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  • Biofuels Carry Upside For Early Investors: Jim Lane
    Biofuels Carry Upside for Early Investors: Jim Lane

    Source: Zig Lambo of The Energy Report (2/16/12)

    http://www.theenergyreport.com/pub/na/12599

    The biofuel sector, already an $80 billion a year industry, is still in its infancy. In this exclusive interview with The Energy Report, Biofuels Digest Publisher Jim Lane discusses the exponential growth slated for this once-obscure energy source, and how its market resembles the traditional oil and gas industry in many ways. While biofuels are not for the faint of heart, as Lane cautions, investors who do their homework can get in early on companies that offer incredible upside potential.

    The Energy Report: Many investors have some level of familiarity with biofuels, but don't have the depth of understanding required to enter that market with confidence. As the publisher of Biofuels Digest, which focuses exclusively on this sector, what do you think is the best way for investors to dip their toes into these equities?

    Jim Lane: The biofuels sector has grown into an $80 billion (B) industry today, even though it's only in its infancy. Why be interested in the sector? Because it's big and it's going to get bigger. There's lots of money to be made and lots of good to be done.

    TER: What exactly is a biofuel?

    JL: Biofuels include any fuel molecule produced from a plant source using tools and microorganisms from synthetic biology. It could be a residue from agricultural waste, forest waste, municipal solid waste, animal waste, or something made using a biological process. There are about 100 different plants that can be used to produce biofuels, and many can be grown in areas that won't support traditional food agriculture. The main plant sources are still corn, sugar cane and soy beans, but biofuels can also be made synthetically from carbon dioxide and water, or carbon monoxide and water. Biofuel processes can turn pollutant waste streams with little or negative value into value streams sometimes worth thousands of dollars per ton.

    The main basis to date has been using traditional processes, such as yeast fermentation, to produce an alcohol fuel known as ethanol. We also have a process that takes plant or waste oils and turns that into what's called biodiesel. Those are pretty built-out industries in many ways. They'll grow, but they won't grow quite as much in the future as what we call advanced biofuels, which use exotic processing techniques to extract value from unusual feedstocks.

    TER: Are investors making money in this space at this time? What segments are doing best at this point and why would that be?

    JL: Yes, investors can make money in this market. It depends on the stage of the company. It generally takes about 10 years to go from the original lab or research work to producing on a commercial or industrial scale. Depending on a company's stage of development, investors may see early-stage cash burn, the beginnings of commercialization, or substantial profitability. The companies that are further along on their path are very profitable. For example, Valero Energy Corp. (VLO:NYSE) is a major U.S. oil refiner, and last quarter its most profitable division was ethanol production, based on about 1,100 million gallons in capacity. But the bigger opportunities for investors are in selectively picking the winners of tomorrow, because those will offer more upside.

    TER: Is there a lot of research going on in different areas that aren't anywhere close to commercialization at this point, or has commercial production been largely standardized?

    JL: While there are well over 200 companies currently developing projects around the world using advanced biofuel techniques at various stages of development, there are three basic areas for investors to consider, much like the oil and gas market. We designate these areas as upstream, midstream and downstream.

    The upstream segment includes companies that are developing advanced feedstocks with higher yields that grow under more exotic conditions. They're working on genetics and seed development.

    Midstream companies utilize processing technologies that extract fuel from plants or waste material, similar to an oil refinery, whereas upstream is comparative to traditional oil and gas exploration. Consider the feedstocks an above-ground oil fuel, if you will.

    Downstream companies are the ones that get the fuel to market, such as the pipelines or the gas stations that are delivering those fuels to consumers.

    TER: What would you say to those critics who suggest that biofuels are just another passing fad? What are the growth prospects for this industry?

    JL: Any business that's gotten to $80B in sales is real, and in the United States and Brazil it's now an unsubsidized business. Ethanol, in Brazil, is unsubsidized and actually outsells gasoline. The International Energy Agency projects that 30% of all transportation fuels could be biofuels by 2050. We use 1.2 trillion gallons of traditional fossil fuels worldwide, so the demand potential is in the hundreds of billions of gallons and the sales will be in the trillions of dollars. It's definitely not a passing fad; the potential is just being unlocked now.

    TER: What are the job creation possibilities in this industry?

    JL: It's a very robust job outlook, according to a recent report by Bloomberg called Moving Towards the Next-Generation Ethanol Economy. Looking just at U.S. ethanol, which is a small piece of the pie, they expect that by 2030, 2.4 million man years of employment would be created. A lot of that is in construction-680-odd thousand man years between now and 2030. This includes engineering talent, operators, laborers, people who collect and transport the biomass and the fuel and also the administration and management. These are very similar to jobs in traditional oil and gas facilities, with a few more biologists.

    TER: What factors and investment criteria should investors consider if they want to get involved in this industry space?

    JL: Investors should look at three main factors. First is the extent to which the processing technology is proven or demonstrated at scale. Has it been done at pilot? The earlier you take that on, the more risk you have that the technology may fail along the line. A later-stage technology gives you more confidence. But, the returns are going to be commensurately smaller. So, the more research you do on the processing technologies, the earlier you can invest with confidence; which should give you a bigger return. I think that goes for every kind of high technology.

    Next is feedstock. To what extent does the processing technology have a guaranteed price at which that feedstock can be acquired? A company that has a 20-year contract for municipal solid waste at a fixed price is on solid ground. If it is buying a commodity crop with fluctuating prices, investors need to understand how the company has hedged that, because you don't want to be buying $8 feedstock to make $3 fuel.

    On the downstream, you want to make sure there is an offtake contract with a credit-worthy buyer. You certainly don't want to have a long-term contract with a company that may go bankrupt. Investors should look for companies that have done a really good job of locking in feedstock costs as well as a reliable offtake contract.

    The more certainty investors have on those three fronts, the less risk they will shoulder. On the other hand, less risk usually means less potential reward.

    TER: What are some of the leading companies in the industry at this point, and what are they up to?

    JL: We've had seven companies with successful IPOs in the last 18 months, with 10 in the IPO queue right now. Of the entire cleantech sector, 75% of the companies in the IPO queue are biofuel companies. That tells you a little bit about where Wall Street is putting its emphasis and which of these sectors is going to succeed in the short term. The biggest success stories include companies like KiOR, Inc. (KIOR:NASDAQ), which went public last year. It's a company that uses a technique called Biomass Fluid Catalytic Cracking. KiOR creates diesel, jet fuel and gasoline from wood chips very cost effectively. The company already has over $1B valuation. It's now building its first commercial facility in Mississippi with very strong support from former Governor Haley Barbour to build a total of six plants in the area.

    Renewable Energy Group Inc. (REGI:NASDAQ) is another company that just did its IPO. That company is the number-one biodiesel producer in the United States, at about 300 million gallons a year, and had strong revenue growth last year.

    TER: What other companies look interesting?

    JL: Solazyme, Inc. (SZYM:NAS) is a company that makes renewable oils from algae using advanced synthetic fermentation. It also makes skin creams, which are selling on the Home Shopping Channel very successfully. Solazyme is making fuel and also has a joint venture with Roquette Group. It is also making algae cookies and has all kinds of products it can make from renewable oils. We expect them to be very successful not only in food and skin care but also in making jet fuel for the Navy and in all kinds of applications across the spectrum.

    Gevo Inc. (GEVO:NASDAQ), went public last year and makes isobutanol, which is an alcohol-based fuel. Isobutanol also a very important component in the chemical industry. Gevo is just building its first commercial facility, which will be open in the first half of this year. That's a very exciting company to watch.

    Amyris, Inc. (AMRS:NASDAQ) is based out of Silicon Valley. Its technology uses sugar cane syrup and is being commercialized now in Brazil. Amyris makes an exotic collection of fuels and chemicals and lubricants and all kinds of great products from sugar cane, as well as a renewable jet fuel and diesel being commercializing in Brazil.

    Another Silicon Valley company, Codexis Inc. (CDXS:NASDAQ), is an enzyme, fuels and chemicals developer. Its major investor is Shell, and it is producing enzymes and other components of fuel creation in its work. The company recently bought its chemical rights back from its original parent, Maxygen, Inc.(MAXY:NASDAQ). Codexis is now deploying a wide variety of solutions to make low-cost sugars for the chemical industry. That's important because you need sugar in order to turn something into a chemical. This company is going to be the "Intel-inside" of the industry.

    Then there's Rentech, Inc. (RTK:NYSE.A), which has a very advanced process making diesel and jet fuel through what's called gasification. It's based in Los Angeles and commercializing its technology in Ontario, Mississippi and Colorado. These companies are examples that are at, or are going to commercial scale right now, in which investors can take a position today.

    TER: Are these companies making money, breaking even, or are they still in the "trying to get there" stage?

    JL: Most of them came out quite early. Biotech stocks often come out either pre-revenue or early stage. Renewable Energy Group came out a little bit later in its evolution. The other ones are still in the cash-burn phase. I think Amyris is deploying its second commercial plant and the others are in the process of building their first commercial facility. Amyris will need to get three or four up to be solidly profitable and cover the overall administration and R&D costs. You would expect to see most of those in the black around 2014 or early 2015. The most important thing for an investor is not current profitability, but where they are on their path to profitability. Waiting until they are totally in the black and everything is already established is less risky, but you're going to be sacrificing some of the upside.

    TER: What sort of capital costs are involved in putting a commercial plant into production?

    JL: The first commercial plant is usually the most expensive due to the R&D involved, and can cost anywhere from $250-400M. Larger projects can be up to a billion dollars apiece. As the industry develops standard designs, costs could drop to somewhere in the range of about $200-300M per project. So this is not for the faint of heart. Certainly these companies will be accessing project financing for the debt component. This is a very capital-intensive industry similar to the traditional oil and gas industry.

    TER: You also publish the Biofuels Digest Index composed of 30 component stocks that seem to cover a pretty broad range of companies. How do you determine who you cover?

    JL: We look at the 30 companies that have the largest capacity and also include some pure plays. So, we have companies like BP Plc. (BP:NYSE; BP:LSE) and Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE). BP's biofuels unit alone has 4,000 employees. It's a very heavy investor in biofuels. Shell also just did an $8B acquisition or joint venture and merger last year. We also have Archer Daniels Midland Co. (ADM:NYSE). From large-caps we go down to some of the smaller ones I've mentioned like Solazyme, KiOR, Gevo, Amyris, Rentech, Codexis and Renewable Energy Group. The key there is that all of them are fully focused on biofuels and chemicals, or it's a significant part of their operations and profit flow. We change them around a little bit, of course, as we've had a lot of recent IPO activity. It has been a pretty good sector to invest in over the last 18-24 months.

    TER: Do you have any other points you'd like to discuss and closing thoughts you'd like to leave with our readers?

    JL: Investors usually ask me what the best way is to pick winners and avoid losers. The answer to that is to read a lot and study up on the technology. Never buy anything that you're not sure of, or you don't know. These are exotic technologies. A lot of them are early stage. It's very important for investors in early-stage, high-technology companies to be fluent in understanding a company's upstream feedstock strategy, if its processing technology is proven, and who's the offtaker. And is that represented in hope or is that represented in hard contracts and real dollars? If you've done your homework, you can find a lot of value, which plenty of investors have. It's all based on being a knowledge worker before you are an investor.

    TER: We greatly appreciate your time and input today on a sector that certainly provides another growth area for investors to consider. We'll look forward to talking with you again to see how these companies progress.

    JL: Much appreciated.

    Jim Lane is the editor and publisher of Biofuels Digest, the most widely read biofuels daily newsletter.The Digest covers producer news, research, policy, policymakers, conferences, fleets and financial news. It is home to the Biofuels Digest IndexTM, The 30 Most Transformative Technologies, and the "50 Hottest Companies in Bioenergy" annual rankings.

    Want to read more exclusive 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) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

    2) The following companies mentioned in the interview are sponsors of The Energy Report: Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for services.

    3) Jim Lane: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for this interview.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

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

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    Feb 21 6:16 PM | Link | Comment!
  • Oil Prices Make For Profitable ETF Trades: Roger Wiegand
    Oil Prices Make for Profitable ETF Trades: Roger Wiegand
    14 February 2012 @ 07:29 pm EDT

     

    Oil Prices Make for Profitable ETF Trades: Roger Wiegand

    Source: Brian Sylvester of The Energy Report (2/14/12)

    http://www.theenergyreport.com/pub/na/12577

    Today's retail investors have more options than ever before, but there is a shortage of practical information on how to manipulate different investment products, be they ETFs, options or equities. Enter Roger Wiegand, editor of Trader Tracks. In this exclusive interview with The Energy Report,Wiegand discusses his methods for energy investment and how to set tailor-made time and price windows to realize solid gains.

    The Energy Report: Roger, we are still in the early stages of 2012 and gas prices are near all-time lows, with a barrel of oil bobbing in the US$100 range. What approach are you employing to make money on oil without getting burned by gas, given that many names out there have substantial assets in both commodities?

    Roger Wiegand: We have three trades on right now. Our futures trade is an oil spread where we buy a window of opportunity on price, which allows investors to fix their positions according to their own price constraints and risk comfort levels. We are looking for an oil futures price to high of $120 a barrel (bbl) for May to June of this year. Oil is around $100.60/bbl and there is very good support for oil right now. Over the years, we have found that oil will move in a trading range of $4 increments. We are in the middle of those increments now. I call it $98.50-102.50/bbl. As the cycle and the calendar move forward, we are looking for a high of $115-120/bbl for the first half of 2012.

    For share traders, we have two positions in stocks, both exchange-traded funds (ETFs). One is ProShares Ultra DJ-UBS Crude Oil ETF (UCO:NYSE.A), and the other is Horizons BetaPro NYMEX Crude Oil Bull Plus ETF (HOU:TSX). The UBS Crude Oil ETF is a double-long position ETF on oil, meaning that if oil went up $1, investors would earn $2 on this particular trade. The Horizons BetaPro NYMEX, a bull-long ETF, is much the same. Normally, when we recommend a share in our letter, either an ETF or a company, our objective is to make +25% in 90 days. We can't always do it, but we do quite well.

    TER: You trade all manner of ETFs: gold ETFs, oil ETFs and even a Canadian dollar ETF. Why do you find these instruments so appealing and what did you do before ETFs existed?

    RW: Before ETFs, we would trade companies, using options and/or spreads on currencies and futures. It is very handy for a shareholder to buy an ETF because investors are basically buying an index or a bundle. Some of these holdings offer very attractive leverage; I like the ones that are x2 or x3.

    One warning I would give is that there are so many ETFs on the market now that they are becoming diluted. We used to trade SPDR Gold Shares ETF (GLD:NYSE) for gold and iShares Silver Trust (ETF) (SLV:NYSE), but we do not recommend them any longer because they do not move as they did before. Other kinds of trades can give us a better position. SPDR Gold Shares and iShares Silver Trust have become elephants and it takes a lot of buying to create movement.

    But, we are happy with our oil ETFs, and we like the Canadian dollar ETF because it is a way to park money in Canada, which we feel is a much better place than the U.S. dollar. Canada is a commodities-driven country and the Canadian dollar is strong with good underpinnings. We featured it a year or two ago in our newsletter and the traders that opted into it are now up over +20%. We also see the Canadian dollar going to 108.00 on the index. It is at about 100.48 right now.

    TER: There is quite a media buzz about ETFs, but many retail investors do not have a thorough understanding of how best to trade them. Could you outline some must-have information for retail investors looking to play?

    RW:Take the oil ETF, USB Crude Oil, for example. It is a double-long on oil. Normally what will happen with oil in the first half of any year is that it will start out slowly, go to a peak, then correct. There will be a correction when the refineries change over from heating oil to gasoline for the summer. If you can find two good long positions during the year-normally January to May, and September to November/December-and if you have a modest goal of making 25% within 90 days, each of those segments work quite well. You can do the same thing with gold. We have grain and corn ETFs too. The objective is to match up the ETF's price, buy it at the low and try to make 25%. Keep in mind those trades must fit the calendar cycles.

    TER: What is the downside risk to ETFs?

    RW: We do not look at gold and silver ETFs, but in our opinion-and I cannot prove it-the gold ETF does not have 100% of gold behind it for every share. If things got really dicey in the gold market, and they could as it is very volatile, there might be some difficulty in getting out quickly enough on an exit. There are probably better trades that you can work with to do that. The NYSE AMEX (NYSE.A) exchange lists the ETFs-you'd be amazed at the number available. People like them because they do not have to pick a company; you can just buy a market index sector, but some of these sectors will sit and not move. Sometimes an ETF or an index will only move modestly when the overall sector is moving a lot. You have to be careful.

    As far as determining a good entry point for futures or stocks, you can take the high and low, add them together and divide by two. That will give you the mean and the point where you can match price with the calendar and decide where it could go from there. We get spots on the calendar during the year when we are too high on a lot of gold and silver stocks and, while we like the companies, you must consider the amount of potential movement to make money. If we can see only a movement of 5% or 10%, we will not take it. If somebody wants to buy it, we will say okay, but hold it and understand that there could be a couple of pullbacks before it goes up to the next price.

    TER: Do you expect oil to outperform gold in 2012 in terms of percentage?

    RW: It is hard to tell because the gold price is getting quite large. But consider that gold pretty much gave us 15+% for a whole decade from about 2000 to 2010. In the last couple of years, the return has been more like 17-18%. If you use leverage and spreads the way we do, and if you are a good stock picker, you can do better than that. We have had some stocks that we have been in and out of four or five times that have made 50, 60 and 100% every time. That is why in our letter you will see a lot of stocks that are negative right now being recommended at previous highs, but people need to understand that those who have been reading the letter for a long time have purchased those companies maybe two, three or four times and made some excellent gains.

    TER: Natural gas prices are in the doldrums. How long do you expect it will be before gas prices begin to stabilize above $4 per trillion cubic feet? (tcf)

    RW: It will be a while because of oversupply. About two years ago, two major natural gas wells were discovered in Louisiana. One thing that will push gas up in the summer is air conditioning demand. Air conditioning demand will cause power companies running power plants on natural gas to burn quite a bit more. What will happen then is the gas price will go up. We have been lingering at around $2.35-$2.50/tcf. It probably should go up maybe $0.25-0.30/tcf for the summer, but I cannot really see gas going back to $4-5/tcf for quite some time.

    TER: That is unfortunate. What are some other ways that you have exposure to oil in terms of equities?

    RW: One of the other things you can do is buy options on big oil companies. With some of the biggest ones, if you understand the calendar and the way their stock price moves within a window, you can buy an option for $1.50-2.50 and within 90 days, it will usually return 100%. They seem to work pretty well.

    TER: How do you know when to get in and out?

    RW: Again, that is the calendar. For example, say that you have Exxon Mobil Corp. (XOM:NYSE) stock. It has about $45 million (M) in cash in the bank. It is at a point where they are not spending a lot on exploration right now. They take cash and buy entire exploration companies, or entire major, proven energy fields, which is easier. Suppose we think that within a calendar window of about 120 days, a company has the chance to bypass performance and go up +$20. What we would try to do is look at our call option that would be close to being in the money, and buy one at the money or slightly above it for $1.50-2. Then, when the stock price rises up, the option goes up in value. Those have worked out pretty well. We had many of them, not only in energy, but also in gold and silver and precious metals companies like Goldcorp Inc. (G:TSX; GG:NYSE) and others in 2006 and 2007. The volatility and changing markets will go in and out as far as your ability to do this. We have been away from that opportunity for a while, but it is starting to come back again. Trading and investing strategies are in constant change.

    TER: How do you respond to someone who says, "I don't trust newsletter writers because they often get shares in exchange for promotion?"

    RW: I have heard that before. The answer for my newsletter is that I do NOT trade any of the shares, which is purely deliberate on my part. For ethical reasons, I do not want to be recommending shares or ETFs or anything related to shares and then buying them myself. Now, newsletter writers can do that legitimately. The good ones I do know, who do it legitimately, will make a recommendation and buy it themselves 10 days later. And, when they put out an order to sell it, they wait 10 days and then sell their position. Obviously, there is going to be some influence. All of us in this business know the miners, the companies and the officers. What I look at, being a technician, is if the stock does not move, I do not want it. Periodically, we will get one that is a good company but, for whatever reason, it just sits still.

    TER: Can we discuss equities? What are some of your positions in the energy side?

    RW: It is not in the letter right now, but we do like to trade Exxon because it is easy to trade. Some of the refinery companies such as Valero Energy Corp. (VLO:NYSE) and a couple of other ones have not done that well right now because the refining business is very competitive.

    I would suggest that if readers are looking to buy shares in an oil company right now, one thing they can do is go toward the explorers. We have one good explorer in New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX). New Zealand Energy hit a big well. Its activities are confined primarily to the country of New Zealand, and it has done a tremendous job. This well is producing 550 barrels a day. It has a second well being drilled right now and their stock just took off like a rocket when the well came in. If you can find the right one, it is a wonderful thing to be an investor.

    TER: How did you learn about that particular company?

    RW: I was referred to it by a radio friend of mine who bought it. I looked at the chart and the website and studied it, and it looked like a super opportunity.

    TER: What is the chart telling you now?

    RW: The chart paused because it had a big ride in the value of the shares with that well coming in. There was a little bit of a pullback, but we are seeing what I call a continuation triangle in the chart right now. The chances of the next well coming in appear to be pretty good. We like the company and the management. We think that when that second well comes in, it will go up quite a bit more.

    TER: On its website, the company says it has the stated goal of being the largest independent oil producer in New Zealand. As you have said to me in the past, you set a goal of making 100% every year. Do you like the fact that this is a lofty goal?

    RW: Absolutely. It is hard to make 100% on a stock. The stocks where we have done so have usually been gold and silver. But this particular oil stock has been absolutely great from the standpoint of those who got in on the ground floor. There was some profit taking because it made so much money in a short period of time regarding the news on that first well. But the second well is starting up and I am fairly positive it will do well. You can buy the shares and hold the stock, although with some of these juniors, you are probably better off if you do not. It does have risk. It is a junior exploring company and its future is based on oil discovery, but now it is in a position where it has five more wells on the schedule. It is generating cash flow and preparing to drill another one. And, it has five major permits right now with multiple wells planned for 2012. I would say the chances are fairly good for another well to come in and then the stock would go higher.

    A good junior oil explorer is hard to find because they are quite risky. We had one about six years ago with good managers and a lot of cash-a well in Wyoming, I believe. It was straddling a land position between two big wells that were operating-one with Exxon and one with Marathon Oil Corp. (MRO: NYSE). They were operating 50 miles apart and this one was right in the middle. It looked good and the stock was about $2.50 when we recommended a buy. The promotion was heavy on it and even though it had not really hit a well, the stock went almost to $7. My concern was if it came up dry, the stock would make a big reverse. So I walked people up using risk exit points and we got all the way to $6 and change. Then an announcement came that they were going to delay drilling. I told people to sell it. For some reason, they never drilled the well and the price went all the way back. But, my people were in from $2.50 to more than $6 based on a strategy that I devised to protect their position. I told everybody, "If the well comes in, you can buy it again at about $7.50 on the charts." But we elected to get out at $6.50.

    TER: Any parting thoughts in the energy space as far as what retail investors should expect for this year?

    RW: Natural gas is going to be flat. I would leave that one alone. The most opportunity for junior stocks is in the explorers. We can trade call options based on inflation and share prices rising in some of the seniors. That would really pretty much cover the yard as far as opportunity this year. Also, there is this Iranian question that is wide open. I do not think the Straits of Hormuz will be blocked, but the threats do so create a premium of $5-10 in the oil price. I think that premium pretty much went away as things calmed down, but it still could be as high as $5 and move up to $10. That premium is above the fundamental value of the shares themselves. I think inflation in the U.S. right now is running at 11.5%. They claim it is almost nonexistent, but that is not true. If you want to see good inflation numbers, look in the little box where they report in the Wall Street Journal commodities over a one year span and today's prices. The differences are very dramatic.

    Roger Wiegand is the editor of Trader Tracks, a newsletter based in Maspeth, N.Y. that provides investors with short-term buy-and-sell recommendations and commentary on political and economic factors that are driving the market. He can be reached at tradertracks.com ortraderrog@comcast.net. Contact Linda Gorman at Resource Consultants for information on Roger Wiegand's Technical & Fundamental Trading Class in Tempe, Arizona on April 26, 2012. Wiegand is also speaking at the annual Wealth Conference at the same location April 27-28 along with five other nationally known speakers. Call Linda Gorman at 800-494-4149 or 480-820-5877 for information and registration.

    Want to read more exclusive 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) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

    2) The following companies mentioned in the interview are sponsors of The Energy Report: New Zealand Energy Corp. Streetwise Reports does not accept stock in exchange for services.

    3) Roger Wiegand: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for this interview. As reported above, Roger Wiegand does not personally trade any shares but trades futures and commodities for his own account. His personal trades are posted in Trader Tracks Newsletter available by subscription. Contact Claudio Basis, 718-457-1426 to sign-up.

    Streetwise - The Energy Report is Copyright © 2012 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

    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

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    Feb 17 5:16 PM | Link | Comment!
  • MLPs-Wall Street's Best-Kept Secret: Yves Siegel
    MLPs-Wall Street's Best-Kept Secret: Yves Siegel
    07 February 2012 @ 05:23 pm EDT

     

    MLPs-Wall Street's Best-Kept Secret: Yves Siegel

    Source: George S. Mack of The Energy Report (2/7/12)

    http://www.theenergyreport.com/pub/na/12509

    Despite depressed natural gas prices, investors in master limited partnerships (MLPs) leveraged to natural gas liquids can expect both excellent income and share price appreciation, says Credit Suisse Senior Analyst Yves Siegel. In this exclusive interview with The Energy Report, Siegel discusses his favorite MLPs and their winning formula for double-digit returns.

    The Energy Report: Yves, what can investors expect out of MLPs between now and the end of 2013?

    Yves Siegel: Steady as she goes. The yields for our group now are around 6%, and we expect distribution growth to be about 7%. If Fed Chairman Ben Bernanke is true to his word, we'll continue to expect an environment of low interest rates for the next two years. So if you combine the yield and the distribution growth, we think investors could see low double-digit returns.

    TER: How do distributions grow?

    YS: When contracts roll over on terminal assets, they typically roll over at higher rates because they're competing with new facilities. In order for companies to get a return on their facilities, they need a certain price. Storage at Cushing, Oklahoma, for example, is relatively expensive to build. When contracts roll over for those existing storage assets, typically those rates can move up to the prevailing rate for new construction. Distribution growth results not only from contract rollover but largely from new builds and investments that come online, either through greenfield projects or through acquisitions. The MLPs as a group have been able to grow distributions by investing capital in excess of the cost of capital. That's been a winning formula for quite some time.

    TER: Do you see real estate partnership investors shifting their attention to energy MLPs?

    YS: I would suggest that retail investors who are searching for yield and invested in real estate investment trusts (REITs) are now looking at MLPs. I would also include investors who have historically invested in utilities. I think MLPs have been around long enough now that investors are feeling more comfortable with investing in the security.

    TER: Returns on your MLPs coverage universe have been excellent in recent months, some experiencing double-digital total returns. With more demand and buying, do you expect yields to grow in addition to distributions?

    YS: No; I think yields will compress. The current average yield is around 6%. I wouldn't be surprised to see that reduced to 5.5%, the rationale being that stock prices move higher once the market sees healthy returns. Demand for income-oriented securities remains pretty robust. In a low interest rate environment, people continue to look for places where they can safely park cash as opposed to keeping it under their mattresses. I expect a combination of increased distributions and continued higher stock prices. The result would probably be net-net compressed yields.

    TER: Do you expect to see initial public offerings (IPOs) for these types of MLPs this year?

    YS: Yes, I expect to see new MLPs come to the market.

    TER: Everything you've covered suggests good health in this sector. What is your investment thesis right now?

    YS: The themes have been threefold: One, invest in MLPs that are well situated to participate in burgeoning shale plays, because as producers pursue these plays, they need the infrastructure to support further production.

    Two, we think natural gas liquids (NGL) fundamentals are strong and will remain strong for the foreseeable future because NGL prices correlate with crude oil prices. NGLs are a byproduct of a natural gas production, and current low prices for natural gas are part of the cost of producing NGL. But crude oil prices are high, and that determines the revenue stream NGLs will produce. This all speaks to a very favorable margin opportunity. We would suggest that MLPs that have exposure to NGL fundamentals should continue to do well.

    Three, we like this notion that MLPs can buy assets from their sponsors at attractive valuations that enable them to grow distributions. These dropdown stories will continue to perform well over the next couple years.

    TER: Are extraction products from natural gas the most profitable part of natural gas production?

    YS: Yes. As we speak, natural gas prices have fallen below $2.50/thousand cubic feet (Mcf). Natural gas is very depressed, but what's keeping the economics favorable is the fact that some of these plays, such as the Marcellus shale play, produce NGLs along with the gas. The NGLs triple the actual realization on the commodity because of the liquids content. So that is a very, very powerful thematic right now.

    TER: What are your preferred standards for MLP growth and income?

    YS: Our approach focuses more on total return. Simplistically, an investor can buy a stock that's yielding 8% but has 3-4% distribution growth, and he or she would probably have an 11-12% return. Conversely, an investor could buy a stock that's yielding 5% and is growing 7-8%, and wind up with a 12-13% total return. Balancing total return with calibrated risk is the right approach. Don't try to capture total return and take undue risk. Overall, the market pays for growth.

    MLPs with more growth typically have much lower yields, so it's not inconsistent for us to recommend Western Gas Partners, L.P. (WES:NYSE), for example, which is yielding below 5% but which we think will have double-digit distribution growth over the next couple of years. At the same time, we could recommend Boardwalk Pipeline Partners, L.P. (BWP:NYSE), which is yielding around 8% and is going to have much more modest distribution growth of 3-4%.

    TER: Let's segue into your top MLP picks.

    YS: Well, what we like about Boardwalk Pipeline Partners is that it has a very steady revenue stream tied to its interstate pipelines. With new management in place, we think 2011 was perhaps an inflection point for the company to try to focus more on growth. It has done so by buying storage assets from Enterprise Products Partners, L.P. (EPD:NYSE) and signing a gathering agreement with Southwestern Energy Co. (SWN:NYSE) in the Marcellus. We think there is an opportunity to accelerate the growth in distributions if management is successful. If management falls short of that goal, I think investors would still be happy with the safety of the yield.

    The other company that's within that interstate pipeline business model is El Paso Pipeline Partners, L.P. (EPB:NYSE). That stock came under a little pressure when Kinder Morgan Energy Partners, L.P. (KMP:NYSE) announced that it was buying El Paso Corporation (EP:NYSE) last year. I think El Paso Pipeline Partners was unduly punished because investors felt the distribution growth would slow. It is going to slow, because instead of having all of El Paso's pipeline assets migrate into the MLP, now some of those assets will be migrating into Kinder Morgan. It's almost a truism that the growth at El Paso Pipeline Partners is not going to be as robust because those pipelines will be moving into a different entity. However, we still think El Paso Pipeline Partners will be able to grow its distributions at 9%, and in fact, Kinder suggested as much. So we think a 5.5% yield and 9% distribution growth over the next couple of years is a good formula for success and a good formula for total return potential.

    When you think about the other theme we spoke about, the strength of the NGLs, Targa Resources Partners, L.P. (NGLS:NYSE) fits into that. We like Targa because of the investment opportunities, the integrated model it's pursuing within its midstream business and its very good management team.

    We also like DCP Midstream Partners, L.P. (DPM:NYSE), which is another NGL story, but it's also a dropdown story. There is the MLP, DCP Midstream Partners, and its sponsor, DCP Midstream LLC (DPM:NYSE), which is 50% owned by Spectra Energy Corp. (SE:NYSE) and 50% owned by ConocoPhillips (COP:NYSE). DCP Midstream Partners will continue to see assets migrate to it from DCP Midstream, helping to finance its growth while it pursues its own organic growth.

    Then, within the dropdown stories and also in the midstream space, it's hard not to mention Chesapeake Midstream Partners, L.P. (CHKM:NYSE) and Western Gas Partners, which I mentioned earlier. Both of these MLPs are owned by exploration and production (E&P) companies-Chesapeake Energy Corp. (CHK:NYSE) for Chesapeake and Anadarko Petroleum Corp. (APC:NYSE) for Western. The upstream parents are investing millions of dollars on building infrastructure to connect their wells, and the MLPs are helping to finance that via the dropdown. In the case of Western, it is having some good organic growth in the DJ Basin on top of what it can expect to acquire from its parent. We think Western and Chesapeake give investors nice, double-digit growth.

    For investors who are looking for more safety, or simply more mature MLPs, Enterprise Products Partners LP probably represents the best in class, being the largest MLP and having a vast footprint within the U.S. spanning NGL, crude oil and refined petroleum products. It covers the whole spectrum, and it has an excellent management team. It has an excellent balance sheet and a great formula for 5% steady distribution growth as far as the eye can see. Enterprise is a real core holding and one that we would like to have in any MLP portfolio.

    TER: Over the past 52 weeks Enterprise is up 15%, and it's up 2% over the past four weeks. With a $43B market cap, what are its growth prospects?

    YS: Well, it is investing $3-4B annually in organic growth projects. Let's not forget that it will cost billions of dollars to build U.S. energy infrastructure that supports shale play development. We think that a majority of that spending is being done by MLPs and Enterprise is a good case in point. That runway is probably pretty long, meaning infrastructure spending should last several years. That bodes well for the MLPs that are investing the capital and should be generating returns that support distribution growth.

    It's not only the size of the company that matters, but the ability to execute projects efficiently and cost effectively, using existing assets in some cases that provide leverage. For example, Enterprise will be using some of its existing pipeline and its right-of-way in order to realize its planned ethane line, stretching from the Marcellus to the Gulf Coast. The joint venture crude pipeline that it is doing with Enbridge Energy Partners, L.P. (EEP:NYSE) from Cushing to the Gulf Coast makes use of an existing pipeline there. It is reversing the Seaway pipeline at an extremely reasonable cost, which speaks to your point that there are not many companies out there that have the infrastructure or the entrepreneurial spirit to go after these projects.

    TER: Are there any other companies that exhibit this entrepreneurial spirit?

    YS: ONEOK Partners, L.P. (OKS:NYSE) has an excellent management team, and it is also a play on the burgeoning NGL market. I would also mention Magellan Midstream Partners, L.P. (MMP:NYSE), which is focused on crude and refined products pipelines.

    TER: Both of those companies have had tremendous runs recently; ONEOK is up 39% over the past 52 weeks, while Magellan is up 21% or so.

    YS: Both of those stocks have good growth characteristics and excellent management teams, but investors might want to wait for a better entry point before buying. They've certainly had really terrific runs.

    Sunoco Logistics Partners, L.P. (SXL:NYSE) is also doing its bit to take advantage of getting ethane out of the Marcellus. It is also helping to de-bottleneck the amount of crude oil that's trapped at Cushing by moving crude production from the Permian Basin down to the Gulf Coast instead of north to Cushing. I put it in the same sort of category, as it has a good management team, strong balance sheet and very good growth prospects. All those good things are reflected in the stock price, so a better entry point might be worth waiting for.

    TER: Sunoco Logistics has pulled back a bit over the past four weeks, but not much.

    YS: I'd just like to stress the fact that the companies in the MLP class are very transparent because of cash flow. It's a very good pass-through structure for getting cash back to shareholders in a tax-efficient manner.

    TER: If you had to pick one of these MLPs as a very favorite, what would it be? Or should investors choose a basket of MLPs?

    YS: My thought is that investors are best served by diversifying within a basket of MLPs. I don't think MLPs are mispriced securities, so you're not necessarily going to have outsized returns, nor do I think investors who are looking at the bond and stock markets could really expect outsized returns. For the equity market, if investors could see a 6-8% type of total return, they should be pretty happy.

    TER: Yves, we haven't seen any large gains in the price of crude over the past six months, and we have certainly seen the price of gas depressed. If energy commodities began to strengthen, what kind of an effect would that have on these MLPs?

    YS: It would affect different sectors in different ways. With the gathering and processing companies, most of the contracts are for a percentage of proceeds. The MLPs do a pretty good job of hedging their commodity risk out one to three years. But in a strong NGL- and crude oil-pricing environment, net-net they would benefit. Low natural gas prices are positive for gas processing margins. However, some intrastate pipelines would see diminished volumes if drilling slows down in dry gas areas. If crude and gasoline prices were to get too high and gasoline prices get too high, refined petroleum product pipelines might experience some negative pushback because of declining volumes in their pipelines.

    TER: Thank you for sharing your knowledge and time today.

    YS: You bet. Thank you.

    Yves Siegel joined the Credit Suisse Energy Research Team in June 2009 to cover the MLP and natural gas pipeline sectors. Immediately prior to joining Credit Suisse, Siegel was a senior portfolio manager at a New York hedge fund focused on MLPs. Prior to his buyside experience, Siegel had established a leading sellside MLP franchise, having spent more than 10 years at Wachovia Securities after prior sellside engagements at Smith Barney and Lehman Brothers. He has received both a BA and an MBA from New York University and is a CFA charterholder.

    Want to read more exclusive 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) George Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

    2) The following companies mentioned in the interview are sponsors of The Energy Report: Enbridge Energy Partners, L.P. Streetwise Reports does not accept stock in exchange for services.

    3) Yves Siegel: I personally and/or my family own shares of the following companies mentioned in this interview: Enterprise Products Partners, L.P. and Kinder Morgan Energy Partners, L.P. Credit Suisse may do banking business with the companies mentioned in this report. I did not receive any payments from the companies mentioned. I was not paid by Streetwise for this interview.

    Streetwise - The Energy Report is Copyright © 2011 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.

    The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

    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

    Feb 13 3:21 PM | Link | Comment!
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