Would You Write a Blank Check to
Harold Pederson?

By Dr. Russell McDougal

Right about now, Harold Pederson is working on his golf game somewhere in the vicinity of Phoenix, Arizona. You wouldn’t want to pay his green fees but you will be more than interested in his next endeavor once this brief sabbatical is over. So, who is this Harold Pederson, and why is he so worthy of commentary even when he is in between ‘jobs’?

Mr. Pederson is a Canadian oil and gas exploration executive with a track record that few can match. He sold Luke Energy earlier this year in a hugely successful transaction after building up the company from scratch over the last three plus years. This is what Pederson does exceedingly well. In a moment, I’ll tell you more about his enviable long-term track record.

One of the most profound principles in resource exploration is that the ‘people’ involved in a company are the number one criterion to use in stock selection. Let’s look at two theoretical companies:

• Company number one is efficiently run and produces 2,000 barrels of oil per day, which it has done consistently over a period of many years. Solid but unspectacular.

• Company number two produces 5,000 barrels of oil per day and they continue adding significant production each and every year. They are clearly in a growth phase.

What do you think would happen if we switched these two company’s management teams?

You would likely find that the first company will soon be in a growth phase as they add significant production year by year. Company number two, the previous growth company, will now likely find itself stagnant in spite of previous stellar successes. Stellar management is quite predictable and so is average management.

In the volatile field of resource exploration you only want to hitch your wagon to outstanding management. Thankfully, there is plenty of that to go around. Finding it is the difficult part.

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Let’s look closely at Pederson’s track record. He became President and Director of Jordan Petroleum in 1986 as the company went about acquiring, developing and exploring for oil and gas properties in Canada. The stock was selling for approximately $0.50 Canadian at that time. Apparently Mr. Pederson found the goods because Jordan was sold 11 years later for $9.80 Canadian. With the exception of the spike during the first Gulf War, the price of oil was flat in inflation adjusted terms during that period. That’s a return of 1,860%... an impressive start.

Pederson’s next venture began in 1998, with a new company named Keywest Energy. In February of 1998 the stock began trading at $0.73 Canadian. A small company that builds oil and gas reserves to around 10,000 barrels of oil per day equivalent will very likely attract suitors, and that’s exactly what happened.

Pederson’s Keywest was sold to Viking Royalty Trust five years later at a price valued at $7.29 Canadian. A return of almost 90%, this time in a shorter time frame. Harold is starting to look like a dependable workhorse at this point.

He evidently didn’t take too much time off for golf after the Keywest success, because he soon started another company trading at $1.45 Canadian. This company, called Luke Energy, employed the same strategy Pederson had followed in his previous ventures – that was to acquire, develop and explore for oil and gas in Canada.

Considering Pederson’s track record, it came as no surprise when Luke was sold in March of 2006 to Connacher Oil and Gas Ltd. for a value of $6.06 Canadian. That’s a 317% return in just 3 years.

Exactly why has Pederson been so successful? There are a number of reasons. First, he knows the oil and gas business like few others and he is the consummate entrepreneur. He has consistently put together the right properties and the geological expertise to make discoveries. Pederson has connections, a world class team and the financial backing to repeatedly get the job done. He simply has a nose for petrochemical success, and his successes have elated his shareholders.

Word has it that he’s had his fill of golf and another startup company will be coming down the pike in the near future. Do you imagine that he will have any difficulty obtaining funding for the new company? Clearly not, and odds are that he will duplicate or exceed his previous successes. You may consider buying and accumulating stock in his new venture over time. In the world of natural resources exploration, partnering with Harold Pederson is about as close as you can get to a buy and hold, no worries stock purchase.

The most important criterion for success in resource investing is tapping the greatest talents around – professionals like Harold Pederson. You must find a way to sort the wheat from the chaff. That is where the experience factor plays out – accessing sources that have already scaled the learning curve to guide you appropriately. You must form your own trustworthy circle of contacts via newsletters, brokers and other experts to consistently find and invest only in the best companies.

Will Pederson get a ‘blank check’ from me for the new company? Not likely, but you can be confident that a large number of shares of his next stock will be resting happily and comfortably within the portfolio.

The knowledgeable folks at Rick Rule’s Global Resource Investments will be among the first to know what the next Pederson deal will entail. They are especially adept in finding ‘good people’, like Pederson, in which to invest.  The number is 800-477-7853 and you can ask for Luke Smith or Ben Miller.

Good Investing,

Rusty

P.S.  The current downdraft in the oil and gas markets is assuredly a short term phenomenon. The technical indicators portray an oversold condition and you can bet that efforts are being made to portray the markets as cheerfully as possible between now and November 4th. The motto is... ”Look for Value, Think Long Term.” It’s time to be in accumulation mode and rescue some babies that were thrown out with the bath water.

Market Watch

Bond Traders Getting Ahead
of Themselves

By Rick Pendergraft

Since the Federal Reserve meeting last week, the 30-year bond and the 10-year note have both rallied sharply. I have been actively watching the Commitment of Traders report on the bond, but the note had slipped my mind. When I looked at it yesterday morning, I was shocked to see what a huge long position the large speculators have built. As you can see in the chart below, large speculators (the blue line) are sitting on the most bullish bet they have made in the last five years (by far). The red line represents the closing price of the ten year treasury notes.

As a contrarian investor, I love to see extreme levels of optimism and pessimism. Almost invariably these instances mark sharp turning points in the market. When the vast majority of traders are going long, who is left to buy? And conversely, when the vast majority of traders are short, who is left to sell? It is at times like these that it pays to take the other side of the trade.

And right now, it looks like it is time to short the 10-year note. If you don’t have a futures account, you can trade the iShares Lehman 7-10 Year Treasury Fund (IEF).  You can trade options on this ETF and it is also available for short selling. The options are very reasonable. You can go out as far as December and buy an in-the-money 84-strike put for as little as $1.35.