shhughes1116

In the midstream world, proposed projects are not constructed without firm commitments. Those firm commitments, in almost every case, take the form of take-or-pay contracts that last 15-20 years. So the comments that volumes may not materialize is quite irrelevant. And yes, I realize that ETP's yield is almot 9%...I specifically stated that in my earlier post.

How do you know EPD and ETP aren't hurt by weakness in O&G? Oil is being hit by supply, but it's also being hit by demand, what does that tell you about volumes? Pick up the ETP or EPD 10Q and read it, that will tell you all you need to know about crude volumes. But since you may not do that, I will spell it out, in the context of ETP: 1. 10% of EBITDA from ETP is derived from liquids. Of this , off the top of my head, half is crude and the other half are NGL's. So 5% of EBITDA might be impacted by lower crude prices. 2. 10% of EBITDA is derived from their retail segment (i.e. retail gasoline and retail diesel). Margins tend to go up for retail gasoline and diesel sales when crude prices drop. 3. Most, but not all, ETP crude pipeline service is based on take-or-pay contracts. You dont ship? No problem, you still pay. 4. When O&G companies go bankrupt, trustees attempt to maximize cash flow by continuing to produce oil and gas. Hard to void your take-or-pay contract if you still want to get gas/oil to the market. 5. When crude volumes decrease, the first shut-ins tend to occur with crude shipped by rail (substantially more expensive than pipeline transport). The remaining crude volumes continue to be shipped by pipeline. EPD generates more EBITDA from crude oil pipelines, but they are also predominantly moving crude oil from basins with very low costs of production and very close proximity to the gulf refinery complex (i.e. well established basins in Texas). As such, they are not impacted much by reduced crude volumes. While I generally think that crude oil consumption throughout the world will decrease over time, you should also recognize that it is becoming cheaper for Europeans to import refined gasoline and diesel from the United States than it is to refine crude in Europe. Therefore reductions in crude oil consumption will impact refiners less in the United States than it will in other countries, and thus it will have less of an impact on pipeline operators.

Buying EPD and ETP. Both have sold off quite a bit...I am happy to nibble on some EPD @ a 5.8% yield and ETP @ a 8.8% yield. People seem to think that the weakness in oil and gas producers mean that the midstream companies are f*cked also. What most forget is that commodities operate in a cycle...low commodity prices tend to drive higher demand. In the case of ETP and EPD, both have substantial access to demand drivers such as our country's premier petrochemical complex and Mexico's increasing appetite for low-cost natural gas. Also picking up some REIT's that have been slaughtered recently (GPT and MPW). Everybody in the market seems to think that rising rates spell doom for REITs. However, I have a tough time seeing how the Fed raises rates by more than 25 or 50 basis points over the next two years, so the cost of REIT funding will not increase that much. Moreover, rising rates generally indicate an improving economy which yields higher rents for existing properties under management...beneficial for REITs. I've also been looking at some of the short-term debt of mid- and small-sized independent oil and gas companies. While there are some real stinkers out there, the general fear in the market of O&G bankruptcies has caused some decent pricing on O&G short-term debt. Reasonable coupons and pretty decent yield-to-maturity. I haven't pulled the trigger yet, but am getting closer on some of the senior stuff... heads I win, tails I end up with a stake in a restructured company with decent O&G assets.

I've only been a federal employee for a few years, but I will share my perspective on TSP. I put all of my new contributions into the G-Fund. I think right now the G-Fund is earning a 2.5% annual return, so barely keeping up with inflation. I view this like a pot of cash to invest as opportunities arise. As the market is moving up or side-ways, my biweekly contributions continue to build up the balance of money in the G-Fund. When the market starts to fall, I use the mechanical process listed below. The mechanical process keeps me sane. When we have a 5% pullback in the market, I put 50% of the money sitting in the G-Fund into the C-Fund (1/3), F-Fund (1/3) and the S-Fund (1/3). If the market continues to a 10% drop, I put the remaining G-Fund money into the C-Fund(1/3), F-Fund (1/3) and S-Fund (1/3). As the market rises or moves sideways, I do not remove money from the C-Fund, F-Fund, or S-Fund. In February or March, I rebalance the C-Fund, F-Fund, and S-Fund so that each represent 1/3% of my TSP's non-G-Fund assets.

Best financial/investing interview I have read in a while. I like the fact that he is concise and to-the-point. And there are actually some good nuggests in there, unlike most of the other BS financial commentary floating around the web.

There are a lot of reasons factors that have influenced the decline in oil prices. If the issue was simply that Saudi Arabia wanted to punish other countries with higher production costs, they could have achieved a far quicker result by ramping up their domestic production. Announcing an increase of 500k-1million bpd, in the face of weak prices, would have driven the price of oil down far faster, and further down, resulting in a far faster supply/capex response. That is not their goal. The Saudi's are smart. They realize that rapid contractions in capex and exploration will result in another parabolic price increase in crude oil. Parabolic increases and decreases in the price of crude serve as encouragement for alternative energy development, which reduces future demand for their primary export product. Thus the Saudi's are looking for the market to set a reasonable price range that will allow producers to recoup a reasonable rate of return, while allowing a reasonable price for consumers that will discourage/slow the development of alternative energy.

I missed the boat on that one also. A while back I read an article about Allen Meacham's position in Sandridge Energy, including an explanation of why they got out of the position. I wish I had read that before I started a position in EXXI. My position in EXXI was primarily based on the value of their proven reserves (fairly substantial) in the Gulf of Mexico relative to the EV of the company. Had I read the article, I probably would have avoided EXXI. Also burned by a position in RIG. While I saw the downturn in oil coming, I did not anticipate the severity of the downturn, particularly with respect to rig usage and contract values/lengths. Finally, my biggest blunder of the year.... I sold out of SCO in late-summer @ ~$28 for a 15% gain. Because of my employer, I am unable to invest in certain parts of the market, so I tend to be overweight energy pretty much all of the time. Because of that, I generally try to remain hedged, either through USO/SCO or by shorting an overvalued E&P company. Anyways, I was hedged with SCO during the Summer months, as WTI and Brent moved through $100/barrel. I basically added to my SCO position all summer as oil moved higher and higher. It became a 20% position for me as I was convinced the price of WTI was disconnected from the actual supply-demand for WTI. Anyways, the position became a bit large for me, so when it finally turned around and hit a 15% gain, I sold. I was really on the fence about this one, and figured the prudent action was to take it off the table for a reasonable gain. Hindsight is obviously 20-20, but I must say it is rather painful to see SCO at ~$76 now.

WMB, EPD, and ETP. In addition to these three, I also have money in CLMT (Specialty Refiner) and USAC (provides compression equipment for midstream pipelines).

Those who are venturing into oil producers have far bigger cajones than I do, or they are simply not aware of some of the ex-US development of shale. For instance, Argentina has one of the largest shale deposits in the World (vaca muerte); they are just beginning to develop this shale which should result in substantial amounts of new oil and gas production in South America. Mexico is opening up their oil industry to foreign companies. This should result in increased production from existing fields, as well as new oil and gas production. China has the largest shale reserves in the world, and they are also beginning to develop those (although I think their severe water issues will slow this development initially). Those who are betting on a snap-back in crude pricing are not taking into account all of the new reserves that are now technically and economically feasible around the world. While I don't think we are going to see a substantial drop from current crude oil pricing, I simply don't see the price of crude oil bouncing back. I think we are entering a period of pricing that is similar to natural gas pricing. As price recovers, marginal shale producers open up the spigot and flood the market, thus depressing prices. If you are determined to play the energy space, I would stick with companies that benefit on the demand side from low prices and/or increased use of hydrocarbons. I have a sizable investment in pipelines because I think that lower prices will stimulate a higher demand for natural gas and crude oil, thus creating the need to move more product through these pipelines.

Do you have a price target? Yeah. I suppose there are two ways to value this company. On an EV/EBITDA basis and on a yield basis. USAC has equity of $700 million and debt of $500 million, so enterprise value of $1.2 billion. Their run-rate EBITDA, coming out of the third quarter, was $27 million per quarter. As I stated in my earlier post, I think this underestimates their earning power because not all of their new compression equipment was installed for the duration of the third quarter. So let's assume that their quarterly run rate will be ~$30 million exiting the fourth quarter. Move over, they are adding another 200k HP in compression equipment next year, so about another 20% increase in HP. So let's assume a quarterly run rate of ~$35 million by q42015. That yields an EV/EBITDA of 8.5. I think an oil services firm would be willing to pay 10x given some of the cost synergies they could realize, so maybe $20/share based on annualized earnings from q42015. You could also value USAC based on yield. I see a 10% yield being reasonable given the nature of their business, which also yields a target share price of ~$20 given their current distribution.

Got The cash cost is misleading when comparing different types of production. Gotta take into account the cost of the maintenance capex necessary to sustain production at current levels. If you include that, then the cost of shale wells go up a bit given the high initial production and relatively steep decline rate. This contrasts with Saudi production, where cash costs are cheap and maintenance capex is low due to low decline rate and the characteristics of that particular oil basin.

Getting inflation is the target of Abenomics, without inflation they can`t inflate their debt away in the long run. Its called financial repression and was done by the UK in the past century. They are not forced to borrow their money long term, when rates go up they can just finance this with short term debt. And short term rates are under full control of the BoJ. yeah but interest rates go up with inflation. And since they are so extremely levered, if that happens, the hole in their budget becomes bigger and bigger. They spend twice as much as comes in already, and one quarter of that is interest. So if interest doubles, suddenly they are screwed. They would need to borrow more, and more inflation will only widen that budget gap, untill there is no other way besides hyperinflation or default. What you are saying is possible with the US. But not with Japan. The US has a small budget deficit, and debt isn't so massive yet. I mean sure there is some small chance things will go alright. But there is a reason they are rotating through ministers of finance. And one even had a panic attack after looking at the books. The key point that no one mentions is their reliance on importing foreign hydrocarbons. If/when they "monetize" their debt ( and I generally believe they are already doing that but calling it QE), the cost to import hydrocarbons using their inflated/worthless currency will skyrocket. That will have an enormous impact on a economy that has reduced reliance on nuclear power.

Warning? It will be too late by that point. When Japan finally cracks, yields in the Western countries will shoot up, preventing countries from rolling over debt and/or slashing budgets to support higher debt service payments. I can't feel sorry for the Japanese though...their issues are in large part due to population growth (or lack thereof), which could have been resolved by allowing some immigration, but the Japanese are too rascist to do so. They are going to get what they deserve....

My predictions for 2015: The western world descends into civil war, and all of the gold investments that were supposedly a "hedge" on inflation/money-printing/chaos turn out to be absolutely worthless because there are no functioning exchanges, and all of the white-collar folks with physical gold have it stolen by the smarter folks who invested in guns, bullets, and water purifiers. Just kidding.... My prediction is little to no change in the major averages...just a volatile year and an elevated VIX.

I sent you a PM but I am curious about this as well. I presume the thesis is that higher margin specialty chemicals won't experience the price-drop that feedstock has? Thanks for the idea. Specialty chemicals will be subject to the same margin compression and margin expansion as fuel when the price of crude changes. The important difference are the margins. CLMT's fuel segment had gross margins of ~$3/bbl in Q32014 (July, Aug, and Sept). During this time, WTI declined from ~$102/bbl to ~$92/bbl. CLMT's specialty chemicals segment had gross margins of ~$43/bbl, which comprised ~80% of CLMT's EBITDA for the quarter. Generally speaking, I expect the margins for specialty chemicals to fluctuate as crude pricing fluctuates. This doesn't impact my thesis. My long-term thesis for CLMT could be summed up by a couple of key points: 1. Specialty chemical business (production and distribution) is pretty segmented in the United States. There is a lot of room for consolidation. CLMT has been quite active doing this, and appears to have been pretty successful in integrating new production lines as well as new distribution teams. 2. Specialty chemicals tend to be pretty sticky, and the demand tends to be pretty inelastic. There are a lot of examples that come to mind... 3. CLMT sells about 90% into domestic market, and 10% into foreign market. Recent acquisition gives them toehold in foreign distribution. Once the price of crude stabilizes, I expect them to start pushing more into foreign markets. Given that I expect the Brent-WTI differential to persist for quite some time, CLMT will have a pricing advantage even when selling into foreign markets. 4. CLMT established an agreement with Wal-Mart, and now Wal-Mart is carrying their Royal Purple line of lubricating oil. This provides a pretty substantial step-up in retail distribution for CLMT. 5. Controlling family owns about 26% of the limited partner units, plus the general partner interest. This gives me a little bit of confidence that they are not going to dilute their limited partner units willy-nilly. This belief has been confirmed by their limited use of an ATM program.

When you say small...are you saying ~1% positions? Just curious...I have been looking at CTCM for quite some time and held off because of the price. It is starting to get interesting for me.

Isn't that a good thing for the refiners? That's not entirely accurate. Capacity expansion can occur via two mechanisms: (1) Brownfield expansions (i.e. the expansion and improvement of BP's Whiting Refinery a few years back, primarily via addition of massive coking units; the expansion of CLMT's Montana Refinery by way of new distillation towers and a new mild-hydrocracking unit); and (2) Greenfield expansions (i.e. new MDU/CLMT refinery in the Bakken which is first new refinery in the United States in 30 years). Capacity is growing in the United States, primarily because of the opportunity to export refined products to Europe and Asia. In addition to the new MDU/CLMT refinery in the Bakken, another topping refinery is far along in the planning stages for the Bakken, and a third MDU/CLMT topping refinery is being considered for the Bakken. These are relatively small 20k/day refineries. On top of this, folks like KMI and EPD have also been planning new "refineries" where they will minimally process crude distillates for export. If you are going to play the refinery business, I see two ways to do it profitably: 1. Figure out where there are going to be structural changes in feedstock that have not been priced into the shares (i.e. PFB on the east coast transitioning from expensive seaborne Brent to cheaper inland crude). 2. Look for the niche players that are using their refinery business as a means to provide cheap feedstock to their higher margin specialty chemical business. CLMT is one; there are a few others if you look closely. 3. Play ALDW. They are a variable distribution refinery, essentially paying out all of their cash flow. If you are willing to track the spread between WTI and their feedstock on a daily basis, you can pretty closely estimate their payout for the upcoming quarter given they have one refinery with access to a limited slate of feedstocks. This should be pretty obvious to all market participants, but for the most part, the share price generally reflects the previous quarter distribution rather than expectations for the upcoming quarter. Pretty easy to arbitrage this for some capital appreciation and the dividend if you are willing to spend some time tracking this information.

Do tanks really run on gasoline? I've always assumed they ran on diesel, like large industrial engines. It would certainly be more efficient... The gas turbine engine is quiet. You are correct, historically most tanks have run on diesel engines. However, M1A2 uses a gas turbine rather than a diesel engine...can run on Diesel #1, Diesel #2, JP-4, JP-8, kerosene, and even marine diesel if you are in a pinch. United States has typically fueled their Abrams with JP-8...gets a whopping 0.6 miles to the gallon, so a typical armored division uses ~600,000 gallons of JP-8 per day when deployed to the field for combat. Imagine what that does to the market for refined products! ERICOPOLY is right on the money about the noise level...M1A1 was known as Whispering Death when they ran it through trials. Sorry to hijack this thread with irrelevant chatter...I'll stop now.

It is funny that you mention that...we American's are pretty good at starting wars and blowing s**t up when we need a positive jumpstart for our military-industrial complex or a quick way to boost world-wide oil demand (you would not believe the amount of gasoline that an M1A2 tank guzzles on a daily basis when driving around the desert). Sorry for the sarcasm, but, in general, I find it a bit silly how much Americans berate the Russians for what they do, yet we Americans have a pretty rich history of nation-building and war-mongering. For what it is worth, I am a conservative and come from a family where there has been a substantial amount of service to our Armed Forces, both in the past and in the current period.

I think that is a bit of an oversimplification. In looking at the economics of refining, you need to ask yourself whether we are in an extended cyclical upswing, or whether there has been a structural change in refining. I would argue that we are in the middle of a cyclical upswing, which will ultimately be ended when the midstream folks finish building out a pipeline network that provides east coast and west coast refiners with access to inland crude. At that point, we will probably see more of a convergence in Brent-WTI, as well as a narrowijg in the spreads currently enjoyed by the inland and gulf coast PADDs relative to the east coast and west coast PADDs. At that point, profitable refining will simply depend on what the crack spreads are, and the ability of the refiner to produce higher margin specialty products such as base oils, lubricants, solvents, etc. profitability of the larger refiners will also to some degree depend on their midstream assets and logistics assets. Both Tesoro and PSX have decent midstream and logistics assets, while PBF has been building out logistics assets on the east coast (primarily rail terminals). I personally don't think there is much opportunity in the larger refiners. I think the current share prices are reflective of my expectation to future performance. However you might consider looking at some of the niche companies in the business that produce specialty chemicals. I have a fairly large position in Calumet Refining (CLMT). They are a refiner in the sense that they own about half a dozen small refineries. However, the primary purpose of their refineries is to supply their specialty chemical operations with base oils and other important feedstocks. Thus about 80% of their EBITDA is based on the production and distribution of specialty chemicals. I also find them to be attractive because they have been rolling up small mom-and-pop specialty chemical companies and distributors. Their share price has been whacked along with the sell-off in crude...I suspect we have been seeing a capitulation if retail yield seekers. Anyways, CLMT seems to be priced as a specialty chemical producer, based on current EBITDA and a substantial amount of debt. However, the debt is the result of a fairly large organic growth program that should yield an incremental 200million EBITDA per year, with the first project coming online now, two more projects coming online in mid 2015, and the final project coming online in q12016.

Mainly by vomiting in a trash can. :) That about describes me today. A substantial portion of my portfolio is in refining (CLMT) and midstream (ETP, USAC, EPD, and WMB). It has been a nauseous few months...

I am, thanks for the suggestion. I am in need of a few, less-than-exciting positions to complement my roller-coaster ride in midstream oil/gas. The death industry looks interesting to me...

It's my personal belief that Saudi Arabia orchestrated the lower oil prices for the following reasons: 1) It's a shot at Iran. Maybe putting pressure on Iran will entice them to give up their nuclear program. 2) ISIS has been selling oil. I believe that is where they have been getting the majority of their profits. Lower oil profits means less money for them and may weaken their base. SA is certainly no friend of ISIS and it must scare the shit out of them to think that Iran is on one side and ISIS is on the other. 3) To a lesser degree, this hurts Russia and shale producers. If this takes out some of the supply then it's icing on the cake. I would be interested in hearing other's thoughts about the above? Does anyone get anything from Stratfor? I would be curious their take on this whole thing. Thanks, AtlCDore I initially thought there was a strong geo-political aspect to the Saudi's decision to maintain production even in the face of falling crude prices. However, the more I read about the Saudi's experience and thought process in the 70's and 80's, the more I think that this is entirely an economic decision on the part of the Saudi's. This is illustrated by the Saudi's experience over the previous three decades. In the past, in the face of falling crude, they cut production to maintain crude pricing. A couple of things happened that negatively impacted Saudi Arabia. First, Certain OPEC members have historically always exceeded their quotas, so the Saudis bear the brunt of the production cuts. Second, by cutting production and maintaining higher crude prices, this has stimulated a higher rate of growth in non-OPEC production. And third, as non -OPEC production has increased, the share of oil supplied by OPEC has declined substantially. Fourth, higher crude prices reduce future crude demand substantially given that higher crude prices stimulate investments in alternative energy sources. Fifth, the Middle East ships a substantial amount of crude to Asia, particularly China. The Chinese have the largest shale deposits in the world, and they are getting ready to exploit them given their reliance on imported crude and imported gas. Lower crude prices make it much less economic to pursue development of Chinese shale, thereby ensuring continued reliance on Middle East crude. (Ultimately I think the Chinese will fail to exploit their vast shale deposits given their severe water issues, but that is a discussion for another day) So I am led to believe that the Saudi's actions are entirely to maintain market share, and by doing so, the low prices will encourage an increase in demand while cutting the legs out from under development of certain crude alternatives.

How will potential bankruptcies and lack of future drilling affect midstream? I know nothing but I thought I heard that midstream enters into long term contracts. What if the counterparty defaults? I am intrigued but not interested so I am waiting. It looks like the bad companies sold off and I will wait until they go bankrupt or quality sells off before I start to get very interested. As I stated in my original post, I think the slow down in drilling activity will negatively impact midstream companies that focus on building out collection/gathering systems. That is simply my assessment based on how they seem to plan and build out those systems, relative to the larger interstate pipelines. With respect to counterparty risk, that is certainly a concern with any company engaging in long-term contracts. However, my belief is that if/when some of the marginal companies default (and I think there will be a few that do) their trustees will continue to honor the contracted terms in order to get their hydrocarbon product to the market. How else would they maximize cash flow from the distressed asset if they can't get their hydrocarbons to the market? I think the great recession is instructive in this case. Not only did demand drop off, but the credit markets froze up as well. Yet many of the stronger midstream companies maintained their distribution or even increased it, with few counterparty issues. I think it is also useful to point out that the marginal companies most likely to default, for the most part, are smaller operators that make up a small portion of contracted volumes on the bigger pipelines. I don't have any numerical data to substantiate this claim...this is just something I have gleaned from reading a number of 10k's. In my case, I have focused on midstream operators where demand seems to be driving the construction and/or expansion of pipelines. Williams Company is a good example with their transco pipeline. Upstream companies seem to be falling all over themselves to get space on this pipeline because it serves some of the biggest natural gas markets in the country. EPD is another good example, especially given their distribution coverage of almost 1.5:1 and their assets in the Gulf Coast Region. and SHLX is another good example...although the valuation is a bit rich right now, shell has some premier midstream sssets that will likely be dropped down to SHLX....their stake in the colonial pipeline is a great example.