Seeking Alpha

The Energy Report's  Instablog

The Energy Report
Send Message
The Energy Report features leading investment coverage of fossil, nuclear, renewable and alternative energies. A Streetwise Reports publication. www.TheEnergyReport.com
My company:
The Energy Report
My blog:
TheEnergyReport.com
My book:
The Energy Report Newsletter
View The Energy Report's Instablogs on:
  • Three Ways To Play Uranium: Dundee's David Talbot Names His Top Draft Picks

    Investors in the uranium space are like Goldilocks: They have three major ways to play, says David A. Talbot, senior mining analyst at Dundee Capital Markets. The Athabasca Basin entices with high rewards for high risks. U.S.-based in-situ recovery offers stable cash flow from stable operations. And companies challenged by current market prices that are positioning themselves smartly for an upswing also provide opportunity. In this interview with The Energy Report, Talbot explains the turbulent currents roiling the uranium space, and names a few players he thinks are positioned just right.

    The Energy Report: David, the uranium spot price has recovered to a 52-week high of about $35 per pound [$35/lb] after nearly three months in the doldrums. What drove the rise?

    David Talbot: This uranium price rally is due to a few temporary news items, and perhaps one real supply/demand story. The Cameco Corp. (NYSE:CCJ) strike was a driver, as it was headline news, but now the strike is over. It wouldn't have impacted the market anyway, unless it had lasted for several months, but investors did get excited.

    There is risk with regard to Russia due to increasingly harsh sanctions, but this is simply a worry at this point. We have a hard time believing that Europe and the U.S. are going to cut off 24% and 18%, respectively, of their own nuclear fuel sources. If the cuts do happen, the impact might be huge, however.

    Finally, ConverDyn Corp. [private], the U.S. uranium converter, is suing the U.S. Department of Energy to stop it from dumping stockpile supply into the spot market to the detriment of uranium companies and converters.

    TER: The price is back up to where it was stalled for a number of months earlier. Do you think it's going to continue to rise?

    DT: We're not confident that we are in a sustainable price rally. We might see a leveling off or rebalancing in the $30-35/lb range. We really don't expect the price to sink back down below $30/lb. Until we see meaningful supply cuts and Japanese restarts spurring uranium purchases, the market remains oversupplied, perhaps through 2017, by our estimates.

    TER: The spread between spot and contract price is shrinking. What's your estimate for 2015 for both of those prices?

    DT: The spread shrank as the spot price rose, and the term price remained stagnant over the same period. Historically, there was no spread between these two prices, but starting about 2005-2006, when investors started to buy spot uranium, we did see a separation. It's likely that utilities won't contract as much uranium with such a large spread, and that's why term volumes are down so much, in part.

    Recently, the spread between spot and term dropped to about $7.50/lb. That's almost a three-year low. Over the past decade, the average has been about $10.50/lb. Our price forecast for 2015 is $40/lb for spot U3O8, and $58/lb for term U3O8. We expect to start seeing an influx of term contracting to cover future uranium requirements by the nuclear utilities, which is very important. Term contract volumes have only been 85 Mlb combined over the past two years, versus about 350 Mlb that has physically been used in the reactors. Term volumes have more than tripled over last year, but still, something has to give.

    The Ux Consulting charts of uncovered uranium requirements at reactors show a steepening slope on the graph, suggesting that the urgency of procuring fuel is increasing. This happened in 2005-2007, when many utilities rushed to the market at the same time and prices rose dramatically. When the heavy contracting was done, the line on the chart flattened and prices fell. As we're seeing an increasingly steep uncovered requirement trend line again, we believe when contracting does begin, it will feed off itself, specifically for 2017 and beyond, and prices could take off.

    TER: The term price on the charts that I've seen has fallen to $44/lb. If that continues, what would it mean for the economics of mining?

    DT: It doesn't look good for the economics of mining. Broadly speaking, only about 100 Mlb of annual supply is economic at the $34/lb level. Considering corporate costs, debt and other reasonable returns on capital, that number would probably be lower. Very few operating companies can actually make profits, except perhaps ultralow-cost mines in Kazakhstan, and maybe some U.S. in-situ recovery mines [ISRs] as well. Most will rely on long-term contracts at higher prices to generate positive cash flow.

    World averages for production costs are about $50/lb for open-pit mining, about $45/lb for underground mining, which tends to be higher grade, and $38/lb for low-cost ISR. We see potential for further shutdowns, like the Rossing uranium mine in Namibia [Rio Tinto], if prices persist at these levels. The lack of margin also eliminates much of the incentive for investors to finance projects.

    TER: What is the progress on the restart of the Japanese nuclear power sector?

    DT: Kyushu Electric Power Co. Inc.'s (OTC:KYSEF) [9508:TKY] two Sendai reactors have been approved by Japan's Nuclear Regulatory Agency [NRA]. On Sept. 10, the NRA said that the two reactors met safety requirements for restart. The reactors still have to pass operational safety checks and win the approval of local authorities. While there are hurdles, this is the closest we have been to restarts post-Fukushima, and many expect first restarts in Japan early next year.

    We believe that 13 of the 19 Japanese reactors that have applied for restart have some degree of local support; those should be easier to get back online. Many investors are focused on the negative, but it's important to note that Japan represents only 10% of world demand for U3O8. Germany, the poster child of Western powers getting away from nuclear, would have been down to 2% of demand anyway by 2020, even before its decision to exit. The other 88% of the world still needs uranium to run its nuclear power plants, and the number of plants being built continues to rise.

    Japan is still taking delivery of much of its contracted uranium. Although it is lending some, large inventories have been built up. I expect that the contracts will be renewed in some fashion. The Japanese are relationship-driven, and probably won't risk losing personal connections or access to product. Security of supply is important to the country.

    People are interested in the long-term fundamentals of the industry. Almost everybody believes that demand for energy will continue to grow. Clean energy is preferred, as the effects of global warming become more prominent. Even oil-rich nations, such as United Arab Emirates and Saudi Arabia, are diversifying into nuclear. We expect several other nations to do the same as the need for low-cost, baseload energy increases-especially as electric vehicles begin to take hold. Initial capital for nuclear isn't cheap, but solar, wind and other intermittent alternatives simply cannot provide baseload stability or cover large energy requirements. There should be a mix, and nuclear should be in that mix.

    TER: What developments should investors be concerned about in the uranium space?

    DT: People should be worried about underfeeding. For those who aren't familiar with underfeeding, it's a matter of keeping the centrifuge machines turning and putting more work into enriching uranium. The lower enrichment prices get with this technology, the less natural uranium the utilities require, which is not good for the producers. The utilities get their desired amount of enriched uranium, and what follows can be sold by the enricher without losing any additional U3O8.

    With the U.S.-Russian Highly Enriched Uranium Agreement [HEU/Megatons to Megawatts Program] gone, enrichers have available capacity and have been enriching their own supplies. Just as worrisome, HEU supplies were sold into long-term contracts, but underfeeding supplies are being partially dumped into the spot market.

    Underfeeding has always been around, but it appears that underfeeding supplies have increased by about 50% this year, to an estimated 5-15 Mlb worldwide. This underfeeding is the main reason why the HEU agreement end hasn't had the market impact that many thought it would.

    TER: What would you expect the effect to be on spot and term prices if underfeeding continues?

    DT: It's certainly going to slow down any rally in the uranium sector. The problem is, as long as uranium prices are low, enrichers are going to have excess capacity. As long as they have excess capacity, they're going to continue to do enrichment work and provide more of a product that's coming into the market at low prices. It's an ongoing issue. Do I see that changing in the short term? Not necessarily. Before we see a fix in the underfeeding issue, I believe that the utilities need to get back to purchasing uranium, thereby using up much of this available enrichment capacity.

    TER: What Canadian companies do you find interesting?

    DT: Cameco is a top-tier exploration-producer. Essentially, it's the only blue-chip stock in the uranium sector. We currently recommend Cameco with a Buy rating, high-risk. We have a $23.50/share target price on the stock, although Cameco's share price has come off recently.

    We believe that if uranium turns, Cameco is the go-to name for big money in the sector. The company has a large portfolio of high-grade, long-life, world-class and relatively low-cost operations. This top defensive play realizes uranium prices that are about 33% higher than spot prices at current levels. Cigar Lake is now operational, and we are waiting for it to ramp up, and risk does exist with the ongoing Canada Revenue Agency litigation, but the company's low sensitivity to uranium price is important at these low prices.

    TER: "One of the better discoveries in the Athabasca"-that's high praise given what I've heard about the basin.

    DT: It certainly is. There has been a rash of discoveries in the basement in the past several years. In the past, not much attention was paid to the basement rocks, and basement rocks are more competent. They're easier to work with, especially when they're shallower. Unconformity deposits, hands down, are the highest-grade deposits, but it's easier to work with basement deposits. Exploration for basement deposits has not been as prevalent, especially outside the Athabasca Basin, on the fringes beyond the limits of the sandstone. You wouldn't find an unconformity deposit where the sandstone has eroded away, but you can find basement deposits in those areas, and that's what we're seeing at Patterson Lake South [PLS] and the Arrow discovery. It's part and parcel of the evolving exploration methodology that people use to test the basement with these days.

    TER: What about your third category?

    DT: In a rising uranium price environment, I suggest a couple producers: Energy Fuels Inc. (OTC:UUUU) and Uranium Energy Corp. (NYSEMKT:UEC).

    Energy Fuels has a Buy rating, high risk, with a $14/share target. Operations feed into its White Mesa Mill in Utah, which is the only fully licensed and operational U.S. uranium mill, and it's licensed for 8 Mlb of production per year. Energy Fuels is essentially 100% hedged, with sales of 800 Klb this year, opting only to sell into contracts. Most recently, sales were almost double those of spot prices. The company has some excellent contracts. Several operations remain on standby, or construction has been halted. Higher prices are required to unlock its vast pipeline, which includes projects in Wyoming and New Mexico, plus existing mines in Colorado, Utah and Arizona, which could lead to more than 4-5 Mlb of production company-wide. That would provide great leverage for this company.

    On Uranium Energy, we've got a Buy rating, high risk, with a $2/share target price. While Uranium Energy is officially a producer, as it has some remnant ISR production, we prefer to treat it as a developer with access to a fully permitted and operational ISR plant. What's overlooked is this company's growth opportunity, with its Anderson project in Arizona and Burke Hollow and Goliad ISR projects in Texas. The company never overpays for acquisitions and is quite active from an acquisition standpoint. It has tremendous leverage to rising prices, and probably the best growth profile of the U.S. ISR producers. We do expect Uranium Energy to play catch-up as uranium prices rise.

    TER: The share price trend for Uranium Energy has been consistently down for almost three years. Is that a cause for concern or an opportunity for an investor?

    DT: I think that's an opportunity. Uranium Energy is entirely unhedged. This is a company that doesn't want to enter into long-term contracts, that believes uranium prices are going to rise in the future and wants full exposure to those rising prices. It worked last time around.

    In 2010, Uranium Energy was the darling of the sector. The stock was a ten-bagger that year. It went from $0.50/share to $5/share as uranium prices rose dramatically. That was a volatile stock going up, and post-Fukushima it's been a volatile stock coming down. This company will become exciting when Goliad, Burke Hollow, better wellfields at Palangana and Salvo come online. They'll give it a tremendous growth profile going forward.

    TER: Uranium prices are stagnant, but some exploration stocks are doing very well. That seems counterintuitive. Are these two indicators connected anymore?

    DT: There are two main issues here: timeline to production and uranium pricing. Some companies have time on their side. Long-term explorers are in the limelight due to potentially large high-grade discoveries. High grades are sexy no matter the commodity, but 1% uranium ore at current low prices is still almost $1,000/ton rock. Investors tend to be focused on discoveries, how big they might get, what the grades are, how they will impact economics, and what those economics might be. The projects are likely to be developed well off in the future, when uranium prices are expected to be higher. At least theoretically, these companies should be partially insensitive to short-term uranium fluctuations. Other companies do trade on uranium price movements-near-term developers that require financing and producers-although some mining companies should be more immune because they have the ability to sell their production into higher-priced contracts.

    We've tracked investor sentiment in the sector for more than eight years now, using Uranium Participation Corp. (OTCPK:URPTF) [U:TSX] as a tool, comparing its share price with the underlying net asset value [NAV]. We do recommend Uranium Participation: It's Buy rated, high risk, with a $5.70/share target price, and is a great way for investors to get into a larger, liquid company that acts as a holding company for physical uranium. We see it as leaving the production risk, the permitting risk, the jurisdictional risks, and just buying the commodity.

    Lately, however, this company's usefulness as a tool has diminished because it has traded at about a 20% premium for most of this year, suggesting huge positive sentiment in the uranium equity market-although the stocks don't necessarily reflect that. Now, between the recent uranium price rally and Uranium Participation being off slightly, essentially the stock is trading at par with its NAV. This is the first time since late 2013 that the stock has been down at these levels. I think it's simply a matter of time before the stock corrects to the upside. I don't think it indicates that investors believe uranium prices aren't going to rise over the long term.

    TER: Great. Thank you for your time, David.

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

    Dundee Capital Markets Vice President and Senior Mining Analyst David Talbot worked for nine years as a geologist in the gold exploration industry in northern Ontario with Placer Dome, Franco-Nevada and Newmont Capital. Talbot joined Dundee's research department in May 2003, and in summer 2007 took over the role of analyzing the fast-growing uranium sector. Talbot is a member of the Prospectors & Developers Association of Canada and the Society of Economic Geologists, and he graduated with distinction from the University of Western Ontario, with a bachelor's degree in geology with honors.

    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: Energy Fuels 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) David Talbot: I own, or my family owns, shares of the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Dundee Capital Markets and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by Energy Fuels Inc. Dundee Capital Markets has provided investment banking services to companies mentioned in this interview in the past 12 months: Energy Fuels Inc. and Uranium Energy Corp. All disclosures and disclaimers are available at www.dundeecapitalmarkets.com. Please refer to formal published research reports for all disclosures and disclaimers pertaining to companies under coverage and Dundee Capital Markets. The policy of Dundee Capital Markets with respect to research reports is available at dundeecapitalmarkets.com. 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.
    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 16 3:06 PM | Link | Comment!
  • Energy Master Limited Partnerships Go Mainstream: Baird's Ethan Bellamy

    As Robert W. Baird & Co.'s Ethan Bellamy explains, master limited partnerships are yield-producing investments that can bring remarkable returns to smart investors and provide short-term buy-sell profits. In this interview with The Energy Report, Bellamy discusses a fistful of partnerships worth an investor's dollars.

    The Energy Report: Ethan, your firm covers a lucrative space in the natural resources sector, master limited partnerships [MLPs]. Would you briefly describe this investment vehicle?

    Ethan Bellamy: Master limited partnerships are a subset of publicly traded partnerships that have been around since the tax reform of the late 1980s. They serve businesses that extract and transport energy in the United States. They also may generate qualifying income sources in rents and dividends.

    TER: How do MLPs differ from other types of partnerships?

    EB: MLPs are publicly traded. They get the liquidity benefits of publicly traded securities, coupled with the tax efficiencies and merits of a partnership. The tax structure eliminates the double taxation of dividends. There is no layer of taxation at the entity level, and the tax only occurs at the limited partner level. It is sometimes misconstrued that MLPs are tax-free. In fact, they are not. They are taxed at the unit holder level. But they have a net present value pick-up that one does not find in regular investments.

    TER: Why are most MLPs in energy and real estate? Why isn't the form used more universally?

    EB: In the late 1980s, Winchell's Donuts and the New York Knicks and a bunch of non-energy businesses converted into the MLP structure to make their businesses more tax-efficient and investable. Congress elected to wall off the MLP structure to a subset of extractive resources to prevent the erosion of the corporate tax space. The MLP space was subsequently expanded to include biofuels and logistics. There is a move afoot to expand the sector to include renewable energy sources.

    TER: Is that a good move?

    EB: Renewables deserve a level playing field. I would welcome any cash-flowing businesses with good yield characteristics that can diversify the energy sector.

    TER: Energy MLPs have been seriously outperforming utility stocks and many other energy investment vehicles during the last five years. Why?

    EB: There are two main reasons. First, the Federal Reserve's aggressive monetary policy propped up anything with a yield handle. MLPs are just one of the many beneficiaries of the Fed's accommodative policy. Equity owner-yielded securities have done particularly well.

    The second reason is a more specific energy variable, which is the resource expansion brought about by hydraulic fracturing and horizontal drilling. Three-dimensional seismic design and a host of new technologies have potentially unlocked vast global resources. But the United States and Canada are the only places, so far, where these technologies have been employed to great economic effect.

    The combination of strong secular growth characteristics and the strong technical backdrop of the yield bubble is driving capital into the MLP sector, creating an extraordinary return. On top of that, the MLP space has mainstreamed; it has gained enough critical mass to become a legitimate institutional investment class. Mainstreaming caused a sea change in valuation for MLPs.

    TER: Is there a flipside to holding an energy MLP for the long-term?

    EB: Yes, there is a flipside. My biggest single fear is falling oil prices. Producing an extraordinary amount of natural gas cut natural gas prices in half. The next oversupplied commodities to fall in price were the natural gas liquids: propane, butane, isobutene and ethane. Crude oil has held up better, mainly because it is a more globally transportable commodity. But we are beginning to saturate the North American system with crude. Even though we can export refined products, there is a danger that in 2015 we may see significant retrenchment in crude oil prices because of the oversupply situation.

    These situations pose some risk to the energy MLPs. Equities are influenced by the price of oil because it has such a pervasive impact on the economy. But MLPs have a higher trading relationship to oil prices than non-energy securities. If oil prices falter too much, drilling will slow. When drilling slows, volumes slow. MLPs have energy and oil price exposure.

    The second potential headwind to owning MLPs would be caused by rising interest rates-if they do increase in the near-term, as many people expect.

    TER: Is there a short-term seasonality effect on the MLP sector?

    EB: November tends to be a buying opportunity for MLP investors. Investors like to buy MLPs around Halloween and sell them in January. Historically, the January MLP valuation is tied to the flow of bonuses and investments and taxes. January is usually positive for MLP performance, and it is a good time to sell.

    TER: Which MLPs do you like in the energy services niche?

    EB: On the oil field services side, we are partial to New Source Energy Partners L.P. (NYSE:NSLP). New Source started out as an upstream MLP focused around the Hunton Formation in Oklahoma. It has expanded into oil field services, particularly into pressure testing. It has done an excellent job of growing its distribution, post-initial public offering [IPO]. It is poised to create an integrated upstream model, which we view as a compelling opportunity.

    We are generally interested in the fuel distribution MLPs. We like both Susser Petroleum Partners L.P. (NYSE:SUSP) and CrossAmerica Partners L.P. (CAPL:NYSE) [formerly Lehigh Gas Partners L.P.]. Both of these MLPS have recently completed transformative, highly accretive merger-and-acquisition [M&A] deals that are likely to lead to substantial distribution growth. We have raised our price target significantly on both of those names due to their growth trajectories.

    We closely follow Cypress Energy Partners L.P. (NYSE:CELP). Cypress Energy is primarily a saltwater disposal business. It also performs pipeline integrity and systems testing. Saltwater disposal is a newer entrant to the services space. The Cypress model focuses on pipeline safety, which is an issue attracting media attention. Cypress is poised to gain contracts due to the safety issue from MLPs that operate pipelines. The dominant part of the Cypress water disposal work is in the Bakken, in North Dakota. Production growth in the Bakken leads to top-line drivers for Cypress, both in terms of production water and flow-back water from fracking jobs.

    Another disposal services name that we keep an eye on is NGL Energy Partners L.P. (NYSE:NGL). There are likely to be several IPOs in the disposal services arena soon.

    TER: What is the story with explorer/producer MLPs in the oil patch?

    EB: The upstream MLPs have had a rough go of it lately. They tend to have the highest yields in the sector, both in terms of greater commodity price risk and because their distribution growth has been diminished, or flat-lined, due to weak commodity prices, particularly for natural gas. Natural gas has made a bit of a comeback lately, but the upstreamers are still fighting the effect of the dip. The upstream market is fairly competitive, too.

    The biggest name that people will recognize in the space is Linn Energy LLC (NASDAQ:LINE). Linn Energy was recently the target of rigorous short-seller attacks. It finally turned the corner by creating an asset plan, which is in full stride. It has eight transactions underway right now. Linn Energy should be able to restart its distribution growth in the first half of 2015.

    Mid-Con Energy Partners L.P. (NASDAQ:MCEP) runs its oil patch business fairly conservatively. It is disciplined in acquiring new assets. We like it.

    Legacy Reserves L.P. (NASDAQ:LGCY) did an important deal with WPX Energy Inc. (NYSE:WPX). The two companies have created an incentive structure and turned themselves into a dropdown MLP overnight, which we think is going to lead to enhanced distribution growth.

    I caution, however, that oil price fragility could generate an outsize impact on upstream MLPs, and these partnerships are not all created equal. Legacy could have a rough quarter after Permian differentials blew out as much as $22/barrel. That created a headwind for firms that did not have their basis risk swapped out.

    TER: What do you look for when deciding to invest in an MLP?

    EB: The big-picture strategic rationale for owning MLPs is the secular growth. Many MLPs operate pipelines, for example. They provide the foundational infrastructure of the overall oil and gas infrastructure, and they can be risk-resilient. It makes sense for income investors to balance a portfolio with MLPs-maybe in the 5-10% range, depending on income needs.

    It pays to be a little cautious here, though. We look for high visibility on distribution growth that will not be derailed because oil prices take a hit or the market collapses. We like well-run, bellwether, highly liquid MLPs, particularly ones that can do well in a stirred-up environment.

    Plains All American Pipeline L.P. (NYSE:PAA) is one of the best-run MLPs. We style it as "anti-fragile." Plains is in the crude logistics business, and it is positioned to capture enhanced margins during times of volatility. These types of MLPs are great places to stash capital for an investor focused on preservation and income. MLPs like Plains can make lots of money during a crisis.

    TER: What kind of income are we talking about?

    EB: Income stream for the higher-quality MLPs ranges from 2-4%. An investor can walk up the risk chain to the upstream MLPs, which can return 10%. A name that is yielding 2-4% is likely to experience significant growth, with substantially higher yields, in the coming years. Conversely, there is a reason why an MLP has a 10% yield handle. It is not free money. If it was a relatively lower-risk investment, it would carry a lower yield handle, so caveat emptor.

    TER: Price and yield have an inverse relationship for MLPs? Like bonds?

    EB: Exactly. The defining variable in MLP yield, and therefore price, is the rate at which firms are growing their distribution. Distribution growth is a proxy for enhanced value creation down the road, as well as for the stability of the distribution. An MLP cannot grow distribution if its base level of income is not stable.

    TER: Do you have other MLPs to call to our attention today?

    EB: Enterprise Products Partners L.P. (NYSE:EPD) is the bellwether, big-liquid MLP. It just did a $4B transaction; it bought the general partner of Oiltanking Partners L.P. (OILT:NYSE) and 66% of Oiltanking's common units, and has proposed to buy up the remaining public stake in Oiltanking. The deal is indicative of how a good MLP expands its business. It is also indicative of the consolidating trend in the space, which is providing a tailwind for the whole group.

    TER: Thank you, Ethan.

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

    Ethan Bellamy specializes in the analysis of master limited partnerships at Robert W. Baird & Co. Previously, he was director of research for the Lehman Brothers MLP Opportunity Fund, where he was responsible for fundamental analysis and due diligence in public, PIPE and pre-IPO investments in natural resources. He also covered MLPs at Stifel Nicolaus. He holds a master's degree from the University of Colorado at Boulder, and a bachelor's degree from Clemson University.

    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) Peter Byrne 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: 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) Ethan Bellamy: 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. Robert W. Baird & Co. has a financial relationship with all companies discussed in this interview. 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.
    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 09 3:11 PM | Link | Comment!
  • Oil And Gas Investor Editor Leslie Haines: We Will Never Stop Importing Oil, But We May Start Exporting

    Horizontal drilling and fracking have opened new opportunities for investing in domestic energy, whether for pure-play explorers in developing shales, producers in mature areas, or service companies opening up the monster wells. Oil and Gas Investor Editor-in-Chief Leslie Haines has been following the revolution for nine years, and agreed to share with readers of The Energy Report the names of some beneficiaries of new technology's multiplier effect.

    The Energy Report: As editor-in-chief of Oil and Gas Investor, based in Houston, you follow the development of U.S. shale closely. Is the U.S. really on track to energy independence, or will depletion rates cut this boom short? What are the production numbers telling you?

    Leslie Haines: I have been covering shale development since 2005, and it looks like we are on track for energy independence by 2020 or so. However, we're never going to stop importing oil because supply diversity is prudent.

    Depletion rates are significant in every shale play. Some of the depletion rates are quite steep in the early years of a play, but wells tend to produce for 20 years or so at a lower rate, so overall production rates are still growing.

    The monthly U.S. Energy Information Administration [EIA] reports show that in H1/14, U.S. gas natural production alone increased by more than 4 billion cubic feet a day [4 Bcf/d]. The bulk is coming from the Northeast, from the Marcellus and Utica plays in Pennsylvania, Ohio and West Virginia. Also, a lot of new natural gas is coming on, in association with oil production in West Texas, in the Permian Basin, and in south Texas, in the Eagle Ford play. While some gas areas might be declining, we're getting enough new natural gas to offset that decline. In fact, both oil and natural gas production in this country are the highest they've been in about 35 years.

    Natural gas in storage was down last year, and now we're refilling. Every summer and fall, you refill storage to prepare for winter. It looks like we're going to have a lot of gas in storage. We've had a fairly mild summer and haven't had a huge call for natural gas for air conditioning, compared to what it could have been. Between the production and the weather factors, it looks like we'll have plenty of gas in storage for the fall.

    TER: How will the development of monster wells, as they're being called, impact that balance?

    LH: When we say monster well, we are referring to an above-average initial flow. We're seeing this happen in the Utica play in West Virginia and southern Ohio. Some very large dry-gas wells are being reported with initial flows of 20-25 million cubic feet of gas a day [20-25 MMcf/d]. That's a huge gas well by anybody's measure. It is just one more example of U.S. production surging due to horizontal drilling and fracking. Those two techniques combined have revolutionized everything in this country and allowed us to recover a lot more of the underground reservoir.

    TER: The techniques continue to develop as more environmentally friendly and efficient methods are discovered. What are some new techniques you are seeing?

    LH: The size of the average frack is getting quite a bit bigger. It used to be that the horizontal leg might only go out 1,000-2,000 feet [1,000-2,000 ft]. Now, it's going out as far as 5,000-7,000 ft horizontally, so the well bore is exposed to more of the reservoir. The size of the fracks has also gotten bigger, with 20 or 30 frack stages along a lateral. That has increased production.

    In one basin, you may find the number of formations that can be tapped is quite numerous. In the Permian Basin of West Texas, for example, more than 5,000 vertical feet of pay can be tapped. If you sink three horizontal legs into that well, three different horizons can be fracked and produce from one well. It triples the effect of that well and acreage.

    TER: What's an example of a company taking advantage of that multiplier effect?

    LH: Two good examples are Pioneer Natural Resources Co. (NYSE:PXD) and Concho Resources Inc. (NYSE:CXO) in the Permian Basin. Production is soaring. In fact, Pioneer is one of the companies that recently received special permission from the government to export a little bit of condensate as a test case. Pioneer is a very active proponent of exporting crude.

    TER: Is the company testing price impact, or market demand, or something else?

    LH: All of the above. The company is trying to prove to the government that we need to be able to export crude oil in addition to refined products like gasoline. It is very controversial.

    TER: In the absence of exporting, are we producing too much? The EIA's Weekly Natural Gas Storage Report showed 2,801 Bcf at the beginning of September. Is oversupply keeping the price of natural gas down?

    LH: A lot of Wall Street analysts have reduced their outlooks for oil and gas pricing-and company earnings projections-through the rest of this year and into next year. For example, Bernstein Research just came out with a report in which it is bringing down its natural gas price estimate for 2015 from $4.50/thousand cubic feet [$4.50/Mcf] to $4/Mcf. It plans to leave the price there through 2016.

    We are seeing such an incredible surge in supply of both oil and gas that producers, analysts and investors are starting to get a little bit worried. We had very high natural gas prices a few years ago, and then the surge of new production, combined with a mild winter, made the price of natural gas go right back down. At one point, natural gas was below $4/Mcf. It's come back a little this year, but there is still quite a bit of concern.

    TER: Are today's prices less than what it costs to pull the oil out of the ground?

    LH: Producers are still making money, but the prices for drilling and fracking are inching up because there's so much demand for wells to be drilled and fracked.

    TER: You sat on a panel at the Stansberry Society conference in Dallas with S&A Resource Report newsletter writer Matt Badiali earlier this year to talk about the future of shale. He divides the shales into mature [the Bakken and the Eagle Ford], and developing [the Tuscaloosa, Utica and Cline areas]. Are investors rewarding companies with shale play diversity, or is it considered smarter to master one shale type?

    LH: The stock market used to reward companies for diversity. Investors wanted to see a balance between oil and gas, and two, three or four different project areas. However, that has changed. Now investors favor pure-play companies. A company like Oasis Petroleum Inc. (NYSE:OAS), which is in just one play, the Bakken, has done very well in the last year.

    Sanchez Energy Corp. (NYSE:SN), which is in the Eagle Ford and Tuscaloosa Marine Shale, is not being rewarded for the Mississippi project yet. The Tuscaloosa play is still developing, and hasn't proven to be economic yet. The company has some expensive wells with downhole technical challenges. The players in that area are still working on solving the geology. In the Eagle Ford, however, Sanchez is very experienced and successful. That part of its business is well recognized.

    But, in general, I would say that diversity is not being rewarded in the market at this time. It's better for companies to focus on two or three plays at the most, and in well-established areas like the Bakken, the Eagle Ford and the Marcellus.

    TER: Are there still upside opportunities in the established shales?

    LH: The Marcellus Formation is considered the second largest gas field in the world. Production keeps growing every quarter. It's difficult for a company to get in there now. Most of the lease positions are already carved out. Companies have gone beyond finding the sweet spots, and are focusing on two things. One is how to drill a more efficient well faster, while reducing costs. The other is infrastructure. The Marcellus and Utica plays are constrained because there is not enough pipeline to get all the gas to market. A ton of midstream projects have been proposed and are underway. Billions of dollars are being spent to build pipeline infrastructure to move the gas not only to the population centers in the northeast, but also to eastern Canada. Some of the gas is going to be piped down to the petrochemical plants on the Gulf Coast. Some of the gas is even being piped to the West, to Chicago and beyond.

    TER: This sounds like more of a manufacturing operation, now that companies don't seem to be drilling dry holes anymore. Who are the main players?

    LH: Companies like Cabot Oil & Gas Corp. (NYSE:COG), Range Resources Corp. (NYSE:RRC), Chesapeake Energy Corp. (NYSE:CHK) and EQT Corp. (EQT:NYSE) are doing quite well in the Marcellus. The same thing is true in the Bakken, the Eagle Ford and the Permian Basin. Some 20 companies may drill a play, but a handful do most of the work. And they are the bigger companies.

    TER: Do you envision mergers and acquisitions in that space, as some of these companies mature?

    LH: It's really about the play maturing. We see a similar pattern in every shale play. Companies decide that a play is relatively mature, and that they can make a higher return somewhere else. They put their assets on the market, sell to somebody else in that play or to a master limited partnership [MLP], and then redeploy their money into another play that might have a faster growth trajectory.

    TER: What is a recent example of that?

    LH: Marathon Oil Corp. (NYSE:MRO) sold its North Sea assets to redeploy more capital to the Eagle Ford, which has much higher returns.

    TER: You wrote a September cover story on service and supply companies, which is one way investors are leveraging the oil and gas industry. Are margins increasing in that business?

    LH: It looks like they're about to, yes. Almost 1,900 rigs are drilling in this country at any given time. I'd say 90% of those wells will need to be fracked. That is an enormous demand for rig crews, frack crews and all the associated equipment and materials. Last year, about 17 million hydraulic horsepower was installed. The amount of horsepower available for fracking has probably doubled in the last five years. Everything is bigger, longer, higher pressure-more, more, more. Service companies have pricing power because there is such a frenzy of activity right now.

    TER: There are many types of service companies. Is there one part of that industry that's growing faster than the others?

    LH: One bright spot is in companies that provide sand for fracking. They've been doing extremely well in the marketplace. Their stocks are way up, and they keep adding new capacity, to deliver yet more sand to the marketplace for fracking. The oil field service index, PHLX Oil Service Sector (OSX:NASDAQ), has risen steadily since January, and the hottest subsector seems to be the frack sand providers. Some of them have tripled in the past 12 months.

    TER: What are some examples of solid frack sand providers?

    LH: US Silica Holdings (NYSE:SLCA), Hi-Crush Partners LP (NYSE:HCLP) and Emerge Energy Services LP (NYSE:EMES) are three. Their revenues mirror the increase in drilling activity, which could be 14% in the next year. That is why analysts are telling us that it looks like profit margins have come off their lows, and service prices are starting to rise again.

    TER: Thank you for taking the time to talk to us.

    LH: Thank you.

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

    Leslie Haines is editor-in-chief of Oil and Gas Investor magazine. She began her journalism career in 1980 in Williston, North Dakota, at the Williston Daily Herald. She was the energy and business reporter for the Midland Reporter-Telegram in Midland, Texas, in 1982 and 1983. She joined Hart Energy Publishing in Denver in late 1983 as a copy editor. Soon thereafter she began writing for Western Oil and Gas World. In 1985, she joined the staff of Oil and Gas Investor magazine. She was named managing editor two years later, and became editor in January 1992. In November 1992, the Independent Petroleum Association of America awarded Haines with the 2nd Annual Lloyd Unsell Award for Excellence in Petroleum Journalism. She is a former president of the Houston Producers' Forum, and is on the board of the Houston Energy Finance Discussion Group.

    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) 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) Leslie Haines: 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. 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 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.
    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 02 2:54 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.