Higher for Longer - AAII Washington D.C. Metro Chapter

Higher for Longer: How
to Profit from Sustained
High Energy Prices
Elliott H. Gue
AAII DC Metro Chapter
May 2012
The Big Picture
Credit Spreads
Seasonal Distortions
A Few Additional Uncertainties
• US and French elections.
• Fiscal Cliff
• Statistical distortions caused by autumn 2008
collapse in data.
• Oil prices remain elevated, natural gas prices
outside the US still high.
• US housing market is bottoming but not booming
and more foreclosures ahead.
• Europe far from healed.
US and ICE Natural Gas Prices
Supply is Too Healthy
Less Gas Drilling Won’t Help
More Efficient
Energy: Oil, LNG over US Gas
Teekay LNG Partners (NYSE: TGP); 7%
Teekay LNG owns: 20 liquefied natural
gas (LNG) carriers, 5 liquefied petroleum
gas (LPG) carriers and 11 oil tankers.
Long-Term Charters with an average
remaining duration of 16 for LNG, 15 for
LPG and 10 for tankers.
With charters fixed, TGP grows by
increasing the size of its fleet.
Day-rates for LNG carriers at near record
Surging international natural gas prices,
growing demand from Asia and Europe
Cheapest Gas is in Marcellus
Inergy Midstream (NRGM); 7.5% Yield
• 42 bcf of natural gas
• 1.5 million barrels of
natural gas liquids (NGLs)
• 90% of storage booked
under LT agreements
• 2.1 mbbl new NGLs
storage capacity due June
• MARC I Pipeline due July
Linn Energy (NSDQ: LINE)
Linn is an LLC, similar advantages to an
MLP but no General Partner or IDRs.
Most important regions are MidContinent (KS, TX, OK; 65% of reserves),
and Permian Basin (TX, NM; 18% of total
About 50% oil and NGLs, 50% natgas
Significant drilling upside in Granite
Wash, Permian and Bakken
Growth via Acquisitions, benefit from low
cost of capital.
Hedges covering 100% of natural gas
production through 2015, 100% of oil
through 2013.
US Royalty Trusts: SandRidge
Permian Basin Trust (PER)
• Royalty Interest in 16,800 gross
acres in Permian Basin of TX.
• 87% oil and 9% NGLs.
• 509 producing wells, 888
development wells before March
31, 2016
• 80% proceeds from existing
wells, 70% from new wells.
• Hedges and subordination
structure insulate from
commodity prices.
• 12-Month forward yield: 12.5% to
• Buy Under $26.
Other Royalty Trusts
• SandRidge Miss. II (NYSE: SDR) owns wells in OK and KS
Anadarko Basin 85% of expected revenues from oil.
• 80% of proceeds 67 existing wells, 70% from 206 development
• 10.5% yield in 2012, 15% in 2013.
• Pacific Coast Oil Trust (ROYT) 80% of proceeds from developed
properties, 25% from remaining properties, 7.5% from Orcutt
• Plans to develop wells is shallow, porous Diatomite (fossilized
algae) formation using cyclic steam injection.
• Whiting USA Trust II (WHZ) 90% of net proceeds from 1,300 gross
• Terminates 12/31/2021 or after 11.79 million bbl oil produced.
• 72% crude oil.
Deepwater Boom
Cobalt Energy (NYSE: CIE) announced
Cameia – 1 Discovery in Angola, opens up
new pre-salt field
Gulf of Mexico deepwater drilling coming
back sooner than expected.
Brazil’s Petrobras ramping up deepwater BZ
Shortage of ultra-deep rigs developing,
sending rates >$600,000/day
Rig signed at $648,000 per day in 2013
3 rigs due off contract in 2013
Yields around 8 to 9 percent
Possible MLP listing to offer even more yield
Pacific Drilling (PACD) – 4 drillships under
long-term contract, 2 new drillships for
delivery in 2013.
Pacific Drilling (PACD)
The Bakken Shale
A Few Shale Recommendations
• EOG Resources (EOG) – Well-diversified
producer with exposure to the Bakken Shale,
EagleFord Shale, Barnett Combo and Niobrara
• Oasis Petroleum (OAS) – 300,00 net acres in
the Bakken Shale, produces about 11,500
bbl/day and will spend as much as $850 m
drilling in 2012
US Silica (SLCA)
Value in Services and Coal
• US thermal coal prices to remain
pressured by weak gas prices.
• Met coal market more promising.
• Peabody Energy (BTU) strong met
and Australian exposure an
• Long-term value in PRB.
• Avoid US-focused services
companies like HAL and BHI.
• International business showing
signs of picking up.
• Benefits Schlumberger (SLB) and
Weatherford (WFT).