David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Email of the day on MLPs

    I wonder if one of you can be tempted to have a look at some charts of the more successful Master Limited Partnership?  In particular ETE, MMP and TRGP have had rivetingly consistent charts for a number of years, and they have been my main money spinners recently. However they are doing so well that I have now got out of them fearing a pullback, but (as always with a bull market) wondering whether hanging on to a good thing would not have been best.

    These three are either General Partners or (MMP) have no General Partner, which partly explains why their growth is so high, as I understand that a GP is in a way a leveraged play on the underlying LP.  But their charts are much more consistent than those of their LPs and indeed than those of most other MLPs.  The whole sector (AMJ) has also had an explosion recently, which does make me think the trend is actually likely to continue.

     

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    Musings from the Oil Patch May 27th 2014

    This report by Allen Brooks for PPHB may be of interest to subscribers. Here is a section on German electricity prices: 

    Revising the EEG is not the only power industry debate ongoing in Germany. The electric power companies are dealing with the government’s decision to shut down its nuclear power industry. Estimates are that small plants may cost €500 million ($684 million) to €1 billion ($1.368 billion) for larger plants. While cost is one aspect of dismantling nuclear power plants, there are many unanswered questions about what to do with the nuclear fuel and components from the plant that are radioactive. Moreover, these dismantling projects may take 10-20 years to complete, subjecting them to potential cost over-runs. Because of these technical and cost challenges, the heads of the three utilities responsible for eliminating Germany’s nuclear power plants have developed a plan to get the government to establish a “bad bank” structure for the plants. The utilities would contribute the roughly €30 billion ($41 billion) in reserves they were forced by the government to accrue for clean-up costs to the bank with the government (taxpayers) assuming all the technological and cost over-run exposures.  

    The decision by Ms. Merkel’s government’s decision to shut down its nuclear power plants cost the Germany utilities substantially. They were forced to absorb the balance sheet hit from the write-down of the plants’ value, plus the additional costs of mothballing the plants while dealing with the costs of the dysfunctional power market due to the implementation of the EEG and Energiewende. They were forced to cut their dividends while suffering significant earnings hits, both of which hurt share prices. It is fascinating to watch the Germany energy industry deal with its mandate to completely shut down its nuclear power industry by 2022 while trying to meet the country’s 2025 and 2035 goals of 45% and 60%, respectively, of renewable power generation. The cost of these policy changes has levied a financial toll on both Germany’s manufacturing sector, which is heavily dependent on export competitiveness, and its citizens. Do the recent Ifo institute index results reflect ongoing fallout from these policies and if so, what might the proposed energy sector reforms mean for Germany’s economic future?

     

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    Short Term Oil Market Outlook

    Thanks to a subscriber for this interesting report from DNB Markets. Here is a section:

    Even though the second half of the year looks stronger fundamentally than the first half, there are some larger parts on the move in the oil market. The last two years we have seen a stronger and stronger tendency for non-OPEC production to cover a larger and larger part of global oil demand alone and the latest year non-OPEC production has been growing quicker than global oil demand. That can hardly be described as a bullish development for the fundamental supply-demand balance. The market has however the last couple of years been saved by all the lost OPEC barrels, but will that continue? Can we have as a base case that the Iran negotiations will fall apart, Iraq will fall into civil war, no barrels will return from Libya and Venezuela will break apart? It could happen of course but to have that as a base case is not prudent in our opinion.

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    Are We Underestimating America's Fracking Boom?

    Thanks to a subscriber for this article by Dennis Berman for the Wall Street Journal which may be of interest to other subscribers. Here is a section:

    In that way, Sasol is a metaphor for what we don't yet understand about America's gas boom. Most know what fracking has meant for oil and gas prices. But because much of the work hasn't started yet, few appreciate the true extent of the industrialization that's about to begin.

    So let's put it this way: We are building a Qatar on the Bayou. From whole cloth, companies are laying new cities of fertilizer plants, boron manufacturers, methanol terminals, polymer plants, ammonia factories and paper-finishing facilities. In computer renderings, the Sasol site looks like a fearsome, steel-fitted Angkor Wat.

    In all, some 66 industrial projects—worth some $90 billion—will be breaking ground over the next five years in Louisiana, according to the Greater Baton Rouge Industry Alliance. Tens of billions of other new investments could be coming, says Louisiana's economic development secretary, Stephen Moret. How many projects will actually get built remains to be seen.

    Assuming that most will, you realize we are still probably underestimating the positive impact of the gas boom on both local and national economies. The entire GDP of the state of Louisiana is about $250 billion annually.

    "As an economist, I can only say, 'Wow. Holy Cow,'" said Loren Scott, a Louisiana economist who has studied the state for 40 years. "We typically measured expansion in terms of hundreds of millions of dollars. Something like that makes your eyes bug out." He expects, for instance, that once 10-year tax-abatement deals expire, schools boards will "find themselves with a bonanza."

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    Pemex Reducing Repsol Stake as Mexico Prepares Oil Opening

    This article by Adam Williams for Bloomberg may be of interest to subscribers. Here is a section: 

    The Mexican company is reducing its shareholding as lawmakers prepare regulations to open up the oil industry to foreign investment for the first time since 1938. Pemex was “very disappointed” in Repsol’s performance, Chief Executive officer Emilio Lozoya said in an Oct. 31 interview. The stake “has returned zero” under the current administration, he told a congressional energy committee on Nov. 20.

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    Blackstone Unit Foreshadows Google Path to Power Company

    This article by Ehren Goossens, Mark Chediak and Jim Polson for Bloomberg may be of interest to subscribers. Here is a section: 

    Meanwhile, Comcast, the cable giant, is in a pilot project with NRG in Pennsylvania that adds electricity to its cable, phone and Internet packages. AT&T last year entered the home automation and security business in 15 markets; while not yet planning power sales, it has introduced a smart thermostat that puts it solidly in the home energy-management business. It could do what Comcast and Vivint are doing.

    Google’s $3.2 billion acquisition of smart-home startup Nest in February “ought to give utility officials a sinking feeling in the pit of their stomachs” since it makes clear the Technarians have begun to seriously eye at least the periphery of utility business if not its core, said Adrian Tuck, CEO of Tendril Networks Inc. a Boulder, Colorado-based energy-services management company.

    Google Energy
    While coy about its ultimate energy ambitions, Google is already a power generator through more than $1.4 billion in clean energy investments and holds a wholesale power license.

    Last month it contributed $100 million to a program to promote rooftop solar power with SunPower Corp.

    Nest, maker of the Learning Thermostat that memorizes and adjusts to users’ preferences, gives Google a leap-ahead presence in the burgeoning smart-home market at the precise time that power in the U.S. has begun to flow both ways with the rise of rooftop solar and other forms of decentralized, home-grown energy, collectively called distributed generation.

    Though Tuck said he has no special insight into Google’s thinking, he believes that its Nest acquisition may well be a “Trojan horse” that gives Google a back door into the utility industry with the ability to leverage its smart thermostats into massive quantities of salable demand response even as it begins to compete directly with utilities with its own green-power projects.

    Google spokesman Tim Drinan declined to comment on Tuck’s speculation.
    Tuck’s company Tendril is also doing a brisk business in advising regional cable, home-security and home-automation companies how to exploit this opening. He said the utilities he talks to feel constrained by tradition, phobia or regulatory uncertainties from wading in -- a mistake he likens to Eastman Kodak Co. being slow to join the digital camera revolution.

     

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    Fueling the Next Industrial Expansion

    Thanks to a subscriber for this interesting report from Deutsche Bank focusing on natural gas demand growth. Here is a section: 

    Our bottom up analysis suggests US industrial demand is likely to assume a higher growth trajectory as new projects take hold beyond 2015. While we are wary of simply adding both our top down and bottom up approach to forecasting, the announced project backlog and the implied intensity of incremental natural gas demand is significantly ahead of consensus expectations. Our view is that some portion of the industrial projects is additive – not a substitute - to the baseload of US industrial natural gas use implied by a top down survey. 

    The EIA and Wood Mackenzie forecast US industrial demand growth for natural gas based on trend. The EIA annual energy outlook assumes 22.2 Bcf/d of 2018 demand (up 2.5 Bcf/d from 2012). Wood Mackenzie looks to add both a baseline of GDP driven growth (1.9 Bcf/d) and a similar project build-up adding 2.0 Bcf/d. We would also note Wood Mackenzie recently revised its total industrial demand estimates, with total 2018 industrial demand increasing from 22.7 Bcf/d (Fall 2013) to 23.6 Bcf/d, directionally in line with our work. 

    Our utilities equity research colleagues highlight the potential impact from the pending EPA ruling on carbon regulations for existing coal plants. Aggressive carbon reduction targets are expected, but mandating specific levels may prove difficult in light of the Clean Air Act limitations. We expect the result will be more demand side reductions and more natural gas burn in the power stack. While a potential positive for deferred natural gas, compliance is likely in the 2019-2030 timeframe. 

    Our top down macro approach forecast based on a multi-variable regression model compares favorably with a 22.5 Bcf/d implied forecast by 2018, implying ~0.5 Bcf/d annual growth. At risk of double counting, we remain confident that little of the project based inflection in demand is included in the EIA estimates. We see the potential for 2.3 Bcf/d of incremental natural gas demand through 2018 based on our bottom up forecast. This demand is identifiable, risked, and promises to reach an inflection point by 2016. We believe that industrial demand is likely to find a balancing point between these our top down and bottom up approach, but above levels implied by major forecasting agencies such as the EIA.

     

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    Noble Returns to London LNG Trading as U.S. Adds Volume

    This article by Anna Shiryaevskaya and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section: 

    U.S. gas traded at $4.391 per million British thermal units on Louisiana’s Henry Hub by 5:21 p.m. London time. Northeast Asian LNG for delivery in four to eight weeks cost $13.50 a million Btu in the week to May 19, according to assessments by World Gas Intelligence. U.K. front-month gas, a regional benchmark, was at 44.51 pence a therm ($7.48 a million Btu) on ICE Futures Europe.

    Sanchez Gestido is returning to Noble after leaving “about a year ago when a decision was made that the business wasn’t ready for this initiative,” Griffiths said.
    Cheniere Energy Inc. will start exporting LNG in the first quarter of 2016, Jean Abiteboul, president of Cheniere Supply & Marketing Inc., said on May 19 in Amsterdam. The Houston-based company’s Sabine Pass terminal is the first to win full approval for U.S. exports from the Federal Energy Regulatory Commission since ConocoPhillips’s Alaskan Kenai plant in 1967. There were 14 more U.S. export terminals proposed to FERC as of May 21.

    Cheniere will charge 115 percent of Henry Hub prices plus $3.50 a million Btu in liquefaction fees, and estimates shipping costs of $1 per million Btu for Europe to $3 for Asia, according to an April presentation on the company’s website.

     

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    Encana CEO Surprises With Makeover in One Year

    This article by Rebecca Penty for Bloomberg may be of interest to subscribers. Here is a section: 

    Since taking over, the former BP Plc executive announced the sale of $2.3 billion of gas properties, the purchase of $3.1 billion of oil lands, planned a royalty spinoff and paid down debt. Suttles is shifting production toward more valuable oil and gas liquids to buffer Encana from the wave of North American supply unlocked by modern drilling techniques that reduced gas prices about 60 percent in the past six years.

    “He’s done a better job than what I was originally anticipating,” Kyle Preston, an analyst at National Bank Financial in Calgary, said in a May 15 phone interview. “My original view, and it was probably shared by much of the market, was that Encana was this beast of a gas-focused company and it was going to be hard to turn that ship around.”

    In November, Suttles laid out plans to fire almost 1,000 people, or about 20 percent of Encana’s workforce, and lower its dividend 35 percent to cut costs and boost profits.

    “He took the hard medicine up front” and the company is now on a “good path,” Craig Bethune, a vice president and portfolio manager at TD Asset Management Inc. in Toronto who holds Encana shares, said in a May 15 phone interview. “The stock’s done well so that’s probably your biggest evidence.”

     

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    Can crowdfunding give us safe fusion power by 2020?

    This article by Dario Borghino for Gizmag may be of interest to subscribers. Here is a section: 

    According to LPP Fusion chief scientist Eric Lerner, the vast majority of the financial resources have been allocated to ITER's approach to fusion power, while other avenues, such as the one being pursued by his team, have been largely neglected, despite being much cheaper. Using an approach he calls "focus fusion," Lerner says his team can obtain a crucial electrode for $200,000, demonstrate net power gain with $1 million, and solve the final engineering problems, leading to a functioning fusion reactor with just $50 million in funding.

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