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Unrecognized Value
Monday, August 07, 2006

Today we have read all about BP closing its Prudhoe Bay operations in order to repair an oil pipeline, and watched as oil prices climbed $2 to finish just below $77 per barrel. Now we understand this to be a short term blip and that eventually that production will return to the supply of crude, but until then we should have elevated prices. It is thought that through the numbers supplied by OPEC and other supplying nations that crude supply has between 1-2 million barrels per day of extra capacity (than is demanded). This takes nearly 25% of that capacity off-line, which is probably an understatement because conventional thought is that many nations have overestimated their potential output. Take into account that we have a war in the Middle East right now (on terror at this point but with the potential to escalate into region warfare as it is getting ever harder to distinguish between some organizations and political states). So it is our assumption that oil will be pegged at around $80 per barrel for some time, and the reason we believe that oil companies are extremely undervalued.

Case-in-point: LUPE.ST has been trading within a trading range and seems to be stuck. In all honesty the company has not moved forward with their adding reserves through the drill bit as they had hoped, but they have been adding producing assets at a staggering rate. Also, they are a PRODUCER of oil and not an explorer putting 100% of their eggs into one basket. The company is diversified across many fronts (geographically and E&P-wise). This stock is undervalued in our opinion as it has seen its fortunes dwindle as oil has powered to new highs recently. We want to keep an eye on LUPE.ST as we see the potential for it to break out and make another run into the 100s should it be able to break through and hold the $K 90 mark.

Another company to look at is Talisman Energy which has been a staple of our personal portfolio for many years. TLM is undervalued due to its ties to Sudan years ago and the political and legal liabilities that are attached to that since sold asset. The company has been approached numerous times over the years with buyout offers, none of which were accepted because management felt that they were not high enough to entertain as well as their belief that they could add more value through their management of the assets than the purchasing company's management. So far this logic has proven true and set a precedent for potential buyers: Don't go to management unless you have a superior proposal to our current management's ability to run the company. Personally, as a shareholder, I would prefer that management keep control of the company and keep adding value as they have over the years. However, I am perfectly aware that should it happen, management will have an offer on the table that they think is more than adequate. As a shareholder it is nice to know that you are not employing sell-outs to run the company, but concious individuals that will only bring a proposal to you when they realize that the return offered in the buyout is far greater than they themselves can earn you. This is another diamond-in-the-rough company that should see some action to the upside, especially with prices as high as they currently are and their continued push into tar sands and alternative energies.

We hold by our belief in uranium, and in no way want to scare you from the future windfall profits from our investments made today, but diversification is very important. These two companies would sure look nice along with Cameco and SXR as the cornerstones of our energy portfolios. We would be acting as responsible investors to spread the risk out among our speculative plays, but even more responsible to accept gains we know are less than we could have made in order to have a fallback plan. Now do not missunderstand what we are saying, because although these two plays are safer, we still believe that they will yield a significantly higher rate of return than the market over the years, just not as high as our junior uranium plays. There is a price to pay for a safety net however, and in this case the price is not too high.


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