THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Then one day, he was shootin' at some food
And up through the ground came a bubblin' crude,
Oil that is, Black Gold, Texas Tea.
Well, the next thing you know Ol' Jed's a millionaire" ---The Ballad of Jed Clampett
You don't have to be a Beverly Hillbilly to correlate oil with wealth---and never so much as today. I hope you all took advantage of the drop in oil related stocks this week.
On Tuesday, the U. S. Energy Information Administration (an awesome source of information, by the way) reported that petroleum consumption was lessening and that inventories of petroleum products, including gasoline were rising. This news caused speculators to exit the market resulting in crude dropping below $100 per barrel (/bbl) and a 9% drop in the wholesale price of gasoline. The impact was felt throughout the oil patch with the price of almost all oil related stocks dropping. As is often the case when speculators exit, the market overreacted to the negative,thus creating buying opportunities---or at least methinks.
Contrary to popular belief, oil producers, processors and retailers do not like oil over $110/bbl or the price of gasoline over $4/gal. At those levels, discretionary petroleum purchases (e.g. family driving vacations) drop, resulting in less demand for petroleum ("demand destruction"). The "sweet spot" for the oil industry is a price somewhere between that needed to support exploration ($60/bbl) and that where demand destruction begins ($110/bbl). We are now back in that range with West Texas Index (WTI) oil closing Friday at $99/bbl.
So, like Jed Clampett, I went shootin'. But, what to buy? As you all know, I am a "yield hunter". I like large multinationals because they have a decent dividend and the potential for significant growth (e.g. Shell, Chevron, ConocoPhillips), but I positively adore U. S. oil trusts and the preferred stock of small domestic producers. At this time, these plays don't face as many headwinds (e.g. permits, international upheaval, exchange rates, Congressional hearings) as the multinationals.
I bought more Sabine Royalty Trust (SBR) on a dip Friday. I love this stock because it pays a MONTHLY dividend which will likely increase in the next few months due to the lag time between production and the royalty payment (e.g. this month's dividend reflects the royalties paid for the month of February--before the spike in oil prices). Even with this lag time, SBR pays a 6.4% dividend at its current stock price. Notably, I stayed clear of Prudhoe Bay (BPT), and indeed sold off two positions I held in it--one for a profit, the other for a small loss. This week the WSJ reported that the Alyeska Pipeline which transports most of the crude from Alaska southward is facing real challenges. The natural decline in volume and pressure running through the pipeline from 30 years of pumping the same fields will result in a drop in temperature inside the pipe to below 32 F by 2013, a situation that could result in water vapor freezing which in turn could cause cracks and leaks in the pipeline. This is just one more reason why more oil fields need to be approved in Alaska. It would be a shame if the flow southward were hampered because it supplies 15-20% of U. S production and there are 10billion bbls still left in the ground (a total of 16bn bbls. have been extracted in the past 30 years)
I also bought some more of my uber favorite Magnum Hunter Resources Series D Preferred (MHRpD). This week MHR's CFO gave a stellar presentation to a Baird conference. The replay of the webcast can be found if you scroll down on the webpage cited here. http://finance.yahoo.com/news/Ronald-D-Ormand-Executive-iw-2559791737.html?x=0&.v=1 Log on, listen and follow along on the power point. MHR looks to be a winner with a presence in Eagle Ford, Marcellus and the Bakken--the three largest shale fields in the lower 48. The D Series pays a "qualified" dividend of 8.2% at its current price and is not redeemable until 2014. The Series C pays a higher dividend but will be redeemed in December.
I know that the pundits preach caution when it comes to commodities. This may be advisable on a very short term basis, but in the mid and long run, one commoditiy, oil, will be a winner so long as its price stays in the "sweet spot". With the strong and steady increase in demand from emerging markets like China and India and with the reduction in energy alternatives (this week Japan announced it is altering its national energy policy away from increased reliance on nuclear energy), oil and similar petroleum liquids (and on a longer horizon, natural gas) will continue to be in demand. That is why I went for another cup of Texas Tea.
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