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Elliott Gue

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  • Solid As Granite: Chesapeake Trust Ramping Up Distributions [View article]
    Thanks for the comment. A couple of points to make. First, since the market is aware that Chesapeake Granite's (CHKR) distributions are likely to rise over the next couple of years (due to Chesapeake drilling another 118 wells by June 30, 2015) and then fall after that, there's no reason that the price of CHKR's units would plummet. The market would begin to price in production declines long before they actually occur. Also remember that as wells mature, production falls but it's typically at a fairly predictable pace so these wells will continue to be economic for years to come.

    Second, absolutely it's possible that the trust could continue to throw off distributions well in excess of their target levels. This could be due to a number of factors including higher-than-forecast oil and natural gas liquids (NGLs) pricing, better-than-expected production and/or a lower-than-forecast decline rate. In fact, this is already the case as CHKR's target distribution for the two month period from July 1 to August 31 was $0.54 and it actually paid $0.58. (By the way, it's targeted distribution for the fourth quarter is $0.68.)

    Third, it's important to remember that this trust was established with two mechanisms that protect investors from commodity price volatility. First, Chesapeake ( contributed hedges that cover roughly half of production through June 30, 2015. After that the trust is not permitted to take on new hedges. In addition, the trust, like many newer trusts, has a subordinated unit structure. What this means is that of distributions fall below a minimum level (roughly 80% of the target), the sponsor (Chesapeake Energy) forgoes a portion of its distributions in order to make public unitholders whole. This structure will end four calendar quarters after Chesapeake finishes drilling those 118 new wells. The point is that starting in 2016, the trust will become more sensitive to commodity prices so if prices rise it will have a more dramatic positive impact on distributions.

    I hope that helps to answer your questions.
    Jan 23 01:42 AM | 1 Like Like |Link to Comment
  • 7 Stocks On My Watchlist [View article]
    Thanks for the comment. I see no reason the stock couldn't retest its spring 2011 highs up close to $16.

    Even at that price, WWWW would only be trading at about 11 times 2012 earnings estimates.
    Jan 15 05:38 PM | Likes Like |Link to Comment
  • Energy Investing In 2012: How To Come Out On Top In Volatile Markets [View article]
    DO has a fleet of older rigs and a number of less capable midwater floaters. These rigs earn lower day-rates than deepwater and ultra-deepwater rigs. In addition, producers are showing a marked preference for newer rigs equipped with the newest, largest blow-out preventers and other equipment in the wake of the 2010 Macondo oil spill.

    My favorite name in the group is Seadrill (NYSE: SDRL), a stock that has one of the newest fleets in the industry and has contracted most of its rigs at attractive rates for years into the future. It also pays a significant 8.7 percent dividend supported by its significant backlog of rig contracts. I've written about it in more depth a few times on Seeking Alpha.

    Disclosure: Long SDRL
    Jan 12 03:53 PM | Likes Like |Link to Comment
  • My 2012 Investing Cheat Sheet [View article]

    Thanks for the comments.

    I agree with you that Iran is unlikely to actually make good on their threats. This isn't the first time they've made threats about disrupting the global oil market.

    The Persian Spring is an interesting idea though I think it's still unlikely. Like a lot of New Year's predictions I've seen one could make the argument that it's a possible improbable -- something that's unlikely to happen but might have a higher chance of occurring than the market expects.

    Hypothetically, if there is a Persian Spring, I just don't see a reason why the oil price would decline in the near to intermediate term . A more likely scenario is that Iranian supply is disrupted for a period of time, sending oil prices sharply higher in the near term. Longer term, if oil prices went too high, too quickly as was the case last year, you'd see a significant impact on the global economy and demand. That might ultimately bring down oil prices once again as it did early in the summer of 2011.

    I didn't catch the conversation you're referencing but one argument I have heard from some people is that a revolution in Iran would ultimately lead to a new government that's more friendly to allowing Western oil companies in to invest. As capital flows into Iran and the country's aging oil production and transport infrastructure is repaired, the idea is that it could increase production. I've heard some say it could eventually produce more than Saudi Arabia.

    I see that scenario as downright ridiculous for a number of reasons. First, Iran's major fields have not been produced properly for years and if a producer tries to produce a field too quickly or uses technology improperly it's possible to damage the field itself. Sometimes you will hear pundits talk about the size of Iran's reserves of crude. Reserves just aren't a particularly meaningful figure as they're just an estimate (especially in the case of Iran where reliable data hasn't been released in some time) and what really matters isn't how much oil is in the ground but how much of that oil can be produced and how quickly (bbl/day) it can be produced.

    Also, there are myriad unanswered questions. For example, what would the security situation be like in Iran post-revolution? What would the terms offered the western oil companies look like? These points could delay any restoration of Iranian output.

    I can remember about two years ago at a conference where I had a debate with another participant. His argument was that a rapid ramp up in crude production out of Iraq would end in a glut of crude oil and a rapid fall-off in prices. This was abut the time that Iraq began auctioning off drilling rights for various fields. At the time they published very aggressive production goals and some simply took these goals as a reasonable projection of future output. Of course, Iraq hasn't even come close to producing what its projections suggested. Iraq is a promising market from a geological standpoint but it will take years for the needed investment to flow into the country and even then I doubt you'll ever see the most aggressive production estimates realized.

    As for the Saudis, remember that a rise in Saudi output or OPEC production is often bullish (not bearish) for oil prices. This seeming paradox is caused by the fact that rising Saudi output implies a reduction in Saudi Arabia's spare capacity. Saudi spare capacity is the only buffer the world has between supply and demand. A recent example of this phenomenon: notice how oil dipped momentarily then jumped following OPEC's most recent meeting.

    As for the broader market, I do think we'll see more upside broadly in 2012 but it will be a bumpy ride. A lot of people I speak to seem to be unaware that the S&P 500 enjoyed its best fourth quarter performance in nearly a decade in 2011 -- the ride was so bumpy it didn't really "feel" like a rally.

    I do think it makes sense to hedge yourself on rallies this year. That could take the form of a relatively sophisticated strategy such as you suggest. Alternatively, investors might consider just taking some profits off the table during big rallies and using significant sell-offs as opportunities to buy. In the newsletters I edit I have adopted a fairly conservative strategy headed into early 2012 that focuses on high-yield (income-producing) groups like the Master Limited Partnerships (MLPs). I also recommend a few short positions in areas I see as vulnerable.

    I apologize for the reply that was probably longer than the original post.
    Jan 2 01:28 PM | 1 Like Like |Link to Comment
  • My 2012 Investing Cheat Sheet [View article]
    I don't really work much with funds as I tend to recommend and buy individual companies.

    In that regard, I've written about several that fit my 2012 outlook in articles posted on Seeking Alpha over the past few weeks. Here are a few of the themes covered in my 2012 outlook with symbols for stocks/funds I've written about recently on SA in parentheses:

    Bullish on Dividend/Income (TGP, VOC, PBT)
    Bullish Gold (AUY, GLD)
    Bullish Energy (OXY, SLB, EOG)
    Bullish technology (PCLN)

    I'll be writing up more of my top ideas in future posts on Seeking Alpha.
    Dec 28 01:53 PM | 2 Likes Like |Link to Comment
  • My 2012 Investing Cheat Sheet [View article]
    Here's my general take on gold. Gold is money. For centuries, the yellow metal has been viewed as a store of wealth and a store of value that has largely maintained its purchasing power over time. Unlike fiat currencies such as the US dollar or the euro, gold cannot be created out of thin air.

    Many investors regard gold as a hedge against inflation and the falling value of the US dollar. And gold certainly does perform both of those tasks. For example, as US inflation soared from the early 1970s through the early 1980s, the S&P 500 marched in place and the value of government bonds was eroded by persistent double-digit inflation. But gold acted as a safe-haven, surging from a fixed level of USD35 per ounce in 1971 to highs of about USD800 per ounce in 1980. On an inflation-adjusted basis, those 1980 highs equate to about USD3,000 an ounce in today’s dollars.

    But gold can also act as a hedge against a deflationary spiral. The Great Recession of 2007-09 was the worst economic downturn since the 1930s. The credit market bubble burst and for the first time in years household debt began to decline as a percentage of gross domestic product (GDP). This deleveraging cycle is inherently deflationary. But gold acted as a safe haven amid the crisis, rallying from about USD840 per ounce at the end of 2007 to over USD1,200 per ounce in December 2008.

    The dollar has generally been weak against most major foreign currencies since early 2009. From its March 2009 highs of 89.10, the US dollar index dropped to less than 73 in April of this year. That decline certainly contributed to the doubling in the value of gold over the same time period.

    But too many investors forget that gold isn’t just a hedge against the value of the dollar, but also a store of value that can act as a hedge against the value of all paper currencies. The ongoing European credit crisis demonstrates that the euro common currency is far from perfect in its current form. It’s likely that the European Central Bank, like its US counterpart, will be forced to print money in an effort to stem the risk of credit contagion emanating from fiscally troubled nations such as Italy and Greece. Gold is not only an alternative to the dollar, but to other flawed currencies such as the euro and yen.

    The bottom line: All investors should consider holding at least a portion of their assets in gold. Given the uptrend in gold prices over the past few years, a conservative long-term target for the yellow metal is a retest of its inflation-adjusted 1980 highs of about USD3,000 per ounce. And if the financial crisis deepens further, you’ll be glad to have some exposure to this safe-haven asset class.
    Dec 28 01:47 PM | 2 Likes Like |Link to Comment
  • Exposure To Rising Oil Prices And Solid Distributions Are Reasons To Like Permian Basin Royalty Trust [View article]
    Thanks for all of the comments. Going forward, I'd expect the decline rate to remain roughly constant; the trust's distributions will tend to track the path of oil prices. If oil prices rise faster than production declines, PBT can maintain or grow its payout. If you're looking for a high-income play on oil with monthly income, PBT is a good investment.

    That said, as I mentioned in the article, I prefer other trusts to PBT. Generally, speaking, the best time to invest in a US trust is in the first year of two after it goes public. Unlike Master Limited Partnership (MLPs), the former Canadian trusts and limited liability companies like Linn Energy (LINE), the US trusts can't make acquisitions and typically aren't as aggressive in terms of drilling new wells on existing properties. They also can't really hedge their output, making them quite leveraged to commodity prices.

    But, some newly listed trusts are structured in such a way that they can actually grow production for the first 2 to 5 years of their existence. A typical structure would be for a trust to have a certain number of existing, producing wells and a commitment from their parent/sponsor company to drill additional wells in a pre-set time period (usually 2 or 3 years). As these new wells are drilled and completed, production rises as does distribution potential.

    Many new trusts also have some hedges in place and use a subordinated unit structure to protect distributions in their first few years as a public trust.

    Since these trusts, like the MLPs, tend to attract more retail as opposed to institutional buyers I have found that their full distribution/yield potential often isn't recognized until they pay out a few distribution payments to unitholders. That's one reason I like to keep an eye on the IPO calendar looking for new trusts going public.

    As for the Permian Basin fracturing potential, I would second many of the comments already posted here. Another point to note is that the most profitable opportunities for fracturing in the Permian Basin have focused on a handful of areas like Bone Springs and Wolfberry. Not all parts of the Permian are suitable or economical to produce with a combination of horizontal wells and fracturing.
    Dec 26 01:17 PM | 2 Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment.

    It's truly amazing how investment in alternative energy always chases the least cost-effective solutions because that's where the subsidies are most attractive. Germany is a perfect example. Notice how the build-out of onshore wind dropped off as feed-in tariffs for wind came down, challenging the subsidy economics of new projects.

    Solar ramped up as wind investment dried up because feed-in tariffs guaranteed tremendous 20-year returns for new installations. Now, the government is cutting solar subsidies because the costs are mounting so the investment focus appears to be turning once again, this time to offshore wind. Offshore wind is one of the only sources of electricity with worse economics than solar PV in my chart above.
    Dec 26 12:43 PM | 2 Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment. I addressed some of your points in prior comments but have two additional comments.

    First, leaving aside all the arguments about whether the EIA's cost estimates are correct or off base, one thing is for certain: alternative energy stocks certainly haven't been good for investors. A number of erstwhile high flyers have gone bankrupt this year and former technology leaders like First Solar have been among the year's worst performers and have dramatically underperformed the broader energy indices. Alternative energy stocks may actually be the only sector that's fared worse than the financials over the past year.

    The fact is that many of the investors "lured" to the sector have been attracted to subsidies. In Germany, feed-in tariffs lock in impressive returns on investment for a 20 year period. I certainly have no problem with saavy investors who took advantage of these subsidies to invest in alternative energy and lock in low risk government-guaranteed long-term returns.

    But, that game is coming to an end as these subsidies are now cut across the developed world. Since Europe was a major source of subsidies, the ongoing sovereign credit crisis there certainly isn't going to help matters.

    As for the cost causation argument, the idea that the relationship depicted in the regression chart is caused by resource shortages simply doesn't hold water. The two EU countries with the highest power costs are Denmark and Germany. Denmark has significant domestic natural gas production. It's a tiny country of 5.5 million people but produces about 0.8 bcf/day of gas (2010 figure), considerably more than the 0.5 bcf/day it consumes. In other words, the country is a net gas exporter that, unlike many EU nations, isn't dependent on Russian gas imports.

    As for Germany, the country actually has about 41,000 million metric tons of coal reserves and has long been the EU's largest coal-producing nation. In fact, if we look at the entirety of Europe and Eurasia including the former Soviet states, there is only one country with larger reserves and production of coal than Germany: Russia. Germany also still relies on coal for about 40 to 50 percent of their electricity production so domestic resources are a meaningful asset.

    Looking at the other side of the equation. France has no developed energy commodity resources. The country has no coal or gas production to speak of yet it has among the lowest electricity costs in the EU. That doesn't support your theory either.
    Dec 26 12:34 PM | 2 Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment.

    I try to stay out of the political arguments and focus on the investment angles but I am continually amazed at how many comments I get from any articles that are seen as vaguely favourable to the energy industry. An article I posted on Seeking Alpha after the Macondo spill in the spring of 2010 is another good example of this.

    The good news is that given all the raw emotion surrounding these issues, investors willing to step back and evaluate the facts dispassionately have opportunities. For example, after the Macondo spill, I read dozens of articles about how deepwater drilling was coming to an end because of the spill. In the end, it was a great buying opportunity for a number of stocks focused on the deepwater.

    As for utility cost increases, I think you are correct. I just got back from a trip to the UK and the cost increases they're seeing are enormous. Power prices are up 20 and 30 percent year-over-year in some cases compared to down 3 to 5 percent in the US. I can tell you it is a big issue for consumers, particularly with the economy there at or near recession.

    The simple fact us that environmental issues tend to carry the most weight in good economic times not during recessions when most households are worried about costs.
    Dec 26 12:12 PM | 1 Like Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comments. I agree that Bill Gates is a brilliant man but I would be careful about basing buy/sell decisions solely on his actions. Some readers may remember a few years ago when he invested in a company called Pacific Ethanol (produced ethanol), firm that ultimately went bankrupt. To be fair, I believe he may have reduced that stake before they went Chapter 11 but I doubt it was a winner overall.

    It's important to remember that someone with as much cash as Bill Gates can take a few more speculative positions in the context of a larger portfolio. That doesn't mean they're sure winners.
    Dec 26 11:59 AM | Likes Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment. "Grid parity" is really only half the issue.

    After all, wind power has already achieved grid parity in many markets and the EIA projections outlined in the article show onshore wind competitive with nuclear and advanced coal on a pure cost basis. The falling cost of wind has been due to some tremendous advances in the efficiency of turbines over the years.

    But, despite these advances, wind hasn't really been able to replace conventional fossil fuels because of the inherent variability of output from wind plants. Large-scale wind plants can see their capacity factors--percentage of total generating capacity actually produced--range from 10 percent to levels of 60 percent plus from month to month. Offsetting these peaks and lulls requires the use of natural gas peaking plants as shadow capacity. In the UK and Germany, shadow capacity equal to 90 percent of total installed wind capacity is required to maintain the grid's stability.

    If and when solar achieves grid parity, it's still not going to be a viable large-scale generation option.
    Dec 26 11:55 AM | 1 Like Like |Link to Comment
  • The Dirty Truth About Clean Energy [View article]
    Thanks for the comment. As the world's largest natural gas producer and with a glut of gas in storage, the US will inevitably enter the liquefied natural gas (LNG) export business. There are a few different export terminals under various stages of development both in the US and Canada. The EIA isn't really modelling any net gas exports in its annual energy outlook though they're no longer projecting a surge in LNG imports as was the case a few years ago.

    That said, I just don't think LNG exports are going to have much of an impact on gas prices or generation costs in the intermediate term. First, the costs of actually building these export terminals is enormous and it wouldn't be surprising at all for delays to creep into the process. Even assuming all the LNG export terminals are built on time, the actual export capacity will ramp up only slowly starting in 2015. It will be 2020 or later before the quantities are significant enough to really have much of an impact on price.

    Secondly, US and Canadian producers are essentially mothballing their dry gas fields and focusing their attention on wet gas--natural gas liquids (NGLS) rich--and unconventional oil fields. The reason is that demand and pricing for oil and NGLs is far better than for natural gas. But, there's enough gas produced from these fields to meet domestic demand at the current level.

    Producers drilled the dry gas fields like the Haynesville and Montney Shales to hold their leases but are now reducing activity levels. Once a market for gas materializes (export and or vehicle fuels) these fields can be produced.

    I don't see gas prices remaining at current depressed levels forever but a move back up to around $5/MMBTU or so should be enough to incentive additional production. A move to that level wouldn't hurt gas economics a great deal.
    Dec 26 11:48 AM | 1 Like Like |Link to Comment
  • Occidental Petroleum Corp: Unprecedented Discoveries And Expertise Keys For Growth [View article]
    I can certainly see DNR getting acquired. They are leveraged to oil and that's good leverage to have in this environment. I think a lot of these oil-levered producers are getting dragged down by the macro concerns and "risk-off" trade rather than their underlying fundamentals.

    We are seeing a pick up in M&A interest in the energy patch. I' also note that the US corporate bond market is wide open for business despite what's going on in Europe so access to capital isn't relly an issue.
    Nov 23 02:41 PM | Likes Like |Link to Comment
  • Overcapacity In The Oil Services Industry? What You Need To Know [View article]
    We are producing more of our own energy. North America is independent when it comes to natural gas. In fact, the US is the world's largest gas producer.

    We're also energy independent when it comes to coal.

    US oil production is growing thanks to unconventional fields and the deepwater Gulf. This gives the nation a significant advantage
    Over other developed nations like Germany and Japan that import nearly all of their energy needs.

    I think it will be tough for the US to become totally independent in terms of oil but probably can become less dependent over time. Producing shale fields will require a huge investment in new infrastructure including pipelines, gas processing plants, storage and terminals. This is one reason I write a lot about the high-yield Master Limited Partnerships ( MLPs) like Enterprise Products Partners (EPD). These firms are buikding out a tremendous amount of infrastructure to support these plays.

    Long EPD
    Nov 20 11:08 AM | 2 Likes Like |Link to Comment