This is how I’ve been thinking of the issue as well. I still find it strange how suddenly this stuff changed, as the rest of the world struggling along was not breaking news this quarter. The problem with the scenario of increased volume that I see is that if OPEC members break rank, they loose more of their power. But the real key is that I honestly don’t think our supply is going to continue much longer at these prices. Oppenheimer released this research a couple days ago:
Estimates free cash flow and profitability for several names at different levels. It was interesting analysis. If you read local Texas papers, they are saying there is nothing to worry about. But lots of big names are cutting back significantly and I think it won’t take long for that to show. And perhaps with GDP for USA coming in at 5% and creative central bank tactics abroad, the demand side may be shifting in the near term. I’m not so sure though, as some other countries problem’s seem to be very deep.
In terms of the debt idea by Geo and myself earlier, I’ve also seen some of these entities have issued redeemable preferred stock that are trading at significant discounts. If redeemed at par and maintains dividends, VNR’s preferred stock will yield around 90% since it is trading significantly below par. VNR was the company that posted the breakeven table in an SEC filing – but they didn’t include oil this low, as I don’t think many expected it.
us Canadians can’t own MLPs. 35% non-refundable U.S. withholding tax on distributions plus whatever tax is payable in Canada.
as for major cuts by U.S. producers, have you seen any research that takes a guess at how much U.S. production would fall by next year? i thought consensus is that at worst, U.S. production would be stable, even at $60, assuming some major CAPEX cuts. Canadian production should rise by about ~300,000 bbls/day next year at nearly any oil price due to a record number of oil sands projects and upgrades coming on line.
i still think Iran caves before U.S. producers out of necessity and we see 2M/bbls/day in new supply, at which time, that would be evidence enough to U.S. producers that oil will be lower for longer and it’s worth taking the hit to shut-in some projects.
I’m not a wizard on Canadian taxes, but why wouldn’t you be able to take the US withholding tax as a foreign tax credit? The net tax effect would then be relatively low.
because the income distributed by MLPs is considered U.S. business income. only withholdings on U.S. investment income is refundable under the Canada-U.S. tax treaty so the withholdings on MLP income is non-refundable.
Oppenheimer’s research discussed this. There are two airlines (I don’t recall which) that have no gas hedges and are expected to outperform as a result.
And sorry to hear about the tax issues Matt. I’m still reading the 10K/Q’s for MEMP, but it looks promising. During the height of the oil, people were upset with them for limiting their upside with costless collars and issuing equity instead of debt to fund projects. They strike me as a very conservative management team, which is great. I just have to decide if I think oil is increasing any in 3 years and what level is reasonable. And that’s going to be like rolling the dice ha ha
I’m pretty sure this is only true in LIRA/RRSP/TFSA/etc… You can deduct withholding tax on business income as a foreign tax credit in non-registered accounts. That’s my story until I read otherwise, and everything I read on this issue supports my position.
Thanks for posting your thoughts. While management may be conservative, in my opinion the E&P MLP model is inherently risky. Look at these E&P MLPs’ cash flow statements – they are not pretty. These companies issue debt to make the majority of their distributions. It requires a lot of capital to replenish reserves which chews up what otherwise would be cash available for distributions. Pipelines fit the MLP model far better b/c once the capital is invested, maintenance is low for years which supports free cash flow for distributions. Dividends should be paid for with free cash flow (not debt and cash proceeds from divestitures), and E&P’s in U.S. aren’t generating free cash flow unless they aren’t replenishing their reserves. The tax treatment is attractive and in a low-yield environment I get the interest, but I think the energy infrastructure companies fit the MLP model a lot better than E&P’s. A colleague of mine has called “E&P MLP” an oxymoron.
btw I think American Airlines is one of the airlines that does not hedge its fuel costs.
Yes, American is one fo the two. And I agree about them being risky – which is why I am interested by a management team that tried to mitigate the risk much more than others. But I still don’t know about oil prices – Saudi Arabia saying they will continue to sell at 20 suggests to me that some suppliers will get priced out before it goes back up, but where it goes up to and how long that takes is the question.
^ If you’re worried about risk mitigation, you probably shouldn’t be looking at a B-rated (Moody’s and S&P) E&P that borrows to make its distributions. This company is leveraged and the MLP model is risky. Also, if you pull their 10-K, MEMP’s proven reserves are 65% natural gas, 10% NGL’s and 25% crude oil. Production thus far into 2014 is a similar split. MEMP is mostly a dry natural gas E&P. Those crude oil hedges only represent a minority of their production.
It’s hard finding a true crude oil E&P in the U.S. b/c most of these shale formations are natural gas and NGL’s. Bakken is mostly crude but others produce a lot more natural gas and NGL’s than these companies like to communicate – I think many companies are deceptive on this topic.
yes, you are right. the reason for not buying in each account type is different.
for registered accounts, you don’t want to buy because of the non-refundable withholding tax.
for non-registered accounts, you are still subject to refundable withholding tax and you are forced to file U.S. taxes, which i can only assume costs several hundreds per year, or maybe more. i know some americans who file from here and they pay well over $1,000 so i’d imagine a mini-return would at least run $500 or so. unless you owned say $250k+ in MLPs, and for some reason you believed MLPs were truly better than the Canadian dividend paying alternatives, then i guess it might make sense. but if you don’t hold this specific position, it doesn’t make sense.
that said, there is a new front street MLP mutual fund product that came out that deals with the tax problem for you at a cost of 1%/year.
I didn’t say I was avoiding risk, but you seem to suggest mitigation and avoiding are the same thing. I take your posts as trying to make sure I don’t overlook something, which I hope is right At any rate, if you look at their hedge book they also have gas hedged out the same years. As I posted earlier, their NGL are the ones not hedged very far and that’s expected given the lack of liquidity in the market. Gas hedges aren’t as newsworthy right now. I’m more bullish on nat gas than oil to be honest as I think I’ve said earlier in this thread, but I’m more bullish on oil at these levels than I was when I was posting at oil @ 85.
^ not trying to argue with you or anything! I’m just weary of the Johnny-come-lately’s in this industry. There’s just been a fair amount of IPO’s in the oil and gas industry lately, and MLP’s have been very popular with the zero interest rate policy in the US. I love the oil and gas industry and I think there are lots of excellent companies out there, but if someone is looking for an area of the market where froth may exist due exceptionally easy monetary policy, this may be it…This is a (i) very capital intensive industry and debt markets have been very healthy on the speculative side, (ii) crude oil prices may have benefited from easy monetary policy, (iii) barriers to entry in U.S. E&P have been very low lately and (iv) high yielders (MLP’s) have traded at high valuations.
Don’t take my skepticism the wrong way. I prefer the higher quality companies, and I believe some companies are deceptive on their liquids production in presentations (many companies in the US produce more NG than they’d like to say). I actually appreciate you sharing your thoughts on Lending Club, btw. It wasn’t much but I threw some cash into it two months ago.
Yea, no worries. I appreciate the feedback, as I am relatively new to the industry. The majority of my oil/gas holdings are in a fund and I’m thinking of going long an ETF, but I’m also preparing for an equity research interview so trying to get back into the swing of individual security analysis.
My interest got peaked when I got to see the credit side of the industry through work (one assignment with oil/gas directly, the other maritime vessels in the gulf). But I agree and part of the risk I see with the model is interest rates rising. Seems to me this sector has benefited greatly from that. The reason I’m interested in gas initially is the prospect of regional markets becoming more international as these LNG projects are approved and come online in the USA.
Feel free to PM me if you ever have LC questions or want tips/tricks. I’m on a LC forum where there is a lot of shared information in terms of system quirks, strategies, exploits, etc. I don’t know what my experience would be like without that community (and the third party tools). My account outgrew the ability to manually invest in the last year and the ecosystem was a life saver to making it extremely passive.
The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc.
At any rate, if you look at their hedge book they also have gas hedged out the same years. As I posted earlier, their NGL are the ones not hedged very far and that’s expected given the lack of liquidity in the market. Gas hedges aren’t as newsworthy right now. I’m more bullish on nat gas than oil to be honest as I think I’ve said earlier in this thread, but I’m more bullish on oil at these levels than I was when I was posting at oil @ 85.