Chen Lin: How My Portfolio Gained 63% In 2012

Includes: ALDW, ALJ, CENJF
by: The Energy Report

Chen Lin has gotten so much attention for his investment success, new subscribers to his newsletter, What Is Chen Buying? What Is Chen Selling?, have to line up on a waiting list. Luckily, he sat down with The Energy Report to share some of the investment ideas that helped his portfolio climb 63% in 2012. Learn how Lin played price differentials and dividends to create outstanding gains in a challenging year, and what his moves for 2013 may be.

The Energy Report: Chen, what's your economic and market outlook for 2013?

Chen Lin: In the past few months, China seems to have turned the corner as its real estate market started to turn up, and so goes its economy. I believe the U.S. will likely do well. I don't see the EU breaking up in 2013, and Japan is going to be printing a lot of money this year to try to jumpstart its economy. So although I see slow global economic growth, it's still growing, especially in China and the U.S. I believe the stock market can do quite well, as investors have been piling into bonds and cash in the past a few years.

TER: Oil prices have recovered from their lows of last year, but Brent is much stronger than West Texas Intermediate [WTI] and closer to its March peak than WTI. What's your forecast at this point?

CL: I see relatively stable oil prices. There will be a lot more oil coming from U.S. shale plays. However, the pipeline to the Gulf will be limited and the United States has a ban on exporting oil. We are likely to see a lot of oil coming from Oklahoma to the Gulf Coast. However, the oil has to be refined at the Gulf Coast because it cannot be exported, so the new pipelines will likely push down Louisiana Light Sweet until it sells at a sizable discount to Brent, which could create some interesting opportunities for refiners on the Gulf.

TER: How do you view the domestic versus international production arenas in terms of investment potential? Where do you see the best investment opportunities in 2013?

CL: I've been really focusing on international onshore plays in the past few years and will continue to do that. International companies can get the Brent price. Domestic producers are usually shale or offshore plays with high capex. Capital is very hard to get, especially for small companies, so that's why I'm focused on international onshore players. The geographic area I'm mainly looking at is Southeast Asia and onshore Africa, because those are areas in which China is likely to make more acquisitions.

Last year was very difficult and many juniors were hit very hard -- it reminded me of 2008. I see potential on the other side of the trade, where most investors are going to cash and bonds and avoiding risk. Maybe investors are getting ready to take on more risk. That's got me quite excited for 2013, and I'm continuing to watch the market for opportunities to arise.

TER: What are the global implications of China's aggressive oil and gas acquisition plans?

CL: I think China's acquisition strategy is twofold. One is its focus on North America, mostly in Canada, where the primary goal is to understand fracking technology and see if it can be applied in China or elsewhere. The other focus has been on Southeast Asia and Africa, which can be very beneficial to juniors. We've seen some M&A activity there, and I expect to ride the wave and hopefully take advantage of that.

TER: Has your investment strategy changed at all as a result of developments over the past six months?

CL: Not much, but I have started to look a little at some more risky junior plays because investors have been extremely risk-averse. This is a good time to start looking at them more closely.

TER: You recently closed your newsletter to new subscribers. What was the reasoning behind that?

CL: My newsletter has been getting a lot more popular lately and I really hate to see stocks swing a lot on my recommendations. In an ideal world, stocks should only rise and fall on their own merits, and not on my recommendation. So I decided to close it to new subscribers so our existing subscribers could have a better chance to make profitable trades. We are allowing people to go on a waiting list if people drop out.

TER: Do you feel that investors need to be more trading-oriented in order to profit in the energy market these days?

CL: Personally, I'm a pretty long-term oriented investor, but recently the market has been so rough I've been forced into taking more of a trader approach. I really enjoy working on long-term winners and energy companies that can be self-funded are extremely attractive. I have quite a few very long-term plays I've been in two or three years and still holding. I'm hoping the market will stabilize a little so we can have longer-term trades, but I do short-term as well.

TER: When you talked with us, mid-year 2012, your portfolio was up somewhere between 40% and 50% for the first half of the year. How did you do overall for 2012?

CL: My partner, Jay Taylor, tracked it at about 63%. There's a retirement account without any leverage or option trading, which was intentional. I was fortunate to do very well over three main areas in 2012: energy, mining and biotech. Actually, my biggest winner in 2012 was in biotech. Sarepta Therapeutics (NASDAQ:SRPT), which I discussed in The Life Sciences Report not long ago, has actually returned 15-fold in the call option trade. We also made a few very profitable trades in metals and mining. For example, we bought gold and silver stocks and ETF call options just weeks before QE3, which we sold on the QE3 news market swing. I also did quite well in the energy sector.

TER: What names have been good performers in the last year?

CL: Another stock with a nice return that is still undervalued is Coastal Energy Co. (OTCPK:CENJF). It's offshore Thailand, so development is always slower than onshore; fortunately, the wells are inexpensive to drill. I wouldn't put it in the same category of Mart and Pan Orient. I've been trading it in and out since the stock was trading at a few dollars. Last year when an Indonesian company proposed to buy Coastal, I sold out all my shares. I told my shareholders to sell on the surge and then when the takeover failed, I bought back at a much lower price. I've been trading in and out of this one.

Another stock I've been trading in and out of, so far successfully, is PetroBakken Energy Ltd. (PBKEF.PK). It pays about a 10% dividend right now on its Bakken play. It's quite undervalued if you compare it with its peers. I just bought it back recently after making a 50% return in the last round a year ago. Hopefully, it will rally from here. Many traders like to trade by the chart, which sometimes ignores the fundamentals. I often put "opposite trades" in place to take advantage of market swings.

TER: Do you have any other situations that look particularly attractive?

CL: A couple of weeks ago I took a position in a refinery play, which is a recent IPO called Alon USA Partners LP (NYSE:ALDW). Its parent is Alon USA Energy Inc. (NYSE:ALJ). Alon USA Partners is a master limited partnership that's based on a single refinery in the Permian Basin. The Permian Basin right now has huge oil production, and there's a big spread between the local oil -- West Texas Sweet --and Brent. Management is guiding about a $5.20 dividend for 2013. Right now, the stock's trading about $22. That means the dividend will be over 20% in 2013.

People wonder what happens if, in the long run we have all the pipelines built in the next 5-10 years. Alon USA Partners LP should still have an advantage because it would be more like a pipeline company. Why? Because it can take oil locally instead of piping all the way to the Gulf Coast, and then it can refine that into gasoline and sell locally instead of piping the gasoline from the Gulf Coast. Basically, its margin will be the pipeline cost to pipe oil over, and then pipe gasoline and diesel back. It should have a double-digit dividend, even after everything's settled. Right now we're looking at a huge dividend, more than the guidance by the company, which is $5.20 for 2013. It hasn't announced yet, but some analysts are expecting over $2 in dividends for Q4/12 -- just in one quarter for a $22 stock.

TER: That's pretty amazing.

CL: It's a very nice dividend play. Also, Alon USA Energy owns about 82% of USA Partners. If you calculate the value of the shares it owns, it's more than USA Partners' whole market cap, which is absurd. Alon USA Energy also has another refinery in Louisiana that can take advantage of Louisiana Light Sweet, which will go down to the Gulf of Mexico later this year or next year, when the pipeline is built. So to value the rest of the assets to negative is really absurd. I own both companies.

TER: There's hardly been any refinery capacity built in this country in many years, so any company with a refinery is in a pretty good position.

CL: Plus, refineries are closing down on the East Coast and in California because they're not making money because Brent is so high. The U.S. has the Jones Act, which forbids foreign tankers from shipping oil from one U.S. port to another. After Hurricane Sandy, they had to suspend the Jones Act. All the light sweet going to the Gulf of Mexico cannot go anywhere, which is just absurd under the existing laws.

TER: You've given us some really good ideas and follow-up, Chen. Thanks for joining us today.

CL: Thank you.

This interview was conducted by Zig Lambo of The Energy Report and can be read in its entirety here or on our instablog.

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

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: None. Interviews are edited for clarity.
3) Chen Lin: I personally and/or my family own shares of the following companies mentioned in this interview: Sarepta Therapeutics Inc., Coastal Energy Co., Petrobakken Energy Ltd., U.S.A. Partners LP and Alon USA Energy Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.