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The LNG Investment Bible, International Edition

Investors have an enduring love affair with liquefied natural gas (LNG), likely because of the highly publicized political debate over whether the Dept of Energy would approve proposed export schemes to ship US natural gas overseas.

After a prudent period of study, the Obama administration in May 2013 ended the moratorium on approving LNG exports to countries with which the US doesn’t have a free trade agreement--a crucial component for any proposed terminal to move forward.

Meanwhile, investors salivate over the wide spread in commodity prices between North America, which has more than enough production, and Asia, where natural-gas prices track the price of Brent crude oil.

In this issue, we explore the factors driving the supply and demand balance in the near term and over the next five years, while highlighting our favorite plays on the coming boom in Australian LNG projects.

The next issue of Energy & Income Advisor will spotlight our favorite plays on US and Canadian LNG exports--and some stocks to avoid for tactical and fundamental reasons.


Trust Exercise

With an average yield of more than 13 percent, US-listed oil and gas royalty trusts can prove irresistible to income-starved investors.

But investors should resist the urge to chase the highest-yielding names; selectivity and a thorough understanding of the trust’s structure and underlying assets are critical to uncovering the best values--and avoiding the riskiest names.

The Yorkville Royalty Trust Universe Index--a capitalization-weighted basket of 28 royalty trusts--has returned 2.4 percent over the past 12 months, lagging the 12.1 percent gain posted by the S&P 500 Energy Index.

Trust-specific factors, not macroeconomic forces, have driven this performance; the top performer in the Yorkville Royalty Trust Universe Index delivered a 57 percent return last year, while the biggest laggard gave up more than 68 percent of its value.

Although income-seeking investors often gravitate toward a buy-and-hold strategy, a valuation-focused approach that seeks to take advantage of market dislocations is essential to outperforming.

Investors must look beyond yield and understand the various drivers for each security, from the duration of hedge books and the sponsor’s drilling obligations to the production mix and regional outlook for hydrocarbon prices.

And the Winners Are…

The holdings in our model Portfolios posted solid fourth-quarter results and have continued to outperform their benchmarks.

Since the MLP Portfolio’s inception on Nov. 15, 2013, our holdings have delivered an average total return of 7.16 percent, compared to the 2.16 percent return generated by the benchmark Alerian MLP Index.

Over this period, the Portfolio’s conservative sleeve has generated an average total return of 8.9 percent, while our aggressive holdings are up 5.3 percent.

In this issue, we share our updated take on these master limited partnerships (MLP) and our analysis of their fourth-quarter results and growth prospects.

Note that we have also updated our comments in the MLP Ratings table for many of the 100 names that we track; we will complete this review over the coming days.

We also review fourth-quarter results from our International Portfolio holdings that have reported earnings since the last issue of Energy & Income Advisor.

The International Scene

The strong US dollar has made it tough sledding for the stocks in our International Portfolio, though the recent rally in the Canadian dollar has provided a welcome tailwind for our Toronto-listed holdings.

However, the Aussie remains under pressure because of concerns about slowing economic growth in China and other emerging markets that import natural resources from Australia. (See Down and Out Down Under.)

Although we can’t say whether the Canadian and Australian dollars have bottomed, investors should remember that both countries’ governments remain in much better fiscal shape than our own. And the regulatory environments in Australia and Canada tend to favor energy companies and their investors.

At the same time, traders view these currencies as a proxy for China’s economic growth and appetite for commodities; as long as investor sentiment toward the Mainland’s economy remains negative the Australian and Canadian dollars could remain under pressure.

The silver lining: Investors who take a long view can buy shares of first-rate companies at a discounted price.

Knowing the Drill

In the Sept. 29, 2013, issue of Energy & Income Advisor, we dropped offshore driller SeaDrill (NYSE: SDRL) from our Focus List, encouraging readers to take profits on the stock. 

In subsequent months, signs of an emerging oversupply in the market for deepwater drilling rigs has weighed heavily on shares of SeaDrill and other contract drillers, raising questions about the group's future prospects.

We examine the trends driving these fears and evaluate their company-specific implications, while highlighting one offshore contract driller that stands to benefit from this recent swoon and an onshore rig owner that's poised to outperform this year.

Meanwhile, our quarterly deep dive into the oil-field services sector finds that the supply-related headwinds facing offshore contract drillers haven't diminished exploration and production companies' demand for oil-field services. 

We share our top takeaways from the three largest oil-field service providers' fourth quarter conference calls and highlight the best ways for investors to profit.

Looking for Value in MLP Land

Upstream master limited partnerships (MLP) underperformed the Alerian MLP Index last year, thanks to first-half weakness in the price of natural gas liquids (NGL).

A concentrated media campaign raising concerns about the Linn Energy LLC's (NSDQ: LINE) hedging practices, maintenance capital expenditures and the quality of its assets also spooked individual investors away from the group.

But the completion of Linn Energy's blockbuster acquisition of Berry Petroleum suggests that the Security and Exchange Commission won't pursue large-scale accounting changes in this niche industry.

More important, units of our favorite upstream MLPs trade at favorable valuations, offer above-average yields and could enjoy a re-rating as volatile commodity prices prompt investors to gravitate toward heavily hedged names. A solid pipeline of potential asset acquisitions should also support distribution growth.

A number of the top-performing MLPs last year grew their distributions after a fallow period; we look at 15 names whose growth has stalled, highlighting the best values and the potential value traps.


Pockets of Value

We revisit the investment thesis for the major US airlines and add our favorite name to our Model Portfolio as a hedge against a potential downdraft in crude-oil prices.

Not only do airline stocks stand to benefit from any weakness in oil prices, but our top pick also trades at a discount to its peers and offers exposure to accelerating economic growth in the US and Europe.

Canadian equities lagged the S&P 500 and other equity markets last year because of weakness in the nation's currency and concerns about a slowing growth in Asia's emerging markets and its implications for our northern neighbor's energy sector.

But this pullback gives savvy investors with a nose for long-term value an opportunity to pick up high-quality, dividend-paying energy stocks that trade at favorable valuations.

Looking into the Crystal Ball

Investors dealt with their fair share of uncertainty in 2013. Fear peaking this spring after the Federal Reserve announced plans to rein in quantitative easing and the now-familiar game of chicken in Congress that this year resulted in a temporary government shutdown.

But the US economy appears to be on sound footing heading into 2014, which bodes well for equity markets. 

Energy investors endured their fair share of volatility in 2013, with oil price differentials shrinking for a brief period before widening once again.

Here’s our take on what’s in store for 2014 and how to position your portfolio.


Rating the Master Limited Partnership IPOs of 2013

Energy-related master limited partnerships (MLP) have completed an unprecedented 18 initial public offerings (IPO) thus far in 2013, bringing the universe of publicly traded partnerships to an all-time high.

Although 2013 will go down as a record year for IPOs in the MLP space, the quality of these new offerings varies widely. Many of these names operate in familiar segments of the oil and gas industry, but their underlying assets leave a lot to be desired.

Investors undoubtedly will gravitate to the elevated yields offered by some of these IPOs. But you should also consider the stability of the MLP’s distribution and the likelihood that the payout will grow over time.

In this issue, we get caught up to date on the IPO class of 2013.

New Order

The breadth and depth of Energy & Income Advisor's coverage of the energy sector is unparalleled; the publication covers every link in the energy value chain, from upstream (oil and gas producers) to midstream (pipelines and processing) and downstream (refineries and marketing).

As part of our mission, we track more than 70 dividend-paying Canadian energy stocks and every energy-focused master limited partnership. This holistic approach helps us to identify the best opportunities in the global energy market before the crowds rush in. 

In this issue of Energy & Income Advisor, we introduce a new International Energy Portfolio to help investors focus on our favorite dividend-paying stocks in Canada and Australia. We also slim our Focus List to our top ideas.

  • Live Chat with

    Elliott and Roger on Apr. 28, 2014

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Coverage Universe

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLP Ratings

      Our assessment of every energy-related master limited partnership.

    • International Coverage Universe

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.


    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Peter Staas

      Managing Editor: Capitalist Times and Energy & Income Advisor