Time moves forward, but history often circles back.
As we mark the 105th anniversary of the end of World War I, I can't help but ponder: are we on the precipice of history repeating itself? The echoes of the past seem to resonate in the present, stirring uneasy parallels between then and now. The global landscape teems with uncertainty, from economic downturns to shifting power dynamics. The stakes, however, are magnified today. With a global population teetering at 8 billion, the implications of our actions and reactions reverberate more widely and deeply. Just as the 20th century was rife with change and tumult, so too does today's world bear the hallmarks of transition and potential conflict. The lessons of a century ago urge us to heed the warnings and navigate the challenges with wisdom and foresight.
Regional tensions like the Middle East unrest and Russia-Ukraine conflict, foreshadow possible larger confrontations. If that wasn't bad enough, beneath the surface, there's a gigantic geopolitical shift unfolding: a reigning superpower squares off against a rising challenger. In many ways, the current geopolitical situation resembles a grand chessboard, where every move sends ripples across the globe. Using the 20th century as a lens through which we attempt to predict how the rest of this decade unfolds, we might foresee these tensions culminating in a worldwide catastrophe. Also, the looming weight of global debt along with other financial indicators suggest a looming economic crisis that could potentially precede any militaristic showdown. The imminent question is whether a volatile economic collapse or a global conflict will set the stage for this decade's defining moments. Whichever path unfolds, we may see tumult akin to the turbulence of the 1930s-40s.
Active Defense
Navigating the complex terrain of today's global landscape, I've been refining an investment strategy that I'm currently applying to my own portfolio. This approach is crafted with a dual objective: to provide a shield against potential downturns while also spotlighting select opportunities that stand to benefit should global tensions intensify. It's about being prepared for the storms while still positioning oneself to capture the updrafts.
Throughout the majority of this year, my portfolio has resolutely remained 100% cash-allocated. Yet, as the year winds down, I'm pivoting to an 'active defense' approach. My conviction that a significant stock market downturn looms within the next 12 months hasn't wavered. While I remain committed to maintaining a substantial cash position, I'm also keen to carve out strategic investments — essentially, hedges designed to capitalize on potential black swan events that might propel certain sectors to stratospheric gains.
Given the volatility of today's markets, my active defense strategy is designed with both prudence and opportunity at its core. By keeping my entire portfolio in cash, I safeguard my capital, positioned to acquire shares of top-tier companies at distressed prices during the anticipated market downturn. However, I am not merely biding my time on the sidelines. The interest accumulated over the year is now been strategically reinvested in targeted hedges within sectors likely to benefit should the current geopolitical tensions escalate into outright conflict. Some of these tactical moves includewarrants,which offer the chance for substantial returns without jeopardizing the foundation of my holdings.
My goal is to focus first on those sectors are well-positioned to capitalize on any unforeseen geopolitical disturbances or miscalculations that could lead the world toward significant conflict. Sectors such as commodities and resources, including oil, natural gas, precious metals, and critical minerals, but also artificial intelligence and technology. In my previous article, I discussed a company engaged in the development of a mining asset in Nebraska, which is abundant in critical minerals and rare earth elements. In this piece, I will take a closer look at natural gas and helium, two sectors that find themselves at the nexus of potential turmoil and considerable opportunity.
Desert Mountain Energy (DME.V): A Play on Helium and Natural Gas
When we hear 'helium', floating party balloons often spring to mind. But did you know helium wears many more hats than just lifting those colorful inflatables? Dive deeper, and you'll discover it's a superstar in the tech world. MRI machines? They need helium to stay cool. Those fiber optic cables that power our binge-watching? Helium plays a part in making them. Even deep-sea divers benefit, mixing helium with oxygen for safer descents. From the medical field to space exploration, helium's versatility makes it far more than just a party trick. Helium is found primarily in wells associated with natural gas and it's a resource that is in high demand and short supply.
Enter Desert Mountain Energy (DME), a publicly traded resource company primarily focused on exploration, development and production of helium, hydrogen and noble gases. Owning two significant assets - one in Arizona and a freshly acquired one in New Mexico - DME's journey began in Arizona, with the McCauley Helium Field, where they set up a modular helium processing plant, powered by a substantial 3,600-panel solar farm spread across 8 acres. As production loomed on the near horizon, the company was primed to commence operations at the wells with all systems 'go.' However, upon initiating the plant and beginning production, an unexpected decline in pressure was encountered. This prompted the company's engineers to prescribe a 'stimulation' procedure to restore the well's productivity. This lead to a complex, time-consuming permit application process. The ripple effect of this unforeseen hurdle has been substantial, threatening to delay helium production by a staggering two to three years.
Rather than remain in a state of limbo, DME's management showcased adaptability. They decided to shift gears by acquiring aproducing assetin New Mexico. The acquisition, named the West Pecos Slope Abo project, came into DME's fold in July of this year, for the small sum of $2.5M. This isn't just any asset; it spans 77,000 acres with a network of 188 natural gas producing wells, complemented by 50 miles of collection systems. The company believes that an additional 70-100 wells could be developed on that property. The natural gas produced by the 188 wells is sold under contract and pays $3.68 per mcf and expires in April 2024. DME relocated its modular helium processing plant from Arizona to New Mexico and operational start-up is anticipated to take place by the first half of this month.
Desert Mountain Energy (DME) took operational control of the West Pecos Slope Abo project on July 1, 2023, inheriting natural gas production levels that had dwindled to approximately 104 million cubic feet of gas per day (MCFGPD). Despite production intermittently halting for a total of 10 days across July, August, and September due to flow line work, there was a marked improvement post-maintenance. The company's July average production climbed to 275MCFGPD, with August and September seeing a surge to an average of 822MCFGPD. Committed to progress, DME has been systematically enhancing well operations, plant line feed compressors, and general maintenance, aiming to exceed 1,500MCFGPD in the near term. Such meticulous improvements set DME on a clear path to significantly ramp up both natural gas and helium production by April 2024, potentially freeing the company to renegotiate or even terminate its current natural gas contract and explore direct sales to end-users. At the time of writing this article, the relocation of DME's modular helium extraction plant is expected to be complete. This facility will not only extract helium but also high-value gas condensate liquids, creating an additional stream of revenue for the company. The modular helium extraction plant will be powered by natural gas from the very same West Pecos Gas Field, exemplifying DME's commitment to vertical integration and strategic foresight in optimizing underutilized assets.
The plot thickens further: recall the 3,600-panel solar farm the company set up in Arizona? Although the processing plant has relocated to New Mexico, Desert Mountain Energy isn't letting the solar farm go idle. Instead, they plan to monetize it by selling electricity to Arizona's power grid. While awaiting permits for production in the McCauley field, this solar venture provides a revenue stream, making the most of every asset at hand. Their portfolio is further enriched by a trucking subsidiary catering to the oil and gas sector, raking in approximately USD $250k monthly in revenues. The truck fleet was originally purchased as a way of beating inflation and availability issues.
In essence, DME has adeptly navigated its path, making a strategic transition from the brink of helium production in Arizona to seizing opportunities in New Mexico. As a diversified producer, the company now oversees 188 natural gas wells, already contributing to its revenue stream. In the near future, DME anticipates expanding its income sources to include its trucking fleet business, sales of natural gas, and the extraction of helium and valuable condensates from that gas. According to an email exchange with the company's management, DME aims to reach a monthly revenue goal of $1.5M USD. Even if the company only achieves $1M in monthly revenue, this could result in an annual revenue of $12M USD for the year 2024. Additionally, in Arizona, the potential for generating revenue persists through the sale of electricity from their existing solar farm.
Financial Information
In March 2023, the Company completed a public offering, securing gross proceeds of $23,097,750. Under the terms of the offering, the Company issued 11,845,000 units at a price of $1.95 each. Although the stock price started the year at $2.90, it has since plummeted to its present value of $0.35, primarily due to challenges in Arizona. Nevertheless, I'm optimistic about their strategic redirection to New Mexico. This pivot broadens their portfolio with natural gas, natural gas condensates, helium production, the trucking business and the potential revenue from the solar farm in Arizona. As of June 30th, the company reported cash reserves of $14.8M. Drawing from a video presentation from October 19th by Don Mosher, the company's president and board member, I estimate their current cash holdings to be at least $10M. In the near term, the company aims to boost gas volumes from the existing 188 wells through low capital expenditure tasks, like mitigating system choke points and performing well workovers. In that presentation, Don mentioned that the company could achieve a positive cash flow once natural gas sales kick off in mid-November of this year.
Financial Data
| As of October 2023 | Dollar Figures in $CAD |
|---|---|
| Cash on hand | Roughly $10M |
| Debt | $0 |
| Shares Outstanding | 89,813,109 |
| Options | 6,655,000 |
| Warrants | 2,314,218 |
| Tradeable Warrants | 11,400,000 |
| Fully diluted shares | 110,182,237 |
In line with my 'active defense' investment strategy, I'm dedicating an amount equivalent to two months of interest income to invest in this vertically integrated, diversified producer. I find the current market prices to be particularly attractive for entry. Starting off, I've invested in the company's warrants, which are currently priced appealingly at $0.025 per unit, with an expiration date in March 2025. Additionally, I am also adding regular shares into my portfolio, at the price of $0.35 per share.
Back on June 1st, these warrants were trading at $0.35, echoing the stock's value of $1.42 per share on that date. My strategy entails trading the warrants but keeping the regular shares for a very long time. I see substantial upside in DME's future; with its unique market position and the ongoing high demand coupled with a constrained supply of helium, the company stands at a strategic vantage point. Moreover, a harsh winter in Europe could catapult natural gas prices, enhancing DME's prospects. And don't forget the McCAuley Field and Arizona. Once the company receives the permits, it would provide an additional revenue stream. In light of these factors, and considering the critical role helium plays, I am optimistic about DME's trajectory.
Trendpost Takeaway
While the markets have experienced a slight rebound recently, I'm inclined to view this as a mere feint in the grander scheme of economic trends. The sharp uptick in interest rates since early 2022 has substantially driven up the cost of capital, which, in turn, applies an intense strain on companies and individuals alike. The rising cost of living, coupled with stretched consumer budgets, is likely to lead to a contraction in spending. As a consequence, businesses are beginning to tighten their belts, leading to a spate of operational shutdowns and an increasing number of storefronts shuttering their doors. Exacerbating these economic tribulations is the commercial real estate sector grappling with a blow from WeWork's recent bankruptcy. With the company succumbing to almost $19 billion in liabilities, including long-term office leases, amidst already struggling office spaces with 20% vacancy rates, the fallout is expected to exacerbate the vacancy woes and cast a long shadow over the commercial real estate industry.
I'm choosing to sit tight on the principal within my portfolio, opting to reserve that firepower for the opportune moment when top-tier companies are available at distressed prices. For now, I'm satisfied with employing the interest income accrued from my portfolio's cash reserves this year to make modest, calculated investments in strategic hedges that act as insurance against an escalation of current tensions into something much larger.
As we consider the prudent path of insurance and strategic hedges, I am also turning an attentive eye towards the sectors of AI, defense, and technology. These areas represent a frontier of growth and resilience amid global uncertainties. In my forthcoming articles, I will shed light on a select few smaller companies that exemplify the potential within these cutting-edge domains and align seamlessly with this tactical investment approach.
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.