Featured in this Issue:Market Outlook

PDC Energy

Noble Corp.

Patriot One Technologies

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Energy & Resources Insider 2

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Energy & Resources Insider 3

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Energy & Resources Insider 4

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Energy & Resources Insider 5

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Energy & Resources Insider 6

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Energy & Resources Insider 7

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Market Outlook

With the oil markets starting to look healthier, it is a good time

to revisit the oil companies and look for those that can capital-

ize on the new environment.

OPEC looks likely to hold to its production deal for the time

being despite the difficulties coming from Iraq, and with other

producers coming to the table as well, most notably Russia,

the market may have finally turned a corner. If the deal falls

apart, it will likely be because of recent comments from Iraq.

Iraq recently demanded that it be exempted from any produc-

tion limits imposed by OPEC in November, with Iraqi officials

arguing that the war against ISIS is a justification for allowing

it to produce more. "We should be producing 9 million if it

wasn't for the wars,” the head of Iraq state oil marketer

SOMO, Falah al-Amiri, told reporters. "Some countries took

our market share.”

Still, there are mixed signals for crude going forward. Right

now, supply still exceeds demand and inventories are still

elevated. Inventory drawdowns in recent weeks have been

strong – for instance, the Energy Information Administration

just reported a drawdown of nearly 600K barrels for the most

recent week.

On the other hand, restored supply from countries like Nigeria

and Libya are creating more supply pressures and weak Chinese

demand remains a problem. The major catalyst for oil will be next

month’s OPEC meeting coming two years after the Thanksgiving

“oil massacre” which ignited the oil collapse in 2014.

Adding to concerns about oil prices, the WSJ is reporting that

there were 5,069 DUCs in September, up markedly versus the

3,768 count in January 2014. That increase is due to compa-

nies pausing their drilling programs and waiting to complete

wells until oil prices regain further ground. If all of these wells

come online it would add roughly 250,000 barrels per day of

additional supply.

Against the backdrop of the troubled oil industry, clean

energy Ais still making remarkable progress. So much so that,

it appears the clean tech revolution really is upon us. (Clean

tech picks will be the subject of a future newsletter in the next

month or so.)

According to the IEA, renewable energy outpaced fossil fuels

for installed electricity capacity across the globe last year. The

fact that clean tech was able to make so much progress

despite competition from low oil prices suggests that once oil

prices rise, clean tech will truly begin to alter the energy land-

scape around the globe. 2016 is really starting to look like an

inflection point for the transition to cleaner sources of energy.

The world saw installations of 153 gigawatts of renewable

energy in 2015, or about 55 percent of the total. 2015 marked

the first time that the world installed more renewable energy

than fossil fuel-based capacity, and that’s probably going to

continue for years to come. The IEA said that an average of

500,000 solar panels were installed every single day last year.

Smart investors should be paying attention to this trend

regardless of one’s views about oil and traditional fossil fuels.

Being a good investor requires pragmatism after all.

In this month’s issue of Energy & Resource Insider, we highlight

an oil stock and a backend energy play both of which are

poised to build on new opportunities in the energy sector and

offer outstanding returns to investors going forward. In

addition, we take a look at a Canadian nanocap that is risky,

but might just present a good speculative trading opportunity

for the near future.

Our first pick for the month is PDC Energy, Inc. PDCE is a

mid-cap upstream oil & gas company that has strong cash

flow from operations bolstered by an excellent hedging

program. PDCE increased production by more than 65% in

2015 and the company appears poised to grow 2016

production by more than 30%. Many oil stocks are a dicey

proposition at this point – while oil markets are slowly recover-

ing, the extent of the damage that the oil price collapse has

done to the long-term growth prospects of US unconvention-

al producer groups remains unclear. PDCE is not in this boat

– instead the company’s fortuitous hedging program has

largely helped to insulate the firm from the worst of the

collapse.

PDC has three core areas: The Wattenberg Field in Colorado,

a new holding of 57,000 acres in the Delaware Basin in Texas,

and the Utica Shale in Ohio. The Delaware Basin is the newest

area for the company and came about as a result of a trans-

formative deal the company made in August. Utica has a

tremendous amount of long-term potential, but Wattenberg is

the more important of the two fields.

Total 2015 net production for the Company was 15.4 MMBoe

from these two areas, an increase of approximately 65%

year-over-year, and consisted of 45.4% crude oil, 18.4%

NGLs, and 36.2% natural gas, most of which was derived

from the Wattenberg Field. That natural gas production is

increasingly looking like it may be a more valuable asset than

many investors had assumed thanks to rising natural gas

prices and the prospect for a chilly winter this year.

PDC Energy’s stock has stayed mostly steady throughout

much of the last year because it is among the strongest compa-

nies in the oil sector relative to its size. Consider the following:

In October, 2013 PDCE peaked at $73.93/share. With

double the production and proven reserves today, we

believe the share price can reach a new high, if crude oil

prices return to $60.00/bbl.

In the 4th quarter of 2015, PDC generated $126.2 million

of cash flow from operation ($3.06/share) and we

forecast that cash flow from operations will more than

cover this year’s capital budget.

The Company’s production guidance for 2016 equates

to approximately 36% YOY production growth.

PDC operates the majority of their drilling program and

since most of their leasehold is now held by production,

they can adjust their capital program if necessary.

The stock’s performance over the last year should make it

more attractive to investors, not less. Put differently, at this

point investors are much better off owning a smaller piece of

a stronger company than a larger piece of a weaker one.

Investors who are hoping that oil prices will rebound fast

enough to salvage the various oil companies on the brink of

financial distress are likely to find themselves disappointed; a

sustained price rebound cannot come soon enough for many

of the weaker players in this industry. Again though, PDC

Energy is different and the stock’s performance reflects this.

As the oil price rebound continues, PDCE is poised to capital-

ize on its financial strength by snapping up distressed com-

petitors.

That ability to capitalize on emerging opportunities is already

making life easier for PDC Energy as the firm’s shrinking costs

show.

PDC had a strong balance sheet going into the start of the

year, but the firm further boosted its balance sheet at the start

of the year with a ~$260M equity raise for 5.15M shares, and

then a 6.5M share offering in September. While the secondary

offering did dilute existing shareholders, it also gives PDCE a

fortress balance sheet that most of its peers lack. With that

equity raise now behind the firm, it’s unlikely that shareholders

will face further dilution any time soon.

The relatively limited dilution that previous equity investors

have faced with $2.3B PDCE will be more than made up over

time thanks to organic and inorganic growth opportunities.

The firm’s production should continue to grow throughout the

current crisis, and its financials look robust given the macro

environment.

Importantly, despite the superior performance of the business

and despite the stability in its stock price, PDCE is trading at

roughly 15X 2016 unhedged EBITDA versus 19x for its peer

group. PDCE is a superior operation compared to most of its

peers – yet it trades at a cheaper multiple!

Overall, we rate PDC Energy’s common stock (NASDAQ:

PDCE) a Strong Buy up to $65/share with a price target of

$88.00 within 12-months. Our valuation of the company’s

common stock is based on proved and probable reserves,

financial position, historical and expected drilling & comple-

tion results and a high level of confidence in the management

team’s ability to take advantage of current market conditions.

PICK #2

While PDCE is a strong performer in the energy space, the

stock has not seen the kind of decline in price that deep value

investors often look for. Our second pick for the month is

much more in line with the deep value philosophy and comes

from one of the most beaten down verticals in the energy

space; offshore drilling. This is not a sector for the faint of

heart, but for those with a long-term outlook, stocks in the

offshore space could have 10X returns over the next five to

seven years. Most oil stocks, including PDCE, are unlikely to

see that kind of upside, no matter how high oil goes.

For those who have not regularly invested in the offshore

drilling sector, the story here is an unpleasant one. Over the

last few years as relatively high oil prices spurred investment

across the entire energy sector industry, offshore drilling

expanded like everything else.

One area of offshore that saw a particularly large infusion of

corporate cash was ultra-deep water (UDW) drilling. UDW

companies like Ensco PLC, Seadrill, Transocean, Diamond

Offshore, and Noble Corp. all put substantial investments into

bringing new offshore drilling rigs to market. (Note: Noble is a

separate company from Noble Energy (NBL). The two have a

common corporate legacy, but are separate entities today.)

As a result, by the middle of 2014, there was an emerging glut

of UDW rigs and day rates on these rigs started to collapse.

The oil price collapse last fall exacerbated the supply issues in

the industry. By 2015, many offshore drillers were talking

about stacking existing rigs. Stacking involves storing rigs to

reduce costs of operation. Stacking can be cold or warm with

each process having different costs and benefits but in both

cases the step is an extreme one for a company to take. The

process of stacking is costly, not easy to reverse, and often

leads to subsequent rig scrapping.

Stocks across the UDW space have collapsed in value. Trans-

ocean, Ensco, and Seadrill are all down more than 75% in the

last couple of years. Many companies in the space have short

interest ratios of 10% or more of their float, and most have cut

dividends. A few of the smaller players have even gone bankrupt.

with ~50% of average equipment days contracted for 2017.

Even with the currently atrocious market, Noble is still roughly

breaking even. In its most recent quarter NE said that Q2

contract drilling services revenues totaled $877M, helped

immensely by a $379M gain from a settlement with Freeport

McMoran which canceled a contract during the quarter. With-

out that settlement, contract drilling services revenues were

$484M, down 18% from $591M in Q1, driven by a reduction

in fleet operating days, with fleet utilization declining to 65%

vs. 79% in Q1.

The company is well positioned for most of the potential

industry disasters on the horizon like Petrobras’ evolving

business outlook. Every other major deep water driller will

likely find themselves in more trouble than Noble if the market

continues to deteriorate.

Overall, Noble is better positioned to survive the downturn

than any other deep water firm. As the market starts to turn,

Noble should see considerable upside. NE spun-off most of

its low spec rigs in a company called Paragon Offshore last

year. PGN eventually went bankrupt. Noble’s decision to a

portion of Noble’s debt backed by low quality rigs was a

smart move. Nonetheless, the remaining Noble Corp. assets

have significant upside potential in even a modest market

recovery. As the market starts to recover, Noble should see

cash flow of roughly $4-$5 per share eventually. The compa-

ny’s higher specification fleet, limited debt, and efficient oper-

ations could make it either an excellent acquisition target or

an effective acquirer of distressed firms as the sector

bottoms. (An ESV/NE combination would be particularly inter-

esting for investors.)

Putting all of this together, and applying a multiple of 15X

cash flows supports a valuation of $75 per share AFTER the

market eventually recovers. Right now, Noble is not worth

$75 a share. And it will take time for the market to correct

itself. But even if the market continues to languish, and competi-

tors start going bankrupt (e.g. HERO earlier this year), Noble

would probably be the last major company left standing. Thus,

the stock is essentially de-risked at these levels. A significant

stock price recovery may take a couple of years, but for deep

value investors with a medium term outlook, Noble is a rare

breed in an expensive market; a cheap stock that could see

5-10X returns with significant room for eventual earnings upside.

Our final pick for the month is an unorthodox play in the energy

space, and is a good choice to balance the broader oil market

risks that impact both Noble and PDC Energy. This third pick is

perhaps the most exciting in that it encompasses a safe and

effective method of playing on a major technology innovation.

PICK #3

Our final pick for this month is an off-the-radar nanocap

Canadian company called Patriot One. The firm is not an

energy or resource company, but it came across our desk

with a story and technology which are compelling enough to

be worthy of your consideration.

With that said, like virtually all nanocap companies, Patriot One

is a risky venture and any funds invested in the firm should be

treated as speculative capital. Patriot One has a very interesting

and compelling product, but despite that the odds are high that

the firm will run into challenges in the next few years and those

challenges will keep the company grounded.

Still, for investors willing to take a risk with an investment,

Patriot One is a good choice. IF the company manages to

overcome the business obstacles it faces, then the payoff will

be enormous. To be clear though, this is not a stock for

widows and orphans – it is a stock for speculators who are

willing to lose their entire investment on the chance of a 10X

or 20X return.

Patriot One is a pre-revenue company, run by CEO Martin

Cronin, and it is preparing to launch its first product. The firm

trades on the Canadian Venture exchange, and its share price

is quite volatile. From a trader’s point of view, it may be a

good opportunity though because the launch of Patriot One’s

new product should gin up greater interest in and awareness

of the company.

Patriot One recently introduced its first product, the NForce

CMR1000. The product is a body scanner designed to identify

concealed weapons on a person’s body or in baggage using

microwave technology combined with pattern recognition.

The technology can be "deployed overtly or covertly in a small

space profile, giving a very, very high degree of accuracy to

detect a weapon concealed on somebody passing through

an entranceway". The range is up to 12 feet.

Patriot One's Chief Science Officer, Professor Natalia Nikolo-

va describes the invention as "most effective with metallic

weapons, such as handguns, rifles, metallic shrapnel and

explosive vests, hand grenades—anything that has metal is

certainly detectable… Ceramic handguns is possible to

detect", but "explosive powders, no, or gels. This is a radar

detector. It is not a chemical detector".

However, the technology does build on artificial intelligence

which promises improved detection even years after initial

deployment. "The radar is combined with machine learning,

some clever algorithms, which understand what that radar

signal coming back means", Cronin says. "So it's not a dumb

system. It's a very smart system that analyzes the signature

coming off the subject". Nikolova says "Because it is based

on learning machines, also known as classifiers. You can

constantly update your knowledge about what is a threat and

what is not a threat. While radar hardware is fixed, the "classi-

fiers are constantly updated" and the "system can learn

continuously about the environment, about new threats, and

about new non-threats".

Patriot One describes the product as “the world’s most

advanced technology for covert screening and detection of

concealed weapons.” The company says that the CMR1000

is “far less expensive, easily concealed, and utilizes a single

scan for detection, as compared to the numerous scans

required by large, expensive and manned static installa-

tions… NForce CMR1000 screens individuals in real time as

they pass though the CMR1000 detection field in access

points, halls and entryways.”

Wall Street analysts have cut estimates across the sector,

and sentiment across all of the stocks in the space cannot get

much worse. No one wants to buy these companies. And that

is exactly why sage investors should be looking at the sector

very carefully right now.

The downturn in the Deep Water space will not last forever.

Already most of the major players in the space are quickly

stacking rigs, deferring the delivery of previously ordered rigs,

and cutting costs anywhere they can. All of this is setting the

stage for an eventual rebound in the sector.

That rebound in the offshore sector could start as early as

2017; the UDW sector still has growth ahead of it. For

instance, influential energy research firm Douglas-Westwood

projected that capex in deep water exploration will jump 69%

between 2015 and 2019.

The best opportunity in the deep water space right now is

Noble Corp, trading under the ticker NE. The stock is incredi-

bly cheap compared to its historical metrics and compared to

the potential for the future. The company also has a strong

and modern fleet. (pictured below)

Compared with many peers, Noble has better financial flexibil-

ity and its contract coverage is stronger. Noble Corporation's

impressive fleet also means that the company has an impres-

sive backlog. The company earned total revenues of $1.5

billion for the first-half of 2016. The company earned the

majority of these revenues from the United States, but also

has its revenue well spread out.

The company's revenues come from a number of different rig

types, but primarily from ultra-deepwater rigs which make up

almost 80% of the company's revenues. Ultra-deepwater rigs

tend to have longer contracts that provide income for many

years, including during a market downturn. However, it also

means that the company's source of income is concentrated

primarily in its ultra-deepwater fleet.

The firm has a current ratio of about 1.67X and has nearly 60%

of its average available rig operating days contracted for 2016

Patriot One lists a number of key features that make its tech-

nology a major step up over existing systems.

Small enough for covert hall and doorway installations.

Images of the target NOT generated; absolutely no privacy

concerns.

No subject compliance required. System acquires results

on moving targets.

Secured locations inconspicuous – not institutional.

Time consuming scans not required.

Doesn’t require line of sight.

Compact and lower cost than millimeter-wave units.

Low cost allows for multiple networked units.

Weapon profiles updated network-wide regularly.

Real-time and entirely computer-based. Human operators

NOT required.

Early detection reduces inspection team size and buys first

responders critical intervention time.

System “learns” and continuously perfects its detection ability.

Frequencies are aligned with international regulations for

safe use of microwave bandwidths.

Given security concerns proliferating around the world at this

point, there is obviously a huge market for this type of prod-

uct. Assuming the Patriot One product works as well as

advertised, the market will likely embrace the technology

quickly. For a parallel, one only needs look at the rise of auto-

mated passport scanning machines that did not exist a few

years ago, but are now the standard at customs and immigra-

tion areas in airports around the world. That technology was

developed by a Portuguese start-up. The same thing MIGHT

happen with Patriot One. It’s risky, but possible.

Trying to value Patriot One at this point is mostly an exercise

in futility. The target addressable market (TAM) for the compa-

ny’s NForce CMR1000 units is probably at least 200,000

units in the US alone just based on the number of public

schools, hospitals, government buildings, and major airports.

Worldwide, the TAM is probably upwards of 2 million units

based on reasonable extrapolations off US figures. Market

size for Patriot One is not the issue.

Instead, investors need to consider two prospects for Patriot

One. First, the company’s stock will probably rise in the short

run as the firm gets increased attention around their product

rollout. That may make the stock a good short-term trade.

Second, over the long-term Patriot One can only be success-

ful if it can scale up production and its sales force economi-

cally. That’s a lot easier said than done. If the firm does pull of

the feat, in a few years this could be a company with $100M+

in annual sales up from nothing today. That in turn would

probably lead to a 20X return on the stock and an IPO on a

major stock exchange. For the right type of investor then,

Patriot One is definitely one of the most interesting invest-

ments on the market right now.

Thanks for reading this edition of Energy & Resources Insider.

Please visit OilPrice.com for the latest energy news from our

team, and keep an eye out for next month’s newsletter when

we will reveal more stocks picks that come from our deep

dive into the fundamentals and opportunities of various com-

panies across these industries.

Until next month, happy investing!

Energy & Resources Insider 7