Posts tagged “pipelines”
Two Conversations about A Tragedy
It’s been just over a month since a train loaded with crude oil from North Dakota derailed and exploded in the Canadian town of Lac-Megantic, Quebec, killing an estimated 47 residents. In the interval since the accident, the relevant authorities have focused on ascertaining the cause of the accident and determining how best to improve rail safety. However, there has also been another, less-customary conversation about whether oil in general, and the specific oil on this train, might be too dangerous to transport by rail at all. That conversation would benefit from some context that appears to be absent.
Both conversations began with a tragedy in a place I recognized immediately. Ten years ago my wife and I passed through Lac-Megantic and drove along the Chaudière river that originates there, on its way to the St. Lawrence. It’s an area of natural beauty and historical significance. The images of destruction and of oil spilled in the river were gut-wrenching.
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).
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.
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.
Despite continued opposition to the Northern Gateway pipeline, energy firm Enbridge has committed an additional $150 million to that project in a show of commitment to its goal to carry oil from Alberta’s oil sands into northwestern British Columbia, allowing it to be easily shipped to Asia.
Enbridge began work on the project with a $300 million investment, but ensuing controversy due to the perceived environmental risks associated with the long distance pipeline have slowed progress, leaving many wondering if Enbridge would abandon the project altogether. (Read More: Enbridge Set to Invest $6.28 Billion in Oil Pipeline)
The announcement comes as Enbridge works to improve its penetration in delivering crude to North American markets, beginning with the launch of the so-called Eastern Access Program, and a similar program intended to help ship oil produced in the Gulf of Mexico.
The secretary of Russia’s National Security Council is now warning that militants have joined forces with pirates to carry out attacks on key maritime oil transport hubs like the Strait of Hormuz and the Suez Canal. According to the EIA, the Strait of Hormuz “is the world’s most important oil chokepoint due to its daily oil flow of 16.5-17 million barrels (first half 2008E), which is roughly 40 percent of all seaborne traded oil (or 20 percent of oil traded worldwide).” The following is the final segment of this week’s three-part series (Links to: Part I and Part II) on oil infrastructure and terrorism. Regularly scheduled programming will follow shortly. The report was written by Donald J. Evans, a Senior… Continue»
Yesterday’s New York Times contained a story that depicts the vulnerability of the U.S. military’s fuel supply chain: U.S. Military Orders Less Dependence on Fossil Fuels In Iraq and Afghanistan, the huge truck convoys that haul fuel to bases have been sitting ducks for enemy fighters — in the latest attack, oil tankers carrying fuel for NATO troops in Afghanistan were set on fire in Rawalpindi, Pakistan, early Monday. In Iraq and Afghanistan, one Army study found, for every 24 fuel convoys that set out, one soldier or civilian engaged in fuel transport was killed. In the past three months, six Marines have been wounded guarding fuel runs in Afghanistan. Also, as an update to the link I posted leading… Continue»
In light of the recent attacks by militants on tankers carrying oil for NATO and U.S. troops, the series that I am posting this week is especially timely. When we consider the dependence of the U.S. and the western world on the Middle East, the potential for terrorism on oil infrastructure looms as a large risk hanging over our economies. This week’s three-part report (for Part II of the series, click here) asks a specific question: Given the strategic importance of Middle East oil to the West and its economic and technological dependence on oil: Why have pipelines in that part of the globe not been primary targets of international terrorism to date? The report was written by Donald J…. Continue»