Thursday, February 23, 2012
Wednesday, December 21, 2011
How to play the coming LNG boom
Many readers are familiar with recent changes in the natural gas situation. To recap: new drilling techniques (fracturing and horizontal drilling) have unlocked an enormous new source of gas. The traditional markets for natural gas have not been able to absorb the supply, and much of the additional gas has gone to lower-valued uses such as electrical generation. Moreover these same drilling techniques are now being used for oil, and are producing copious natural gas as a byproduct. The surplus is probably baked in for several years.
While this is happening in the US, the situation in the rest of the world is much tighter. Gas from older exporters such as Russia and newer ones like the Mideast and Australia are priced against oil. The final cost to the consumer may be double or triple the US price. There are many shale deposits in Europe and Asia as well, but extraction is many years off.
I can think of a few ways of investing in this...
First, it is clear to me that there will be a large and growing demand for the higher-tech drilling needed to carry this out. For the next few years, this will be in the US, but eventually it will go worldwide. The problem for investors is that much of the technology is owned by gas producers, who are suffering from the very gas glut they created. Names in the equipment and service space include Baker Hughes (BHI), Halliburton (HAL) and Helmerich & Payne (HP). Some of these stocks have been hit pretty hard since August.
Second, it is likely that the US - world price discrepancy will be arbitraged. Some think this will occur as nontraditional markets for gas are developed in the US (think vehicle fuels). I do not agree with this. The cost of the infrastructure modification is just too great. Instead, it is more likely that the US becomes an exporter of gas. Several companies are starting to look at this. One, Cheniere energy (LNG) actually has signed contracts with two overseas buyers. I have invested in the associated MLP (CQP). This has a 10% return backed by an associated pipeline. If the LNG export plan is successful, it would be a huge upside.
Another winner from the US - world arbitrage is likely to be LNG tanker owners. There is currently an overcapacity of oil tankeers, but LNG is a different animal. I like TeeKay (TK) and the associated MLP TeeKay Partners (TGP).
While this is happening in the US, the situation in the rest of the world is much tighter. Gas from older exporters such as Russia and newer ones like the Mideast and Australia are priced against oil. The final cost to the consumer may be double or triple the US price. There are many shale deposits in Europe and Asia as well, but extraction is many years off.
I can think of a few ways of investing in this...
First, it is clear to me that there will be a large and growing demand for the higher-tech drilling needed to carry this out. For the next few years, this will be in the US, but eventually it will go worldwide. The problem for investors is that much of the technology is owned by gas producers, who are suffering from the very gas glut they created. Names in the equipment and service space include Baker Hughes (BHI), Halliburton (HAL) and Helmerich & Payne (HP). Some of these stocks have been hit pretty hard since August.
Second, it is likely that the US - world price discrepancy will be arbitraged. Some think this will occur as nontraditional markets for gas are developed in the US (think vehicle fuels). I do not agree with this. The cost of the infrastructure modification is just too great. Instead, it is more likely that the US becomes an exporter of gas. Several companies are starting to look at this. One, Cheniere energy (LNG) actually has signed contracts with two overseas buyers. I have invested in the associated MLP (CQP). This has a 10% return backed by an associated pipeline. If the LNG export plan is successful, it would be a huge upside.
Another winner from the US - world arbitrage is likely to be LNG tanker owners. There is currently an overcapacity of oil tankeers, but LNG is a different animal. I like TeeKay (TK) and the associated MLP TeeKay Partners (TGP).
Finally, for those with a longer term horizon, companies with a position in European shale acreage are interesting. Western Europe will probably be wrangling over environmental issues for years, but the eastern Eur countries will go quicker. Poland is starting right now. Companies there include Marathon (MRO), Nexen (NXY) and the small cap San Leon (London SLE). Shell is in Ukraine. Another way to play this would be to short Gazprom (OGZPY), the main Russian exporter.Of course, the political situation in Russia will likely overwhelm other fundamentals.
Tuesday, August 23, 2011
Long Cocoa
Here's why...
1. Weather in the West African cocoa zone has gotten quite dry. It was very wet for several months, but no more. In fact, satellite photos show suprisingly low levels of vegatation. This has happened awfully fast, so the satellites may be wrong or not getting the whole picture. Nonetheless, it is a big change.
2. Last week's Committemnts of traders had managed money net short cocoa. This is very unusual. The outside money normally wants to be long, and this is especially true for markets which they don't fully understand, like cocoa. I have gone through the records, and a short MM position has always let to a rally.
1. Weather in the West African cocoa zone has gotten quite dry. It was very wet for several months, but no more. In fact, satellite photos show suprisingly low levels of vegatation. This has happened awfully fast, so the satellites may be wrong or not getting the whole picture. Nonetheless, it is a big change.
2. Last week's Committemnts of traders had managed money net short cocoa. This is very unusual. The outside money normally wants to be long, and this is especially true for markets which they don't fully understand, like cocoa. I have gone through the records, and a short MM position has always let to a rally.
Libya and the mid-Continent Refiners
To show how things are so completely interrelated, the success of the revolution in Libya is responsible for the relative decline in the mid-US refiners. The "reasoning" is this : Libya will come back on stream; world (Brent) prices will come down and be equalized with WTI; and the refiners will lose their edge.
All this is plausible but awfully premature. Brent - WTI will not get back to normal levels until pipelines are built that can move the oil surplus in mid-North America to the coasts. BTW, the surplus is getting bigger with continuing drilling in "oily" shale structures. For now, the prospective pipelines are having a hard time getting financing (one was put on hold yesterday). So I'm using this as a chance to add to positions.
All this is plausible but awfully premature. Brent - WTI will not get back to normal levels until pipelines are built that can move the oil surplus in mid-North America to the coasts. BTW, the surplus is getting bigger with continuing drilling in "oily" shale structures. For now, the prospective pipelines are having a hard time getting financing (one was put on hold yesterday). So I'm using this as a chance to add to positions.
Thursday, August 11, 2011
Sold out of Barry Callebut
The dollar price of this stock has skyrocketed because of the increase in the Swiss Franc. I still love this company. Also the great weather in the African cocoa region means that their factories will be humming all year. Nonetheless, I don't like global macro plays. I don't believe I have any edge in this sort of thing. So I got out yesterday. It was a great trade.
What's that old saying about lucky vs. smart?
What's that old saying about lucky vs. smart?
Friday, July 29, 2011
The Mid-continent Refiners
I believe there is a significant opportunity in the US refiners. My list includes :
MPC The refining spinoff of Marathon Petroleum. This is my favorite.
CVI CVR Partners refining business. This also has a fertilizer component, which this blog has talked about extensively
SUN Sun Oil, which has recently spun off its coke business and is now more of a pure play.
The basic theory here is one of increasing US crude production between the Rockies and the Appalachians. Most of this is currently traditional oil. Over time an increasing percentage will be shale oil, as the technology of fracturing ever more viscous hydrocarbon improves. The result of this has been an oil "lake" in the nations's interior, somewhat similar to the natural gas "bubble" in North America. A result has been much lower prices in this region. Most of this blogs' readers have noticed this as the Brent - WTI spread. In fact, it is really the mid-US - rest of world spread. This has led to much lower input costs for refineries in this area.
Additionally, this is an out-of-favor industry. The prevailing theory is that US oil demand will fall over the coming years because of higher prices, lower growth and inroads from alternate fuels. This will make many refining assets surplus.
I don't buy this. As long as the low-priced crude is available, it makes sense to refine it. True, some of the refined products will have to be shipped to the east coast, reducing net backs. Still, the sum will be quite positive to the refiners. Also, it makes sense on a worldwide basis for US cat cracking to be used for export products to high gasoline growth parts of Asia.
-- more to come --
MPC The refining spinoff of Marathon Petroleum. This is my favorite.
CVI CVR Partners refining business. This also has a fertilizer component, which this blog has talked about extensively
SUN Sun Oil, which has recently spun off its coke business and is now more of a pure play.
The basic theory here is one of increasing US crude production between the Rockies and the Appalachians. Most of this is currently traditional oil. Over time an increasing percentage will be shale oil, as the technology of fracturing ever more viscous hydrocarbon improves. The result of this has been an oil "lake" in the nations's interior, somewhat similar to the natural gas "bubble" in North America. A result has been much lower prices in this region. Most of this blogs' readers have noticed this as the Brent - WTI spread. In fact, it is really the mid-US - rest of world spread. This has led to much lower input costs for refineries in this area.
Additionally, this is an out-of-favor industry. The prevailing theory is that US oil demand will fall over the coming years because of higher prices, lower growth and inroads from alternate fuels. This will make many refining assets surplus.
I don't buy this. As long as the low-priced crude is available, it makes sense to refine it. True, some of the refined products will have to be shipped to the east coast, reducing net backs. Still, the sum will be quite positive to the refiners. Also, it makes sense on a worldwide basis for US cat cracking to be used for export products to high gasoline growth parts of Asia.
-- more to come --
Thursday, June 30, 2011
Update and More on CALM
UAN This has been a huge winner, up 13% since I first put it on the blog. Today the USDA came out and said that corn acreage is higher than the market had thought. UAN products are sold mainly to grow corn. I took a little off. The stock may have a downturn now as the market reflexively reacts to lower corn prices. (Fertilizer companies are often used by equity traders to play the ag market). If so, I'll buy more.
BARN This is a little tricky. In Swiss Franc terms the stock has been steady. But the Franc has been gaining sharply. In US$ terms, the stock is up slightly since I put it on the blog and up 19% since Jan 1. The company's EU sales are being hurt by the strong Swissy. Still, I believe this is a good outsourcing and EM story, and I am holding on.
CALM This has gained 6% since I put it on the blog. The ample supplies of feeds in this morning's USDA report should be good for this name.
Some more info on CALM. The stock pays out 1/3 of earnings in dividend, rather than a fixed amount. Management thinks this makes more sense in a cyclical business like eggs. I agree, but I'm sure this is widely disliked by the average retail and long-only investor. This is the sort of thing I like to see: a non-typical but smart commodity-oriented decision.
The other thing about CALM is that it is very heavily shorted (38% of the float!). I'm not sure what this is about; there may be something I don't know about. One idea I have heard - that other egg producers are using it to hedge! Also, it seems the shorts have been in this since forever. If you have an account at a broker like Interactive Brokers, who allows you to lend out your stock, you can pick up about 8% annually on the borrow!
WORKING ON -- Marathon Petroleum (spinoff).
BARN This is a little tricky. In Swiss Franc terms the stock has been steady. But the Franc has been gaining sharply. In US$ terms, the stock is up slightly since I put it on the blog and up 19% since Jan 1. The company's EU sales are being hurt by the strong Swissy. Still, I believe this is a good outsourcing and EM story, and I am holding on.
CALM This has gained 6% since I put it on the blog. The ample supplies of feeds in this morning's USDA report should be good for this name.
Some more info on CALM. The stock pays out 1/3 of earnings in dividend, rather than a fixed amount. Management thinks this makes more sense in a cyclical business like eggs. I agree, but I'm sure this is widely disliked by the average retail and long-only investor. This is the sort of thing I like to see: a non-typical but smart commodity-oriented decision.
The other thing about CALM is that it is very heavily shorted (38% of the float!). I'm not sure what this is about; there may be something I don't know about. One idea I have heard - that other egg producers are using it to hedge! Also, it seems the shorts have been in this since forever. If you have an account at a broker like Interactive Brokers, who allows you to lend out your stock, you can pick up about 8% annually on the borrow!
WORKING ON -- Marathon Petroleum (spinoff).
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