Sunday, March 22, 2015

Adding Philips 66 (PSX) to investment portfolio

I am adding Philips 66 (PSX) to the long term investment portfolio. The company is, according to its website, a "diversified energy manufacturing and logistics company. With a portfolio of Midstream, Chemicals, Refining, and Marketing and Specialties businesses, the company processes, transports, stores and markets fuels and products globally."

The company does not produce crude oil. Instead it transports and stores oil, refines oil into various products including fuels and chemicals, and it markets these products. It is a basically a value adder to crude oil. The current crude oil market is a big boon for this company as I will explain. 

The company buys crude oil in the US which is priced substantially below the world price due to the oversupply in the US. It refines the oil and then sells the refined products based on world prices. Because of the stupid policy of the US government to ban crude oil exports US oil sells at a discount to the world price. However, the refined products that Philips sells can be exported and sell for the world price which is higher. The company captures the arbitrage between the US oil price and the world oil price via the export and marketing of its products. Its substantial transportation and storage assets lets the company move feedstocks and products around so as to make the most profit. The company is one of the best companies around for playing the current shale oil expansion in the US. 

The company was spun out of ConocoPhilips in 2012. The company has raised the dividend rate 28% in the last year and has completed stock buybacks that have lowered the share count by 7%. The management is committed to further of returns of capital as the company transforms itself into a logistics and marketing company. I am adding Philips to my long term investment portfolio. This is not a complete analysis so please due your own due diligence. 

Here is an in depth overview of the company on Seeking Alpha

Saturday, March 21, 2015

Rig count continues fall; production beginning to fall


 It’s official: The shale oil boom is starting to waver. And, in a way, it may have souped-up rigs and more efficient drilling technologies to thank for that.

Crude production at three major U.S. shale oil fields is projected to fall this month for the first time in six years, the U.S. Energy Information Administration said Tuesday.

It’s one of the first signs that idling hundreds of drilling rigs and billions of dollars in corporate cutbacks are starting to crimp the nation’s surging oil patch.

The media likes headlines about oil storage filling up but that will not happen. There is plenty of storage for crude oil and refined products. This difference between reality ans media hype is currently depressing sentiment and prices in oil stocks. I would be looking to get long quality oil stocks as the herd begins to realize that we have reached inflection point in oil production growth. In addition, the maintenance turnaround season at refineries is coming to end and this will result in refineries coming back online and sucking down inventories as they build gasoline production for the summer driving season. The increased demand will run into declining supply and will result in higher oil prices by yearend. 

Sunday, March 15, 2015

Nuclear back to pre-Fukishima levels


Uranium-watchers might remain preoccupied with Japan but the rest of the nuclear world has returned to a “pre-Fukushima state,” according to at least one authority. In an interview with the news agency RIA Novosti quoted by the World Nuclear News on March 10, Leonid Bolshov, director of the Nuclear Safety Institute of the Russian Academy of Sciences, said predictions of a slowdown have proven false.

 “Calls for the abandonment of nuclear power crop up every now and then in different countries but these are, as a rule, the result of short-term political speculation and go against the everyday needs of national economies,” the WNN quoted him.

It looks like the uranium price is beginning another move higher. This is happening in the context of absolutely no media coverage. This is a good thing because it allows for a stealth bull market and slow and steady is healthy.

The uranium stock ETF has still not put in a confirmed bottom and just appears to want to grind lower. If it can rally off the recent low it is testing than we may see relief to the upside.

Saturday, March 7, 2015

Altius Minerals acquires Callinan Royalties Corp.


Pursuant to the Arrangement, Altius will acquire each outstanding Callinan common share for 0.163 of an Altius common share and C$0.203 in cash, valuing each Callinan common share at C$2.27 based on Altius’ closing share price on the Toronto Stock Exchange as of March 4, 2015. This represents a 28% premium to Callinan’s closing price on March 4, 2015 and a 26% premium to the respective 20-day VWAPs of both Altius and Callinan for the period ending March 4, 2015. Upon completion of the Arrangement, Callinan will become a wholly-owned subsidiary of Altius and existing Altius shareholders and Callinan shareholders will own approximately 81% and 19%, respectively, of the outstanding Altius common shares. Callinan will be entitled nominate one member to the Altius board of directors upon closing of the Arrangement.

Altius is a long term holding for me. The management at Altius has demonstrated over a period of years that they know how to serially compound capital. This acquisition is another demonstration of this principle. The Altius royalties are long life assets (30+years) in commodities that are needed for modern civilization itself. Thermal coal, potash, copper, the case of the thermal coal royalties there is no price risk as the royalty is based on volume and are tied to coal fired plants in Canada. 

This is one you just buy and put away for many years and let the management compound your capital for you. The kicker is that once the debt comes down a bit more the management has been clear that they plan to institute a dividend. In the past share buybacks have been the norm whenever management has felt the shares were undervalued. Most people will not buy a company like this because they are not patient enough to wait for the plan to play out over time along with the fact that collecting royalty checks is not very sexy. However, it is quite profitable and this is how long term wealth is created. 

The other thing I like about these royalty companies is the optionality they provide. Typically, along with the royalty, the company has an option on the surrounding ground which can add up to thousands or tens of thousands of acres. As money is invested in exploring adjoining properties the royalty company usually has the option of acquiring a royalty on any additional resources that are found. As the former CEO of Franco-Nevada said, "If you control a million acres of ground don't you think at some point you get lucky?" So there is long term upside. 

As this article from Richard Mills explains the demand for commodities is not going to go down over time it will only increase.

At this moment there are slightly over 7 billion people living on this planet, an urbanization rate of 53 percent means there are roughly 3.71 billion urbanites in the world today. It has been estimated that by the year 2050 our global population will reach 10 billion people. If our global population does indeed reach 10 billion people, and if Birch and Wachter's expected urbanization rate of 70 percent is achieved, seven billion people, or almost the equal of today's current world population will be considered urban.

Could we hit the ten billion people mark? Could 70 percent of us be living in cities by 2050? The answer is likely yes. Developing countries are responsible for 90 per cent of current population growth - these are on average very young people with many years of fertility/reproduction left to them. By the year 2025, in just 10 short years, 84 per cent of the world's people will live in developing regions.


The developing world's urban centers are expected to burgeon, drawing 96 percent of the additional 1.4 billion people by 2030. Due to the overall growing global population - but especially an exploding urban population (urban populations consume much more food, energy, and durable goods than rural populations) - demand for water, food, housing, heat, energy, clothing, and consumer goods is going to increase at an astounding rate.


But what if all these new one billion consumers were to start consuming, over the next 10 years, just like an American? What's going to happen to the world's mineral resources if one billion more 'Americans' are added to the consuming class? 

In 2010, more than 38,000 pounds (19 tons) of minerals and fuels were needed per person to maintain the American lifestyle.

What will happen to prices of commodities long term indeed? Buy right and sit tight.

Weekly Energy News

Rig count continues to fall:

U.S. energy explorers shut rigs targeting oil for the 13th straight week, extending the biggest retrenchment in drilling on record and dragging the total count to the lowest level since 2011.


Contract drillers including Pioneer Energy Services Corp. are laying down rigs. The San Antonio-based company said on Wednesday that it has received notices from clients terminating agreements early for 12 rigs in North Dakota’s Bakken shale formation, the Eagle Ford play in Texas and the Permian Basin of Texas and New Mexico.

“U.S. companies have decreased their 2015 spending levels by 29 percent,” Evercore ISI analysts including James West said in a research note March 2. “The key takeaway from this report is U.S. production is poised to flatten and likely fall by year end.”

Uranium up 10% over the last month:

Major accidents at Rio Tinto's Rössing uranium mine in Namibia and BHP Billiton's Olympic Dam in Australia have removed 8% of the global uranium supply. In the last 30 days, spot price of uranium has increase 10% to $38.75.

The falling rig count will eventually cut into supply growth. It will take a while but the cure for low prices is always low prices.I think one thing that people are missing is that just about every country around the world is cutting interest rates. I expect this stimulus to filter through eventually to the underlying economies and I think oil demand will surprise on the upside. This coupled with reigning in of investment in new production will lead to a bigger rise in oil prices than most are expecting. To take advantage of this you have to have conviction that the oil price will react as it always has when supply is constrained and demand increases. The price will go up. However the share prices of oil companies will move far in advance of this as speculators and investors anticipate the oil price rise. 

Wednesday, March 4, 2015

It is Inevitable that oil will go back up in price


Oil's rapid decline since August of last year has been dramatic. To listen to some commentators you would also think it is unprecedented and irreversible. Those claiming that oil will continue to fall from here and remain low for evermore, however, are flying in the face of both history and common sense. The question we should be asking ourselves is not if oil prices will recover, but when they will.


History tells us that the price of oil will bounce back, but so does basic logic. Oil is a finite resource that we are using at an increasing rate, and as long as that situation remains, the laws of supply and demand mean that the price must recover. That is a good thing. As long as oil remains cheap there is little incentive to invest in the alternatives that we will inevitably need someday, nor to reduce our consumption of what is essentially a dirty fuel source. So, enjoy low fuel prices while you can, but don't expect them to last forever.

The bottom line here is that whatever happens in the short term the long term facts are in our favor. Most of the world continues to industrialize and urbanize. From past evidence of other countries going through this process we know per capita oil consumption will increase as this urbanization continues. So the demand side is continually going to grow as it has for the past several decades. On the supply side we know that oil wells deplete eventually. As the price has collapsed investment in finding and developing new oil resources will not happen. This will lead to an eventual balance in supply/demand. Therefore buying oil and oil stocks when most are negative on the industry is consistent with my contrarian investment philosophy. No it is just a matter of doing what Jesse Livermore advised, "be right and sit tight."

Sunday, March 1, 2015

Adding World Point Terminals LP to investment portfolio

With the explosion of shale oil production in the US one of the problems that has come to the surface is where to store all the oil. Even though the rig count continues to decline it has not resulted in a consummate reduction in US oil production. Oil is beginning to pile up and there are concerns that lack of storage will lead to further price declines.

World Point Terminals (WPT) is a master limited partnership that owns facilities that store crude oil and refined products. They are not concerned with the price of these products they basically just store the products for a fee. The company owns 14.6 million barrels of storage capacity at various locations in the Northeast, Midwest, and Gulf Coast.

The MLP is affiliated with Apex Oil (Apex is the general partner) and has right of first refusal of any Apex asset sales.The MLP recently just acquired a facility in Greensboro, NC under these terms.  The good thing about MLP's is that under the current tax rules they are obligated to pay out the majority of their earnings to shareholders. However they also have some unique possible tax consequences that each person would be wise to investigate before buying shares.

I am adding World Point Terminals to my long term investment portfolio as I am a long term bull on North American energy production. I like the nearly 6% yield and the potential for longer term growth as the MLP adds capacity either through building of its own facilities or acquiring existing facilities. As long as the government of the US will not allow crude oil exports the oil will have to be stored somewhere.

Sunday, February 22, 2015

Madalena Energy increases 2P oil reserves 155%


Year End 2014 Reserves Highlights:

 • Proved (“1P”) reserves have increased 149% from 2,603 MBoe to 6,490 MBoe;

 • Proved plus Probable (“2P”) reserves have increased 155% from 4,505 MBoe to11,494 MBoe;

 • 1P and 2P reserves per common share have increased 68% and 72% respectively;

 • 2P reserve replacement was 763%;

 This is good news for Madalena Energy and does not even include any reserves from the Vaca Muerta shale areas. As oil recovers I am expecting big things from Madalena.

Saturday, February 14, 2015

Rig count continues to plunge and new speculative position


The number of active U.S. land rigs plunged by 98 this week in one of the biggest declines in the past three decades as fallen oil prices continued to pummel the industry’s drilling ambitions.

Eighty-four U.S. oil rigs were idled this week and 14 gas rigs stopped running, according to oil field services firm Baker Hughes. Two U.S. offshore rigs became active this week.

Baker Hughes’ 71-year-old U.S. rig count, one of the industry’s go-to indicators of future oil production and demand for rigs, was down by 406 drilling units compared to Feb. 13, 2014. The last time the rig count fell by 98 was in January, 2009 – the two declines are tied for the biggest drops since 1987.

I added Madalena Energy to the speculative portfolio last week. I am going to go ahead and add Petroamerica (PTA.V) to the speculative portfolio this week. I have owned Petroamerica in the past, and this recent big drop has re attracted me to the name. Petroamerica operates in Columbia.

Tommy Humphrey's has a good update on the company over at CEO.CA.
The company has approx US $60 million in cash and CAD $35 million (approx $28 million US) in debt due in April. The company had previously announced it looks to refinance the facility.
The company is guiding 5400 barrels per day production for the first half of 2015 and is deferring its growth plans until oil prices recover.

#PTA is substantially carried for two high impact wells in the Llanos Basin that Parex will drill in the first half of the year. Both are 50% working interest to PTA.

Year end reserves and end of year financials will be released by mid April.

It’s all about cost saving measures now, Ralph says. The G&A has been reduced by a third already and they intend to decrease it further. They are working to renegotiate service contracts. 

Transportation and diesel costs are coming down.

The company’s Llanos Basin production should have sufficient margin down to the mid $30’s, with Putomayo production likely costing $40-$45 per barrel (my estimates). This is inclusive of royalties.

If oil goes back up to $85-100 this stock will easily be a multi bagger. The question is how long do oil prices stay down.This is another high risk high possible return situation which looks like it has suffered capitulation as a large holder of stock dumped their shares.

Saturday, February 7, 2015

Uranium making recent 52 week highs and the uranium stocks are making lows

This is simply a divergence that cannot and will not last. The spot price of uranium is up 30% yet the stocks are making lows. This is an excellent opportunity to buy while prices remain cheap. Raymond James seems to think so also:


TER: In the Raymond James uranium industry analysis issued in October, it was observed that "equities and fundamentals have diverged." What opportunities are in this for investors? 

DS: We were describing the different paths in the space. The spot price was rising and supply/demand fundamentals were improving, whereas equities got pummeled after highs touched earlier in the year. This is still the case. Spot is 30% above its bottom, and yet indicator stocks like Cameco recently reset 52-week lows, and the share price of the UPC fund (Uranium Participation) is implying a discount to its NAV. 

The downdraft in oil prices has also had a dampening effect on uranium stocks, widening the divergence, despite the fact there's no relationship and very little global competition between the two commodities. Nuclear, after all, is a stable generator of emissions-free baseload power, the plants can operate reliably and inexpensively for more than 60 years, and investment decisions on new reactors are made on these criteria. 

We expect this year to benefit uranium equities, as a series of developments should support a positive story for prices in the medium term, derisking a trajectory toward the $70/lb equilibrium price level, which is the level where enough development is incentivized on new mine supply to meet long-term demand. These 2015 developments include the long-awaited restarts of Japanese reactors, a surge of new grid connections in Asia, further rationalization on the supply side and, most critically, a wave of nuclear utility buying after a long hiatus. 

Accordingly, we are quite confident in a reversal in the divergent trend. The stocks are washed out and have a limited downside risk, but the upside potential, with several tailwinds brewing on the macroeconomic level, appears very compelling. We think investors should be buying these stocks right now. 

I know I sound like a broken record on uranium but the bottom appears to be in and the price of uranium can move higher quickly. This is an excellent time to take an initial position or add to existing positions. I think the rally in uranium stocks that will take place over the next several years, if played correctly, will have the potential to add a zero or two to the back end of your net worth.