The purveyors of doom and gloom were still hawking their services there. But the primary solution they all offer – a cure-all elixir for all that ails markets – was beginning to wear thin. They were lacking in the usual conviction that this one asset is the confident remedy for all investment problems. And the audience seats at these sessions were half-filled.

Indeed, gold is losing its luster.

The erstwhile commodity fix has been under pressure of late. Yet, even while most eyes have been on declining commodities – especially gold, silver, and platinum – something else has been happening.

Crude oil is emerging as a new replacement to reflect stored market value.

That is good for folks like us who invest in the energy sector, because it will provide a floor to downward pressures in prices. It will not counter all forces reducing the price of oil, but it is likely to temper such movements, allowing us some leverage.

Take a look…

The Yellow Metal’s Fall from Grace

Before 2013, the reliance upon metals as a value play during volatile trading periods has become almost a mantra. Such commodities are usually regarded as barometers for broader market moves, although the precipitous fall in pricing over the past month has called that position into question.

That fall has been considerable.

SPDR Gold Shares (NYSEArca: GLD), the most widely held gold exchange traded fund (ETF), has fallen 15.3% since April 1. Meanwhile, the equivalent for silver – the iShares Silver Trust (NYSEArca: SLV) – is down 21%. ETFS Physical Platinum Shares (NYSEArca: PPLT), the most popular platinum ETF, is the best performing of the three, but it’s still down 8.8% since April 1.

Normally, gold is regarded as the primary refuge when markets move south, with silver regarded as a distant second. Both silver and platinum are also regarded as indicators of market improvement (along with copper, a commodity I have long regarded as an “acquired taste” largely dependent these days upon Chinese industrial performance).

What has been happening recently, however, is different. GLD and SLV have declined far more than the overall market has risen. In other words, a cursory view would immediately show that what is happening is way more than the commonly perceived negative side of the “flight to security.”

That is, if gold (and to a lesser extent silver) are seen onlyas a refuge when things so sour, the reverse move of the market up should cause interest in the metal to decline.

The current slide, however, is well beyond the rise in market prices. As of open this morning the S&P has risen 6.7% since April 1, less than half the fall in GLD and only a third of SLV.

With the much announced sales of gold holdings by investors like George Soros and Warren Buffett, the largest slide in some three decades has put the metal’s position as a further market barometer in doubt.

At the same time, the price of crude oil has become a more accurate reflection of where markets are moving.

Why Oil’s the Better Market Indicator Today

West Texas Intermediate (WTI), the NYMEX benchmark futures contract crude rate, has decline less than 1% since April 1, but has risen 7.7% over the past month, better than the 5.6% improvement in the S&P.

Yet this is not translating into a similar result for Brent, the London-based benchmark comprising the other primary crude oil standards worldwide. There, the price has declined 6.6% since April 1, although rising 3.5% for the most recent month.

Now the focus between these two has fallen upon the “spread,” the difference in price. In every trading session since mid-August 2010, Brent has been priced higher than WTI. Both of the benchmarks have lower sulfur content than some 85% of the oil traded globally on a daily basis while WTI is a slightly better grade than Brent.

Nonetheless, Brent has been trading at a premium to WTI. One reason has been the glut of volume at Cushing, Okla. (the primary pipeline location in the U.S. and the place where NYMEX sets its WTI daily price). Another is the usage of Brent as a yardstick for more actual oil sales internationally than WTI.

The surplus at Cushing is now being reduced due to a reverse flow on an existing pipeline to Gulf Coast area refineries and the prospects moving forward from new transport networks. Meanwhile, Brent is experiencing added competition from new sour (i.e., higher sulfur content) crude benchmarks rates in determining trading prices.

When combined with additional American domestic oil coming on line, the spread is narrowing. As of open this morning, it stands at 8.1% of the WTI price (the better way of measuring the actual spread’s impact on the U.S. market).  It was discounted almost 23% less than three months ago.

This contraction of the spread will have some interesting benefits for energy traders moving forward and we will discuss these in an upcoming OEI. But it is also related to the matter we are considering today.

As that spread narrows, WTI becomes a more ready reflection of actual global oil prices. And as the premium returns to New York traded oil, we will also acquire a more ready indicator of crude’s rising position as a store of market value.

There are a range of interesting outcomes for the energy investor from this development. While the average investor is not about to begin trading in oil futures, there are several ETFs that would accomplish the same objective.

Using select ETFs to target individual company shares will also result in increased trading leverage.

I will have much more to say about this once the revised oil position settles.

Sincerely,

Kent

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.

Sincerely,

Kent

But you can still make money.

That’s the beauty of hedging.

As I noted on Monday, the initial moves will be in oil and gas, although broader hedges across energy types will become viable plays later.

The strategy I’ve developed provides a way to “ratchet” profits – a positive movement of the hedged position despite the occasional move down in specific stocks – in the current energy market. I will lay out next week to several thousand people assembled for the MoneyShow at Caesar’s Palace in Las Vegas, Nev.

But I think it’s only fair that you get it first.

It’s all very exciting because something really significant and new has taken place.

And we will be profiting from it.

Today I will sketch out the basic idea I call a concentric cross-hedge. On Monday, I will also give you some stock picks for this strategy (picks that are already in the Portfolios for my subscribers of Energy Advantage and Energy Inner Circle).

Bear in mind, this is not a “one size fits all” type of trade. Different developments will require different applications. The overall strategy, however, remains the same.

I noted Monday that the usual idea of a hedge is to counteract risk in a portfolio by providing some insurance against movements in either direction. But this is not the only way to hedge.

In a more aggressive strategy, an investor will offset (or enhance) performance in one category of stocks with selections in another. In this way, the hedge uses specifically selected shares from differing sub-segments of the sector to improve overall performance. This is a profit-intensive kind of insurance.

These stocks are chosen to complement a movement in share value of the combination, not simply of each individual share. This is where the ratchet comes in. One or more of the shares could be going down and the overall performance of the hedge could still be improving.

Here’s what a “conventional” hedge of this type looks like.

In this example, we are hedging three different sub-segments in oil or gas:

• Operations: the extractions of hydrocarbons
• Processing: thetreatment of raw materials
• Product: the commodity sold to an end user

For the volume coming out of the wellhead, the end user is a refinery. For oil products or wholesale gas, the end user is a retail or industrial customer.

Each of these stages encompasses the stages preceding it. We are also retaining a traditional view of directionwith such a hedge, that is, upstream before midstream before downstream, as the following diagram illustrates.

The problem with operating this way involves situations in which volatility is high – the sort of pressures, for example, like this morning’s downward move in oil prices. In this case, all of the components of this hedge are likely to be moving down as well.

The solution is to emphasize the components determining value,not direction. This is what I call a concentric cross-hedge.

In this case, we emphasize three components and play the relationships among them. As visualized below, Productremains at the center of the hedge.

However, this Product is a bit different. The key to how this kind of hedge approaches oil or gas is including within the portfolio ownership of the actual Product, not simply the acquisition of shares in a company extracting it.

The other two components are also different from a conventional hedge. We are now looking at sub-segments in a process generating value-added components to raw material, not simply stages through which raw material chronologically passes until it is consumed.

Throughput allows us to include the value generation from midstream services, those providing everything from gathering, initial processing and separation, through storage (a separate revenue-gathering add on) and transport.

Arbitrage, on the other hand, is quite different. Here we are interested in identifying and exploiting that sequence (or those sequences) that allow an appreciation of price by using a differential in value opportunities.

OK, this last one sounds vague. But the hedge allows us to exploit exchanging usages, regions serviced, final product type and specialized ways of delivery that result in higher prices in comparison. We are arbitraging here distinct market penetrations of the product.

Here is the key to this approach: We’re improving the profitability of a combination, but it’s no longer dependent upon any particular direction, and actions no longer have to be done in a particular sequence.

You can design a concentric cross-hedge in any number of ways to represent differing positive relationships developing among hundreds of market participants. Each one is structured to exploit a separate connection as a result of what the market actually does. For the more adventurous investor, it will also open up some interesting options plays.

Nonetheless, each hedge structured this way will allow you to partake in profit potential resulting from a concentric move, rather than simply what is resulting from the separate selections of shares.

The challenge is to do the heavy lifting in constructing these hedges, which I do for my Energy Advantage and Energy Inner Circle members to maximize a number of profit opportunities.

In Monday’s OEI, I will provide an example of stock selections using the concentric cross-hedge. The hedge is possible only now because of some major developments in one component of it.

I’ll fill you in on all the details and background Monday.

Sincerely,

Kent

As it unfolds, I have been working on how to exploit this trend and will be rolling out my recommendations when I appear at the MoneyShow in Las Vegas next Tuesday and Wednesday.

Of course, before I sketch my new approach to the Caesar’s Palace audience, I’ll outline it here first. You can expect more on this in coming OEI editions.

Today, I want to extend on Friday’s discussion and set the stage for the revisions I will be begin sketching out in the next OEI.

This is once again about hedging.

But this time we will be developing a strategy to profit from the current energy climate.

Initially, the application I have in mind will relate to crude oil and natural gas. There will eventually be ways to include renewables, power generation, and even coal into the mix.

But we can move on oil and gas now.

The Art of Hedging

The art of the traditional hedge involves employing a very simple concept. By taking at least two opposite positions, an investor couches a portfolio against the full impact of major pricing volatility. One should go up, the other down, regardless of what the market actually does.

Such an insurance policy always has a slight preference in one direction or the other. Otherwise, a perfectly structured hedge will result in a “0″ return.

Futures contracts are a case in point.

The objective is to “insure” one position by taking another in the opposite direction. There, one could take an option in an attempt to offset volatility in a contract already held. The option gives an investor the right – but not the obligation – to buy a certain asset at a specific price and time.

A futures contract requires that such a purchase be made.

If the initial contract turns out to be correct, the option is allowed to expire and the investor sacrifices only the premiums paid for the option. The downside is the amount one has to pony up for a futures contract. One in crude, for example, requires the purchase of 1,000 barrels of oil.

However, if not investing in futures contracts on commodities (or any financial asset for that matter) or stock options, hedging strategies are designed as an offset to simple changes in stock prices.

This is accomplished by acquiring stocks that tend to profit when underlying fundamentals go in different directions. A direct simple play here on the underlying oil would be buying into exchange traded fund (ETFs) that improves when oil goes up – for example, the S&P GSCI Crude Oil TR Index ETN (NYSEArca: OIL) – and offsetting that by purchasing one that improves when the oil price moves south.

The most used here is ProShares UltraShort DJ-UBS Crude Oil (NYSEArca: SCO).

But hedging can also be used with all manner of straight stocks. One particularly straight forward approach is to parallel companies sensitive to natural gas price fluctuations. In this example, you want to benefit if the price goes up or down.

The Risk May Outweigh Reward

Many investors will think this is a recipe to short stocks. That is also a statement on the period in which we live. Not too long ago, if you didn’t like a stock’s prospects you sold it. These days you short it. The idea is straightforward enough. The short is designed to make money if a stock is declining in value. It involves borrowing shares, immediately selling them, and then later buying them back at market to return them.

The problem with shorts for the normal investor, and the reason I do not recommend them, is the risk. If you are wrong and the stock moves up, there is theoretically no limit to how much you can lose.

An ETF such as SCO mentioned above is a short fund. But you are buying and selling it as a normal stock. That insulates you from the dangers of a direct short, although an ETF also costs you some loss of proceeds in fees.

But back to the natural gas example.

A direct hedge using stock would involve holding both a gas producer and a utility employing gas as a fuel source for the generation of electricity. If the price of the gas goes up, the producer wins but the utility would decline, since it would experience a rise in generating costs. A decline in gas prices would tend to have the opposite effect.

You can readily see the same sort of dynamic in operation with respect to pipeline and other midstream services, refineries, and the relationship between equipment manufacturers and oil field service (OFS) providers.

A period of narrow price variations in the underlying raw material – in our case oil or gas – is a good opportunity to establish such a traditional hedge. That is because it will not subject you to much downside risk regardless of which way the market moves.

And that allows for some experimentation.

What I am going to start laying out on Friday involves a different hedging altogether. I will suggest hedging individual shares to reflect various segments of oil and gas. And the ultimate objective is to maximize an upward return rather than provide a standard insurance against volatility.

This will involve pairing shares rather than offsetting them.

Stay tuned. This is going to get interesting.

We’re already seeing kneejerk reactions to short-term indicators today.

A better jobs report catapulted crude oil futures prices immediately. The figure was encouraging but not a barnburner. Of course, some massive revisions upward for the previous two months hardly hurt either.

Some of this is the result of investors still gun shy after a massive recession. Now we have certainly had a very nice bull market run and the prospects of another meltdown any time soon are negligible.

Nonetheless, the new drivers of prices provide little chance for real dynamics to work themselves out. This is all about reaction. Picture it as the newest investor version of smoke and mirrors.

Today’s prospects are very good for the oil sector. Natural gas has pulled back from some heavy gains. Major losses earlier this week will be erased by the end of trading today. There is a range forming, and it is likely to remain absent any unexpected developments (largely geopolitical at this point).

Demand will increase as we move into the summer; global levels will rise quicker than domestic in the U.S. or Western Europe. That will provide some upward pressure on oil prices.

Remember as well that, while certain region such as the U.S. have a new largess in unconventional (tight or shale) oil, the full volume of that new production will be more expensive to bring on line. That means the additional extraction will not decrease the overall price.

However, the real question is how to make money if trading is in a narrow range for the near term.

You need to develop a new hedging strategy. Here’s how…

The Market Sector Approach to Hedging

Now the conventional hedge seeks to provide insurance against rapid price increases or decreases. You set up investments providing for a return regardless of which way the market actually moves. Each trading session, you are guaranteed a winner in one direction but a loser in the other.

A portion of the loaf is better than no slice in such an environment.

But how do you set up a convenient hedge when trading company stocks rather than commodities? With commodities you could easily buy a gold play, say SPDR Gold Shares (NYSEArca: GLD), that would rise when gold prices improve. On the other side, PowerShares DB Gold Short ETN (NYSEArca: DGZ) is a short fund and would improve if the gold price declined.

But this is far more difficult if one is focusing on oil companies rather than the oil itself. The approach I would suggest is to hedge using market sectors.

This approach would use producers, midstream, processors, and service companies to provide a better overall picture of the oil picture and improve return when trading is in a narrow range and demand is estimated to increase.

In other words, the picture we could be looking at for the next several months.

Here’s How to Approach This

To initiate this hedging strategy, it is better to begin with getting as broad a market exposure relative to the strategy as possible without having to acquire a number of different company stocks.

This is tailor made for the use of exchange traded funds (ETFs), allowing exposure to a large number of companies in a specific segment of the market.

Initially, I would suggest three such segments:

1. mid-level producers;
2. pipeline and related service providers; and,
3. oil field services and equipment.

There are a number of ETFs available, but not all are of the same quality. The two important elements are how reflective the ETF is of a particular area of oil investment. The second concerns the fees charged by the ETF.

The first determined whether the fund is actually representing the segment you are looking for. The second is all about how much your return is paralleling the performance of the underlying shares.

I daily track all ETFs available in all segments of the energy sector. We are about to move into the summer upward cycle in oil and that would be the time you should introduce this hedging strategy. Remember, hedging means you are to expect both winners and losers. There may be unusual trading sessions in which all increase or decline, but this is not the normal outcome.

What you need to do during the period we are entering is to provide your energy portfolio with a base. This use of ETFs is not the only investment approach you will be employing. But it should be able to give you a stable foundation so long as the environment remains essentially the same.

If the market is going to provide us with this narrow trading range, in oil that means we should be balancing operators’ field development plans against existing production levels, the offset of pipeline transit to storage, and processing runs against refinery capacity. That would take three well-selected ETFs from my tracking list of over 60.

Stay tuned. Once the dust settles, we’ll begin to prepare your oil insurance plan.

Is it sustainable?

What prospects exist for the average individual retail investor?

Before we address these questions, it would be best to lay some groundwork. The increase in solar share prices has been just about across the board. This is most clearly seen in the rise in solar and related exchange traded funds (ETF). Guggenheim Solar (NYSEArca:TAN) has advanced 24.8% this past month, while American Vector Solar Energy ETF (NYSEArca:KWT) is up 15.2%. The iShares S&P Global Clean Energy Index (NasadqGM:ICLN) has improved 11.8%.

However, before you rush out and buy any of these ETFs, consider the longer view. From December 1, 2012, TAN is down 36%, KWT is off 34.9%, and ICLN is weaker by 10.7%. The recent push up has resulted in some – apparently – better solar plays. Yet the medium-term perspective indicates the run up might not last.

Here’s why…

In this case, sustainability is all about market position. Solar remains a niche energy source. By the end of 2012, it accounted for only 1% of global energy consumption. Nonetheless, there have been some important developments that do provide some reason for optimism.

To begin with, the costs of solar cells and related material have come down dramatically. There have also been improvements in inverter technology, allowing thereby a cut in the energy lost when moving from direct current, which is how the power is generated, to alternating current, which is how that power is moved onto the grid and along to consumers.

The first is a mixed blessing to many in the industry, because it results from a massive undercutting of prices by Chinese companies. While that is allowing averages to go down, it likewise has resulted in significantly strained margins, bankruptcies, and production interruptions.

Solar also has been moving out of the realm of a subsidized energy to one that could become market competitive. Last month, Deutsche Bank issued a report – the fourth of its kind – which suggested that solar may reach grid parity as early as the first quarter of next year. If ever there was a Holy Grail in the business, this is it.

Reaching grid parity essentially means that a source of energy is at about the same price as competing sources. Solar for some time has been criticized as being too expensive relative to other energies. Without continuing government subsidies, this argument runs, it would not be able to survive in the market.

Some residential subsidies survive, but the largest for new projects expired in the U.S. and the European Union at the end of last December. The strain on share prices in the first quarter of this year was a clear reminder of the end of such support.

Then there was an unexpected development: In several parts of the world, conventional electrical generation became more expensive for a range of reasons while the effective cost of solar was coming down.

Before the end of last year, solar reached grid parity in Hawaii, and it’s on track to accomplish the same before the end of this year in Italy, Australia, and Brazil. Depending on how one reads loads and distribution, there are claims that grid parity may occur for California (or at least parts of the state) in 2014.

Additionally, proponents of solar also point out that, factoring in “external” costs – especially those to the environment – solar is already at grid parity in most of the United States.

Should we then begin to look seriously at solar as a growth area for investment profit? Are these stocks finally going to be moving up on a regular basis?

Not so fast.

I am still of the opinion that this is going to be a very rocky ride – with some significant shortfalls approaching.

The primary problem involves integrating some rather heavy multi-year capital infusions required for generation and distribution infrastructure. And there are still noticeable problems resulting from at least a third of the power generated being lost back to the atmosphere. Furthermore, there is still a massive loss of electricity when moving harvested power from the photovoltaic cells to the feeder lines for transit.

Most importantly, however, the industry needs to move from being a residentially-focused energy provider. That market has some expansion in it, but it cannot – by itself – save the sector. Germany has been learning this lesson over the past year, as expectations for solar and wind taking over for nuclear have fallen short.

What is necessary is a transition to utility-scale projects, despite the inherent problems in project cost that initially entails. And here, the recent success of a leading company is worth mentioning.

First Solar, Inc. (NasdaqGS:FSLR) is the dominant American solar energy provider. Not too long ago, the company was almost exclusively pushing out roof panels. Then it was undercut by cheaper production from China, and suffered an extreme price contraction.

The company has now moved into the utility side of solar. A knockout quarterly report has catapulted the stock. FSLR has risen 64.4% in the past month – although it is still 56% lower that it was 18 months ago.

First Solar, and the sector as a whole, is now overheated and there is a price decline coming. In the absence of major contracts in areas other than residential, we may witness a contraction in short order.

I am not persuaded that solar will make it without continued subsidies and government support. But this may yet be the beginning of something interesting.

Sincerely,

Kent

It’s hardly reassuring that the epicenter of all this is the Middle East.

The primary problem is hardly new. Actually, calling it an “old” problem is more accurate because the culprit is a collapsing network of delivery and storage that has been deteriorating for decades.

Unfortunately, this is hitting hardest those areas already beset by broad, accelerating economic shortfalls. That they also happen to be areas of significant unrest hardly improves the situation.

The latest is Pakistan. There a combination of lower-than-expected water availability and a government powerless to provide the diesel fuel essential for the planting season means a population already on the brink is staring at food shortages.

The picture is very grim.

The main difficulty here remains the energy crisis that has locked this country in a downward spiral. Pakistan has some of the worst energy prospects on the globe, accentuated by low levels of domestic production and alternative importing possibilities charged with politics.

Take an essential natural gas pipeline from Iran, for example. The transfer of gas across the common border between the two countries would be an immediate relief for this beleaguered nation. But that project is in no-man’s land.

The Western pressure against Tehran to end its nuclear program prevents any new projects because the sanctions are targeting Iranian hydrocarbons. Islamabad has attempted to kick-start a liquefied natural gas (LNG) import plan to offset the political impasse. Unfortunately, that alternative involves a considerable cost that the government cannot afford. It has started a domestic war among potential corporate participants, and is likely to take too long to develop.

As an aging electrical grid begins to break down, rolling blackouts have become a daily routine. Major cities are often able to provide less than eight hours of reliable power. That, in turn, is wreaking havoc on industrial production, food distribution, local revenue, and the manufacture of goods necessary for money-making exports.

In addition, the increasing energy plight is undermining the thin veneer of political stability. Already, the central government has lost control over wide expanses of territory inside the country now effectively controlled by local warlords and terrorist groups bent on toppling Islamabad’s ability to govern.

This week, the situation is becoming worse. Opposition politicians are beginning to demand government action, associating themselves for the first time more directly with demands made by more radical groups. The situation is deteriorating.

The collapse of an overburdened energy delivery network is now becoming a likely cause of a domestic insurrection. And as the energy picture worsens, so does employment prospects in a country where the median age is 21.5 years. The rising number of unemployed youth in this region is a fertile breeding ground for terrorism.

However, Pakistan is hardly the only nation in this unsettled region experiencing an energy crisis. Its neighbor, and frequent adversary, India has similar problems. There, one of the leading engines in the international development drive is experiencing its own energy crunch.

Once again the source is an inability to procure and deliver adequate energy. India is experiencing a disturbing rise in brownouts and blackouts, while its requirements for imported energy continue to grow. Its population is 6.5 times the size of Pakistan, making the demand even stronger.   

India is also feeling the pressure from Iranian sanctions. The country is the second-leading importer of Iranian crude (after China). New Delhi has received a reprieve from Washington – the U.S. has granted it a temporary exemption from the sanction penalties.

Saudi exports have helped some, but India is again paying an “Asian premium” for that oil, a price higher than the same oil bound for other places like Europe. And with its refineries built to operate on Iranian-grade crude, even finding continuing (not to mention affordable) alternatives will still create problems.

Elsewhere, Egypt is facing an absolute energy shutdown. As the problems in Cairo streets heat up again, government officials now speak openly of massive power deficiencies. One suggested earlier this month that the delivery infrastructure could shut down altogether.

This week in Jordan, blackouts have hit, with the prospect of more frequent shortfalls coming. Jordan has been a bastion of relative stability during the Arab Spring, but there are signs of unrest developing there as well.

Then there is Turkey. What happens in this country may well end up being the lynchpin for the entire Middle East. Turkey’s energy needs are the fastest growing in the world, with prospects forming to transform the country into the de facto regional leader as internal disorder blunts the influence of Egypt and Syria.

Turkey is also poised to be the primary new throughput nation for gas and oil coming into Europe from rising production in the Caspian basin. The gas future looks very strong with competing pipeline projects contesting to deliver energy west by traversing the country.

Increasing oil exports, on the other hand, are limited to what additional volume can be moved safely through the Bosporus and the Dardanelles – the Turkish Straits. This is a major chokepoint in international oil trade and an accident would subject large and congested populations to an outright disaster.                

Yet these days the government in Ankara is becoming more concerned about its ability to feed the growing domestic demand requirements. Turkey’s internal stability will depend on solving its own energy distribution situation.

As the picture darkens, a region thought for some time to be ripe for competition over energy production is morphing into one where the next wave of conflict may well result from the lack of energy availability.

That becomes far more dangerous for everybody.

Sincerely,

Kent

Investment capital is moving east at an incredible pace.

Last week, the Pew Charitable Trusts issued the fourth annual “Who’s Winning the Clean Energy Race?”

Worldwide, nations increased clean energy generation capacity by 88 gigawatts (GW) in 2012. However, that also complemented an 11% decline in overall investment compared to 2011.

Some of that is explained by the impending end of heavy government subsidies in both the U.S. and the European Union. But despite the drop, 2012 still marked the third straight year in which clean energy investments topped $200 billion worldwide.

The year still ended with more than five times the investment recorded in 2004, the year generally used as the base for calculations.

The recent upward spike by leading U.S. solar energy stock First Solar (NasdaqGS: FSLR), up better than 32% for the month through close of trade on Friday, has accelerated the entire sector in the short-term. Unfortunately, this masks a continuing weakness in solar companies in the longer-term. FSLR is down 61.2% over the past 18 months.

Meanwhile, American Depository Receipts (ADRs) of the leading Western wind power company – Danish Vestas Wind Systems (OTC: VWDRY) – are down 3.4% for the most recent month and 58% over the past year and a half.

Simply put, the FSLR advance resulted from a much better than expected quarterly bottom line, itself largely the product of phased out subsidies. I don’t see this to be a sustainable recovery.

There is also another important element to remember.

Looking only at what is happening in the West among the renewables misses the trend entirely. In fact, Phyllis Cuttino, the head of Pew’s clean energy program, concludes that “Clean energy trends demonstrate the ongoing resilience of this emerging sector in the global economy.”

The reason she would say this in the face of a global decline in investment is rather simple.

There is a strong move of clean energy investment movement into Asia in general and China in particular. This is now the driving force behind a clean energy push.

So do any opportunities exist in Chinese clean energy projects?

Policy Leads the Way to Profit

The Pew report states: China has done everything right by putting long-term, consistent policies in place, goals for clean energy in every case they have increased them. If you’re looking for a place to invest, China sure looks like a good bet.”

But I am not getting on the Chinese clean energy investment bandwagon just yet.

Here’s why.

While I track dozens of Chinese solar, wind, and related renewable energy companies, their performance has been spotty at best. In addition, there remain significant transparency, liquidity, and regulatory concerns with many of these shares.

The trend, on the other hand, is hardly in doubt.  

As Pew explains, “2012 continued the ongoing trend of investments moving away from the Americas and into Asia and Oceania.” The report goes on to state that “the Asia and Oceania region has experienced uninterrupted growth in investment annually for nine years and in 2012 became the leading regional destination for investment for the first time.”

The figures are striking.

Investment in clean energy dropped 31% in the Americas for the year, counterbalancing a 30% rise in 2011. The U.S. led the decline at 37% year-on-year, Brazil 32%, and Canada 23%.

In marked contrast, the investment rose by 16% in Asia and Oceania to $101 billion. That accounts for 42% of the entire global total, with the brunt of the rise resulting from significant growth in China and, to a lesser extent, in Japan.

Solar Remains the Clean Energy Source in China

The Pew report singles out China for special emphasis. It is especially noticeable in solar energy investments. Despite the aggregate drop in global clean energy investment, for the second consecutive year, the report states, “solar technologies attracted more investment than any other clean energy technology, accounting for $126 billion in investment during 2012, 58% of the G-20 [most developed nation] total.” 

It was not surprising that China led the charge here as well. The country has been rapidly taking over leadership in both solar technological development and application. Once again, according to the report, “China attracted nearly double what it did in 2012, with $31.2 billion in solar investment.”

Elsewhere, the best performers in an overall declining market were Germany ($17.2 billion), the U.S. ($16.5 billion), and Italy ($14.1 billion). However, the U.S. result is tempered by the fact that American investment saw financing decline more than 50% from the level recorded in 2011.

There is no doubt that clean energy is establishing a foothold in the energy balance and is already occupying an established niche in the global market.

It is also evident that the primary investment emphasis moving away from North America and Europe to Asia and China – in spite of the drive currently underway in Germany to emphasize renewables in the replacement of nuclear power.

Nonetheless, until there is a genuine and secure way for individual investors to tap into this transition, I would suggest it is better to wait until the dust settles.

Sincerely,

Kent

It’s a no-brainer and one element in the “new energy balance” that I have discussed over the past year. This balance is less about finding a silver bullet (a breakthrough technology) than about finding a more efficient way to combine existing sources.

As this balance works itself out – sculptured by necessity, profit, competition, and innovation -more segmented sources of energy, each satisfying a portion of required demand, will come online. Instead of looking for a replacement for crude oil, we must find a better way to integrate the entire energy spectrum to satisfy this new energy balance.

The most basic part of this is an ability to exchange energy sources, thereby enabling users to offset supply problems or availability considerations by rapidly exchanging sources. Certainly, some bottlenecks will exist in this process, and, in some cases, the balance remains elusive.

But where the process is already underway, there’s a great opportunity for investors.

The Transportation Problem Continues

Right now, there are no genuine ways to transition from one fuel source for cars and trucks to another.

Natural gas is beginning to replace gasoline and diesel as the fuel for higher-end trucking fleets throughout North America. As liquefied natural gas (LNG) and compressed natural gas (CNG) are introduced for heavy trucks, and more metropolitan area busing lines opt for CNG rather than oil products, there is clear indication that the move has commenced.

Recently, proposals advanced for the implementation of LNG and CNG to fuel train traffic. But moving these into mainstream personal transportation still seems a stretch. While one could go into auto dealerships in several European countries and find several natural gas-run vehicles from which to choose, in the U.S. you usually don’t have any.

Hybrid vehicles, on the other hand, are another matter. These combine using gasoline and electricity and have begun to widen their market. Even the straight electric car is casting a larger shadow on the industry. But hybrid is the first “exchange mechanism” emerging in private transport.

It just so happens that a “hybrid” approach may well work in other segments of energy as well.

After all, for years there have been co-fueled generating plants. These are designed to allow the use of both coal and natural gas in the production of electricity. In addition, diesel engines regularly serve as backup power providers to other primary energy sources.

However, while examples of the multiple applications approach essential in the development of the energy balance, these also have limited applicability. Each considers only one segment and emphasizes traditional energy transfers.

Co-fueled facilities are coming under pressure as coal gives away more ground to gas as a stand-alone fuel for electricity. Meanwhile, the utilization of one energy as a power “backup” to another is really not an example of an energy balance development at all. Rather, it is more a provision of standby power to be used only in an emergency.

As a result, when approaches emerge that do seek as their primary emphasis to integrate across energy lines, one should take notice. That is exactly what is being proposed in India with renewables.

Information emerged this week that the research and development (R&D) unit at Indian major Bharat Heavy Electricals Ltd (BHEL) has had success in the early stages of a different kind of hybrid.

This one is integrating wind and solar power generation.

An Emphasis on Electricity Generation

The idea is to develop the kind of

seamless approach required of an energy balance providing both efficiency of energy usage and reliability of product. Wind and solar are directed toward the same end use (electricity generation) and have the same kinds of problems when it comes to efficiency.

For example, both harvest in direct current but must transfer that into alternating current to move it onto the grid. Then again, both share with other electricity providers the problem of being unable to store the power generated. It is either used or lost.

Given similar problems faced, establishing the ability to transfer from one renewable energy to the other likewise provides opportunities to develop equipment, inverter technology (to provide for the DC-to-AC conversion required by each), and even nanotechnology-based advances for wind blades and solar cells.

BHEL then followed up with another enticing move. This one intends to “hybrid” the wind-solar initiatives with company activities in bio fuels. The objective is nothing less than the emergence of an integrative energy approach spanning three separate renewable sources.

As each new step unfolds, energy integration will spawn new lines of business, and create requirements up and down the value chain, from production through transport and distribution.

Advances like these are going to make the energy balance an interesting and profitable story to follow.

Those of us who have delayed until the last moment rush to mail off those tax checks try our best to not think about all that money going bye bye.

Nothing we can do about it, I guess. But this day–likely circled in red on more calendars than any other–does bring to my mind something more positive.

Like how to make money in the energy sector.

Actually, it’s not as much of a stretch as you might think. Because bridges are already in place between how taxes are paid and energy returns.

Right about now, some of you are probably thinking I will start talking about energy sources like renewables that survive on government tax concessions.

Nope.

Or perhaps you might think this is going to be a discussion of tax write offs for certain field projects that utilize public land.

Wrong again.

And unless you are prone to the more fanciful, your thoughts should not be wandering toward squirreling money away on a small island somewhere.

Because there has been a much more practical approach that’s been generating success for a while now.

This is how you play by the rules and still beat the taxman in Washington.

Become a Master of Energy Holdings

We have talked about master limited partnerships (MLPs) before. My investment advisory services continue to profit from them. And these days they are coming back into focus.

MLPs allow owners to move tax liability directly to their personal returns, bypassing the need to pay corporate taxes. In so doing they are similar to “S” corps, the favorite device for small businesses. There as well the profits or losses from the company move to the individual owner’s taxes and no company-level tax obligation ensues.

This limited partnership model has been quite popular in midstream applications, particularly those established for ownership of pipelines and especially for natural gas. However, MLP “clones” have expanded into other midstream services (gathering, initial processing, terminals, and storage, among others). More recently, they have moved into broader uses, including upstream production operations and downstream distribution.

Now the MLP tax advantage was initially a benefit only to actual owners of the limited partnership itself. However, MLP owners began releasing a portion of the partnership holdings as an equity issuance.

That is when MLPs became something of interest to average individual investors.Whatever percentage of the MLP assets became represented by tradable stock shares had to represent that part of the partnership profits. In addition to becoming shares rising in value, therefore, they also received MLP profits as dividends. Those dividends would regularly be better than average yields for the market as a whole.

Of course, dependent as they are on the price of natural gas or oil, when that price declined so also did the value of the MLP stock issues. As a result, MLPs performed far weaker as the glut of unconventional shale gas hit the market and that new volume collided with a historically warm winter last year to drive down the gas price to $2 per 1,000 cubic feet (the NYMEX futures contract yardstick).

These days, the gas price is rising with the prospects for many MLPs right along with it. Those partnerships that emphasize midstream services in crude oil have already been benefitting from the quicker rise in oil prices, even in the face of a pullback over the past week.

The improvement has also foreshadowed an even more recent development. Partnerships employing the MLP model have shot up to combine midstream assets with those closer to the fields or the actual end consumers. In the process, a new direction has emerged.

When it comes to the upstream applications, traditional oil and gas trusts are beginning to give way to more streamlined production ownership schemes. Trusts are vehicles to hold a percentage of production volume from designated wells over a given period of time. Many also issue equity shares. These once again have been the sole way average investors could participate.

But the prospects for carrying such trust shares have the same problems as MLPs in those environments of declining market price for oil or gas. In addition, the trusts have another drawback. Established for a given period of time, the trust equities also reflect a progressively reducing profit generator.

There’s Nothing Like Flexibility

Here, the new wrinkle comprises yet another partnership clone and an improvement in access by small investors. Focused trusts and similar entities are structuring approaches that allow positions for a fraction of the price they used to command. In the process, limited partnerships are opening for the little guy.

It is unlikely that such partnerships would spin off share issuances. They usually involve projects too small, a limited rather than expanding number of wells, and consider production that has a lower time horizon than earlier trusts.

But they nonetheless open up the world of partnerships to investors until now limited to stocks and bonds.

These new plays require due diligence on several levels: the field prospects themselves; experience of the major participants in the operation; success in contiguous drilling; and on previous related projects, the adequacy of the development and production budgets, among others.

Nevertheless, these new holdings provide an exciting flexibility for individual portfolios. Obviously, there are risks (as with any investment). Yet this approach provides a good diversification balance option, especially when the volatility inevitably hits.

I have been following these new partnership holdings for some time, appraising the strengths and weaknesses of both projects and management, estimating production volumes, and reviewing the partnership particulars of the more promising holdings. They are increasing in number, which requires more careful examination to distinguish the genuine opportunities from the rip-offs.

When the trends become clearer, I’ll provide some greater detail on how to profit in this latest change in the oil and gas ownership game.