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Elliott Gue

 
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  • Drilling Into Transocean Partners LLC And Seadrill Partners LLC [View article]
    Thanks for the comments. Whenever you write a bearish article on a stock, you'll get more than your fair share of negative comments (and some personal attacks) as was the case with my two previous articles on parent Seadrill (SDRL) linked in the article above.

    I welcome negative comments and different opinions. In fact, I addressed many of the comments on my September Seadrill article in a follow up piece on the same stock in October.

    You'll find that knowing which stocks to avoid can do as much or more to help your overall returns than knowing which stocks to buy.

    Just to reiterate and remove any ambiguity, I do NOT think Seadrill (SDRL) is a good buy here. Seadrill, like most deepwater drillers, topped out more than a year ago and many investors don't understand the fundamental drivers of the downturn.

    I covered the headwinds facing the industry at length in the two Seadrill articles on Seeking Alpha referenced in this article. Just to review, the major integrated oil companies -- firms like Total, Shell, BP and Exxon -- are the main drivers of deepwater drilling activity and investment. Towards the end of 2013, these firms began to announce plans to rein in or, at least, slow the growth of their CAPEX budgets for 2014.

    Deepwater CAPEX boomed coming out of the financial crisis and a shortage of rigs pushed up day-rates to the extent that it was impacting the profitability of deepwater projects. The big oils appear to be taking a pause to evaluate the success of their deepwater programs and focus on cash flow rather than production growth.

    This decision had little to do with oil prices as budgets were coming down long before the recent drop in crude. It also had nothing to do with Russia or sanctions.

    At the same time, a number of new deepwater rigs are scheduled to come out of shipyards over the next two years and other rigs are due to come off long-term contracts. These rigs will likely have to accept lower day-rates to find work.

    The recent drop in oil prices happens to coincide with a period when many large integrated energy firms are working on their budgets so that's not going to help matters for the group.

    The outlook for deepwater drillers in 2015 already looks bad and the longer oil prices remain at current levels, the more likely it is the downturn will persist well into 2016.

    I don't recommend any of the deepwater drillers -- Seadrill, Ensco, Diamond, Transocean included -- until we see some signs of a stabilization in this market. That might include rigs being put into storage (coldstacked) or scrapped, helping to balance supply and demand. I'd also like to see investor sentiment turn on the group -- there are far too many people looking to buy the dip or that are attracted to Seadrill's sky-high yield.

    My opinion on this group has not changed and I do NOT rate Seadrill a buy anywhere. I've been advising investors to switch out of Seadrill into Seadrill Partners for the reasons I outlined in the article above; since the beginning of this year, Seadrill Partners has outperformed Seadrill by 23.8%.

    As I noted in the article above, investors tend to throw out the proverbial baby with the bathwater in the short-term, selling SDLP when SDRL gets hit. This is an opportunity.

    I've spilled a great deal of ink on Seadrill and the deepwater space in free articles on SeekingAlpha and elsewhere. I have addressed many of the bulls' key arguments on the stock. I believe my record on the deepwater drillers speaks for itself.
    Nov 11, 2014. 02:42 PM | 5 Likes Like |Link to Comment
  • Updated Outlook For Crude Oil [View article]
    Not to put too fine a point on it but....

    The premium for California oil isn't due to the size of California's energy (or oil demand) but to a lack of sufficient in-State production, requiring the import of more expensive supplies from abroad.

    I didn't mention natural gas in the article because it was an article about the outlook for oil. I agree that natural gas is an extremely promising fuel long term but oil and gas aren't really substitutes for one another. Oil is a transportation fuel and natural gas is primarily a fuel used for heating and electricity production. The idea that natural gas will become a key transportation fuel in the short-run is unrealistic. Even Exxon Mobil, a company which made a $41 billion bet on the future of nat. gas when it purchased XTO, sees gas accounting for just 4 percent of global transport demand in 2040 compared to 1 percent today.

    Currently, the US imports about 500,000 barrels of gasoline per day and exports 375,000 for daily net imports of roughly 125,000 bbl/day. Since we use 9.3 million barrels of gasoline per day, US net gasoline imports account for 1.4 percent of supply so I think you're exaggerating the importance of cheap US gasoline imports.

    Finally, solar (like most alternative energy sources) isn't really a disruptive technology at all. Solar is expensive and completely unreliable as a baseload power source. The idea that solar (or wind or tide or any other "alternative" energy source) will supplant fossil fuels like oil, gas and coal for the foreseeable future is an unrealistic dream.

    Of course, that doesn't mean you can't make money buying momentum-driven alt energy names from time to time. But, the bigger longer-term opportunity is in efficiency and companies that are making the internal combustion engine more efficient. Also, groups like freight rail are benefiting as its cheaper from an energy perspective to move goods by rail than truck.
    Nov 13, 2013. 05:37 PM | 5 Likes Like |Link to Comment
  • Updated Outlook For Crude Oil [View article]
    That's not really how the oil markets work as it ignores the crude quality and infrastructure bottlenecks I covered in the article.

    WTI delivered to Houston and Light Louisiana Sweet (LLS) (priced in St. James, LA by definition) would compete with imported light, sweet crude oils like Brent and Bonny Light. US demand for imported light, sweet crude oil is fast approaching zero and is next-to-zero on the US Gulf Coast, the largest refining center in North America. So, US oil prices -- including the prices of WTI and LLS -- would not need to rise to continue attracting imports because those imports aren't necessary.

    What the US will have to continue importing (as my chart above shows) is heavier oils like Maya from Mexico. Most refineries are set up to blend a particular mix of crudes and the refineries on the US Gulf Coast are already maxed out on light sweet and need more heavy, sour oils to run properly. Fortunately, these heavier grades of crude trade at a significant discount to light, sweet varietals like Brent on world markets.
    Nov 13, 2013. 10:27 AM | 5 Likes Like |Link to Comment
  • Plenty Of Opportunity To Increase Production For Legacy Reserves LP [View article]
    GAAP earnings are an irrelevant measure for Master Limited Partnerships (MLPs) and LLCs. An upstream MLP like Legacy tends to put hedges in place covering production for years into the future. Each quarter, they're required to mark those hedges to market. They must mark hedges to market not just for the quarter in question but their entire hedge book, however far in the future it extends. These are non-cash accounting profits and losses as they do not have to post additional collateral to cover hedge" losses."

    You will often read (typically computer generated) headlines about how a particular MLP "missed" or "beat" earnings expectations in a particular quarter. Often the big "beats" are caused by falling commodity prices in a particular quarter which generates massive earnings as the hedge book is marked to market.

    I look at distributable cash flow--a measure of earnings that strips out non-cash accounting charges--not earnings when evaluating MLPs.
    Jun 22, 2012. 10:06 AM | 5 Likes Like |Link to Comment
  • Big Opportunity In Big Oil: Total [View article]
    My publisher has a policy preventing me from buying a stock I recommend for a period of 30 days after I recommend it in The Energy Strategist. This recommendation is still within that window; therefore, I don't yet own Total $TOT.
    Apr 22, 2012. 12:14 AM | 5 Likes Like |Link to Comment
  • Icahn's Activism Prompts Transocean To Raise Dividend, But There Are Other Contract Drillers In The Sea [View article]
    One point I'd bring up is that Seadrill has actually been fairly innovative in its use of debt and asset sales so that it can continue to grow while still paying out a sector-leading dividend.

    Currently, roughly three-quarters of its outstanding debt is secured, basically a sort of mortgage on the company's rigs. This allows the firm to raise capital cheaply to fund expansion.

    I also like Seadrill's use of the MLP structure (SDLP) to essentially monetize the value of some of its rigs that are booked under long-term contracts.
    Nov 22, 2013. 10:34 AM | 4 Likes Like |Link to Comment
  • Salute Your Drillmasters: Gains In Drilling Efficiency A Boon For Oil-Field Service Providers And Oil And Gas Producers [View article]
    It's truly a revolution underway.

    I think it's also fascinating to think that the US has no need to import light, sweet crude oil into the US Gulf Coast as of the end of this year. Also, the US is likely to overtake Saudi Arabia and Russia later this decade to become the world's largest oil producer.

    And then there are the repercussions for other industries. For example, it's now cheaper to produce base chemicals and plastics in the US than the Middle East due to just how cheap US supplies of natural gas liquids are at this time.
    Nov 18, 2013. 02:30 PM | 4 Likes Like |Link to Comment
  • Updated Outlook For Crude Oil [View article]
    The current 3-2-1 Crack spread -- the approximate profit derived by using 3 barrels of WTI to produce a barrel of heating oil (diesel) and 2 barrels of gasoline -- currently stands at a little over $20/bbl. That's the highest level since early August and is probably the most important driver of the recent surge in the refiners.
    Nov 13, 2013. 05:43 PM | 4 Likes Like |Link to Comment
  • SandRidge Permian Trust: What Every Investor Needs To Know [View article]
    Thank you for the kind comments. I actually do a similar analysis for all publicly traded trusts on an ongoing basis in my newsletter, The Energy and Income Advisor, including SDR, SDT and CHKR and update my buy recommendations accordingly. I have a free report on my site that covers SDR.

    I'll try to post more trust-related analysis on SA in future.
    Jan 9, 2013. 10:32 PM | 4 Likes Like |Link to Comment
  • My 2012 Midyear Outlook For Oil Demand [View article]
    Over the past five years, the S&P 500 Energy index is up on a dividends reinvested basis while the S&P 500 is down on the same measure. Even more aggressive, economy-sensitive groups within energy like the Philadelphia Oil Services Index aren't down even close to 40% (actually the OSX is down 22 percent).

    As one of the commenters below alludes, I am a big proponent of picking individual stocks and sectors within energy rather than buying the index. And there have certainly been plenty of opportunities within energy over the past five years.

    For example, how about one of my favourite groups, the Master Limited Partnerships (MLPs), which I have written about frequently here on SA? The Alerian MLP Index is up 61% over the past five years--a more than 10 percent annualized gains in one of the worst stock markets of the post-war era is hardly "dead money."

    Or, how about buying into deepwater drillers when the media and public panicked in the wake of the Gulf oil spill of 2010 as I suggested in this SA article bit.ly/9UxNB1 ? Deepwater driller Seadrill (NYSE: SDRL), for example, is up 135% since June 1, 2010. That's not dead money either.
    Jul 13, 2012. 03:18 PM | 4 Likes Like |Link to Comment
  • GeoResources: One Of The Stronger North American Shale M&A Targets [View article]
    My publisher prohibits me from buying or selling any stocks I recommend in an article for the first time for a certain period before and after the issue is published. This is a relatively new recommendation in the newsletter.
    Feb 5, 2012. 09:19 AM | 4 Likes Like |Link to Comment
  • Dynagas LNG Partners LP: A Dynamite Investment? [View article]
    No, actually the webinar recording is free of charge.
    Dec 27, 2013. 04:12 PM | 3 Likes Like |Link to Comment
  • Refiners Fall Through The Cracks [View article]
    1. The refiners are also unwilling to blend ethanol above 10% because if they were to do so and it did cause damage to a car, they're worried about liability. This is why the costs of RINs have been rising so quickly this year from $0.07/gallon to nearly $1.50/gallon at one point. At any rate, I covered this issue at some length in the article "Food for Fuel" referenced in the article above.

    2. I would say that Valero (VLO) is advantaged due to the fact their core of refineries are located on the Gulf Coast and a lot of the inland crude oils where production is booming will be finding its way to the Gulf Coast in coming years. In the near-term though I wouldn't buy even VLO due to the headwind of shrinking differentials.
    Aug 22, 2013. 09:30 AM | 3 Likes Like |Link to Comment
  • Near-Term And Intermediate-Term Outlook For U.S. Natural Gas Prices [View article]
    I don't want to belabor the point and I am not sure how we got on the subject of Louisiana specifically (my article applies to the US as a whole.) But, here's a link to gas production data from the State:

    http://1.usa.gov/12VRqAt

    By the way for purposes of the State's classification system, the Haynesville Shale is located in the North.

    Here's my take on this data. Basically, LA gas production is now at the highest level since 1977, even though it will probably be down around 15 percent this year as compared to its recent annual high in 2011. I do not find that to be particularly remarkable as gas prices are currently ultra-low and drilling in the Haynesville (which the attached data show was the source of most of the State's production growth a few years ago) would target dry gas. Prices need to be higher to make this worthwhile.

    To me the more remarkable aspect of this data is the fact that production of gas in LA DOUBLED between 2009 and 2011.

    My point is that there is no need for the big producers to drill the Haynesville and lose money right now; instead they can (and have) switched over to drilling in wet gas plays like parts of the EagleFord in neighboring Texas. This is why Louisiana gas production is falling while total US production is basically holding steady at record levels. And, I do mean record because total US gas production IS higher than the 70's.

    Right now the US has a glut of gas. But, if the market tightened somewhat and prices were to rise back to around $5/MMBTU or so you would likely see a surge of drilling activity in dry gas basins that would quickly result in a resurgence of production just as it did a few years ago.

    It's not like there's a shortage of drilling rigs to handle the work -- just ask Nabor's. Nor is there a shortage of fracturing capacity (ask Baker Hughes).

    In my view, this will keep a lid on gas prices over the next few years. I don't buy the argument that the shale revolution is temporary or that high decline rates mean that gas prices are destined to head significantly higher in the near term. This just isn't supported by the empirical data.

    I greatly appreciate all of the well thought out comments to my article as it's an interesting and complex topic. Quality comments make SeekingAlpha a truly valuable website.
    Jul 20, 2013. 11:43 AM | 3 Likes Like |Link to Comment
  • SandRidge Permian Trust: What Every Investor Needs To Know [View article]
    Thanks again. Sure, let me try to answer those queries:

    1. Basically, the only cash withheld from the trust cash flows consists of $1.0 million in its first quarter for the establishment of an initial cash reserve, post-production expenses such as gathering and compressing, property and Texas franchise taxes, and trust administration expenses paid to the trustee and SandRidge. I don't think they're really building a war chest but do reserve cash each quarter for the payment of future taxes.

    2. Yes. The trust's current estimate is that the final value of the trust units will be $1.80 each due to the sale value of the remaining reserves. I just adopted that estimate in my analysis but it really doesn't matter all that much to the valuation target as $1.80 paid in 2031 is worth less than $0.50 per unit discounted to a present value at 7.5%.

    The NPV calculation simply estimates future distributions, discounts them using a particular rate and then sums up these payments to give you a current dollar value.

    What I think many people are missing when it comes to the trusts is that it doesn't matter that the units lose value as the termination date approaches. If I sold you a piece of paper for $10 that pays a total of $1.50 per year for 10 years and then is absolutely worthless, you are still earning an return on your investment over your holding period even though the piece of paper has no value at expiration.

    3. Basically, yes. that is how I performed the calculation. To estimate the value of the hedges you need an assumed price for WTI-Cushing, the total amount of hedges that are part of the trust and the price at which oil was hedged. This information is provided in summary form in the prospectus.
    Jan 9, 2013. 10:56 PM | 3 Likes Like |Link to Comment
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