Some truths about oil in the USA.

 For many years I have followed and invested in the oil and gas industry and believe maybe not being an authority I do know some truths about the oil situation as it is now. 

1.  The US now has within it's borders enough oil to fuel all our needs now and for the foreseeable future. The finds in North Dakota and the Eagle Ford region of Texas brought forth via fracking and new technologies make it now possible to need not one drop of imported oil from the middle east or anywhere else. 

2. Ditto for gas, just lots more.  We are floating on a ocean of natural gas in this country. This is the reason most utilities are changing from coal to gas electricity generation.  Add in that many long haul trucking companies are looking to convert their fleet to natural gas as well.  Natural gas is cheap and going to stay cheap for a hundred years or more due to the huge abundance we currently have in the ground.  If you have something that can use natural gas such as stoves or heating consider changing over from whatever energy source you are using now because it will likely save you money. 

3. In fact we have so much oil and gas in the USA we will begin EXPORTING it next year.  You read that right we will export it next year to other countries who do not have the technology and expertise we have to get at what they might have underground.  Check out the prospects for Chimera Energy for the first company that will begin exporting. 

4.  I expect you are asking why are we exporting energy and not using it right here in the US instead of continuing to import from the middle east or Venezuela who frankly do not share our values and sometimes outright hate us.  The reason is quite simple Barack Obama, Democrats, and environmentalists do NOT want us to us our own oil resources.  They currently are directing tax money to failed firms investing in wind, bio,  and solar energy.  All these excepting maybe solar have no hope to give us the energy we need at a price we can afford.  Both wind and bio are not only expensive, but have environmental issues of their own.  Solar has finally reached a point where it is affordable, but the issue with solar is that it takes up so much land space we simply can not produce enough to make enough energy to be worthwhile.  Besides using farmland and clear cutting forests to solar farms is not a good idea. 

5.  We are currently paying about $1.00 more per gallon at the pump than necessary.  The reason is that Obama will not allow construction of a pipeline from Canada to our oil refineries on the Gulf coast to refine and compete on the world oil market.  The Keystone XL Pipeline would pipe oil from the also massive oil resources of western Canada is being blocked by the administration and would add tens of thousands of jobs to build the project are being lost.  That oil would drive down prices due to the glut of oil it would impose. 

6.  Like it or not the oil companies and environmentalists are in bed together.  Yes, you read that right big oil companies make huge contributions to The Sierra Club and other big environmental operations to help keep much of this new oil from coming to market.  Much of those contributions are via bogus organizations so you need to look hard to find them, some are right out front and oil companies say they are trying to buy influence which is not so. The environmental lobby in turn does their part to force government to impose restrictions on use and drilling for oil to suit their aims. Talk about strange bedfellows, but it goes to prove the old adage that if the people and firms invested in having a problem would go away the problem would go away too. 

7. Last point and most important how can one make money on this information.  First off note the cost of oil coming out of the ground is more expensive than it used to be since the technology needed is much more involved.  Canadian oil is even more expensive due to the labor and capital required to get it processed so even with the best of environments with a true free market oil at the pump is never goring to see sub par $2.00 again.  Arab oil is cheaper to pump, but add in the cost of transport and you bump that up a good bit.  Not to mention the constant worries of something blowing up in the middle east and the cost to insure again such happenings. However much of the North American market is switching to local sources of energy and despite being higher in price is all but a guaranteed delivery.   For the next couple of years the refiners such as HFC and marketers such as COP offer good value via a solid dividend and good upside in stock price.  Long beleaguered ERF has finally hit bottom and with it's large footprint in the Dakota range has got some good upside along with a nice current dividend.  For those swinging for the fences LUKOY is a good choice. DVN offers significant upside potential as well.  The Eagle Ford play in Texas has been a gusher of late but many of the slow rabbits have been caught there. 

A double for 2013 and a 50% for 2012.

AAMC... This one is the stock of the year from Doug Kass, who has called market movement well the last few years.  Doug's pick last year was ASPS, go take a look at the chart and you will get interested in this year's pick.  This one is a spin off from last year's stellar pick and we believe has a good chance to double as he suggests in his latest letter.  AAMC, or Altisource Asset Management, will manage many of the back office work for foreclosed homes in their portfolio.  This business is growing faster than any other business in the country currently.  ASPS was the first play in the pipe on the foreclosure business.  Now the homes are starting to come out of the other end of the foreclosure process as homes ready to be sold off by banks and the federal government. The states AAMC is operating in are those banks where judicial process is not mandated. If you do not grasp the difference between judicial and non-judicial states look it up as the prior approach is causing significant backlogs in the foreclosure process hindering economic activity in those states.  SBY, a stock we mentioned in our post just before this one, is buying up these homes, repairing and renting them out.  There is a private business American Home.com that is doing the same and could come public soon I like even more.  Frankly many home run stocks in the next few years are in the clearing the foreclosed homes business and AAMC looks to do well.  This stock got public notice yesterday from several websites and jumped $4 or so to $84.  We much prefer to get it at $80 and hope once the buzz is worn off it will drop back some. 

HFC.. Holly Frontier Corp. is one of Goldman Sachs conviction picks for 2013.  After some research of all their picks I like this one best.  It has a 6% plus yield and growth prospects.  The growth prospects come from the increasing oil being found in North Dakota Bakken area and being pumped down to the Gulf coast to be refined in HFC's refineries. The other area showing significant increases in oil production is West Texas and there the fracking technique is rapidly making that area the growth play in the oil and gas business in the US.  HFC's refineries here are right next door. HFC has shown smarts in their business in mergers, in keeping expenses in check, and frankly being in the right place at the right time.  This stock could show a 50% increase this year if Goldman is right and we agree.  They should add to their already impressive dividend and I would not be surprised to see HFC add some refineries this year from purchases.   Buying in the low $40's here is good.

              

Trading Portfolio for 2013

We have spent a good bit of the last two months away from our hedging activities to rest up, reassess the market going forward, and maybe get some of the old thrill back.  We believe that has been accomplished to some degree. We cleared out much of our portfolio with the expiration of options on Dec. 21 and begin to build into a new portfolio that is not too different than the one we formerly traded.  Trading requires knowing your securities.

 The reasons are simple run and gun hedge trading is basically dead in this new Obama world as no one can trust him.  This lack of trust means any stock or industry is subject to being ridiculed or regulated out of existence by Obama. Therefore the positions we will use going into 2013 will be certainly safer than in the past.  We will use much tighter hedging pricing to keep us less vulnerable to silly proclamations from this administration. What this will do is limit our profits a good bit going forward, but since as we mentioned before we are playing with house money if we do not play we have absolutely no chance of profits. 

Below we present our portfolio and most important pricing positions for trading in 2013.  

BCE...This Canadian communications company returns but our price for entry will not be $40 instead of $45. 

CTL...This legacy communication company returns with again pricing set lower at $38. 

T...The largest telecommunications company is added with pricing at $34

NNN...This triple net lease REIT is an old standby and is the longest running stock in our portfolio and is without any doubt the soundest one bar none. Pricing at $30.  We will double our hedging on this one as a reward. 

NCT..This REIT which was added late in the year has a nice upside and good options premiums.  Pricing at $7.50.  We will also trade this one in our long term portfolio. 

O...We will admit Realty Income surprised us with strength at $40 and we will keep it there. 

JNK...We will keep this one, but keep it close in time due to some worry regarding interest rate risk.  Pricing at $40. 

ARCC...This BDC is a solid performer and high yielder.  Pricing at $17. 

SO ...We believe SO has now moved down enough to make the price more interesting.  SO has also cut a good number of coal fired plants and replaced them with gas fired ones that are more acceptable to the EPA.  In the end this company operates a electric utility in the best regulatory states environment period.  Pricing at $42

BP...Dare we take a chance on this one?  We are going to try since it appears BP has set a good base at our entry price of $40. 

ERF..We have been rewarded and burned so much on this one we keep it with concern.  However ERF in our opinion has finally set a base and should be rewarding from here.   We are setting a base at around $13. However we carried this stock over in our portfolio from 2012 and are holding a lost in it currently.  

FTR...We continue to like FTR going forward, but will only use long term options in hedging here.  $4 or $4.50. 

Long term option candidates.

TCAP..Long term option if can get in at $22.50.

SBY..We are awaiting options trading here.  Note an earlier post on this new issue. Entry price $18.50.

LO...We will not be fooled again here with Obama and his FDA.   We will long term option it with an entry price of no more than $110. 

              

              

SBY and OAK...Opportunities for long term investors.

Rarely do opportunities come along like this one and with solid management as well.  SBY...Silver Bay Realty Trust  just started trading less than two weeks ago.  The IPO was at $18.50 and dropped a bit before firming up and now trading just above that price.  We really like this REIT and expect it to be a long term performer in basically an entirely new industry.  

Home foreclosures are continuing at a rapid pace and these homes once they go through the extensive foreclosure process come out the other end as excess housing inventory to be sold off by  banks or the US government.  The disposal prices are much much less than the former selling price and usually much less than what their value will be some years down the road.  Patience here is the key. 

SBY plans on buying up as many of these homes as they can and will fix them up if needed and rent them out.  The idea is to produce rental income that is payable to the shareholders and as the housing market improves sell them off for nice tidy capital gains. We personally think they can make this happen, but again one must wait until housing prices improve. Basically buying SBY you become a partner in renting single family housing with the opportunity to sell homes when the price is right. 

Remember much of home buying is location and the real estate the home sits on, not necessarily the actual home itself.  Here is a key to this stock doing well and that is using their funds to buy homes in future offer desirable selling of real estate that have rental opportunities now.  Management looks to have the experience and skills to do just that. 

There is risk if housing does not improve.   The company will initially own about 3000 homes which is being spun off from Two Harbors Investment.  There is also the worry of renting out all their homes, which currently are not fully rented.  The original value average of $121k is low as well. However on the plus side are annual rents giving a 10% gross return right now. There is some big money moving into these shares and we too believe some part of your portfolio needs to be here. 

We will wait until the stock has some time to trade and the price settles into a pattern to step in and buy shares or if options are offered take a position there. 

OAK...Oaktree Capital Group has been on our radar for some time since starting trading in Spring of 2012.  Oaktree specializes in  contrarian investing.  These opportunities range from distressed debt to distressed real estate worldwide.  We liked the company early on, but wanted to wait and see if they could execute in this economic environment.  They have done so and recently the stock price has responded with a move above $45.  They also have plenty of size at $81 billion in assets. 

Yes, we would love to buy this stock cheaper and will be patient and see if there is a move down with the uncertainty in Washington DC.  However one could buy OAK as a long term holding and do well five years out.  

Both SBY and OAK are long term buy and holds where investors will do well.  OAK pays a nice 4.8% dividend and we expect once SBY gets going they will pay a similar dividend.  We also expect nice capital gains from both here as well.  

OAK is a partnership and will spin off a K-1 at tax time. Consult your tax advisor before purchase and if possible it would do well inside a IRA.