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By Lou Gagliardi on Jun 28, 2013 with no responses

A Look at the Drivers of Deepwater Oil & Gas Exploration

Majority of Global Oil Reserves in Areas of Geopolitical Risk

The last two weeks I have been writing about deepwater oil and gas exploration and the trend to push out into deeper waters further offshore. This week I wanted to drill deeper into the drivers of this important exploration and production trend in the oil and gas industry.

Against a backdrop where 43% of global oil production is  in high risk regions — the Mid-East and Africa account for 32.5% and 10.9%, respectively — and add on top of that another 16% from Russia and Venezuela, you have nearly 60% of world oil production in areas of high geopolitical risk. Looked at from another perspective, National Oil Companies control roughly 75% of proven crude oil reserves (probability that 90% of the reserves will come to production), with the remainder held generally by multinationals – IOCs.

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By Lou Gagliardi on Jun 19, 2013 with no responses

Seadrill an Offshore Driller in Rapid Growth Mode

Energy Trends Finance

In This Issue

Featured Stock
Seadrill Limited (SDRL)

Previous Recommendations
Magellan Midstream Partners LP (MMP): BUY
Global Partners (GLP): BUY

Changes to Previous Recommendation
None

Seadrill an Offshore Driller in Rapid Growth Mode

Seadrill Limited (SDRL) is currently the largest offshore drilling company in the world by market capitalization of roughly $19 billion (B), and with an enterprise value of $29 B. The company boasts an exceptional dividend yield of 9.0% – a dividend of $3.52/share.

In the 1Q of 2013, SDRL beat market expectations for both revenues and earnings. SDRL, like most of the industry, is in a rapid growth mode seeking to capitalize on the explosive worldwide need for safer, better quality rigs in the post BP Gulf of Mexico oil spill to drill in more difficult and deeper waters – ultra deep to capture higher crude prices.

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By Lou Gagliardi on Jun 11, 2013 with 2 responses

Slow Economic Growth Puts Gasoline Consumption in a Downward Spin

As we have built more fuel efficient transportation vehicles over the years, we have been able to curtail our consumption of motor gasoline and distillates – diesel. However even with more fuel efficient vehicles, our gasoline consumption as measured by the U.S. Energy Information Administration (EIA) of total product supplied has been fairly stable since the 1980’s as more vehicles have come onto the road to offset greater fuel efficiency. Then in 2008, the Great Recession hit brought on by the financial crisis and the trend accelerated dramatically downward. By 2008 fuel consumption began to slide downward, by 2012 gasoline consumption literally fell off the cliff.

gas demand lags

The primary catalyst for the dramatic decline in motor gasoline demand has been weak economic growth in the U.S. that has been exacerbated by stubbornly high retail fuel prices pegged to relatively high crude prices, despite a deepening global recession.

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By Lou Gagliardi on May 29, 2013 with no responses

A Midstream Energy MLP With a Nice Upside

Energy Trends Finance

In This Issue

Featured Stock
Global Partners (GLP)

Previous Recommendations
Magellan Midstream Partners LP (MMP): BUY

Changes to Previous Recommendation
None

In the last investment note to our readers, I spoke about Magellan Midstream Partners LP (NYSE: MMP), a master limited partnership or MLP. This week I want to talk about another pipeline infrastructure MLP – Global Partners (NYSE: GLP).

In our current high volatile capital markets and low bond yields, MLPs with a high dividend yield provide downside risk support to their share prices. Additionally, MLPs that provide a critical “middleman” role regardless of whether energy prices are high or low provide relative stability to their revenues and earnings growth, as they are the necessary infrastructure link in the energy value chain moving energy molecules from producers to final consumers.
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By Lou Gagliardi on May 8, 2013 with no responses

Why Magellan Midstream Partners is a Solid MLP Stock

This week I decided to analyze and recommend an energy company I feel is worthy of investing in. In the coming weeks, as we prepare to launch Energy Trends Finance — a service for investors, executives, and others involved in the energy sector — be sure to look out for similar analyses on companies across the energy industry.

Protect Your Downside

With all the crosscurrents in the markets, Europe in recession, Japan with no economic growth, and the U.S. registering slow GDP growth that keeps energy demand sluggish, and continued high volatility in oil and gas prices, I remain cautious in the energy sector. However, although cautious I am not absent from the market as I do believe that with a diligent and “defensive” investment philosophy one can achieve positive results over the long-term.

(Related: Three Reasons to Invest in Energy Long-Term)

Indeed, as I have outlined in several of my energy trend notes over the last few weeks, I remain bullish long-term in energy equities, as investors will continue to be attracted to energy equities due to long-term structural supply/demand imbalances that will continue to see demand – consumption increasingly outpace production growth.

Invest Defensively for the Long-Term

The key is to pick and choose wisely by not focusing on the overall broader energy market, but to seek out energy stocks that are “infrastructure” related as pipeline MLPs, or niche providers to the energy market as offshore rig providers, deep water drillers and specialty pump and valve flow systems.

In the current market of volatile share price swings, seek out companies with high dividend yields or MLPs with high distribution yields that will protect your downside by providing support to share prices in down turning markets. I’m talking about specialty companies with above average dividend yields, solid balance sheets, low debt, a sound credible and simple business plan, and — most importantly — high growth prospects. And that brings us to our energy investment idea this week: Magellan Midstream Partners LP (NYSE: MMP).
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By Lou Gagliardi on Apr 30, 2013 with 1 response

The Energy Industry’s Production Challenge: 100 Million Barrels Per Day

In last week’s note: 2013 Crude Oil Outlook: Supply & Demand, we looked at the more immediate trend in global supply and demand. But this week, I want to examine the long-term oil production challenge facing the industry.

Current global oil consumption is running just under 90 MM b/d, with wellhead production at about a little over 85 Mm b/d, or a deficit or about 4.7 Mm b/d. As we pointed out last week, overall global oil consumption since 2000 to 2012 has been running at a per annum rate of 1.2%; should global consumption continue to grow at this rate, we will hit roughly 100 MM b/d by 2022, or in ten years. If global oil consumption should slow to a per annum rate of 1.0%, we will hit 100 MM b/d only two years later by 2024.

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By Lou Gagliardi on Apr 18, 2013 with 3 responses

2013 Crude Oil Outlook: Supply & Demand

Oil Demand Shift

From 2000 the increasing industrialization of the developing world has been the primary catalyst driving the demand for global crude oil. Among non-OECD nations, China and India have led the charge, with Chinese oil demand growing at a torrid 6.7% per annum rate and India’s oil demand growing at 4.0% per annum. Overall non-OECD demand for oil has increased at a comparable rate of 3.6% per annum, with the Asia/Pacific region growing oil demand at roughly 2.7%. Developed nations, however, have seen diminishing oil demand with a negative -.04% per annum growth rate.

2014 OECD non OECD consumption

As I shall point out, the decline in OECD oil demand is not enough to offset the rising demand for oil from the developing world, so the net result going forward will be an increasing supply/demand imbalance. My analysis points to an increasing deficit — gap in global wellhead oil supply — to meet demand. CONTINUE»

By Lou Gagliardi on Apr 12, 2013 with no responses

Energy Industry Struggling to Generate Free Cash Flow

In my previous column, Energy Industry Capital Spending Reaching New Highs, we looked at how the industry continues to ramp up spending across its sectors. As I noted, this is no surprise given the enormous capital requirements to sustain its business models.

However, what is surprising is that despite the significant tailwind of high crude prices since 2010 to current, net free cash flows (operating cash flow less cash capital spending) have actually declined for the industry overall. Operating costs are increasing crimping margins, and investment spending is rising faster than top-line revenue growth. To put things into perspective, although total industry operating cash flow (OCF) dropped only 1% in 2012 from 2011, from 2007 to 2012 spending grew at a per annum rate of nearly 10% while OCF increased at a 5% per annum rate.

Energy Sector Struggling Cash Flow

The worst offender has been the U.S. E&P sub-sector heavily weighted to natural gas production at low prices; the sector has seen its deficit cash flow grow. In 2012, despite spending decreasing 2% from 2011, OCF dropped a whopping 17%. From 2007 to 2012, capital spending grew at nearly a 7% per annum rate, while OCF increased only 3% per annum.

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By Lou Gagliardi on Mar 25, 2013 with no responses

Energy Industry Capital Spending Reaching New Highs

The value chain for the energy industry is a simple one: Resources to Production to Cash Flow to Value.

At first glance, higher capital spending in the energy industry may seem a paradox during a period of weak global economic growth. However, it requires enormous capital to maintain — let alone grow — its business model. To that end, several tailwinds have helped fuel the industry’s relentless re-investment, simulative monetary policy – low interest rates, high crude prices, rising costs, increasing demand from developing nations, increasingly remote and difficult regions to explore for oil driven by globally constrained light sweet crude oil.

Particularly, high crude prices are a major catalyst driving spending higher. Since 2011, on average, crude prices — whether WTI or Brent — have been at a consistently historically high level; WTI at roughly $94/bbl, and Brent at about $112/bbl.

steady-crude-oil-prices

Looking at the overall energy sector that includes the oil & gas (U.S. E&P, Western Majors and Canadians), refining, pipeline, utility, and oil services sectors, the industry spent over $450 billion, or 58% higher in 2012 compared to 2007 spending, and 6% above 2011, at a per annum growth rate of nearly 10% from 2007 to 2012.

energy industry spending soars
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By Lou Gagliardi on Mar 18, 2013 with 7 responses

Power Generation: Battle Between Coal and Natural Gas

The battle for market share in power generation is primarily between historically abundant and relatively cheap coal and environmentally cleaner but increasingly abundant Natural Gas (NG).

The increasing supplies of NG driven by the productivity of unconventional shale exploration and drilling has pushed NG prices lower over the last few years. With lower NG prices has come greater NG use as a fuel source in power generation.

power-generation-nat-gas-share

While many in the media have sounded the death knell for coal as a power fuel source, and in the very long-term I think coal usage will gradually diminish, it will take years — perhaps even decades — for coal to be relegated to an insignificant role in power generation, but I am convinced it will occur.

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