Higher for Longer: How to Profit from Sustained High Energy Prices - - PowerPoint PPT Presentation

Higher for Longer: How to Profit from Sustained High Energy Prices

AAII DC Metro Chapter May 2012

Elliott H. Gue

The Big Picture

Credit Spreads

Seasonal Distortions

A Few Additional Uncertainties

• US and French elections.
• Fiscal Cliff
• Statistical distortions caused by autumn 2008

collapse in data.

• Oil prices remain elevated, natural gas prices
• utside the US still high.
• US housing market is bottoming but not booming

and more foreclosures ahead.

• Europe far from healed.

US and ICE Natural Gas Prices

Supply is Too Healthy

Less Gas Drilling Won’t Help

More Efficient

Energy: Oil, LNG over US Gas

Teekay LNG Partners (NYSE: TGP); 7% Yield

• Teekay LNG owns: 20 liquefied natural

gas (LNG) carriers, 5 liquefied petroleum gas (LPG) carriers and 11 oil tankers.

• Long-Term Charters with an average

remaining duration of 16 for LNG, 15 for LPG and 10 for tankers.

• With charters fixed, TGP grows by

increasing the size of its fleet.

• Day-rates for LNG carriers at near record

highs.

• Surging international natural gas prices,

growing demand from Asia and Europe

Cheapest Gas is in Marcellus

Inergy Midstream (NRGM); 7.5% Yield

• 42 bcf of natural gas

storage

• 1.5 million barrels of

natural gas liquids (NGLs) storage

• 90% of storage booked

under LT agreements

• 2.1 mbbl new NGLs

storage capacity due June ‘12

• MARC I Pipeline due July

‘12

Linn Energy (NSDQ: LINE)

• Linn is an LLC, similar advantages to an

MLP but no General Partner or IDRs.

• Most important regions are Mid-

Continent (KS, TX, OK; 65% of reserves), and Permian Basin (TX, NM; 18% of total reserves)

• About 50% oil and NGLs, 50% natgas
• Significant drilling upside in Granite

Wash, Permian and Bakken

• Growth via Acquisitions, benefit from

low cost of capital.

• Hedges covering 100% of natural gas

production through 2015, 100% of oil through 2013.

US Royalty Trusts: SandRidge Permian Basin Trust (PER)

• Royalty Interest in 16,800 gross

acres in Permian Basin of TX.

• 87% oil and 9% NGLs.
• 509 producing wells, 888

development wells before March 31, 2016

• 80% proceeds from existing

wells, 70% from new wells.

• Hedges and subordination

structure insulate from commodity prices.

• 12-Month forward yield: 12.5%

to 14%

• Buy Under $26.

Other Royalty Trusts

• SandRidge Miss. II (NYSE: SDR) owns wells in OK and KS

Anadarko Basin 85% of expected revenues from oil.

• 80% of proceeds 67 existing wells, 70% from 206 development

wells.

• 10.5% yield in 2012, 15% in 2013.
• Pacific Coast Oil Trust (ROYT) 80% of proceeds from developed

properties, 25% from remaining properties, 7.5% from Orcutt properties.

• Plans to develop wells is shallow, porous Diatomite (fossilized

algae) formation using cyclic steam injection.

• Whiting USA Trust II (WHZ) 90% of net proceeds from 1,300

gross wells

• Terminates 12/31/2021 or after 11.79 million bbl oil produced.
• 72% crude oil.

Deepwater Boom

• Cobalt Energy (NYSE: CIE) announced

Cameia – 1 Discovery in Angola, opens up new pre-salt field

• Gulf of Mexico deepwater drilling coming

back sooner than expected.

• Brazil’s Petrobras ramping up deepwater

BZ spending

• Shortage of ultra-deep rigs developing,

sending rates >$600,000/day

• Rig signed at $648,000 per day in 2013
• 3 rigs due off contract in 2013
• Yields around 8 to 9 percent
• Possible MLP listing to offer even more

yield potential.

• Pacific Drilling (PACD) – 4 drillships under

long-term contract, 2 new drillships for delivery in 2013.

Pacific Drilling (PACD)

The Bakken Shale

A Few Shale Recommendations

• EOG Resources (EOG) – Well-diversified

producer with exposure to the Bakken Shale, EagleFord Shale, Barnett Combo and Niobrara

• Oasis Petroleum (OAS) – 300,00 net acres in

the Bakken Shale, produces about 11,500 bbl/day and will spend as much as $850 m drilling in 2012

US Silica (SLCA)

Value in Services and Coal

• US thermal coal prices to remain

pressured by weak gas prices.

• Met coal market more promising.
• Peabody Energy (BTU) strong met

and Australian exposure an advantage.

• Long-term value in PRB.
• Avoid US-focused services

companies like HAL and BHI.

• International business showing

signs of picking up.

• Benefits Schlumberger (SLB) and

Weatherford (WFT).