT: What does the US need to do now?

Chen: To ensure new equipment affordable, the emphasis needs to move to audits after the R&D process has started. Audits are also important throughout the process of pre-feasibility studies, R&D, and deployments.

Some large-scale military hardware projects, like the F-35, seem to be nothing more than fishing trips designed to test the waters for new equipment and make as much money as possible.

The original plan held up the F-35 as being less expensive, but that's fallen through. Since the research company wanted to pursue the maximum profit, it is impossible for them to set the price of new generation aircraft at the same level as old ones.

The original price for the F-35 is $50 million. After the F-22 was withdrawn, the price of the F-35 was inevitably pushed higher and higher."

It is always nice to know what the competition thinks.

As investor, I have been shying away from the big players in aerospace and defense segment such as LockMart, Boeing, etc. Big cost overruns, schedule nightmares and political scandals (such as the KC-X bid selection debacle) do not seem to be a good fit in today's constrained fiscal and defense procurement environment and will ultimately limit the upside for such firms. There are plenty of opportunities amongst the smaller players in the aerospace and defense sector and I might blog upon some of these for your profit and amusement at a later date.

Years ago, when the Joint Strike Fighter concept was starting to be acted upon, I thought it was not such a hot idea. At the time, I was of the opinion that given the high costs involved and the radical lead the United States possessed in military and industrial technology over its' competitors, the thing to do would have been to save the time and money and skip a generation moving right along to a sixth generation fighter...whatever that may be! However, that was not to pass.

DISCLOSURE: I have taken profits in Lockheed and Boeing in the past but have no intention of getting back in as of this time. I do hold long positions in the Raytheon Company and Honeywell International, Inc. which both provide components to the F35 Lightning II program.

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Speaking of Propaganda...

As I watched the parade of various and sundry characters in Washington, D.C., on television over the weekend, I was suffering such on overdose of Hopey/Changey Speak that I reached into my desk drawer to refresh my memory on the subject.

I pulled forth my handy copy of Chairman Mao's "Little Red Book", opened it to the appropriate chapter and lo and behold it was just as I remembered it:

"The world is progressing, the future is bright and no one can change this general trend of history. We should carry on constant propaganda among the people on the facts of world progress and the bright future ahead so that they will build their confidence in victory."

"On the Chungking Negotiations" (October 17, 1945) Selected Works Vol. IV, p. 59

Now you know where the "Hope and Change" drumbeat came from to begin with. Nothing succeeds like success!

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PROPAGANDA FILM: "A is for Atom"

Apologies for the absence!

A hobby of mine is collecting and viewing old propaganda flicks. I have a pretty good collection and figure I might as well share what I have learned...especially when it suits my agenda (hey, why reinvent the wheel!)

To get the ball rolling, I would like to direct your attention to a very good, short, animated movie called "A is for Atom". "A is for Atom" is an introduction to nuclear physics and technology that was produced by John Sutherland and copyrighted by General Electric in 1952.

"A is for Atom" was part of the nuclear industry's publicity efforts in the years leading up to the United States' "Atoms for Peace" program. It is a clean, well produced movie which comes as no surprise since Mr. Sutherland worked for Walt Disney Studios before starting his own John Sutherland Productions in 1944 (in fact, he was one of the voice actors for the fawn Bambi). "A is for Atom" is still an excellent and entertaining introduction to nuclear physics.

You can download "A Is For Atom" from the Internet Archive or view at your convenience on You Tube:



DISCLOSURE: Author holds long positions in General Electric, Exelon Corporation, USEC, Inc., Lightbridge Corporation and Cameco Corporation.

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Save the Uranium 233!

Have not a pet cause yet? Perhaps this one is for you: saving the United States Uranium 233 supply housed at Oak Ridge National Laboratories.

There is a move afoot at the United States Department of Energy to destroy the Unites States' existing supply of U233. Uranium 233 does not exist naturally and is a byproduct of various nuclear programs. U233 is necessary for Thorium fuel cycle reactors and has applications in nuclear medicine.

The two big objections to the destruction of the U233 are really quite practical: Uranium 233 is part of the Thorium fuel cycle which is a superior means of generating vast amounts of cleaner energy and its destruction is slated to cost on the order half a billion dollars, much greater than the cost of sitting on the U233 in the first place.

Uranium 233 is not a naturally occurring substance and is fairly difficult to make. You need to petition your Congress Critters, Secretary of Energy Dr. Chu and Mr. Obama to keep the United States' U233 stockpile. When the time comes to use it, having Uranium 233 is much better than trying to cook it up from scratch.

While your at it, you ought to put in a plug for amending and reintroducing the Thorium Energy and Security Act of 2008. This proposed law is a bi-partisan initiative co-sponsored by Senator's Harry Reid (D-NV) and Orrin Hatch (R-UT).

If you think long and hard enough about the future of energy on this planet, Thorium fuel cycle nuclear reactors are the logical conclusion. Having Uranium 233 on hand to start such reactors is a real plus and it is not in the interest of the People of the United States to have our stockpile destroyed.

A few other resources on the subject for your perusal: IAEA Thorium Fuel Cycle Potential Benefits and Challenges and the Energy From Thorium website and blog.

DISCLOSURE: I am long in Lightbridge Corporation(LTBR)...and perhaps you should be, too!

Jules Verne, Gerald Bull and The Orion Project Revisitied

The idea of using a cannon to fire payloads into space is by no means new and probably dates to the first fifteen seconds after the development of artillery proper. Most people are familiar with the concept through the work of Jules Verne in his "From the Earth to the Moon" published in 1865.

The idea of shooting men to the moon appeared in the campy French science fiction film "Le Voyage Dans La Lune" in 1902. This short film has an interesting story in its own right and you can view it free through the wonder of You Tube:



Skipping ahead about five decades, we come to the work of the Canadian ballistician Dr. Gerald Bull who worked on extending the range of artillery pieces and whose passion was gun launching payloads into space. Through the HARP Project and later at his Space Research Corporation in Barbados, Dr. Bull launched projectiles of increasing mass and sophistication to higher and higher altitudes.

Dr. Bull's 16 inch HARP gun in its heyday


The 16 inch HARP gun just before the turn of the Century
Dr. Bull eventually ended up dead outside his apartment in Brussels at, it is said, the hands of unsavory characters for, it is said, his associations with other unsavory characters but here is the contemporary report from the New York Times.

About the same time Dr. Bull was working on his big guns, brilliant physicist Freeman Dyson and a group of other equally brilliant folks at General Atomics
were working on nuclear propulsion for space craft. Dr. Dyson and his team mates were specifically developing nuclear pulse propulsion, an effort to move massive craft by having them pushed along by the shock waves of repeated nuclear explosions. This spectacular idea was undertaken as part of the Orion Project (not to be confused with NASA's current Orion C.E.V. effort).

The following excerpt from the very cool BBC documentary "To Mars By Atom Bomb" gives a good idea of how the Orion space craft was to be propelled:



Jules Verne was science fiction, Dr. Bull has turned to dust and the Orion Project never fully materialized so why am I boring you with all of this stuff on an odd Tuesday morning in the Troposphere? Simple: I was wandering the Blogosphere in my flannel robe and found a great proposal on the Next Big Future blog. The idea is floated as the "15o Kiloton Nuclear Verne Gun"
. The intent is to combine gun launching with the nuclear pulse of the Orion Project except to use one instead of many pulses with the hybrid answering the objections to both schemes.

Launch costs being what they are, I'm all for it!

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The Case For Investing In Marathon Oil

Marathon Oil(NYSE ticker: MRO) appears to be a good investment opportunity. The case appears to be fairly strong but two caveats before we get to it: MRO's business is like any other in that it is cyclical and it could be argued that it is very early in the cycle so if you are not willing to hold it for a year or possibly longer, this might not be for you.



Whats to like about Marathon Oil? More than a few things:

1. Marathon Oil is geographically diversified but does not do business in the "core Muslim countries" which reduces risks which may arise from political instability in the Persian Gulf. Too, MRO appears to have no significant operations in South America which can arguably be interpreted as a plus.

Marathon Oil has Libyan exposure, has other North and West African exposure, does business in Europe, has a substantial presence in North America, and has operations in Indonesia.

2. Marathon Oil is a very integrated oil company. MRO has operations all along the supply chain from exploration to retail distribution with a variety of upstream and downstream operations. MRO has a good sized foot print in the natural gas business.

Furthermore, Marathon Oil has expertise in some of the more advanced areas of the liquid fuel business such as Liquified Natural Gas (a.k.a. LNG), refining of "sour" crude oil (more in a moment on their refining operations) and has a Gas-to-Liquids demonstration project which they claim will be much more efficient than current Fischer-Tropsh process efforts and other competing technologies

Marathon Oil is also getting into North American shale gas to gain expertise to take overseas for projects such as its five and a half year Polish shale gas exploration project. Between November and January, MRO in Poland was awarded 100% interest and operatorship in three blocks totalling approximately 800,000 acres according to their 2009 Annual Report.

3. Marathon Oil is currently trading pretty much right at its book value. As of market close on 5 March, MRO's share price was $30.61 and its book value is $31.15 according to Yahoo Finance.

4. Marathon Oil appears to have support for the current share price trading just above its 50 Day Moving Average and just below its 200 Day Moving Average.

5. Marathon Oil has a P/E ratio in line with its industry group and currently pays a dividend. What the sustainability of that dividend may be is certainly open to interpretation with a Payout Ratio TTM of 47%. This appears to be in line with their industry, however, and MRO does have a good history of paying and growing dividends.

6. Marathon Oil swung from loss to profit in the Fourth Quarter of 2009 helped mainly by sustained high oil prices.

7. Marathon Oil has the look of a takeover or possibly merger target. They have sold off poorly performing assets in Ireland, Gabon and Angola during the downturn, appear to have their debt under control and are keeping about $1.5 billion in cash on hand.

Too, there is only so much exploration & production being done and only so much that can and will be done so for a Super Major to expand in this area it makes more sense to buy somebody with a handsome E & P portfolio and Marathon Oil arguably has some good stuff in their own.

Now, getting back to Marathon Oil's refining business. The whole refining business is pretty beat up and MRO's segment is no exception. However, it is not quite as bad for MRO in the big picture. True the losses in refining will continue to adversely effect MRO's bottom line and many investors will continue to see them as just another beat down refining outfit, but lets take a closer look.

First, the barriers to entry into the oil refining business are very high so over time the refineries which Marathon Oil currently possesses have a great deal of intrinsic value. New refining capacity in North America will not be forthcoming any time soon so when demand picks up supply will return to its traditional tightness. According to MRO's annual report section on refined product sales, volume of gasoline is up significantly over 2009 from 2008 but the feedstock and specialty product category is still down about 25%. Given the early stages of economic recovery, is no surprise industrial feedstock demand is weak.

Secondly, Marathon Oil ranks number five in the North American refining business so they are clearly not as overexposed to the downturn in business as, say Valero (VLO). As has been shown, MRO has other ways of generating earnings.

Also, of Marathon Oil's seven North American refineries, five are capable of refining "sour" crude oil. Venezuelan, Columbian, oil from the Gulf of Mexico and oil from the much talked about oil sands of Alberta are generally of the sour type of crude. Marathon has the assets and expertise to process these feed stocks as the U.S. seeks to divorce itself from distant, sometimes troublesome suppliers. With refineries in Minnesota, Texas and Louisiana MRO has plenty of "skin in the game".

So, in a nutshell, this is the lipstick on Marathon Oil's refining pig: they are not as exposed to the business as some of their competitors, they can make money as the cycle moves forward or they can sell hard assets for for cash. Not exactly a bad state of affairs now is it? Even with the refinery losses taken into account, MRO is still posting a satisfactorily positive EPS.

One may argue that it is early in the cycle to buy Marathon Oil but it is pretty clear that the company is sound and it is certainly attractively valued at this time.

DISCLOSURE: I am long in Marathon Oil and intend to increase my position. When looking to plunk down hard earned money to gamble at Wall Street's table you MUST do these two things: do lots of your own homework and consult with a properly certified, reputable financial professional...oh, and like the song says "know when to hold 'em, know when to fold 'em, know when to walk away and know when to run".

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Terrorists Target Tankers In Singapore

"Singapore Says Terror Attacks Planned on Tankers" reads the headline at the Bangkok Post's website.

The Strait of Malacca is best described as a "target rich environment": it is said that half of the World's merchant shipping tonnage passes through the Strait every year and tanker traffic is three times the volume of that through the Suez Canal.



The Strait of Malacca is about 1.5 miles wide at it's narrowest point and 75 feet deep at it's shallowest point which leaves little room to maneuver. In such confines, the types, sizes and kinds of boats and weapons required to make attacks would not have to be all that great. I recall reading somewhere that the larger crude carriers that transit these waters have as little as 20 feet between their keel and the bottom at some points which leaves little margin for error in the channel and makes mining the bottom of the Strait an easy and distinct possibility.

Parties interested in disrupting traffic in the Strait of Malacca might improvise mines or purchase/steal/otherwise procure bottom mines such as the Manta. The U.S.S. Princeton was damaged by a Manta in about 45 feet of water during Operation Desert Storm. While mining cannot be ruled out, small boat attacks are probably more likely and easier to mount.

The Strait of Malacca would be difficult to close but the bar to deny it to merchant traffic is fairly low. Attacks in the Strait have the potential to make an ecological and/or economic mess. Even a fairly minor incident might cause a spike in maritime insurance rates which could place an additional burden on the global economic recovery.

The current threat is part of a broader issue of World oil transit choke points.

It is only a matter of time before Al Qaeda gets a navy!

DISCLOSURE: This issue is near and dear to my bottom line: I hold shares of Knightsbridge Tankers, Ltd., Tsakos Energy Navigation, Stealth Gas, Inc., D.S. Torm and Golar LNG.

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Why We Need The Big, Expensive Rocket

For all the criticisms one might easily level at the United States Congress, they may be doing something right. There appears to be a good bit of opposition to President Obama's proposed NASA budget.

Mr. Obama has proposed to cut the Constellation program, the aim of which is to return Americans to the Moon and eventually beyond. A key element of the Constellation program is the Ares launch vehicle. With the retirement of the Space Shuttle imminent, the United States would be lacking a heavy lift launch vehicle that is rated to carry humans.

While I am all in favor of austerity in government programs given the horrid debt and obscene deficits that afflict this Republic, retaining the ability to loft men into orbit for whatever reason or contingency is most probably a sound idea.

It is fair to say that the Ares program is behind schedule, looking like it will go over budget, undergoing down rating in proposed capability and looks like it will not be able to put the Orion CEV into a stable orbit without the addition of a third (read that costly) stage. However, the Space Shuttle solid rocket booster which forms the basis for the Ares I fist stage and the proposed J2X engine for the second stage are derived from man rated hardware.

There is a reasonable argument that the successful Delta IV launch vehicle is suitable for lofting the Orion CEV but that platform is currently not man rated. The consensus in the Blogosphere seems to be that the lead time and cost to man rate the Delta vehicle would be comparable to those required to complete the Ares I program. Considering the large amounts of money and effort already invested in the Ares program and the fact that the Ares I has been test flown already, man rating the Delta does not look like such a hot idea.

Imperfect as the program is, the development and deployment of the Ares launch vehicle should continue. Perhaps a partnership between NASA and the space launch industry might be forged to jointly (and possibly more efficiently!) complete the Ares program so that the vehicle might be both a commercial cargo platform and a government manned platform.

If we as a nation do not complete the Ares program, Mr. Obama's advice to every four year old that wants to be an astronaut is essentially "get good grades in school, study math, engineering and learn to speak Chinese".



"Well, I'll be damned...she does fly!"

DISCLOSURE NOTICE: I hold a long position in Orbital Sciences Corporation (ORB) and hold positions in other aerospace and defense firms that may also be contractors to the Ares program.

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Why I Don't Like The Mayor

With all the talk of street cars and light rail in Cincinnati, it is amazing how many people do not know that Cincinnati already has a train, after a fashion. The City owns the Cincinnati Southern Railway.

The Cincinnati Southern Rly. connects our Queen City to Chattanooga, Tennessee. It was built by a bond issue after the Civil War and is run by trustees who are appointed by the Mayor of Cincinnati.

The Cincinnati Southern Rly. is the only interstate railroad owned by a municipality in the United States. The one. The only. Period. Cool, isn't it? Arguably way cooler than some dumb statue in the waters off New Jersey or vain obelisk in the District of Columbia. Too, it is profitable.

The Cincinnati Southern Rly. leases its assets to the Cincinnati, New Orleans and Texas Pacific R.R. which is in turn part of the Norfolk Southern system. This is a long term contract which brings millions of dollars a year into the City's coffers. Rain or shine, feast or famine: that check comes in. Norfolk Southern even paid for some of the improvements such as double tracking the line South of Somerset, Kentucky in the late 1990s.

Over the last year, there have been diturbing reports that Mayor Mallory thinks he might sell the Cincinnati Southern Rly. to raise cash for short term political and economic gain. In fact, some who are intimately familiar with the matter say Mr. Mallory would accept a price that is less than what the railroad is worth.

Arguably, I am not the sharpest turnip that ever fell off of the truck. However, where I come from, people who sell hard assets that are paid for and generate revenue for less than they are worth are considered to be stupid. Based on his alleged intentions in the Cincinnati Southern Rly. matter, Mr. Mallory has revealed himself to be stupid.

Given the high barriers to entry into the interstate freight railroad business and the fact that the one Cincinnati already owns is profitable, it would be very unwise to unload that asset. We should convey this fact in no uncertain terms to City Hall and any individual who aspires to attain office in Cincinnati.

I understand that good fodder for Bloggers is other Blogs. Therefore, allow me to direct you to my Sister's blog: Rancho los Malulos. It is really quite a story, actually, and I think you will be amazed at the various shenanigans of XOMan in the far South of Texas.