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  • The Tao Of Investing In The Renewable Energy Market: Practice Patience, Not Panic, Says JinMing Liu

    With the market bucking like a rodeo bull, investors should hang on and sit tight, JinMing Liu advises, especially with the high-beta cleantech and renewable energy industries he covers. In this interview with The Energy Report, the senior vice president and director of research at Ardour Capital Investments explains how the recent market correction affects both the cleantech and waste-management companies in his portfolio. His advice throughout: Be patient.

    The Energy Report: JinMing, the first half of October was a bloodbath on Wall Street, and resulted in the stock market's worst performance of 2014. How did the selloff affect the companies you cover?

    JinMing Liu: Renewable energy, or cleantech stocks, have very high beta, so what happened in the past weeks had an even bigger impact on them. On the general market level, this correction could be very healthy. We need to wait to see how the cleantech and renewable markets develop, because they could go quickly either way. I suggest investors be patient.

    TER: So investors should sit tight to let the market settle down some?

    JL: They should have patience, because cleantech stocks, in general, have a higher risk profile. Cleantech and renewable energy companies are a newer industry, and the risks associated with them are higher than with more mature, bigger companies.

    TER: Is that true of the waste-handling stocks as well?

    JL: That is a different space. The waste-handling industry has different subsectors. Municipal solid waste is relatively mature. There are also industrial waste and food-processing waste subsectors, which have different risk profiles.

    In the municipal solid waste market, companies like Covanta Holding Corp. (NYSE:CVA) have relatively mature operating models and, generally, very high cash flow. On the other side, industrial waste handling and food-processing waste handling have two different sets of factors affecting them. For food-processing waste, the final products are sensitive to commodity prices, which can affect the stocks of companies like Darling Ingredients Inc. (NYSE:DAR), which I cover. Because of what happened recently with the uncertainty surrounding the Renewable Fuel Standard compliance requirement and sanctions against Russia, expectations for the global consumption of agricultural products have been adjusted. As a result, prices for Darling's products are under pressure. That led to some pressure on the stock.

    The industrial waste segment is very fragmented. Many smaller companies are trying to get in, but the competition is relatively high.

    We are also looking at technological improvements in the waste industry. Some technologies are relatively mature, such as landfill operations, traditional waste-to-energy solutions, burning trash to generate electricity, or the rendering process for agricultural waste. These are mature technologies. Companies either bury, burn or cook food waste to make the final products. But given the increases in different commodity prices, including crude oil, and in landfill prices because of finite space available for landfills, different types of technologies are called for.

    For example, some companies are trying to use municipal solid waste to produce biofuels. Another crossover company, called Strategic Environmental & Energy Resources Inc. (OTCQB:SENR), is using a combination of pyrolysis and plasma technology to reduce the volume of the waste from different industries, including oil refineries and medical waste. These are the areas in which we expect to see potential significant progress in the near future.

    The U.S. generates a lot of waste each year. The waste disposal industry is worth about $50-60 billion per year in the U.S. The traditional waste-handling companies like Covanta have relatively stable business models. Their growth will come from incremental market growth. We may see better opportunities in the future in technologies that help us improve waste-handling and processing.

    TER: The waste industry is driven, in many respects, by regulations. What environmental regulations are generating the greatest business opportunities today?

    JL: The most promising opportunity right now is in energy efficiency through reduced waste. There are quite a few mandates out there. In 2012, the Obama administration put out an executive order requiring energy efficiency at industrial facilities. On the state level, last year California put out a mandate for utilities to install 1.3 gigawatts [1.3 GW] of grid-connected energy storage capacity by the end of 2020. Those areas are driven by regulation, and we'll see a lot of very good business opportunities.

    TER: Has any other state done anything as specific as California?

    JL: Many grid storage projects are ongoing. The U.S. Department of Energy has an active database documenting these, whether they're under construction, in operation or just proposed energy storage facilities. These projects are happening across the country. Whether other states have mandates, I'm not sure.

    One of the important reasons utilities install energy storage capacity is to push off big investments in infrastructure. As you know, this country has very old power infrastructure. That's why I believe new technologies in alternative distributed power generation and energy efficiency and storage will help us work with the aging power infrastructure and move to more sustainable development.

    TER: President Obama has implemented several regulations regarding environmental improvements. Do you think his executive action, bypassing Congress to implement the regulations, will survive the political opposition?

    JL: Yes. First of all, I don't foresee any problem in executive orders being carried out, because I don't think they are that politically sensitive. For example, the Obama mandate for improvement in the Corporate Average Fuel Economy standards for vehicles got support from all the major automakers. Second, the government should have the determination to carry out a specific executive order, meaning putting in place effective measures of enforcement. We think there is a good chance that the U.S. Environmental Protection Agency will reduce CO2 emissions from power plants, for example. On this end, we don't expect significant impact on waste-to-energy facilities, since they mostly use renewable municipal waste.

    TER: Renewable fuels must compete with well-established fuels, so the question of grid parity, or renewables' ability to compete, comes up. Municipal solid waste as energy, for example, has struggled in this country. How effectively can renewable fuel compete today?

    JL: This question has to be answered for the different types of fuels. Ethanol currently competes very efficiently against traditional fossil fuels like gasoline, because we as a country have built a large production capacity for ethanol and our farming/agriculture sector can support such a huge capacity.

    On the other hand, for a similar biofuel, biodiesel, it is very hard to compete without state volume mandates and subsidies.

    Municipal solid waste is a tricky fuel. You can burn it to generate electricity, but municipal solid waste, as a fuel, depends on the tipping fee-the fee charged to municipalities by waste-processing facilities to break even. Revenue from sales of electricity generated is the upside for profitability.

    TER: Does Covanta use any special combustion technologies?

    JL: Covanta uses more traditional technology; its technology is at least 20 years old. There are other emerging technologies for waste-to-energy, like plasma. Air Products & Chemicals Inc. (NYSE:APD), a large company, is building facilities using plasma technology in the United Kingdom. Strategic Environmental, as I mentioned earlier, uses plasma technology in combination with pyrolysis technology to reduce volume or to get rid of some specialty waste.

    Processing waste with plasma is an interesting approach. If members of the public hear that a waste-to-energy facility will be built, they most likely will not support it. But if they hear that a plasma gasification power-generation facility is planned for their neighborhood, they may support it. That is how powerful newer technology might be for the waste-to-energy sector.

    TER: What other companies do you cover in waste management?

    JL: Darling Ingredients, which recently changed its name from Darling International, handles agricultural and food waste. Darling has grown very big through acquisitions. Its stock recently was under a lot of pressure simply because, as a food-waste processing company, its final products are sensitive to agriculture commodity prices. When the corn price is at $3-$4/bushel and the soybean price around $9/bushel, pressure is on Darling's stock. But in the long term, I believe that Darling is a good stock.

    TER: How are you rating your waste-handling companies these days?

    JL: Right now I have a Hold rating on most of my waste-handling companies because the valuations of most of these companies were very high and I expect some correction. I don't want to use the word "bubble," but the valuations stopped me from being positive on these stocks. As I've said, the stock market was due for a correction because the valuations of most stocks are very high, and many of the environmental waste-handling companies are trading even higher because they have higher beta.

    TER: Energy storage also encompasses a wide variety of technologies and applications. Which applications and technologies offer investors the greatest returns and growth?

    JL: In the long term, there will be many competing energy-storage technologies, like the ultracapacitor from Maxwell Technologies Inc. (NASDAQ:MXWL) and lithium batteries from many companies.

    When we talk about energy storage, it can be discussed in terms of two applications-power applications versus energy applications. Power applications refer to a high power output for a relatively short period of time. Energy applications refer to discharge of electricity for longer periods of time near the system's nominal power rating. Ultracapacitors are very good for the first type of application. They can offer a burst of energy to propel a large bus to a certain speed. Other energy-storage applications need longer output periods with more stable energy flow.

    A lot of competing technologies will be on the market in the near future, but among them, lithium batteries have the most promising growth profile for the very simple reason that lithium batteries offer very high energy density. For many applications, we need small but powerful energy sources.

    Lithium batteries are also available in different shapes, which are important for the development of applications. For example, in a cellphone we want a battery that's as compact as possible but has a lot of power, whereas in home energy storage devices, many large format lithium batteries can be used, in a cabinet of the size of a refrigerator. Form factor is another important benefit of lithium batteries.

    In the next five to 10 years, we'll see very strong demand-driven growth from electric vehicles, smartphones, tablets, power tools and gadgets we can't imagine. That's why I prefer the technology.

    TER: Do companies providing energy storage options, such as Highpower International Inc. (NASDAQ:HPJ), Maxwell and Polypore International Inc. (NYSE:PPO), work throughout the range of applications, from cellphones to megawatt-size grid energy storage, or do they focus on specific sectors?

    JL: Maxwell Technologies offers the ultracapacitor, which is for specific vehicular and renewable energy applications. Highpower International is a lithium battery company. Its batteries range from units that can be used in very tiny gadgets, such as a smart watch, to grid-connected energy storage devices. Polypore International is an important supplier for the manufacturing of lithium batteries. It offers a specialty product called the separator-basically a piece of membrane to separate positive and negative electrodes inside a battery. That membrane is very important for the performance and safety of lithium batteries. As you may have heard, lithium batteries may explode if things go wrong.

    TER: The Tesla Motors Inc. (NASDAQ:TSLA) gigafactory won't be online for several more years, but when it comes online, what effect do you expect it to have on battery prices?

    JL: Lithium battery price has been on a downward path for a long time, and I believe the lithium battery price will continue to decrease regardless of when the Tesla gigafactory comes online.

    In the past few years, the demand for lithium batteries has been growing at an annual rate of about 26%. Tesla's gigafactory wants to build about 30 gigawatt-hours of batteries, which is almost identical to 2013's global lithium battery production capacity. If this industry continues to grow at 26% each year, in less than three years, we'll see lithium production, in terms of volume, double. Within five years, that number could triple or quadruple. I don't believe Tesla's gigafactory will have an impact on the pricing. The expansion of other companies' production capacity would satisfy the demand for other areas and applications. Tesla's gigafactory most likely will satisfy its own electric vehicle production.

    TER: Finally, the International Monetary Fund has cut its forecast for global growth. It says the Eurozone could slip into recession, and the stock valuations may be "frothy." How should investors conduct their business in this climate for the next six months?

    JL: I agree with the notion that we are looking at a bubble. In this kind of environment, it's smart to invest in companies that are less volatile-in more defensive stocks. For example, Covanta Holdings pays dividends and generates stable cash flow each year. That's a defensive stock I can suggest.

    TER: Thank you, JinMing. I appreciate your time.

    This interview was conducted by Tom Armistead of The Energy Report and can be read in its entirety here.

    JinMing Liu is senior vice president and director of research with Ardour Capital Investments LLC, which focuses on energy technology, alternative energy and power, and clean and renewable technologies. He has been with Ardour Capital for seven years.

    Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Strategic Environmental & Energy Resources Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) JinMing Liu: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Ardour Capital Investments LLC and/or its affiliates may now, in the past, or in the future make markets, or deal as principal in the securities or derivatives thereof, with the companies mentioned in this interview. In addition, Ardour Capital, its shareholders, directors, officers and/or employees and consultants, may, from time to time, hold a long or short position in the securities of companies mentioned in this interview. Ardour Capital may be engaged to perform investment banking, advisory or other services for the companies mentioned in this interview, and may receive compensation for such services. Opinions expressed herein reflect the opinions of Ardour Capital Investments, LLC and the author/analyst, and are subject to change without notice. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

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  • Why Matt Badiali Says Hillary Clinton Could Be Remembered As One Of The Best Presidents Ever

    Cheap oil prices and the economic prosperity they bring can make politicians and investors look smarter than they are. In this interview with The Mining Report, Stansberry Research Editor Matt Badiali shares the secrets for finding underappreciated commodities and companies before they become overpriced, and names his favorites.

    The Mining Report: You have said that Hillary Clinton could go down in history as one of the best presidents ever. Why?

    Matt Badiali: Before we get your readership in an uproar, let me clarify that the oddsmakers say that Hillary Clinton is probably going to take the White House in the next election. Even Berkshire Hathaway CEO Warren Buffet said she is a slam dunk. I'm not personally a huge fan of Hillary Clinton, but I believe whoever the next president is will ride a wave of economic benefits that will cast a rosy glow on the administration.

    Her husband benefitted from the same lucky timing. In the 1980s, people had money and felt secure. It wasn't because of anything Bill Clinton did. He just happened to step onto the train as the economy started humming. Hillary is going to do the same thing. In this case, an abundance of affordable energy will fuel that glow. The fact is things are about to get really good in the United States.

    TMR: Are you saying shale oil and gas production can overcome all the other problems in the country?

    MB: Cheap natural gas is already impacting the economy. In 2008, we were paying $14/thousand cubic feet [$14/Mcf]. Then, in March 2012, the price bottomed below $2/Mcf because we had found so much of it. We quit drilling the shale that only produces dry gas because it wasn't economic. You can't really export natural gas without spending billions to reverse the natural gas importing infrastructure that was put in place before the resource became a domestic boom. The result is that natural gas is so cheap that European and Asian manufacturing companies are moving here. Cheap energy trumps cheap labor any day.

    Some peripheral beneficiaries from this cheap energy are in the chemical space. Dow Chemical Co. (NYSE:DOW) and others that make things from petroleum will benefit. One of my favorite plays on cheap energy right now is CF Industries Holdings Inc. (NYSE:CF), a nitrogen fertilizer company. The single biggest cost to this company is natural gas. That is a great business as long as natural gas prices stay low.

    The same thing is happening in tight crude oil. We are producing more oil today than we have in decades. We are filling up every tank, reservoir and teacup because we need more pipelines. And it is just getting started. Companies are ramping up production and hiring lots of people. By 2016, the U.S. will have manufacturing, jobs and a healthy export trade. It will be an economic resurgence of epic proportions.

    TMR: The economist and The Prize author Daniel Yergin forecasted U.S. oil production of 14 million barrels a day [14 MMbbl/d] by 2035. What are the implications for that both in terms of infrastructure and price?

    MB: Let's start with the infrastructure. The U.S. produces over 8.5 MMbbl/d right now; a jump to 14 MMbbl/d would be a 65% increase. That would require an additional 5.5 MMbbl/d.

    To put this in perspective, the growth of oil production from 2005 to today is faster than at any other time in American history, including the oil boom of the 1920s and 1930s. And we're adding it in bizarre places like North Dakota, places that have never produced large volumes of oil in the past.

    North Dakota now produces over 1.1 MMbbl/d, but doesn't have the pipeline capacity to move the oil to the refineries and the people who use it. There also aren't enough places to store it. The bottlenecks are knocking as much as $10/bbl off the price to producers and resulting in lots of oil tankers on trains.

    And it isn't just happening in North Dakota. Oil and gas production in Colorado, Ohio, Pennsylvania and even parts of Texas is overwhelming our existing infrastructure. That is why major pipeline and transportation companies, like Plains All American Pipeline L.P. (NYSE:PAA) and Enterprise Products Partners L.P. (NYSE:EPD), have exploded in value. They already have some infrastructure in place and they have the ability to invest in new pipelines.

    There's also a massive amount of growth coming in companies that can process oil quickly. Valero Energy Corp. (NYSE:VLO), a giant refining company, is adding to its existing capacity. Alon USA Energy Inc. (NYSE:ALJ), another refiner, is adding to its rail offloading capacity. It's actually ramping up from 13 Mbbl/d to 150 Mbbl/d at one California refinery.

    The problem we are facing in refining is that a few decades ago we thought we were running out of the good stuff, the light sweet crude oil. So refiners invested $100 billion to retool for the heavier, sour crudes from Canada, Venezuela and Mexico. That leaves little capacity for the new sources of high-quality oil being discovered in our backyard. That limited capacity results in lower prices for what should be premium grades.

    One solution would be to lift the restriction on crude oil exports that dates back to the 1970s, when we were feeling protectionist. It is illegal for us to export crude oil. And because all the new oil is light sweet crude, the refiners can only use so much. That means the crude oil is piling up.

    Peak oil is no longer a problem, but peak storage is. If we could ship the excess overseas, producers would get a fair price for the quality of their products. That would lead them to invest in more discovery. However, if they continue to get less money for their products, investment will slow. There is some good news on that front though.

    Pioneer Natural Resources Co. (NYSE:PXD) produces ultralight crude oil called condensate from its Eagle Ford shale wells in Texas. The U.S. Department of Commerce, which regulates oil exports, approved the export of that condensate, if it is run through a simple "splitter." That's the simplest kind of refinery. Allowing companies to export split condensate could buoy falling oil prices and relieve some supply problems. However, it won't solve the whole problem.

    TMR: If we do reach peak storage, where we all have oil stored in our swimming pools with no efficient way to move it or ability to export it, what is the price where it becomes uneconomic to produce?

    MB: I was in San Antonio a couple weeks ago at Hart Energy's Discovering Unconventional Gas conference, and most of the producers said that at $65/bbl they can still make money, but at $45/bbl, they have to cut off production. Some fantastic oil company stock prices have already been demolished with the overall markets over the last few weeks. There has been a bloodbath, which is fantastic.

    TMR: Is everything on sale, as Rick Rule likes to say?

    MB: Everything is on sale. But the great thing about oil is it is not like metals. It is cyclical, but it's critical. If you want your boats to cross oceans, your airplanes to fly, your cars to drive and your military to move, you have to have oil. You don't have to buy a new ship today, which would take metals. But if you want that sucker to go from point A to point B, you have to have oil. That's really important. There have been five cycles in oil prices in the last few years.

    Oil prices rise and then fall. That's what we call a cycle. Each cycle impacts both the oil price and the stock prices of oil companies. We measured the share prices with the Energy Select Sector SPDR Exchange-Traded Fund (NYSEARCA:XLE). These cycles are like clockwork. Their periods vary, but it's been an annual event since 2009. Shale, especially if we can export it, could change all of that.

    The rest of the world's economy stinks. Russia and Europe are flirting with recession. China is a black box, but it is not as robust as we thought it was. Extra supply in the U.S. combined with less demand than expected is leading to temporary low oil prices. But strategically and economically, oil is too important for the price to get too low for too long.

    I was recently at a conference in Washington, D.C., where International Energy Agency Executive Director Maria van der Hoeven predicted that without significant investment in the oil fields in the Middle East, we can expect a $15/bbl increase in the price of oil globally by 2025.

    I don't foresee a lot of people investing in those places right now. A shooting war is not the best place to be invested. I was in Iraq last year and met the Kurds, and they're wonderful people. This is just a nightmare for them. And for the rest of the world it means a $15/bbl increase in oil.

    For investors, the prospect of oil back at $100/bbl is not the end of the world. With oil prices down 20% from recent highs and the best companies down over 30% in value, it is a buying opportunity. It means the entire oil sector has just gone on sale, including the companies building the infrastructure.

    As oil prices climb back to $100/bbl, companies will continue to invest in producing more oil. And that will turn Hillary Clinton's eight-year presidency into an economic wonderland.

    TMR: The last time you and I chatted, you explained that different shales have different geology with different implications for cracking it, drilling it and transporting it. Are there parts of the country where it's cheaper to produce and companies will get higher prices?

    MB: The producers in the Bakken are paying about twice as much to ship their oil by rail as the ones in the Permian or in Texas are paying to put it in a pipeline. The Eagle Ford is still my favorite quality shale and it is close to existing pipelines and export infrastructure, if that becomes a viable option. There are farmers being transformed into millionaires in Ohio as we speak, thanks to the Utica Shale.

    TMR: What are some companies that are doing a good job figuring out the secret recipe in their respective shales?

    Halcón Resources Corp. (NYSE:HK) is run by the same management team that built Petrohawk Energy Corporation (HK) and sold it to BHP Billiton Ltd. (NYSE:BHP) when shale was a brand new thing. Halcón shares have been utterly destroyed in this downturn, but it is still a great company in the right place with the right people.

    Sanchez Energy Corp. (NYSE:SN) is also an expert in the Eagle Ford right now. It's branching out into the Tuscaloosa Marine Shale in Louisiana. It hasn't found the sweet spots in the shale, but if oil gets to $100/bbl, these guys will find a way. In the meantime, Sanchez is profitable at current prices in the Eagle Ford. The Sanchez family has operated a private oil company in Texas for decades. I have a lot of respect for the management team. Sanchez is in parts of the Eagle Ford that people thought weren't going to be economic, and it is making the wells sing. In fact, Sanchez was able to cut its costs in half using new techniques, adding more sand to the wells and drilling multiple wells from a single pad.

    I like both of these companies.

    TMR: Do you see oil services as a way to leverage the quantity of oil coming out of the shale?

    MB: If you were only going to buy one company to play all of the tight oil revolution, it would be Schlumberger Ltd. (NYSE:SLB), a behemoth of an oil services company that is essentially the Levi Strauss of the sector, a one-stop shop for fracking services, including imaging and materials.

    TMR: What about the sands providers? Is that another way to play the service companies?

    MB: Absolutely. The single most important factor in cracking the shale code is sand. If the pages of a book are the thin layers of rocks in the shale, pumping water is how the producers pop the rock layers apart and sand is the placeholder that props them open despite the enormous pressure from above. Today, for every vertical hole, drillers create long horizontals and divide them into 30+ sections with as much as 1,500 pounds of sand per section. A single pad in the Eagle Ford could anchor four vertical holes with four horizontal legs requiring the equivalent of 200 train car loads of sand.

    That is why the shares prices of companies like U.S. Silica Holdings Inc. (NYSE:SLCA) and Hi-Crush Partners L.P. (NYSE:HCLP) soared. They are fairly recent public entities, but their share prices went straight up after their initial public offerings. It's because the volume of sand is just massive. Ironically, it's created a miniboom in states like Wisconsin, where a lot of this sand originates.

    Investors need to distinguish between companies that provide highly refined sand for oil services and companies that bag sand for school playgrounds. Fracking sand is filtered and graded for consistency to ensure the most oil is recovered. Investors have to be careful about the type of company they are buying.

    TMR: Coal still fuels a big chunk of the electricity in the U.S. Can a commodity be politically incorrect and a good investment?

    MB: Coal has a serious headwind, and it's not just that it's politically incorrect. It competes with natural gas as an electrical fuel so you would expect the two commodities would trade for roughly the same price for the amount of electricity they can generate, but they don't. The Environmental Protection Agency is enacting emission standards that are effectively closing down coal-fired power plants. And because it is baseload power, you can't easily shut it off and turn it back on; it has to be maintained. That means it doesn't augment variable power like solar, as well as natural gas, which can be turned on and off like a jet engine turbine. So coal has two strikes against it. It is dirty and it isn't flexible.

    Some coal companies could survive this transition, however. Metallurgical coal [met coal] companies, which produce a clean coal for making steel, have better prospects than steam coal. Along with steam coal, met coal prices are at a six-year low. One company stands out. Peabody Energy Corp. (NYSE:BTU) owns the largest coal mine [by production] in the world. The North Antelope Rochelle coal mine produces over 100 million tons per year. That's just from one of its mines. If you live in the lower 48 states [outside of the Northeast and California], there's a pretty good chance that your television is powered by one of Peabody's mines.

    It is the world's largest private-sector coal company. The downturn in the coal price killed the stock price. I expected profit from its Australian met coal assets would keep the company's revenues up. But even met coal prices crashed. We sold our position to preserve our capital.

    Generally, I want to own coal that can be exported to India or China, where they really need it. Japan has replaced a lot of its nuclear power with coal and Germany restarted all the coal-fired power plants it had closed because of carbon emissions goals. We are already seeing deindustrialization there due to high energy prices. Cheap energy sources, including coal, will be embraced. I just don't know when.

    TMR: A number of experts we have talked to have said uranium is getting ready to turn up. Are you investing in uranium?

    MB: I do own uranium. When we are nearing the bottom of a resource market, whether it's potash, coal, uranium or oil, I buy the best company in the space first. The Exxon-Mobils of the space are the ones that are going to come back first. In the uranium space, I bought Cameco Corp. (NYSE:CCJ) for my S&A Resource Report newsletter portfolio. It is the company to buy if you're going to speculate on a bottom in uranium.

    TMR: Thank you for your time, Matt.

    MB: Thank you.

    This interview was conducted by JT Long of The Mining Report and can be read in its entirety here.

    Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources, including silver, uranium, copper, natural gas, oil, water and gold. He is a regular contributor to Growth Stock Wire, a free premarket briefing on the day's most profitable trading opportunities. Badiali has experience as a hydrologist, geologist and consultant to the oil industry. He holds a master's degree in geology from Florida Atlantic University. Click here for subscription information.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) Matt Badiali: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. Stansberry & Associates has a financial relationship with all companies discussed in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    3) The following company mentioned in the interview is a sponsor of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Mining Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Mining Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Oct 28 2:09 PM | Link | Comment!
  • Credit Suisse Expert Targets MLPs That Could Increase Dividends And Yields In 2015

    War, severe weather and record natural gas production are buffeting energy stock prices. Where can investors turn for safety? In this interview with The Energy Report, Credit Suisse's John Edwards suggests that midstream master limited partnerships, while they have been volatile of late, are fundamentally stable business models, and have less exposure to volatility than explorers and producers. As a bonus, he names his top companies in a rising yield environment. Let's just hope oil stays above $80/barrel.

    The Energy Report: Energy stocks have faced a number of headwinds this year-everything from severe weather on the East Coast to conflicts in Eastern Europe and the Middle East to growing oil and gas production in the U.S. Are midstream master limited partnerships [MLPs] immune to the volatility of the commodities they carry?

    John Edwards: Midstream MLPs are not immune to price changes, but they have less volatility than other kinds of energy stocks. Let me explain. With most MLPs, the assets are contracted. They're fee-based, so they have minimal direct commodity risk. If MLP clients are not profitable, that will impact demand for the services that the midstream providers offer. So while MLPs don't have direct commodity exposure, they certainly have indirect commodity exposure. A prolonged price slump would ultimately impact the return on upstream companies, and that would subsequently impact the demand for midstream services.

    As long as oil prices stay above $80 a barrel [$80/bbl], we think producers will continue to produce as much as they can. If oil prices dip below $70/bbl, there could start to be curtailments. That would have a negative impact on MLPs because it would slow down demand for infrastructure.

    TER: You recently stated that compared to the Standard & Poor's 500, MLPs capture market upside swings better, without being as affected by the downside. What causes that?

    JE: During difficult economic times, people curtail purchases that can be postponed, like buying a car or a large appliance, or even eating out. But people are a lot less willing to freeze in their homes in the winter, whether they have income or not. Natural gas and crude oil are more stable in terms of demand than many other products. The bottom line is that the preponderance of long-term contracts results in stable revenues for midstream MLPs.

    At the same time, we are in the midst of a technological shift. Demand for crude oil has been flat, despite the economic recovery, due to advances in fuel efficiency. On the other hand, the industry continues to access product in remote areas, thus increasing demand for infrastructure to get the product from where it's produced to where it's consumed. That infrastructure is typically contracted on a fixed fee basis, making the basic economics of that arrangement less volatile than the economy generally. That helps explain why MLPs are less volatile than the broader economic markets.

    TER: Are MLPs vulnerable to the impact of sovereign debt and increasing interest rates?

    JE: Let's talk about interest rates first. Distributable cash flow for investors is calculated based on earnings before interest, taxes, depreciation and amortization [EBITDA], minus interest expense, maintenance capital and other items. That means when interest rates rise, there is less cash available for paying out distributions. It is that simple.

    Sovereign debt issues are more of a macroeconomic risk. Almost every financial crisis that has occurred in the U.S.-and for that matter, around the world-stemmed from an overabundance of debt. Today, there is too much debt on the balance sheets of almost every developed country in the world, including the U.S. That poses a rising risk to the overall well-being of the economy, because as long as countries overspend relative to revenue, they are dependent on external capital to finance that spending.

    Absent changes in spending and borrowing behavior, Western countries face rising risk in having to pay a lot more to attract capital, particularly if such spending is rising relative to gross domestic product [GDP], just as smaller countries did during the financial crisis of 2009. Ultimately, oil and gas demand are at risk due to the risk of a debt-induced recession, and the pipelines that carry those resources could suffer hits to volume. The U.S. cumulative deficit relative to GDP is at record levels now, though annual deficit has recently come down in both absolute and percentage terms as the recovery has continued, albeit more slowly and at a lower magnitude than anyone would like.

    TER: Do you think the market understands MLP fundamentals and is valuing the companies fairly?

    JE: Are MLPs overvalued or undervalued? In view of recent volatility, both in the broader market as well as in energy and energy MLPs, that is a very interesting question. Investors have to consider their appetite for exposure to this sector, and what kind of total return they're likely to experience. At the end of August, MLPs were trading at the lowest yields ever. Also, some individual issues may be overvalued or fully valued.

    We argued last month that the sector was in the process of undertaking a revaluation due to the strong and visible fundamentals, which may run through the end of this decade. Traditionally, this sector has averaged 6% yields, although it has been up and down over the last few years. By the end of August, the Alerian MLP Index (AMZ:NYSE) was in the low 5% yield range and the Cushing MLP Total Return Fund (SRV:NYSE) was in the high 4% yield range. We argued that there is scarcity value because no other asset class has this combination of solid income potential and strong growth.

    Not long after we made the revaluation or rerating thesis, the MLP sector went through a very volatile few weeks, giving up virtually all the gains it had accumulated during the year, and bottoming out on Oct. 14. The whole energy complex also dropped sharply in response to weakening oil prices and moves by the Saudis to press for market share in the global oil market rather than cut production, as most investors in energy had expected.

    Effectively, global crude supply was roughly 1.3 MMbbl/d above expectations this year, due to Libya reentering the crude export market, demand being less than expected, and North American oil supply from shale plays being greater than expected. Despite limited direct commodity price exposure, MLPs sold off hard before recovering most of that selloff in the span of just one week. Now MLPs sit roughly 5% below the peak they reached at the end of August.

    We still contend that a rerating of MLPs is underway, given the combination of yield and growth potential. But if commodity prices drop below $70/bbl for crude and $3/thousand cubic feet for gas-and such drops were sustained-then the capital spending outlook, and ultimately the distribution growth outlook, would be adversely impacted. Consequently, MLP valuations would also be negatively impacted under that scenario.

    However, given the Saudis' track record and their role as the "central bankers of oil," as Jan Stuart on our energy team likes to say, we believe they are more likely going to act to stabilize the crude market. All things considered, we believe oil is likely to stay in the $80/bbl range. Other than perhaps a potential wobble to the capital spending outlook, the distribution growth trajectory is likely to stay in the 6-9% range for the next several years.

    Where the yields on MLPs ultimately settle out is harder to say, but we think there is greater recognition today of what MLPs have to offer investors.

    TER: Let's talk about the source of growth. As shale production moves from some of the established plays in the Bakken, Permian and Eagle Ford to some of the developing areas, like the Tuscaloosa and Mississippi Lime, is that creating demand for more pipelines and storage?

    JE: Yes. We would argue that there is still a lot of demand for natural gas processing assets and pipelines in the Bakken, to process product otherwise going to waste. The Eagle Ford is clearly more established, but we're still seeing areas in West Texas with rising productivity that will create demand for more assets.

    One area you didn't mention was the Marcellus. That's an area where we think there will be tremendous growth and production between now and the end of the decade. Over the last six years, production has gone from 1 billion cubic feet per day [1 Bcf/d] to 16 Bcf/d, which is an astounding number. We expect that, by the end of the decade, production will grow another 50%. That is creating tremendous demand for either reversing flows on pipelines or for additional pipelines.

    TER: What are your estimates for the amount that will be spent on midstream infrastructure in 2014 and 2015?

    JE: Our estimate for 2014 is $45 billion [$45B], and we foresee about the same level of spending in 2015. Overall, midstream spending depends upon which macro study you believe. A study by the American Petroleum Institute [API] indicated $890B of spending on midstream infrastructure over the next 11 years. Another study, by the Interstate Natural Gas Association of America, indicated $640B in spending over 20 years. That is a wide range-$81B/year compared to $32B/year. We think the API study is closer to the mark. Either way, there is still a tremendous amount of capex spending expected over the next decade.

    TER: What is the fastest-growing segment of the MLP market? Is it oil and gas transportation or processing?

    JE: We estimate oil and gas transportation to account for approximately 60% of capital spending, and gas gathering and processing to account for about 20%. We also expect a lot of investment to occur in the export of natural gas in the form of liquefied natural gas. Gathering, terminals and rail transportation are also growing areas.

    TER: Which companies should we be watching during the historically busy fall MLP buying season?

    JE: I don't know if I'd call the fall an MLP buying season. We typically see stronger buying during the first month of each quarter because investors are positioning themselves to capture the distributions declared somewhere between the fourth and the sixth weeks of the quarter. Companies go into the market to raise capital in the middle of the quarter, so returns are typically lower during that time. In the third month of the quarter, investors start to position toward the end of that month for the expected distribution capture for the first month of the quarter, and the cycle repeats.

    As far as which companies we like, in the wake of the recent volatility, pullback and the ensuing rebound, we like Williams Companies (NYSE:WMB), Targa Resources Corp. (NYSE:TRGP), Kinder Morgan Inc. (NYSE:KMI), EnLink Midstream LLC (NYSE:ENLC),EnLink Midstream Partners L.P. (NYSE:ENLK), Tallgrass Energy Partners L.P. (NYSE:TEP), Enterprise Products Partners L.P. (NYSE:EPD) and NiSource (NYSE:NI), just to name a few.

    We think Kinder Morgan's decision to consolidate its MLPs into the owner of the general partner, Kinder Morgan Inc., is going to put it in position to grow a lot faster. In particular, it's going to lower its cost of capital by removing the burden of incentive distribution rights.

    TER: Is the $70B consolidation deal aimed at enabling growth or enhancing value?

    JE: Kinder Morgan had outgrown the usefulness of the incentive distribution rights. They were becoming a burden. The cost of capital was uncompetitive relative to other companies despite the fact that Kinder has an absolutely gigantic footprint and is very successful. Some of the other large companies, such as Enterprise Products Partners, took out their general partners four years ago. That meant Enterprise could outbid Kinder all day long and could grow distributions faster than Kinder. It was getting a much better valuation as well. The time had come to do something. We expect shareholders to approve the consolidation transaction and expect it to close by the end of this year.

    TER: EnLink's growth has been both through acquisition and expansion so far. Are you expecting it to focus more on one of those going forward?

    JE: I think it is going to be a combination of both. EnLink came into existence as a result of a merger between the old Crosstex Energy L.P. (XTEX:NASDAQ) and Devon Energy Corp. (DVN:NYSE). A number of assets that reside at the Devon midstream level are going to be dropped down into EnLink. Crosstex also brought with it significant capital spending opportunities, on the order of about $1B. In addition, a number of acquisitions and organic opportunities are being evaluated. We believe EnLink will continue to execute on its plan to double its EBITDA by 2017. We don't think the valuation fully reflects the objectives that have been set out by management.

    TER: Investors can gain exposure to EnLink through the general partnership or the MLP. What are the pros and cons for both retail and institutional investors?

    JE: I don't think it makes that much difference if an investor is retail or institutional. The consideration is whether investors want to participate in the lower-yield but faster-growing general partner, or the slower-growing but higher-yield limited partner. Currently, in terms of our total return outlook, we're relatively indifferent. We think the total return opportunity is similar.

    TER: You also watch Williams. What catalysts are on the radar there?

    JE: Williams is on the Credit Suisse Focus List. The market does not appear to be fully valuing what we believe is the dividend growth potential of the company. One thing that has held Williams back is the restart of its Geismar Olefins steam cracker, which went down about a year ago. It could restart in Q4/14.

    Williams also has a very large backlog of projects. It has multiple billions of dollars in opportunities going forward. An activist investor has triggered a restructuring of some of the underlying limited partners. That has provided a catalyst for the general partner. At the general partner level, we're still expecting dividend growth over the next few years to be in excess of 20%. It could be 25%+ in the next couple of years, and in the mid-teens over the next five years.

    TER: Another company that you mentioned is Tallgrass. It recently announced an expansion to its Pony Express pipeline, in which it has a one-third ownership interest. How will this impact the stock?

    JE: We see that as a very positive development for Tallgrass. It was an expansion we weren't specifically expecting.

    We are assigning a 50% probability of the expansion happening, which we estimate is worth approximately $5/unit. Even without the expansion, we expect distribution growth in the mid-teens over the next five years, and investors still can get a high 3s yield on the units, which is pretty attractive in our view.

    TER: Do you see yields overall increasing going forward, or are some sectors and companies going to pay out more than others? How will those yields compare to U.S. treasuries?

    JE: That is the question on a lot of investors' minds right now. We think distribution growth in general is rising. We project 2014 Alerian MLP index distribution should average about 7%, maybe 7.25%. We think that number will go up next year, somewhere in the neighborhood of 50 to 75 basis points. The overall average-on an equal-weighted basis as opposed to a market cap-weighted basis-is going to be even higher, probably in the 9% range. The median is about 6% right now, but we expect those numbers to push higher in the next few years given the amount of capital being deployed.

    As the Federal Reserve eases back on bond buying, and interest rates start to move up in the next year, we could see a tug of war. MLP growth rates can do a lot to offset potential headwinds from interest rates. Assuming the interest rate move is relatively smooth, we think the sector will handle it just as it has in the past.

    TER: Thank you for your time.

    JE: Thank you.

    This interview was conducted by JT Long of The Energy Report and can be read in its entirety here.

    John Edwards joined Credit Suisse in April 2012 as a director and senior equity research analyst covering publicly traded MLPs involved in energy and energy infrastructure, along with pipeline companies and companies that own the general partners to energy MLPs. Prior to joining Credit Suisse, he was senior vice president and senior equity research analyst for Morgan Keegan & Company Inc. Edwards also worked in equities research with Deutsche Bank Securities as a vice president and senior analyst covering natural gas pipelines. Prior to working in equities research, he held positions in project finance and business development for an affiliate of Edison International. He received his bachelor's degree in economics from Occidental College, and a master's degree in business s administration from California State University, Fullerton. He is a member of the Financial Analysts Society of Houston, Texas, and holds the CFA designation from the CFA Institute.

    Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. She owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) John Edwards: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Williams Companies, Kinder Morgan Inc., EnLink Midstream LLC, EnLink Midstream Partners, Tallgrass Energy Partners, Targa Resources Partners L.P. (Targa Resources Corp.) and NiSource currently are or have been clients of Credit Suisse during the past 12 months. Credit Suisse has provided investment banking services and received financial compensation from Williams Companies, EnLink Midstream LLC, EnLink Midstream Partners and Tallgrass Energy Partners within the past 12 months. Credit Suisse expects to receive, or intends to seek, investment banking-related compensation from Targa Resources Partners L.P. (Targa Resources Corp.), EnLink Midstream LLC, EnLink Midstream Partners, Enterprise Products Partners, Tallgrass Energy Partners and NiSource within the next three months. Credit Suisse has acted as lead manager or syndicate member in a public offering of the securities of Williams Companies, Tallgrass Energy Partners, EnLink Midstream LLC and EnLink Midstream Partners within the past three years. Comments and opinions expressed are my own comments and opinions. I determined and had final say over what companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8204
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Oct 23 2:01 PM | Link | Comment!
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