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Valero Energy paid Chevron $1.75B for the Pembroke refinery in Wales. The 270,000-bpd refinery – one of western Europe's largest – will be the first major European outpost for Texas-based Valero. The purchase includes ownership interests in four major product pipelines and 11 fuel terminals, a 14,000-bpd aviation fuels business, and 1,000 Texaco-branded wholesale sites. Chesapeake Energy and its Norwegian partner Statoil estimate they will drill as many as 17,000 horizontal natural gas wells in the Marcellus Shale over the next 20 years. Thanks to NRG Energy, the 2011 Houston Livestock Show & Rodeo will be supported by 100% renewable energy for the first time in its 79-year-history. NRG subsidiary Reliant Energy has purchased renewable energy credits in Texas to meet the estimated electricity usage during the full 20 days of the Rodeo. Energy Uncertainty Breathes New Life into Coal Before the eruptions from MENA, it was a foregone conclusion that coal would be declining as a fuel for power generation in the U.S. For the full story, visit www.OilAndEnergyInvestor.com |
Crisis Investing:
My Five Rules for Profiting in
A Rapidly Changing Energy Market
Dear Energy Advantage Subscriber,
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Regional uprisings all over the Middle East and North Africa (MENA)… the unfolding nuclear crisis in the aftermath of the earthquake and tsunami in Japan…
These are just the latest episodes signaling the new world energy order.
Both MENA and Japan are still seen by many analysts as interruptions of – or aberrant departures from – some conceived "normal" market situation.
They are certainly crises, and they are certainly extreme. You don't have a revolution or a potential nuclear meltdown every day of the week.
Yet these events are more than simply outliers.
What is happening these days in Egypt, Libya, Bahrain, Yemen, and yes, even Japan are very visible manifestations of pervasive elements impacting the energy sector. These are not the causes but the effects of underlying dynamics rippling through global energy prospects.
There has not been a "normal" for some time.
But don't let that worry you. The profit picture has never looked better…
Volatility Is the New Standard
(and We're Ready for It)
It can destroy well-honed investment strategies. It can make for very frustrating developments for those still expecting a calm approach to oil pricing or energy availability.
But volatility can also dramatically improve your returns, if you understand it and utilize it as part of a well-thought-out (and flexible) investing approach.
As you already know, harnessing this volatility is at the root of the Energy Advantage approach.
The instability is not going to lessen, nor is it some short-term manifestation. It is now built into how energy is produced, distributed, and traded.
That means companies that fail to factor the rapidly changing volatility into their targets and plans are violating the first principle of risk management – the one that counsels to prepare for the unexpected and minimize its impact.
Factors considered more traditional are still important. If there were any doubt that geopolitical risks or Mother Nature could affect energy, recent events have assuredly answered that question.
Then again, other factors I regularly review – foreign exchange rates, stockpiles, industrial demand, supply quality, mergers & acquisitions – also are seen as major contributors to oil pricing changes.
The overarching element, however, has become volatility.
Now, some of this volatility is closely associated with dramatic events, questions of supply, a weakness in the dollar, and those other "traditional" factors. Yet the volatility in the trading of oil itself, as well as the market's approach to other energies, is taking over as the primary price mover.
Put simply, we no longer need a Gaddafi or a tsunami to trigger volatility in the oil market.
It is already here. And it's here to stay.
I advise approaching this new world energy order with the following five "rules" in mind.
Rule No. 1: Don't Panic
Much of the recent decline in energy stock prices was propelled by investors bailing out.
Yes, intense volatility will make determining market pricing for product and valuation of companies difficult. But it will also provide significant buying opportunities.
Remember, despite the riots in the streets or video of helicopters dropping water on a reactor, the overall dynamics of the energy markets have hardly changed.
Prices will still be going up.
Rule No. 2: Expect "Fat Tails"
As volatility increases, deviations from standard results will increase as well, both in frequency and degree.
This means that more of the major change in prices will be found in infrequent but substantial movement into trading spreads at the more extreme ends of a trading range.
These are usually called "fat tails" – so named because they are wider curves more distant from the center (and they look like somebody drew a tail on the plotted curve).
Look out for these fat tails – and embrace them. In volatile situations, they will signal some significant opportunities.
Rule No. 3: Watch the Energy Balance
Just because there is a crisis hardly means people will stop needing energy.
But there is one overriding reality: Energy sourcing that is made more problematic by an event of market difficulty will simply be replaced by other sources or types.
For example, in the wake of Japan's nuclear crisis, Germany immediately powered down seven nuclear plants – pending safety checks that will last months – and China halted approvals for new nuclear projects. Too many safety measures and delays may make nuclear energy more expensive, less viable, and knock it out of the running altogether. And already, new energy sources are stepping in to take its place in the power generation mix.
The reason behind a spike in volatility will largely determine how one needs to react to it.
Positioning our strategy ahead of this curve allows us two primary advantages:
- The ability to buy into the beneficiary early; and
- A rising flexibility in reacting to market trends.
The important observation here is an obvious – yet often overlooked – one. Investments in energies are not a separate universe from investing in energy-related companies.
Some market volatility will initially paint with a broad brush, causing value destruction all across the board. But the companies that are well positioned in those energy areas benefiting from balance needs will lead the market back up (and up…).
Which energy type fulfills which energy need may change, but the relationship between energy and companies does not. Market transitions in how demand is satisfied must still reflect the dynamics of the market itself. And that translates into a need to identify the connection between market elements and company strategies.
That will result in an early identification of longer-term plays. (See this month's new stock recommendation in the next story.)
Rule No. 4: Trade into the Volatility… Not Away from It
Rising volatility often creates a herding effect.
Despite the fact that the underlying fundamentals remain essentially the same, investors nonetheless rush away from or toward the initial visible manifestations of the volatility's impact.
They are reacting to appearances rather than genuine opportunities.
Now with all the lemmings running in one direction, attempting to move against the tide is self-defeating. Do not trade the results; trade upon the volatility.
Frankly, this does not work in all market sectors… but it does in energy.
That's because, at the end of the day, energy must be secured and used. One may exchange one kind of energy for another. But the world cannot work without it, and the market cannot avoid it.
Additionally, in the case of futures contracts in oil, it is also an asset in its own right. That introduces a further dimension – one of liquidity usage.
The volatility will signal where the profits are going to come. Running away from it only ensures somebody else realizes the return.
If investors want to bury their money in the backyard, why did they get into the market in the first place?
Rule No. 5: Biggest Is Not Always Best
When it comes to what stocks to pick, I often marvel at the suggestions made by bloggers and the advice from analysts showing up on TV. Invariably, during periods of increasing volatility, it's a knee-jerk reaction to go with the big boys.
Now, major oil companies or power producers do provide enough of a diversified approach up and down the product stream to provide some measure of return…
But I need to make this as clear as I can.
The most substantial returns to the investor will come from smaller companies having three strengths:
- An established position in the rising market component;
- A well-focused approach with documented prior success in implementing it; and
- A firm target objective.
For every Exxon Mobil Corp. (NYSE:XOM) or Chevron Corp. (NYSE:CVX), there will be dozens of smaller companies providing much stronger returns. (Again, see the next story.)
This kind of volatile market requires a longer-term perspective, recognizing the significant upward movement taking place in energy, but is still able to provide a nice ongoing return in choppy times.
And that is the reason I started Energy Advantage. 
The LNG Revolution Is
Officially Underway
And shares of the little company leading the charge
trade for less than $9 apiece (for now)…
In the wake of the tragedy in Japan and the ensuing nuclear crisis, the credibility of nuclear power as an alternative energy source has taken a direct hit. And that has prompted serious discussion worldwide about liquefied natural gas (LNG).
Normally, the ability to transport gas is limited by the extent and direction of pipeline systems. This is the single largest drawback to using natural gas.
But LNG overcomes that limitation.
With the LNG process, natural gas is first cooled into a liquid state, then transported – just about anywhere in the world – via tanker, and finally "regasified" at a receiving terminal for injection into pipeline delivery systems.
In addition to providing a new mechanism to bring volume where it's needed, LNG also introduces the ability to establish local spot markets with greater impact on both pricing and availability.
That's good for everybody. But it's especially good for us.
Indeed, LNG – and the little company I'm recommending this month – holds the key to turning a glut of gas burdening the North American market into advancing profits…
The U.S. Is Making Its Move
Even before the nuclear scare in Japan, there have been moves in this direction for some time.
With abundant unconventional gas in North America (from shale gas, coal bed methane, and tight gas), the LNG option has been put forward as a way to export gas and better utilize an expected surplus, while at the same time expanding global markets.
Canada made the first such move – turning the now-under-construction Kitimat LNG terminal on the British Columbia coast from an import facility to an export facility. When it's completed in 2014, Kitimat will take shale and tight gas from the huge Horn River and Montney Basins and turn it into LNG export bound for Asia (where it is perhaps needed most).
In the U.S., the prospects are certainly good for doing the same.
Cove Point, Maryland – the largest LNG receiving facility on the East Coast – is regarded as a major source for LNG exports headed overseas.
In Europe, LNG from Qatar has already established a local spot market providing price flexibility against conventional imports from Russia, and the European Union is keen to bring in more.
Cove Point would be a perfectly positioned export venue for production from the Marcellus Shale covering much of Ohio, West Virginia, Pennsylvania, and lower New York.
Of all the basins, the Marcellus is likely to produce the greatest volume at the lowest overall operating cost. That is a formula certain to intensify drilling activity. And surplus from the Marcellus will be weighing down the market gas price here for some time.
The initial move for the investor, however, comes from further south in the country...
A New Wave of Exports
Houston-based Cheniere Energy Inc., with the very appropriate stock symbol (AMEX:LNG), is leading the drive to export LNG from the U.S. market... and propelling investors into a very promising and expanding return.
Analysts have connected the company with the prospect of Japan's problems directly contributing to LNG prospects. And for good reason.
Cheniere is already exporting LNG from the U.S.
Its Sabine Pass terminal, straddling the Texas border in Cameron Parish, Louisiana, has entered into several major bi-directional arrangements. These allow for both the importing and exporting of LNG.
Already this year, the company has signed three memoranda contemplating the export stream. And that is where we are going to be riding a new wave toward some serious returns.
An Expanding Facility, Major Foreign Contracts
Cheniere will be expanding its terminal at Sabine Pass.
Current plans call for four new modular LNG trains (production lines), each with a peak daily processing capacity of up to about 700 million cubic feet (19.8 million cubic meters) of gas and an average LNG production capacity of 3.5 million tons a year. The company will sign initial contracts for at least 500 million cubic feet a day on each of the four trains.
Well before construction gets underway, however, the contracts are lining up.
In the past two months, Cheniere entered into three major memoranda of understanding with heavy foreign LNG users – EDF Trading on January 20, Sumitomo on January 27, and Endesa and Enel on February 17.
Here's a bit about each company:
- London-based EDF Trading is among the largest commodity traders in the world.
- Tokyo-based Sumitomo Corp. (OTS:SSUMY) is one of the major integrated worldwide trading and investment companies, with operations in more than 60 countries.
- Endesa SA (OTC:ELEZF) is the leading Spanish electric utility and the top-ranked private electricity multinational in Latin America. It operates in 10 countries and has a customer base of over 24.6 million people. It also holds a position as a rapidly rising natural gas operator.
- Enel (OTC:ENLAY) is Italy's major electricity provider and the second-largest natural gas distributor in the country. It provides power and gas to more than 61 million customers in 20 countries. (Both Endesa and Enel are part of the Enel Group.)
This strategy is both straightforward and effective.
Note that Cheniere has paired up in parallel strategies with two of the major traders of natural gas in the world and two of the major end users. The LNG exports coming out of Sabine Pass, therefore, are not dependent upon the activities in any single market or with any single trader.
Two Signals That Now's the Time to Jump In…
The company is striking first in what is certain to be a rapidly accelerating market.
And early results are quite encouraging.
Cheniere had internally estimated its first round of international deals would provide an aggregate of about seven million tons of LNG capacity commitments per year. Yet by the end of February, the memoranda with EDF, Sumitomo, Endesa, and Enel raised the minimum level to 9.8 million tons annually.
And there is plenty more demand globally – along with domestic gas available in the U.S. for processing – to increase the company's LNG totals.
Cheniere is now making it onto analysts' strong "buy" lists. The stock has a YTD gain of 45% but has declined almost 18% in the last several weeks. That makes now a very good time to jump in...
Another important element signals that now is the time to move on Cheniere.
The company's put-to-call option ratio indicates that a further upward push will be coming shortly.
There is considerable volatility built into the near-term projections on price movement, so I expect there to be some hefty daily price movements in both directions.
The overall trends, however, are clearly up.
Action to Take: Buy Cheniere Energy Inc. (AMEX:LNG) at market and use a 30% trailing stop to protect your principal and your profits.
Markets have weathered some nasty instability this month, as the double whammy of continued political unrest in MENA (Middle East / North Africa) combines with the aftermath of the Japanese triple disaster (earthquake, tsunami, and fear of multiple nuclear meltdowns).
Volatility remains the driving force. Investors remain wary. And the energy sector has found itself a lightning rod… for one simple reason. Both MENA and Japan have an immediate and direct impact on energy.
The former holds potentially major volumes of oil that could be taken off the market if unrest intensifies throughout the region. Meanwhile, the latter has done more to undermine the nuclear option than anything since the Three Mile Island crisis in 1979.
Until March 17, the broad market experienced a partial meltdown of its own. During the first 12 trading sessions of the month, the S&P 500 declined 5.3% – falling 4.8% over just five sessions between March 10 and 16. The whipsaw effect has moved stocks, especially in the energy sector.
But in the face of it all, the Energy Advantage Portfolio is holding its own.
On the down side, we did have to pull the plug on a holding for the first time.
Toshiba Corp. (OTC:TOSBF) was in our Portfolio because of its leading position in mini-nuclear reactors. These self-contained operations require no maintenance and are not subject to the dangers of larger reactors. This will actually be a very lucrative market once the current reactor crisis is over.
But the current problem with Toshiba is where it is located – it is headquartered in Tokyo.
This is a top-shelf electronics provider, and the company's main line of LCD screens depends on its Japanese production operations, as do several other components. Those will be closed for the near future. Even when they do open again, they will be held hostage by power shortages rippling across Japan.
Still, Toshiba remains a very good play, so we will return to it once the present crisis is past.
The Portfolio is structured so that not all shares will move in the same direction in an unsettled market. Despite the overall downward pressure, some of our selections are highlighting alternative choices in the energy sector and strong positioning.
It is not unexpected that companies emphasizing both North American production and reliance on natural gas would see upside advantage as soon as trading settles. Indications are emerging that such a settling will take place – but we are just not there yet.
Nonetheless, CONSOL Energy Inc. (NYSE:CNX) and Chesapeake Energy Corp. (NYSE:CHK) are performing as expected.
The Japanese disaster has produced a renewed interest in non-nuclear alternatives, while MENA improves the attractiveness of fuel sourced from North America. CNX benefits from both, continues to be the best positioned between unconventional (shale gas) production and high-grade coal, and is up 18% for the month.
Meanwhile, CHK remains the largest independent gas producer in the U.S. market with a strong balancing move into North American conventional oil and oil shale. It is up 11.5% for the month.
Other strong performers during an otherwise disquieting month were the PowerShares DB Energy Fund (NYSEArca:DBE) and Baytex Energy Corp. (NYSE:BTE).
DBE is an exchange-traded fund (ETF) allowing us to play the difference between New York- and London-traded crude futures contracts, as well as in futures for several major oil products. As the MENA problems play out differently in the European and American markets, it has gained 9%.
BTE occupies some choice oil sands and oil shale territory in western Canada. The company stands to benefit from a "retreat to security" in terms of the geographic sourcing of oil. It is up 7% for the month.
Our two other ETFs, which emphasize smaller North American production companies, have reflected the intense pressure on investment strategies as a whole. Both contain companies with smaller average market caps. And such companies, from whatever market sector, tend to be the first adversely affected by downward slides (like those experienced at the beginning of March).
The Guggenheim Canadian Energy Income Fund (NYSEArca:ENY), representing Canadian unconventional producers, is even for the month, while the Wildcatters Exploration & Production Fund (NYSEArca:WCAT), which includes smaller U.S. oil and gas producers, was down 2%. Both ETFs include companies that will benefit from their location and the overall increasing prices for crude, as indicated by their overall performance. (ENY is up 45% and WCAT up 53% since the Portfolio was created eight months ago.)
The remaining members exhibited a range of reasons for weakness.
Our two leading performers over the life of the Portfolio – Schlumberger Ltd. (NYSE:SLB), with a 64% overall gain through the beginning of March, and Valero Energy Corp. (NYSE:VLO), up 72% through the same period – were both down 8% for the month.
As the world's largest oil field services company, SLB has exposure to several MENA hotspots, including Libya. VLO is America's largest independent refinery. As concerns mounted in the MENA countries and crude prices increased significantly in a short timeframe, refinery shares have generally come under pressure. That's because the cost of crude oil is the single greatest factor in refining expenses.
Still, both SLB and VLO are the best performers in their sectors, have the strongest balance in capacity and location, and will be improving once the dust settles.
NRG Energy Inc. (NYSE:NRG) was down slightly more than 1% for the month. The company has received its loan guarantee for the construction of the major South Texas reactor facility – a project that is likely to go forward despite renewed concerns over nuclear power. However, NRG is also significantly into generating electricity from solar, wind, geothermal, and natural gas. Its broad diversification in sourcing means that it will be one the most stable performers in the generating sector, whatever the crisis du jour.
The PowerShares Global Coal Fund (NasdaqGM:PKOL) is our ETF in global coal, especially the strong Asian market.
Unfortunately, that market is experiencing current difficulties for two reasons: (1) the impact of Japanese industrial contraction; and (2) the abrupt cutback in metallurgical coal because of the cut in Japanese steel production.
PKOL declined 3% for the month. But it will still find some positive offset from Chinese needs, regardless of how quickly a normal power grid returns to Japan.
While U.S. natural gas is a beneficiary of both crises playing out elsewhere in the world, the pricing dynamics continue to put contracts at below $4 per 1,000 cubic feet (the NYMEX futures contract). That, combined with the approaching end of the winter heating season (traditionally set at March 31), prompted a 4% monthly decline in the JPMorgan Alerian MLP Index (NYSEArca:AMJ).
AMJ is our only exchange-traded note (ETN) and addresses gas pipeline master limited partnerships (MLPs). As an ETN, however, it also provides a welcome dividend (currently above 5%).
Our final position is Satcon Technology Corp. (NasdaqCM:SATC). It has declined 11% since the beginning of March.
We reintroduced the stock after it reached its 30% trailing stop because of the company's leading position in the inverter market, technology that allows much higher efficiency in harvesting photovoltaic energy (with applications to wind turbines as well) and connecting to grids.
It is currently under two weights. First, as a small cap, it's subject to downward moves in the market as a whole. Second, it has major contracts coming on-line, but not for several months.
Nonetheless, SATC is going to be a solid performer once the current crisis is overcome. And trading at about $3.20 a share, it is already oversold.
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Energy Advantage is a special publication of Money Map Press 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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