Our First Concentric Cross-Hedge
For those OEI readers who are not also members of either Energy Advantage or Energy Inner Circle, I always begin alerts for those subscribers with the actions I am recommending.
Here’s what I recommend you do today:
Actions to Take:
1. Buy (or add to your position in) Cheniere Energy Inc. (NYSE: LNG) at market and use a 30% trailing stop to protect your investment and your profits.
2. Buy (or add to your position in) Access Midstream Partners LP (NYSE: ACMP) at market and use a 30% trailing stop to protect your investment and your profits.
3. Buy Sabine Royalty Trust (NYSE: SBR) at market and use a 30% trailing stop to protect your investment and your profits.
(This 30% trailing stop advises you to sell the shares if they decline 30% from the highest value realized during your holding of them.)
Friday’s OEI sketched out what I refer to as a concentric cross-hedge. These are trades designed to maximize return in periods of narrow-range trading by combining investment in distinct energy sector sub-segments.
Recall, as a hedge, this approach differs from the standard variety. It provides bothan insurance move against volatility anda genuine opportunity for higher growth in the underlying share values.
There are going to be hundreds of applications for concentric cross-hedges throughout the energy sector as circumstances warrant. These will even develop into interesting applications acrossenergy types in the not too distant future.
For now, however, I will be suggesting such hedges in oil and gas. The initial hedge I’m outlining here is in natural gas. It is the recommendation I will be making to the MoneyShow at Caesar’s Palace in Las Vegas tomorrow.
You are getting it today.
However, all adjustments I recommend to this play, along with all subsequent hedges, will be reserved for Energy Advantage and/or Energy Inner Circle subscribers only.
I will continue to recommend traditional individual stock plays to these services, with the occasional option thrown in for those prepared to take on some risk for an enhanced return. The concentric cross-hedge approach comprises a value-added addition to turn market relationships into investment profits.
For that matter, most of these hedges will involve the combination of individual stock acquisitions. As a result, this new approach is not replacing what we have been doing right along in both Energy Advantage and Energy Inner Circle. Rather, we are providing a bit of enhanced return potential to each Portfolio.
Recall that in this initial hedge we are parlaying Product, Throughput, and Arbitrage, following our discussion in the OEI edition on Friday. That means the selections will emphasize three picks to maximize an aggregate return.
The Arbitrage Play
Here we move on Cheniere Energy Inc. (NYSE MKT: LNG), in the business of liquefied natural gas (LNG). Cheniere has both the expanding modular Sabine Pass terminal on the Gulf of Mexico and the first Department of Energy (DOE) blanket permission for the export of LNG to any nation in the world not on a sanctions list.
That’s huge. The exporting of LNG will comprise a major way of monetizing excess shale gas production in the U.S.
The company also has secured five 20-year, mega-billion contracts with some of the largest LNG importers worldwide. Remember, the kind of arbitrage we are talking about appreciates value; it is not simply a protection against pricing changes.
Trade will begin in the second half of next year, expanding thereafter. But as clearly witnessed with Cheniere, the upward pressure on those firms central to the exports is already underway.
Cheniere is already a member of the Energy Advantage portfolio, where it has improved 66.2% since I recommended it on December 17.
The Throughput Play
In most of the hedges I will be suggesting moving forward, the primary strategy with a throughput component is to tap into those gathering, initial processing, separation/fractionating, storage, terminal, and pipeline components – the ones that provide connection to and value appreciation for the remaining parts comprising the hedge.
Access Midstream Partners LP (NYSE: ACMP) certainly fulfills the objective.
The MLP is made up of the former midstream assets of Chesapeake Energy Corp. (NYSE: CHK) and has been trading on its own only since July of last year.
ACMP is well located to obtain volume directly from the product provider in the hedge and then feed on to the Cheniere Sabine Pass facility. Think of this hedge as a value-added raw material chain.
We added ACMP to the Energy Advantage holdings on February 28. It has already improved 18.3% through close on Friday, 9.4% over the last month. As with most MLPs, it also carries a better-than-average annual dividend of 4.2%.
The Product Play
Finally, the product stock is Sabine Royalty Trust (NYSE: SBR). As I had mentioned in last week’s OEI issues, we want to get more direct benefit from what is extracted – not simply to buy shares issued by an operating company.
A trust like this is set up to provide royalties from a combination of existing producing wells and/or expected future wells, in some cases augmented by leased land that can either be developed or flipped for added return.
SBR distributes royalties from a number of oil, gas, and mineral properties held by the private Sabine Corp. At a $784 million market cap, SBR is among the larger trusts. It will also be providing a portion of the raw material flow across ACMP facilities to LNG.
The stock has improved 8.4% over the past month, rising in 60% of the daily trading sessions. SBR went ex-dividend at the close of trade on Friday. Its annualized dividend yield is currently a very nice 10.4%.
The real change in the “product” components of these hedges, however, is going to come from a significant breakthrough in designing directownership of well production in a way that dramatically improves retail investors’ access, while substantially reducing the entrance fee and the risk.
This development is being unveiled next week. It will serve to improve the return potential on several hedges I will be proposing shortly.
Everyone, stay tuned.