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Rick D

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  • U.S. Oil Export Ban: A Catalyst That May Harm Economy, Producers And Foreign Policy [View article]
    The paper linked to in Jennifer's comment above is well thought out and definitely worth reading.
    Apr 13 09:28 PM | Likes Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]

    IDRs are Incentive Distribution Rights.

    Most MLPs have Limited Partners (that's regular "passive" investors like you and me) and a General Partner who manages the partnership. In TGP's case, the General Partner is Teekay Corporation (TK).

    Typically the General Partner is compensated for their efforts through IDRs. These are usually divided into 4 tiers: 2%, 15%, 25%, and 50%. They work kind of like tax brackets, and act much like a tax on distributable cash flow per partnership unit. For example, the first $1 of DCF/unit might be subject to the 2% rate; DCF/unit of $1 - $2 might be subject to the 15% rate; DCF/unit of $2 - $5 might be at 25%; all over $5 might be at 50%. (These are just made-up figures; I don't know what TGP's IDR tiers are off the top of my head.) As you might imagine, the GP has a strong incentive to get the DCF/unit as high as possible so they can make much more money for themselves from the IDRs.

    TGP is a little ways into the 50% IDR tier. Most of its DCF is "taxed" by the GP at lower rates, but the marginal rate is 50%. This means that if TGP increases its DCF/unit, only half of the increase will flow down to the limited partners. The GP will take the other half of the increase.

    Is this favorable to investors? It depends on how you look at it. Is it good to be in a high tax bracket? Yes, because it means you're making a lot of money. No, because you're paying a lot in taxes and if you increase your income you get to keep less of the increase.

    As a very rough general rule, MLPs in lower IDR tiers are younger and are likely to grow faster, while MLPs in higher IDR tiers are more mature and will usually have lower distribution growth rates.
    Apr 13 08:52 PM | Likes Like |Link to Comment
  • U.S. Oil Export Ban: A Catalyst That May Harm Economy, Producers And Foreign Policy [View article]

    There's nothing wrong with using US ships and crews as long as cost and availability are reasonable. Sometimes they are and sometimes they aren't. The Jones Act is much more of a problem for crude transport than for refined products, but it still increases the transport cost of refined products significantly, particularly for longer distances than your Texas - Tampa run.

    Here is a link to some articles about the Jones Act and energy transport:

    I can certainly refute the claim that oil companies pay little tax. ExxonMobil paid an effective income tax rate of 48% last year, plus quite a bit in sales taxes, duties, and other taxes. See page 20 of ExxonMobil's 2013 Financial Statements at this URL:
    If they're trying to dodge taxes, they're doing a lousy job of it.
    Apr 13 02:23 AM | 1 Like Like |Link to Comment
  • U.S. Oil Export Ban: A Catalyst That May Harm Economy, Producers And Foreign Policy [View article]
    There are many, many problems with a ban on exporting energy. Here are a few examples:

    1. We currently have far more refining capacity than we need for domestic consumption. So we import oil, refine it, and export the value-added refined products for more than the cost of the imported oil. If we banned exports we'd have to close down many of our refineries and put people out of work.

    2. Due to the Jones act, gasoline cannot practicably be shipped directly from Gulf Coast refineries to the east coast of the US. Instead it must be exported to a Caribbean nation, then re-imported. An export ban would result in high prices and shortages of gasoline in the eastern US. (You could get Congress to repeal the Jones Act, I suppose. Good luck with that -- they don't want to be seen as "unpatriotic".)

    3. Due to the fracking boom in both oil and gas, the US has a surplus of condensate and naphtha-range hydrocarbons. Canada, by contrast, needs these hydrocarbons to dilute bitumen from tar sands production so it can flow in pipelines. An export ban would leave us with condensate and naphtha we have no use for, while Canada would have to heat the bitumen at significant expense or not mine it at all, which would increase the price of oil in all of North America.

    4. We have a huge surplus of ethane. We don't have enough petrochemical plants to use it all and there's only so much you can add to natural gas (so-called "ethane rejection") without exceeding the BTU specifications of pipelines. We currently export the remaining ethane, either directly or by "ruffling the molecules" into ethylene. An export ban would leave us with unusable ethane, which would have to be flared, a total waste.

    5. Refineries in the US were mostly configured to handle heavy sour crude imported from the Middle East. Most overseas refineries are configured to handle light sweet crude. The fracking boom in the US has resulted in US production mostly being light sweet. It would make perfect sense to export our light sweet crude to overseas refineries while importing heavy sour, but we aren't allowed to do this because of the current ban on exporting oil. So instead our refineries are being run inefficiently on the wrong feedstock.

    6. Roughly half of our natural gas is produced as a byproduct of oil production. If we ban exports of gas, we will either have to limit oil production based on the amount of gas we can use domestically or else flare some of the associated gas. (We are already flaring a lot of associated gas due to gas prices being too low to justify construction of gathering systems. The Williston Basin can be seen from space due to all the flaring. This is a total waste. Why, when other countries need the gas and are willing to pay up for it?)
    Last but certainly not least, we need to consider what has happened to other oil-producing countries that have artificially constrained domestic pricing of energy. Saudi Arabia, Ecuador, Venezuela, and Iraq during Saddam Hussein's rule come to mind. Did any of these become manufacturing or industrial powerhouses? The only notable effect of these policies I ever saw was that Ecuador was awfully polluted for awhile. Fuel was so cheap that no one ever bothered to properly tune automobiles, trucks, or buses.

    I believe it is best for our country and for our trading partners, who are mostly our friends, if we let the "invisible hand" of the free market do its job.
    Apr 10 02:33 PM | 2 Likes Like |Link to Comment
  • How One Retiree Is Muddling Through Dividend Investing: Part IX - My Dividend Investment Business Plan [View article]

    You have a good, thorough, well-thought-out plan here. You are miles ahead of most investors.

    There is only one part of this I would change, and that is the following selling criterion: "It underperforms stocks in its sector in total returns (price + dividends) for two years running."

    There are two problems I see with this rule.

    Firstly, on average half of all stocks will underperform their sector return in any given year. Thus, the odds of any given stock underperforming 2 years in a row are 1 in 4, just from random noise. You probably don't want to dump a quarter of your portfolio every 2 years. In fact, since you are probably picking the most stable, conservative stocks in the sector, the odds of underperformance in a bull market are actually pretty high. That doesn't mean there's anything wrong with your stocks, as you are likely to discover when the bull turns to bear.

    Secondly, I've found that a perfectly good stock that isn't doing anything wrong operationally, has a solid balance sheet, pays a reliable dividend, etc., can often underperform price-wise for many years before the market finally sees the value in it. As a long-term holder primarily interested in dividends, this shouldn't be a problem for you. In fact, instead of selling, you might want to buy more in this circumstance, as the value relative to other stocks in the sector has improved. I've done this in many cases, and have often been rewarded for doing so.

    I do realize that your selling criteria have the word "consider" in boldface. It's never a bad idea to reevaluate an investment periodically, and that's fine if that's what you're using this rule for; just don't pressure yourself to sell a perfectly good stock just because this criterion has been met. Patience with a good stock is a virtue.

    I do want to thank you for writing this series of articles. It has given me a lot of food for thought about my own investment plan.
    Apr 10 12:20 AM | Likes Like |Link to Comment
  • U.S. Oil Export Ban: A Catalyst That May Harm Economy, Producers And Foreign Policy [View article]

    How are we spending US taxpayer dollars to build infrastructure to export gas? I thought the proposed LNG facilities were 100% privately funded.

    Prices for natural gas may "normalize" worldwide, but they will not equalize. Liquefaction, shipping, and regasification of LNG is expensive, and if the US exports gas we will always have a cost advantage over importing countries that is at least as great as that cost of liquefaction, shipping, and regasification.

    Currently gas in the US is roughly 35 cents/therm and in Asia about $1.50/therm. With the proliferation of LNG projects worldwide, I would estimate that the Asian price will drop to about $1 with or without US exports. If we export gas, the US price will probably increase to about 50 cents/therm. That still leaves the US with a 2:1 cost advantage.

    I personally believe that the benefits and additional jobs created by exporting gas will outweigh the negative impact of somewhat higher wholesale gas prices.
    Apr 9 03:10 PM | 4 Likes Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]

    I will certainly grant you that our economy is rather sub-optimal, but I really can't see it degrading to anything like the level of Syria or Libya no matter how bad things get.

    The days when someone could get a good middle-class manufacturing job for life with only a high school diploma and no specialized skill are gone forever. We can't possibly compete with third world countries for low-skill labor. But for people willing to work hard to gain an in-demand degree or skill, the middle class is still very much attainable. Nowhere is this more evident than in the energy industry itself. I don't see too many folks with geology, geophysics, or petroleum engineering degrees going around without hope. There is a real shortage of people with those skills. I have read that newly-graduated petroleum engineers typically start at about $90K/year and go up from there as they gain experience.

    Instead of fighting the export of energy, why not embrace it? Why not encourage your children and grandchildren to work in the energy industry?
    Apr 9 03:56 AM | 1 Like Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]

    You raise a number of good points.

    One thing that was touched upon in the article but not really emphasized is that TGP is more of an income investment than a growth investment. That conservative nature is a double-edged sword. While TGP's distribution is pretty secure, it really isn't the best play for someone looking to capitalize on likely future growth in LNG. You may have noticed that the author is long GLNG and not TGP. For a younger person looking for maximum growth who is willing to accept a higher degree of risk, GLNG would be a better choice. For a retiree like me who wants a steady, slowly-growing income stream, TGP is the better choice.

    I don't consider the dilution worrisome as long as the acquisitions made are accretive, even though the accretion is relatively small. The IDRs are a more significant issue. TGP is in the 50% IDR tier which will significantly limit future distribution growth. In particular you cannot extrapolate past distribution growth which was in lower IDR tiers into the future. Still, I expect decent distribution growth as charters at lower rates slowly roll over to higher rates in the coming years.
    Apr 9 03:24 AM | 1 Like Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]

    LNG tankers are fairly difficult to build. They are specialized ships that require cryogenic storage tanks plus some way of handling the boil-off gas. There are only a few shipyards that can make them.

    Lead times to build LNG tankers are typically a couple of years, requiring shippers to plan ahead when ordering newbuildings. For shippers on the spot market or short-term charters, this can result in a significant advantage if a shortage develops or a significant disadvantage if a glut of ships results. TGP is primarily a long-term charterer and they typically don't order a newbuilding unless they are pretty sure of a long-term charter for it, so they are not affected as much by shortages or surpluses of ships.
    Apr 9 03:03 AM | Likes Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]

    That floor under the price is important. Without it we'll just keep flaring associated gas from oil wells in places like North Dakota. (You probably already know this, but the Williston Basin is visible from space because of all the flaring.) It's got to be economical to build the gathering systems or they won't be built. And at ~35 cents/therm, often they are not economical to build.

    As rough estimates of typical price ranges, I'd place current pricing at roughly 30 - 40 cents/therm in the US and $1.30 - $1.70/therm in major importing countries in Asia. Again as a rough estimate, if we export gas I expect the US price to be about 50 cents/therm and the Asian price to be about $1/therm. That's still a 2:1 price advantage for the US. If US manufacturers still can't compete, the problem is not energy cost, and in my view shouldn't be resolved by artificially controlling energy cost. Also remember that we are not going to be the only ones exporting gas. Qatar, Norway, Australia, Trinidad, Nigeria, Tanzania, Papua New Guinea, and even Canada immediately come to mind. (Canadian exports will likely affect US pricing in a similar manner to US exports, since we're on the same pipeline system.) Asian costs will drop as new LNG capacity comes on line with or without US exports. Why not get some of that LNG export business for the US instead of letting it go to other countries?

    A modest increase in wholesale gas cost will have almost no effect on residential and commercial use because about half the cost is in distribution. Raising the wholesale price by, say, 40 percent would only increase the price to the end user by about 20 percent. Since gas is way, way cheaper than propane and oil, which run roughly $2.50/therm, a small increase would not materially change the economics of installing new gas distribution infrastructure. Remember that oil and propane are typically used in rural areas where it isn't practical to build out gas distribution infrastructure.

    Similarly for transportation, most of the cost is in compressing or liquefying the gas, not the gas itself. If you fill up an NGV and pay the current average price of $2.30/GGE, you're paying about $1.60/therm. Adding 15 cents to this isn't going to change the economics much.

    Again for electricity, the fuel cost is almost negligible (perhaps 15% of the total retail price). Most of the costs are capital for generation equipment, transmission costs, and distribution costs. Exporting gas would add roughly 1 cent/kwh to the cost. That's not likely to be a game-changer.

    I realize that you are opposed to all energy export from the US, but I thought as an aside I would point out that we are already exporting huge amounts of coal to China. I'd much rather they used natural gas, for air quality and CO2 emission reasons. So why not export NG to them instead of coal?
    Apr 7 01:04 AM | 2 Likes Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]

    I won't go into the politics of the situation because that's not my forte.

    The balance of payments issue is real. We can't forever expect other countries to sell us goods and then have nothing to do with the dollars they receive besides invest them in US Treasuries at ridiculously low interest rates. At some point we have to sell them useful goods and services.

    At risk of putting words in your mouth, I'll venture to guess that your take on this is that we should export manufactured goods instead of natural gas. While I'm sensitive to this issue, I don't believe that banning exports of natural gas is the way to go. Firstly, if we are exporting LNG, natural gas will always be much cheaper here than in importing countries, simply because it is very expensive to liquefy, transport, and regasify LNG. If our manufacturers can't compete with LNG-importing countries when gas in the U.S. is cheaper than in other countries by the cost of that liquefaction, transport, and regasification, then I would submit that we have a different problem with our manufacturing than the cost of energy. Secondly, holding gas prices at artificially low rates in the U.S. encourages waste. In particular we are flaring quite a bit of gas here because it's so cheap that the expense of installing gathering systems isn't justified. In my view, it's ridiculously stupid to throw away gas that countries like Japan and Korea desperately need and are willing to pay top dollar for.
    Apr 6 04:48 PM | 5 Likes Like |Link to Comment
  • Buy Teekay LNG Partners For LNG Growth And 6.4% Yield [View article]
    It is true that many newbuildings to move LNG will be available a year or two sooner than needed to service new LNG liquefaction facilities. This is due to delays in construction of those liquefaction terminals. This should not affect Teekay much, though, as their ships are on long-term charters and, as the article states, only two of their ships go off-charter over the next three years.

    Once new LNG facilities come on line the temporary glut of LNG ships should abate. We may even have a shortage again, which is why Teekay has options for additional newbuildings.

    Teekay can more than cover its distribution for the next 3 years with its cash flow from the remaining charters even if the two ships going off-charter in the next three years are re-chartered at zero. The distribution should be quite safe.

    Disclosure: Long TGP.
    Apr 6 04:29 PM | Likes Like |Link to Comment
  • Natural Gas: The Next Great Growth Area [View article]
    Part of keeping things in perspective includes an awareness of the magnitude of the resource. I have heard that the amount of oil in Alberta's tar sands is roughly comparable to the amount of original oil in place in Saudi Arabia. That's an enormous resource. Is it worth damaging 276 square miles of land to make a resource of that size available to humanity? Others may disagree, but I think that's a good tradeoff.
    Mar 29 03:29 AM | 1 Like Like |Link to Comment
  • Natural Gas: The Next Great Growth Area [View article]

    Hydrocarbons aren't just indispensable in industrialized countries. We could not feed the world's population without hydrocarbons. Mechanized agriculture and modern fertilizers, herbicides, and pesticides, all using hydrocarbons, have changed a world hunger problem into a world obesity problem. We can't possibly go back to plowing fields with oxen and water buffalo, fertilizing fields with dung, and killing weeds and insects and harvesting crops by hand. We'd have massive famine if we tried.

    Hydrocarbons have also freed up most of our population from agricultural work. In the 1800s, most Americans lived in rural areas and worked on farms. Today, most Americans live in cities and work in non-agricultural occupations. The value of the human capital freed from agricultural work is enormous. As just one example, many medical and scientific breakthroughs wouldn't have happened if the people who discovered them had to work on farms instead.

    The extent to which natural gas CAN replace oil is very large. That doesn't necessarily mean that it WILL replace oil, and WHEN it will replace oil and to what extent is very much an open question. I am more optimistic on this than I was a few years ago, and I've positioned my investment portfolio accordingly, with major investments in companies poised to benefit from an increase in usage of natural gas.

    I believe that the benefits of fossil fuels outweigh the harm by a large margin. I used to believe it was a much closer call, but as I learned more about the uses and importance of hydrocarbons, I changed my view. In particular, the dependence of modern agriculture on fossil fuels was a real eye-opener for me. Global warming won't harm humanity nearly as much as worldwide famine would.

    That's not to say that I think we can just go on using hydrocarbons without regard to the consequences. Intelligent choices and tradeoffs need to be made. Obviously I believe that converting uses of oil and coal to natural gas is one of those intelligent choices. Energy efficiency initiatives are another. We need to get the most "bang for the buck" out of our resources, maximizing the benefits while minimizing the costs.

    I would concur with your last concern. As an investor in the energy sector, it frustrates me greatly that the U.S. in particular doesn't really seem to have an energy policy. As a result it is more difficult to do any sort of long-term planning, which is essential for successful investing in the sector.
    Mar 29 03:18 AM | Likes Like |Link to Comment
  • Natural Gas: The Next Great Growth Area [View article]

    There are real environmental issues associated with oil and gas development. Some have been exaggerated, but I'm not about to deny that there are real costs there, and we need to consider them along with the monetary costs.

    I would dispute the statement that you make that environmental damage caused by oil sand mining exceeds the benefit of the additional oil, however. We can replace oil for some things, like home heating and ground transportation, and natural gas is a good replacement for that. But we will still need oil for jet fuel, lubricants, and many petrochemicals, as well as for oil's other current uses until we can transition them to natural gas. These are so valuable to our society that I would submit they are well worth the environmental damage caused.

    Compared to oil and coal, natural gas is the "lesser of the evils". Given that we're not going back to the horse and buggy or to wind-driven ships no matter what, I think natural gas is the best fuel for the foreseeable future.

    We need energy, and we will have to make intelligent tradeoffs. There are no free lunches in the energy business.
    Mar 28 05:59 PM | Likes Like |Link to Comment