In discussing his new report on the oil markets, analyst Jason Burack tells MoneyShow.com about some large-cap stocks with potential, and discusses a junior company in which he sees a great deal of headroom.

Kate Stalter: Today, my guest is Jason Burack. Recently, through your company Wall Street for Main Street, you issued a new report about the energy sector. Why don’t you start out just telling us a little bit about the report, and what you found?

Jason Burack: We originally wrote this report because of a lot of the rhetoric on TV from the mainstream media, and we were just tired of hearing the politicians come on and just blame these greedy speculators on Wall Street and these evil large oil companies.

We just wanted to get people the truth about the market, first of all—what really goes on in the oil market. We already knew a lot about that for years, but we spent an extra two-plus months researching that, and then we wanted to help people profit on top of this from all this additional knowledge. That’s where we fit in here with that.

In terms of the oil market here right now, we’re contrarians and we’re value investors, so we’re looking to try to find opportunities where the market has really mispriced something. Over the next 24 months or so, something can really recover and then reverse back to the mean.

In the case of oil, it’s really sitting at an eight-month low right now, and the market is just pricing in this economic disaster. It’s not really pricing in anyone using any more oil. And when you really dig down into the supply-demand fundamentals of the oil market, and the other factors involved in the oil market, you see that people are still using a lot more oil, especially in developing countries.

Kate Stalter: So, give us a little more detail about what that is. Obviously the politicians will shout one thing about speculators and oil companies gouging. But on the other hand, when you look at emerging markets such as China, you hear a lot about their use of fuel. So, what are you seeing that’s going on, given that prices are so low right now?

Jason Burack: China’s resource policy—they get the whole energy picture. They get that we’re running out of cheap oil. The whole peak oil argument that we’re running out of oil reserves—well, we’re not running out of oil reserves, but we are running out of the cheap and easy oil, the light sweet crude with the low production costs of $10 to $20 a barrel. Basically all that stuff, the conventional stuff, is gone.

China understands this, and what China has been doing is, they’ve invested over $75 billion since 2005 in oil alone. Recently, in the last month, they’ve increased their oil imports over 6 million barrels per day, despite the oil price dropping. So they’ve been just stockpiling oil. The reason for this is they don’t want their economy to run out of cheap energy so it’ll stop growing. They are long-term-oriented in their plan.

The way the Chinese work right now is that’s a very rapidly growing automobile market. Now the last few months, obviously, the auto sales have slowed, but people there, for the last ten years, they had not been driving. So now they’ve saved up ten or 15 years, and they’re not using any financing to buy their cars.

This is their family, they’re buying their first car, it’s really exciting for them. And once they pay cash and they put that money down for the car, they’re not going to stop driving if the oil price is going a little bit higher.

That’s why in the United States, gasoline prices are not—they’ve only dropped, I think, 40 cents per gallon, despite the oil price dropping so much in the last few months. A lot of the reason for that is because the emerging markets, a lot of them have been buying up a lot of the supply to offset this stuff.

Kate Stalter: I want to talk about some specific companies that you’re seeing that could stand to benefit from current market conditions or future market conditions.

Jason Burack: First of all, like a lot of the conventional oil supply, there’s a lot of inflation going on in the market. According to the Bernstein study, there is 11% price inflation just in the last 12 months in energy input cost, so people need to account for this.

But, in terms of companies, for the bigger name companies: Apache (APA), this company has really outstanding fundamentals. They bought assets from BP (BP) in the last couple years. After the Macondo spill, they bought assets from BP in the North Sea. They’re a technology company, too, so they take these old depleted wells in the North Sea and they just bought one, I believe, from Exxon Mobil (XOM), as well, some wells.

And they buy these assets for pennies on the dollar, deplete the wells, and then they use enhanced oil recovery techniques and they can get these wells producing again at really good flow rates. It costs them quite a bit more for a production cost, but they get a really good return on their investment. Apache right now is sitting not too far off its 52-week low. Its 52-week low is around $73, and the stock’s at $84, and the stock was $130 only a couple years ago.

This is a really well-run company. It has a profitable, diversified asset base. That would be one company.

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Another, a larger company that we have in the report, and this is a good technology company, is Diamond Offshore (DO). The reason I think Diamond Offshore is a more conservative investment as opposed to a Transocean (RIG), which we also have Transocean in the report...but compared to Transocean, Transocean is high-risk, high-reward. Transocean has more leverage on its balance sheet, and they have more liabilities from some of the lawsuits for BP, and then they have some issues with a still in Brazil.

Diamond Offshore has literally years worth of orders booked for drilling. Now if oil does go a little bit lower here in the near term, to around $70 to $75, some of these orders might get canceled. Your viewers need to be very aware of this—that there might be a little bit more downward pressure.

But oil is going to be very close to bottoming here at these levels, because if oil does go below really, $80 a barrel on WTI, a lot of this unconventional oil production—the oil sands, the enhanced oil recovery, the deep water offshore oil, and the shale oil production—a lot of these wells have very, very high production costs.

There’s a lot of oil production, but it will turn on very, very quickly if oil drops below a certain price threshold. That’s why I think the oil market is very, very close here to bottoming, and I think there’s a very good opportunity here for contrarians, whether they’re an investor contrarian, a speculator contrarian, or just a trader, to make really good gains over the next 18 months.

Kate Stalter: One thing that a lot of people are justifiably concerned about in the US would be the impact of further regulation on the oil market, as well as the natural gas market. What do you see in that regard?

Jason Burack: That’s a good question. In terms of that, the reason we wrote our report is to geographically diversify people away from there. In our report, we talked about government intervention a lot, and we talked about regulation risk, which is why we actually don’t have a lot of companies in our report that have a lot of exposure to US natural gas prices and the EPA. We intentionally wanted to avoid that.

I think in terms of the shale oil picture, there’s a best-case scenario and a worst-case scenario. I think that the best-case scenario for shale gas production and shale oil production in the US is over the next three to five years, the EPA is really going to come out with a whole bunch of new environmental guidelines, and they’re going to allow the production to occur.

But these new guidelines, which could be 3,000 to 5,000 pages worth of guidelines, are going to force more time and energy rules and regulations. They’re going to cause the production cost to rise substantially from where they are now. That’s the best-case scenario.

In a worst-case scenario, because of the documentaries like Gasland, I think you could see some of these areas in the United States, some of these states, pull a Vermont or what happened in France, where they just shut off any shale drilling.

This is why we wrote our report. Our report is literally filled with geographically diversified companies, literally all over the globe. You mentioned Mart Resources (Toronto: MMT), so we can talk about them in a second, but we literally have companies all over the globe in our report.

Kate Stalter: Let’s follow up on Mart Resources, because we were talking about that in an e-mail the other day. Tell me about that.

Jason Burack: For our junior producers, whether it is oil producers or gold producers, we look for production growth, reserve growth, and massive exploration upside potential.

Mart Resources fits our criteria and then some, and they also have light sweet crude oil, which sells at a premium to Brent. Mart’s net income has increased fivefold from 2011 to 2012, and the stock price has responded accordingly, from about 15 cents to 20 cents, to about, I think, $1.10 right now. The stock has moved, but this is a big growth story and it’s an undervalued growth stock.

Mart is waiting to get additional pipeline capacity for its current oil wells, so it’s going to increase production up to at least 30,000 barrels per day. They also have plans already in place to move existing production from current producing wells up to 45,000 barrels per day very quickly, in less than 18 months if the pipeline capacity issue that they have right now is taken care of. This is a really good growth story in the next 18 months, and they’re literally just waiting on the pipeline issue to be fixed.

They also have a massive amount of exploration upside. I just saw in one of their news releases from a couple weeks ago that they have another, on their step out drilling for an exploration well, they have another 11,000 barrels-per-day well, which is considered marginal in Nigeria.

It’s pretty funny how a marginal well in Nigeria is over 10,000 barrels per day of light sweet crude, because here in the United States a marginal well for a shale oil thing is barely, when you first frack a well, it’s barely 1,000 barrels per day and then the thing drops off in less than a year to 80 barrels per day. And that’s considered marginal here in the United States—higher production costs. So lower production costs there.

The only issue with Mart Resources—and this is the reason why the stock is not already well over $3 a share or over $5 a share—is geopolitical risk. And the market perceives that there’s geopolitical risk, and that’s what hurts the valuation.

Kate Stalter: I read an article not too long ago about the continued interests in drilling off the coast of Alaska, for example—to do as you’re saying, Jason, to avoid the geopolitical risk of some of these emerging nations. Do you see that trend remaining the same? Picking up? Decelerating?

Jason Burack: Well, first of all, as an investor in the resource industry and especially the energy industry, all governments want oil revenue. They do so whether they have a national oil company or they’re taxing the private oil companies more and more each year...they all want it.

I would tell your listeners that there is literally no way of avoiding geopolitical risk entirely when investing in the energy sector, and the best thing you can do with your capital is to make sure you’re diversified.

A company like Apache, with a very diversified asset base that gets their cash flows from many, many countries—that’s a good place to start. If you’re going to buy a report and look at juniors like Mart—and we have other juniors and they’re literally all over the globe, the best ones with the best fundamentals—Don’t bet on one. Make sure that you spread your capital around, so just in case one government goes after it, then your others do superbly.

Kate Stalter: Last question for you: Switching gears just a bit here: as we’re speaking, the Fed made its expected interest rate announcement today. Ben Bernanke is doing his press conference as we speak.

The markets have tended to gyrate according to expectation, or lack thereof, of further quantitative easing, making it very, very difficult for individual investors to be able to plan for savings like retirement. What do you see happening here? What do you think people should be doing?

Jason Burack: Well, unfortunately with central bank policy here, it’s really making it very, very difficult to be the Warren Buffett type of buy-and-hold investor for five, 10, 15, 20 years, because of the fluctuation in paper fiat currencies, because of all the central bank intervention in the markets.

What I would tell people instead is to focus on a 12- to 18-month, maybe 24-month plan, and I wouldn’t go for any further out than that, because the world could be dramatically different in 24 months than it is right now. Especially if Ben Bernanke decides that he can’t do any more stimulus or quantitative easing.

What I would just tell people is, unfortunately, they’re going to have to learn a financial education. So if they’re putting it off, they’re going to have to learn it. They’re going to have to at least be able to ask better questions of their financial advisor or person that they’re giving their money to. That’s the absolute minimum for what they should be doing. They need to learn the education, they need to come up with a better plan.