Energy Investing Rewards, and<br> the Best Midstreams
Federal Reserve Chairman Ben Bernanke told ABC’s Diane Sawyer on Tuesday that gas prices were heading north through July.
Looks like Helicopter Ben hasn’t been reading Oil & Energy Investor.
If he did, he would already have known that, and he would have been able to enumerate the reasons, too. After all, Kent explained the underlying causes of why gas was at record levels to Fox Business fully one month ago. So Bernanke’s revelation shouldn’t be sudden news to any of our regular readers.
Today I want to address some of your questions and comments. We’ve gotten a lot of excellent ones lately – ones that certainly bear further exploration. It seems there are a number of stories and themes we’ve discussed that have really got you thinking.
Remember, if you have a question or a comment, be sure to register below and type your thoughts into the box.
Okay, who’s up today?
Q: Kent: If the hedge funds want your formula on option play why can’t they just subscribe to your newsletter or just sign up for your program and pay the same cost as your subscribers? ~ Marvin T.
A: Marvin is referring to Kent’s new service, Energy Sigma Trader, which identifies mispriced options plays created by Wall Street’s failed financial models (the same ones that caused serious problems back in 2007 and 2008).
A similar question was asked in January, but it certainly warrants another response. (For a deeper explanation, please see my answer to another reader, Jim R.).
Simply put, it isn’t designed for Wall Street.
Those big traders don’t want anyone else to have access to the algorithmic results that identify mispriced options of their own models…
They want (no, they need) them all to themselves.
Think of Energy Sigma Trader as a plane. You have the opportunity to take a trip and make big profits on it…
Well, Wall Street doesn’t just want to pay for a ticket. They want to own the plane and keep everyone else, like you, off it.
That is the nature of these options systems, and they aren’t interested in sharing any of the proprietary information that Kent has created.
Q: James – Last month, you said that someone could lose $3 by putting their money in a savings account, but could make $678 if they had invested in AMJ. One important question: Where did you get that math? I ended up with $510. ~ Jeff G.
A: It’s no secret that Kent and I are interested in midstream investing. The rewards of both appreciation in share prices and strong, reliable dividends makes a sound place to put our money.
As I stated then, if you would have invested $500 into a savings account in March 2009, after factoring in inflation, that investment’s real value would only be $497 in 2009 dollars.
You would have essentially lost $3 because of inflation.
However, if you invested $494.50 and bought 25 shares of Alerian MLP Index (NYSEArca: AMJ) in March 2009, that investment, with dividend reinvestment, would be worth $1,178, based on the price of $40.19 on February 3. That’s $678 in profits. (The index has retreated slightly to $38.92 in the last month).
Now, I recognize that this does not include fees associated with your broker. Had you not reinvested the dividends, then yes, the increased value of your holdings would be $510.25.
But you also need to take the $133.96 you would have earned in distributions, offering a return of $644.21.
That’s a 130% return on the original $494.50 investment.
Q: I wanted to know, what are the other metrics you would delve deep into to rank the performance of midstream companies apart from distributional cash flows and yield? ~ Zephyra
A: This is an excellent question, and something Kent and I are going to be discussing in detail in future. We both agree: Operational analysis offers the best way to measure potential performance for the retail investor.
Still, as Kent told me yesterday, when I dialed him up to get his take, “It’s difficult to answer this question without doing some significant injustice to the subject matter.”
As we’ve seen, the price of oil is rising, while the price of natural gas remains low thanks to a glut in supply and an unseasonably warm winter in the Continental U.S. But as the price of both fuels appreciate in the future, it’s important to remember that a rising tide does not lift all boats when it comes to the energy markets.
We have to understand the operations of companies in the supply chain, as well as a few basics about the nature of midstream companies. And this is the gist of my conversation with Kent.
Master Limited Partnerships (MLPs) generate revenue from several streams.
Pipeline flow is the most obvious, but given the glut of natural gas, we’re seeing an increasing amount of revenue generated from storage of fuels. The key to understanding our MLP investments is to compare the location and structure of these partnerships.
First, we have to distinguish between the companies that primarily focus on either oil or natural gas partnerships. At the moment, crude oil MLPs are going to provide greater short-term returns because of the oil-gas price differential and demand factors.
From there we want to examine whom these MLPs service. As a general rule, the ones that provide gathering services for a greater number of smaller producers tend to fare better than those tied to a small number of large-scale producers.
Next, we want to understand the types of services provided. We want to explore companies based on their operations in gathering, feeder versus long-haul pipeline, terminal, storage, processing, and separation.
Gas MLPs that include significant processing (actually fractionation) capacity are going to generate greater revenues in basins that produce wet gas and value-added products. And those that provide feeder stock to petrochemical and industrial chemical production will fare better than those providing straight-line gas.
We’ll touch on the advantages of certain MLPs over their counterparts in the near future.
For now, let me keep it simple and state that location, structure, and services are three critical markers required to identify the best midstream opportunities.
Kent will be back on Friday.
[Editor's Note: The cost of oil is on the rise, and if you were a member of Kent's Energy Advantage, you'd have already known how to profit off Ben Bernanke's
Kent continues to show his Energy Advantage subscribers how to profit on the best energy companies, even as costs rise.
And it doesn't take much money to make huge gains in this sector. To access Kent's latest research, go here now.
It's the story of the summer in the oil markets.]