KEY DEVELOPMENTS |
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Schlumberger Limited on January 20 posted a 36% jump in fourth-quarter earnings, led by higher revenue and one-time gains. The company reported fourth-quarter net income of $1.41 billion, or $1.05 per share, compared with $1.04 billion, or 76 cents per share, in the year-ago period. Chesapeake Energy is making progress in reducing its long-term debt. Chesapeake's long-term debt (net of cash) as of year-end 2011 was $10.3 billion, a reduction of $1.4 billion from September 2011. Chesapeake's 30/25 Plan calls for the company's long-term debt (net of cash) to be $9.5 billion by the end of 2012. The company intends to achieve this by the end of 2012, regardless of the price of natural gas. Kodiak Oil & Gas announced the closing of its acquisition of Williston Basin oil and gas producing properties and undeveloped leasehold. Included in the acquisition are approximately 50,000 net leasehold acres and net production of approximately 3,600 barrels of oil equivalent per day located primarily in North Dakota. Crosstex Energy declared the quarterly distribution of its partnership and corporate entities from the fourth quarter of 2011. The quarterly dividend on the corporation's common stock will be $0.11 per share. The dividend is payable February 14 to shareholders of record February 1. This amount is approximately a 38% increase over the fourth-quarter 2010 rate. For 24-hour access, visit |
This Month... Rocket Fuel for Your Portfolio
Dear Energy Advantage Reader,
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On January 12, we locked on to our first oil and gas trust for the Energy Advantage Portfolio – Chesapeake Granite Wash Trust (NYSE: CHKR).
And what a pick it is!
Today, there are 23 U.S.-traded trusts on my tracking and trigger lists. As with these other shares in this category, CHKR represents a portion of royalties from operating wells, in addition to the proceeds from planned future fields.
It emerged in January as my first recommendation in this sector because the trust offers two huge benefits. Two benefits you just don't see together every day.
That's the likelihood of share value appreciation as crude oil prices increase, combined with dividends well above the market average. In other words, it resides in what I call the "sweet spot" of energy investing.
That makes CHKR a valuable portfolio addition, one that also provides a dual hedge against volatility – we benefit from the certain appreciation of crude prices, while getting a nice dividend to shield us in times of downward market volatility pressures.
In this respect, the twofold advantage of trusts like CHKR makes them act similarly to Master Limited Partnership (MLP) midstream providers. We have discussed the MLP approach on a number of occasions and currently have several as part of the EA Portfolio.
Trusts including natural gas assets are also valuable, in spite of the current depressed price of the fuel. For one thing, all indications are that natural gas demand will accelerate in the near future. Here, markets from Asia to Europe to North America are looking at gas as the new go-to energy source.
And right now the combination of three factors points toward a rise in natural gas prices:
- increasing gas usage in electricity generation,
- the major development of liquefied natural gas (LNG) export venues from North America to both Asia and Europe, and
- a renewed push to produce compressed natural gas (CNG), liquid petroleum gas (LPG), and LNG as major new vehicle fuels.
Plus, despite the lower current prices, production continues to expand. That translates into benefits for MLPs that provide storage capacity for excess extractions, with a greater percentage of pipeline capacity now being used simply to hold that additional volume in stockpile.
Still, this also tends to benefit stabilizing wellhead prices (the cost of natural gas at the location where it comes out of the ground and undergoes its first transfer and, thereby, sales transaction).
That means certain trusts that comprise both oil and gas are appreciating in value.
When the market value of the commodities goes up – directly, in the case of crude oil pricing, and indirectly in the case of natural gas – the trust will always benefit in proportion to the amount of overall production it represents.
In addition, much as is the case with MLPs, an equity issuance from a trust must – by law – transfer that profit percentage to share owners corresponding to the overall portion of the trust represented by the all the stock issued.
If a trust has released shares totaling 25% of the total trust proceeds, it must move 25% of royalties to the stockholders. That is where the larger-than-average dividends come in… and these can be quite substantial.
Capturing the Dividend Advantage
Our portfolio member CHKR carries an annualized dividend of 9.7%. That places it near the middle of those 23 oil and gas trusts I am tracking.
These trusts have yearly dividends that run from 4.2%... all the way up to 23.4%.
However, not all of them carry both a sizeable dividend and the likelihood of appreciation in share value.
And then there are my three rules for any investor playing the trusts.
Rule One: Understand How the Trust is Structured
Some of them have reducing asset bases, have an end date, or carry questions about the ratio of producing wells to planned wells.
In each of these cases, the return to investors will decline over time.
These still may be a good investment in the short-term.
You just need recognize where the trust is in its depletion scheme, how long before it expires, and whether the well balance justifies that you continue to hold it.
Rule Two: Address Concerns Over Production Rates
Even if the price of crude oil is rising, we have to remember one thing about energy production…
A trust that is experiencing a falling extraction level from its wells will result in a parallel atrophy in royalties. Often, this is as much a region- or basin-wide consideration as it is a field-specific one.
When there are broader declines in overall production across a basin, the exact wells from which a trust receives royalties will rarely be going up.
Rule Three: Review the Financials
Even if everything else is positive, an investor must always review a trust's market cap and liquidity. Remember, some of these trusts are very small in terms of market capitalization.
The trust returning 23.4%, for example, also spiked in price over 100% between mid-October and mid-November. But it only has a market cap of $25 million.
Any trading volume would then serve to distort the market price. Other trusts experience such infrequent trading that you run the risk of experiencing a liquidity problem when trying to sell shares. Most of these shares are held as long-term investments by parties (often partners) interested in securing only a substantial annual dividend.
Fortunately, you will not need to worry about any of the above. I will continue to monitor the trust scene for you and make recommendations of those shares likely to provide both value appreciation and healthy dividends.
That should bring our portfolio into the "sweet spot" as well. 
The Best Way to Play the MLP Field
The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) has been part of our portfolio since the very beginning.
And for good reason…
This exchange-traded note (ETN) provides a way strategy to invest in the performance of the Master Limited Partnership (MLPs) sector's interest returns (i.e., dividends) by replicating the Alerian MLP Index (AMZ).
That index, in turn, tracks the performance of MLPs involved in midstream operations.
And if you've been reading almost anything I've said recently, you know the midstream is just where we want to be investing.
Now any ETN or ETF (exchange-traded fund, which attempts to do the same thing as an ETN, except it reflects stock performance rather than return) carries a management fee – usually indicated by the "net of expenses" phrase in the prospectus.
This means whatever gain the investor realizes from an ETN or ETF is always less than the underlying shares or indices.
Still, even with such a difference, they are much more convenient than having to invest individually in each of the underlying stocks.
But there is one concern.
Are Parallel Profits Good Enough?
AMJ is representative of the typical exchange-traded instrument structured to parallel an index.
It does not represent the universe of possible underlying shares – in this case, all MLPs. It only reflects the composite of the Alerian MLP Index upon which it is based.
And that has led to two departures for investors to consider – one utilizing a different MLP index as its foundation and the other attempting to provide an alternative weighting of the Alerian MLP Index.
Both seek a greater return than AMJ.
Recall that MLPs transfer all profits to the partners, bypassing corporate taxes.
Equity issuances based upon them, therefore, must provide that portion of profits to shareholders based on their percentage of ownership via dividends.
In addition, the services by midstream activities – e.g., gathering, feeder and transport pipelines, terminals, storage facilities, fractionating, and initial processing – likewise offer the opportunity for value appreciation.
Both crude oil and natural gas require these applications, with the midstream components assuming more decisive importance as overall production increases.
AMJ and the index upon which it is based is weighted more heavily toward natural gas.
This is due to the simple reason that MLPs operating in the natural gas industry are more plentiful than their oil counterparts.
This is especially true in the all-important pipeline sector. That is why I have been tracking several other options for us....
Let's Consider the Two Strongest Alternatives
An example of the first alternative is the Cushing MLP Total Return Fund (NYSE: SRV).
SRV is a closed-end fund established by Swank Capital. It began trading on September 4, 2007, and is actually older than AMJ (which began trade on June 2, 2009).
The fund invests at least 80% of net assets in energy infrastructure MLPs, but has a balance among oil and gas that is weighted differently than the underlying shares represented in the Alerian MLP Index.
The second alternative attempts to provide a better return from the Alerian MLP Index than does AMJ. Our example also has the longest name of any of the 1,400-plus shares on my collective tracking lists: the UNS ETRACS 2X Monthly Leveraged Long Alerian MLP Infrastructure Index ETN (NYSEArca: MLPL). MLPL began trade on July 10, 2010.
Here, the objective is actually to provide twice the return using the same base index as AMJ.
The table below summarizes how these three options compare as of open on January 17, 2012.
August 8, 2011, as you probably remember, is the bellwether trading date against which I base comparative evaluations in subsequent sessions.
In this trading session, the S&P lost almost 7% of its value.
So that date remains the base I use in a range of comparative analyses of subsequent value changes.
Now MLPL does provide a dividend level twice as large as AMJ. Its share value improvement since 8/8/11 is actually more than twice that of AMJ, while the current monthly result is about the same.
SRV also has a much higher dividend than AMJ and a better monthly performance, but it lags in the medium-term perspective (since 8/8/11).
However, it's the last two columns that hold the most instructive numbers.
AMJ carries more than $152 billion in market cap, almost 500 times that of SRV, and almost 2,000 times that of MLPL.
AMJ also trades almost seven times the daily volume of SRV and over 18 times more than MLPL.
Both of these are fundamental liquidity considerations. And this is important, given the relatively recent introduction of all three – SRV has been around for only four years and a quarter, AMJ for slightly more than 2.5 years, and MLPL for only about a year and a half.
To be a successful investor, you must be nimble. And to be nimble, you need to be able to sell shares on your own terms, at your selected price and time.
AMJ provides that.
On paper, MLPL may look more enticing. But sustaining that level while still providing a desired flexibility of trade for a stock having an "ultra micro" market cap (my classification for those under $100 million) and much lower trading volume carries some concern during periods of high volatility.
And "high volatility" is the name of the game right now.
Meanwhile, while SRV is larger and carries a higher trading volume than MLPL, share value is not performing as well in comparison to AMJ.
Therefore, I am not recommending either MLPL or SRV at this time. Of course, either one serves a purpose for the more aggressive investor seeking to counterbalance value appreciation with an income component.
Yet for our purposes, both require a longer time line for analysis, and I will continue to keep an eye on them. If there is a change, I will certainly let you know.
But at present, AMJ remains the best option to play the MLP field.
The Fate of the Keystone Pipeline
On January 19, the Obama Administration decided not to approve the Keystone XL pipeline.
This introduced another political firestorm into an already uncertain market.
If there is one subject that will come up during the Presidential debates this year, it is the availability of energy. Energy is central in everything that happens in the U.S. economy.
And Keystone is designed to transport up to 700,000 barrels of oil a day from Alberta to refineries on the U.S. Gulf coast. It represents a new North American initiative to reduce reliance on Middle Eastern imports and would create thousands of new jobs.
It also would spur new investment opportunities.
Growing Environmental Concerns Environmental concerns
have been raised over greenhouse gas (GHG) emissions and the pipeline's passage through ecologically sensitive areas.
Some of the environmental issues can be resolved by simply moving the pipeline route. But others are more difficult to counter.
The crude involved is very heavy oil, primarily from the Athabasca oil sands and similar deposits in Alberta and Saskatchewan. That raw material requires upgrading to synthetic oil and that is far more environmentally invasive than processing lightweight crude.
Therefore, proponents of the pipeline can't resolve environmental concerns simply by changing the route.
And then there is the added problem of a current U.S. statute, namely, §526 of the Energy Independence and Security Act (EISA) of 2007. This prohibits federal agencies from procuring (which includes importing) synthetic fuel unless its life-cycle greenhouse gas emissions are less than those for conventional petroleum sources.
The "life-cycle" considers the GHG emissions throughout the extraction and processing of the oil – that is, from the time it is taken out of the ground, through its transport and upgrading, to its delivery to a refinery (and its emissions there).
When originally passed, this section was designed to benefit domestic American producers over the import of heavier and higher sulfur content foreign oil. It was never intended to create a problem with our neighbors to the north. Unfortunately, we sure have a problem now.
The Future of Canadian Imports
Congress must change this legislation or the Alberta oil flow into the Lower 48 is not possible by statute.
It must also enable a full opportunity to evaluate the environmental impact of the project. To put pressure on Obama, and require a decision prior to the election, Congressional Republicans had insisted upon a presidential decision within 60 days. But this was a flawed strategy.
Everybody understood that the required environmental evaluation could not be completed in so short a time. As a result, the president was able to reject Keystone while still saying (as he made a point of doing with Canadian Prime Minister Stephen Harper) that the project could be accepted later.
That later time will depend on one key number.
The price of crude.
Oil prices are going to increase. Assuming the EIA after the revision in law provides no impediment, primary environmental opposition will have no substantive basis upon which to proceed.
Ultimately, Keystone will receive approval one day… regardless of what happens in Washington. View the full story at www.OilandEnergyInvestor.com.
What a difference a month makes!
The EA Portfolio has given notice that it will be moving decidedly higher.
Through close of trade on January 18, 85% of those shares held for at least one month (33 of 39) were up month-on-month.
Only 33% (11 of 33) had gained in the previous month.
However, it was the strength of the advance that was most impressive.
The entire Portfolio posted an average gain of 11.6%, with 28 shares bettering the NYMEX crude oil price (the West Texas Intermediate benchmark) for the month, while 26 performed better than both NYMEX and the S&P.
Last month, 20 had bettered NYMEX (only because of a very weak overall month for crude oil prices), but only 12 had managed to perform better than the S&P.
The average share last month had registered a decline of 3.8%.
This time around, seven shares posted monthly gains of more than 21%.
Heading the list was oil tanker company Frontline (NYSE: FRO) with a very impressive 42.77% spike, followed by oil and gas producer Magnum Hunter Resources (NYSE: MHR; 36.50%), liquefied natural gas exporter Cheniere Energy (AMEX: LNG; 33.67%), Berry Petroleum (NYSE: BRY; 30.76%), Western Refining (NYSE: WNR; 29.73%), Clean Energy Fuels (NasdaqGS: CLNE; 24.85%) and Energy XXI (Bermuda) (NasdaqGS: EXXI; 21.07%).
Double-digit gains were also posted by 10 others. Marathon Oil (NYSE: MRO) rose by 20.6% last month. Developer Northern Oil & Gas (AMEX:NOG) jumped 20%. Cheniere Energy Partners (AMEX: CQP) rose 17.6% after confidence in its international natural gas prospects continues to grow.
Refinery and marketing specialist Valero Energy Corporation (NYSE:VLO) saw a 15.9% jump. Kodiak Oil & Gas (NYSE: KOG) increased 15.1% as the company aims to expand its oil and gas operations in western energy basins. Crosstex Energy (Nasdaq: XTEX) saw shares appreciate by 14.8%.
The United States Oil Fund (NYSE: USO) spiked 13.3% as the price of light sweet crude rose over the month. MLP favorite Martin Midstream Partners (Nasdaq: MMLP) rose 12.4%. PowerShares Global Coal ETF (Nasdaq: PKOL) increased by 11.8% over the month. Finally, the SPDR S&P Oil and Gas Equipment Services ETF (NYSE: XES) rose 11.3%.
Only six had negative results.
The weakest was Petroleum Development (NasdaqGS: PETD), down 10.29% for the month. PETD is involved in both oil and natural gas production and marketing.
However, it specializes in the purchase and resale of natural gas from other producers, while maintaining its own interests and/or operating position in some 5,000 Rocky Mountain and Appalachia-located wells. The over 30% decline in gas prices hit the PETD business model hard.
A similar, although less severe, loss also resulted for other Portfolio members, once again because of the acute skid in gas prices.
These included natural gas liquids (NGLs) and major propane provider Inergy LP (NYSE: NRGY, -8.07%), along with leading gas producers Chesapeake Energy (NYSE: CHK; -2.63%) and Consol Energy (NYSE: CNX; -2.65%).
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Energy Advantage is a special publication of Money Map Press that provides its subscribers with unique opportunities to build and protect wealth globally, under all market conditions. We believe the advice presented to subscribers in our published resources and at our seminars is the best and most useful to global investors today. The recommendations and analysis presented is for the exclusive use of subscribers. Subscribers should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not secure future results. Recommendations are subject to change at any time, so subscribers are encouraged to make regular use of our website,
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