I don’t spend much time finding very short-term trades, as regular readers know. Staring at my screens and trying to find a great long-term trade hasn’t been a breeze either. It’s not that the trends aren’t there to be found; it’s more that there are few ways I see right now to put them in actionable motion.
But noting those trends are the first step and I see three of them, with the actual trades following later. They are:
1- The inexorably rising price of crude
2- The relative advantage of US Exploration and Production and
3- The Liquid Natural Gas opportunity
Finding trades to go with these energy trends is the trick (and one I’d like to hear your opinions on), so let’s go through the trade opportunities on each of them as I see them today.
I’ve written dozens of columns on the trade opportunity in oil itself. With an increasing global demand profile and a rising cost in procuring the average barrel of crude, it’s far, far more likely we’ll see $125 oil before we see $75 oil – and $150 oil after that. One opportunity I’ve continued to see (and hold) is back month crude futures, which continue at a (lesser but still holding) backwardation, meaning that crude priced two years from now is actually trading MORE CHEAPLY than now. That still presents to me as perhaps the best trade in the investment world.
But most investors aren’t comfortable with a long-term futures position.
The stock opportunity that follows from a long-dated higher crude price are the Exploration and Production companies, and US E+P’s hold a distinct advantage over the rest of the world because of new shale opportunities, first-rate technology and advantaged government leasing and tax policies. I’ve gone through my favorite E+P’s and spoken about them often, so no further discussion is needed here. What I’d rather like to find is a sleeper E+P working in a newer shale area that hasn’t already experienced the exponential share price rallies like many successful E+P’s in the Bakken and Eagle Ford shales.
That hasn’t been easy – and forced me to find target prices to increase positions in already bloated shares of E+P’s like Cimarex (XEC), Pioneer Natural Resources (PXD), EOG Resources (EOG) and Continental Resources (CLR).
Finally, natural gas has shown a longer term opportunity that’s somewhat negative – for although it might experience moments of strength caused by a very bad winter like last year, it looks destined to stay at a price far lower than anywhere else in the world. Sure, natural gas could see $6/mcf at times, but looks far likelier to hover as it is now, around $4. That’s in contrast to $12 EU prices and $16 prices in Japan and implies a tremendous opportunity in liquid natural gas (LNG) exports.
Now, I’ve written many times of the financial hurdles to building an LNG export plant and finding forward contracts to support it, an act of financial suicide if you ask me – and the Apache (APA) walk-away from the Kitimat project in Canada is another example of the ‘smart’ corporate move away from LNG. You’d have to be crazy to continue to pursue an LNG export plan – or crazy like a fox.
Which is how I’ve always viewed Cheniere (LNG), who were either brilliant or knew so little about global energy economics that they wouldn’t be sidetracked. And now that they are going to be the only company ‘dumb enough’ to get to the LNG finish line first (or maybe at all), they’re absolutely going to clean up.
Two years ago that was a reason to recommend them (which I did, as well as Golar (GLNG), running a LNG gasification tanker model). But I can’t possibly recommend them now, despite their fantastic prospects. Cheniere, for example, is still at least a year from shipping their first cargo and are trading at $84, a more than four-fold increase in the last year and a half. I sadly sold my holdings in Cheniere months ago and cannot get back on the bandwagon – they’re nothing but a momentum play now – but I cannot find a similar LNG opportunity anywhere.
So, here are my three sure-fire energy trends, all needing some trades to go with them. Help me find them – send your best ideas on these trends to me at email@example.com and we’ll talk about them next week.