Old Trader's Instablog

Why I Added Royal Dutch Shell To My Retirement Portfolio

Thu, 10 May 2012 18:16:57 -0400

I'm a long time bull on oil, but a few years back, I grew a bit tired of the volatility that comes with the sector. Because my focus is on dividends, my holdings were in Canroys, and I lived through the "Halloween Massacre", when the Canadian government suddenly announced a change in the tax structure that allowed income royalty trusts to flourish, causing an overnight "haircut" of 10-20%. (I took advantage of the situation to add to some positions, fortunately).

Afterward, I decided to move into midstream pipeline MLPs which also provide attractive yields, but with much lower volatility, since their cash flows are relatively immune to the price of the product flowing through the pipeline.

Now, however, the valuations in the MLP sector have risen notably, making me reluctant to add new money there, although I'm still DRIPing my distributions, at least for the time being. Consequently, I started looking at major integrated oil companies to add to my stake in Statoil (STO), which I added because of the firm's expertise in marine/harsh environment production and operations.

Formed by the combination of the Royal Dutch Petroleum Company, a Netherlands-based firm, and the Shell Transport and Trading Company, a UK-based firm, Royal Dutch Shell's headquarters are in The Hague, and the firm's registered office is in London. Shares are primarily listed on the London Stock Exchange (LSE), with secondary listings on the Euronext Amsterdam and NYSE exchanges.

The "B" shares dividends fall under the tax treaty between the US and the UK and are paid in the GBP, while the "A" shares are tied to the Netherlands and are paid in Euros, and lack the advantageous tax treatment afforded the B shares, making the B shares a better holding for investors holding them in an IRA, or other tax-advantaged accounts.

Royal Dutch Shell (RDS.A/B) has come a long way since 2004, when it severely marked down it's reserves by 25%, which knocked the share price for a loop. The firm's also been somewhat "under the radar", in that it hasn't suffered much, if any, of the negative publicity that's accrued to it's competitors, such as BP Plc (BP) and Total (TOT); the Gulf of Mexico spill in the case of BP, and TOT's exposure to events in Libya, as well as a gas leak in its North Sea Elgin field more recently.

Like all of the majors, RDS.A/B is facing increasing difficulties in replacing reserves, but is addressing the challenge on a wide variety of fronts. Increasingly, the firm's focusing on natural gas production, while moving away from oil. Current production favors natural gas over oil by a margin of 57% to 43%.

Although the firm has exposure in the US shale gas fields, by means of the firm's recent acquisition of East Resources (http://www.usatoday.com/money/industries/energy/2010-05-28-shell-buys-east-resources_N.htm) given the state of the natural gas (NG) market in the US, I don't view this as a major plus, given current NG prices in the US. What DOES attract me is the firm's exposure to the Asian markets, and growing involvement with liquified natural gas (LNG), as well as Gas to Liquids (GTL) production. Currently, of the integrated majors, RDS.A/B has the largest LNG operations, with TOT in second place.

Looking at how the firm ranks among it's competitors, RDS.A/B is second in market cap with a cap of $227.8B, behind Exxon Mobil's $396.8B. Interestingly, Royal Dutch Shell is also a close third in terms of yield (4.71% for RDS.B, as of the close on 5-4-12), soundly trouncing XOM's 2.66%.

The highest yielder of the field, which is comprised of Exxon Mobil (XOM), Royal Dutch Shell (RDS.A/B), BP Plc , Total , and Chevron Corp (CVX) is TOT, which yields a nice 5.0%, but is only half the size with a cap of $109.9B.

In terms of yield, the field looks like this:

TOT - 5.0%

COP - 4.87%

RDS.B - 4.80%

BP - 4.57%

CVX - 3.47%

(data taken from Morningstar) www.morningstar.com

I feel that Royal Dutch Shell's size adds a margin of safety when comparing it to other firms that are somewhat cheaper, or pay a somewhat higher yield. In addition, the firm increased its dividend by $.02, from $.84 to $.86, while steadily buying back the B shares during March and April.

The recently announced Q1 numbers seem to have vindicated my choice, with Royal Dutch Shell reporting a 16% increase, from $6.29B to $7.30B, while XOM disappointed with a 11% drop. www.marketwatch.com/story/exxon-mobils-p...

Disclosure: I am long [[RDS.B]], [[STO]].

How Sustainable Is The Good News In Autos?

Wed, 18 Apr 2012 09:58:55 -0400

As the US economy has ground upwards from the Great Recession lows, one of the more recent signs that's favored the bull camp has been a marked rebound in auto sales in the US. Although the odds of a return to the heady days of yesteryear, in terms of unit sales of around 16 million is unlikely any time soon, sales for almost all manufacturers have rebounded nicely since the start of the year.

A number of factors would seem to account for this.... some relatively obvious; some others, perhaps less so.

First, and perhaps the most obvious, has been the notably high age of the current auto fleet in the US, currently running around 11 years. In fact, according to Polk Automotive, in 2011, the average age for auto was 10.8 years, and Crain's Automotive News' most recent numbers show it edging up 11.1 for autos, and 10.4 years for trucks (up from 10.1). No matter how much quality has improved, nothing lasts forever, so it stands to reason that some of the increase in sales can be attributed to necessity.

The downside for the auto makers (although a big plus for consumers), is the fact that quality HAS improved so much. The penchant for buying a new car every 3 years is well behind us. In fact, today, its not at all unusual to have cars last past 150K miles, assuming minimal care. This will definitely have a telling effect on the replacement cycle.

I suspect that another reason for the strong sales was the unusually mild winter across much of the US. Traditionally, January and February are the weakest sales months for auto sales. Between being tapped out from holiday spending, and lousy weather, only the most desperate (and/or frugal) shoppers darken dealers' doors. This year, at least one half of the traditional headwind wasn't in play. Obviously, this isn't an effect that can be counted on, going forward.

Perhaps more disturbing is the "quality" of the current crop of car buyers. According to a piece I ran across from the NYT, via MSNBC Business News, a very sizable number (23%) of auto loans made in Q4, 2011, was made to subprime credits. It seems that more than a few of the big banks (HSBC and JP Morgan are among those mentioned specifically), as well as auto manufacturer lending arms (GM Financial), are busy trying to offset shrinking profits brought about by regulation by going back to the subprime well, lured by the high rates they can charge. Here's the link:

http://www.msnbc.msn.com/id/47015090/ns/business-eye_on_the_economy/

Although auto manufacture doesn't have the same clout it once had, economically speaking, it still is a long ways from being inconsequential. Its stuff like this that make it difficult for me to get really enthusiastic about economic conditions over the near, and intermediate term.

It seems that many have forgotten that imprudent lending was behind the last crisis. Although the damage done was by subprime RE lending, poor lending practices were also rampant in auto finance. It should be noted that auto loans are also among the types of loans that are securitized and sold to yield-hungry investors.

Sources: MSNBC.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Will OPeration Twist Put a Kink In The Market?

Wed, 21 Sep 2011 18:04:39 -0400

It is often said that one shouldn't speak in generalizations, nor stereotype things. Still, it may be worthwhile to remember that the reason that generalizations and stereotypes come into existence; is that they're correct, more often than not.

There's no shortage of generalizations, when it comes to markets, and investing. "Sell in May and go away" springs to mind, as well as thoughts of "Golden Crosses", "Death Crosses", and "Hindenberg Omens".

Perhaps not quite as common, but with more than a few adherents is the thought that the bond market's "smarter" than the stock market, and keeping a weather-eye cast in the direction of the bond markets can provided a timely warning of trouble brewing in equities.

An old standby for investors and traders with longer timelines than a week is the shape of the yield curve. Traditionally, an inverted curve (meaning that short rates are higher than the long rates) has not boded well for equities. For quite a while, the curve has had a mild upward tilt to it as the Fed leaned heavily on the short end of the curve in an effort to stimulate the economy.

Still, the curve has slowly trended towards flat, as events in Europe have driven periodic flights to quality. With the announcement that the Fed will, in fact, implement "Operation Twist", the markets ended up selling off sharply.

How likely is it that the Fed's next plan of action will precipitate an inverted yield curve? By eliminating the support on the short end of the curve, and shifting assets to the longer end, it seems to me that short rates would have a tendency to rise, while the long end would be pressured downward.

Disclosure: I am long GIM, TEI.

First Silver...Now Oil?

Mon, 09 May 2011 19:53:03 -0400

I just got a Market Watch alert, saying that the CME will be raising margin requirements on oil, now. I guess they figured that jacking the margin rate was SO effective in crashing silver, that its time to see how well it will work for oil!

Another Blow For Fiat Currencies.

Sat, 26 Mar 2011 13:59:47 -0400

In the on-going debate between gold bulls and bears, one argument that I've seen repeatedly raised by the bears, is the difficulty (impossibility?) of conducting daily transactions in gold. They point out that one can't go to the grocery store to stock the larder, and pay with the bill with gold. This argument is most often used against those who prefer to hold "physical" gold/silver, as opposed to "paper", such as the ETFs GLD and SLV.

Of course, there are countries, primarily in Asia, where gold is considered "legal tender". Indonesia, as an example, has people using the gold Dinar, and silver Dirham, as well as the "official" paper currency, the rupiah to conduct thier daily business. Of course, I don't live in Asia (and I suspect that the majority of the readers here, don't either), so such arguments aren't especially compelling to US-based investors.

But, in a sign that things may yet change here, there's a bill that currently awaiting the governor's signature in the state of Utah. Both the House and Senate in Utah have passed the bill, which would allow gold Buffalo and Eagle coins to be accepted as legal tender (foreign gold coins, such as Napoleons and Kruggerands would not be allowed), according to an article in the Financial Times on March 24, 2011. No mention was made about Canadian Maple Leafs, another popular gold coin among US investors.

Of course, there are some details to be resolved. For example, under the bill, state taxes on the transfer of gold would end, but only when the Federal government does the same. While I'm not willing to hold my breath until that happens, I can see some pretty rancorous debate on the topic, as disenchantment with both Ben Bernanke and the Fed continues to grow.

Sources: Financial Times
Al Arabiya News Channel

Disclosure: I am long GG, SVM.

How Badly Will 8.9 Magnitude Rock the Nuclear Industry?

Sun, 13 Mar 2011 17:41:11 -0400

Aside from the tragedy that befell the Japanese nation, as a result of the earthquake and resulting tsunami, I can't help but wonder what the effect of the damages suffered by two Japanese reactors will have on the nuclear industry, both in the US, as well as from a global perspective.

In the years after Three Mile Island, and Chernobyl, the reputation of the nuclear industry slowly underwent a "rehabilitation", of sorts. After all, even at the time of Chernobyl, it was correctly pointed out that the reactor was of an old design, and it was misleading to think that the most current designs (at that time) were as prone to such an event. It could also be justifiably argued that the Russian government made numerous mistakes in their response, and handling of the disaster, which added greatly to the magnitude of the event.

It could be argued that the environmental movement, strongest both in the US, and in Germany effectively shut down the nuclear industry in both countries, but other nations eventually proceeded to look seriously at nuclear as a reliable, comparatively cheap and clean source of energy.

Currently, according to the International Nuclear Safety Center, as well as International Atomic Energy Agency, nuclear power is a major energy source in many of the developed nations. Among the largest of users are:

France      78%
Belgium 55%
Sweden     52%
S. Korea   38%
Germany   32%
Japan       29%
US           20%

It can be effectively argued that Belgium and France could count as 1, given their shared border, and the above list doesn't show the rapidly expanding Chinese growth.

There's no doubt in my mind, that events in Japan will give an added impetus to efforts by groups such as Greenpeace to ratchet up their attacks against further development of nuclear powerplants, but its my opinion that many of these arguments will miss a key point. I think that what may well be overlooked is that, as the events in Japan show, the siting of nuke plants is arguably more important than spending massive amounts of time and money trying to "upgrade" safety systems.

One could argue that its "possible" for a large meteorite to strike a nuke plant; does that mean that any future plants should be constructed to able to withstand such a strike without releasing any radiation/radioactive materials? I'm not trying to say that looking at improvements in the safe operation of plants shouldn't be studied, but one will, I suspect, reach a point of diminshing returns.

Looking at the issue of siting, I would think that such an emphasis would preclude the placemnt of nuke plants anywhere along the west coast. Another area that should likely be avoided would be the New Madrid fault zone, in the Midwest, which is centered roughly at the midpoint between Memphis, Tn, and St. Louis, Mo, and effects at least parts of 7 states (Illinois, Indiana, Missouri, Arkansas, Kentucky, Mississippi, and Tennessee).

Given the large area that China encompasses, there are regions that are seismicly active, and should be considered bad choices for nuke plant construction. Given some of the more recent spate of disasters in China, made worse by shoddy construction, the rapid push by China to expand nuclear power should give pause.

I'd suggest that if an investor that has positions in uranium miners, or firms heavily exposed to the construction of nuke plants'such as GE, Toshiba, or Hitachi, to take any profits that they may have.

In summation, while I think that nuclear power will still play an important part in the energy supply equation, globally speaking, I think that the timetable has suffered a fairly large setback, although just how large will depend on how successful Japan will be in bringing the situation there under control.

Sources:

International Nuclear Safety Center
International Atomic Energy Agency

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.