Monday, November 21, 2011

LNG Tanker Market Heats Up

The market for LNG (liquefied natural gas) has heated up, thanks to demand from Japan, China and other Asian nations.

In addition, LNG has become more available with the opening of new export facilities in Qatar, the world's largest LNG exporter.

These two factors in combination have fired up the market for the LNG tankers which transport the gas all over the globe.

This was once a sleepy market with long-term 20 year contracts tying up ships with little profit for the ship owners. No surprise then that about 30 percent of the fleet was sitting idle just two years ago.

But now things have changed...more and more of the ships, especially the new LNG carriers, are being leased on the short-term or spot market.

Charter rates were languishing at a barely profitable $30,000 a day have recently surged to as high as $125,000 a day thanks to surging demand for these vessels. In fact, Swedish shipper Stena Bulk has calculated that 90 to 95 percent of the world's roughly 360 LNG tankers would soon be in use

The CEO of another tanker operator, Norway's Hoegh LNG, said the market was likely to remain “very tight” until 2013 or 2014. And after that the completion of export facilities, such as in Australia, will require still more ships.

Andreas Sohmen-Pao, CEO of BW Gas – owner of the world's biggest LNG fleets – agrees. He said the market will expand even further if the United States started to export significant amounts of its natural gas supply.

By the way, the UK's BG Group last month signed the first contract to export LNG from the United States, once the first export liquefaction terminal is ready in 2015.

This boom in the LNG market is all good news for the LNG carrier companies which are publicly traded here in the U.S. These companies are: Golar LNG Ltd. (NASDAQ: GLNG) and Teekay LNG Partners L.P. (NYSE: TGP).

Thursday, November 17, 2011

Central Bank Buying of Gold at 40-Year High

It really is saying something when the purveyors of the world's paper currencies – the world's central banks – are busily buying gold at a nearly unprecedented rate.

They seem to not believe in their own product – paper money.

The stunning headline, from the World Gold Council, is that central bank gold buying is at a 40-year high.

Central banks only became net buyers of gold last year after two decades of heavy selling.

Central banks made their largest purchases of gold – a net 148.4 million tons – in decades in the third quarter of 2011. The banks took advantage of a sharp drop in gold prices in September.

The World Gold Council declined to identify the central banks doing the buying. It said only that “a slew of new entrants emerged wishing to bolster gold holdings”. You can bet that most of the new entrants were emerging market central banks looking to diversify away from the U.S. dollar.

Marcus Grubb, head of investment at the World Gold Council, forecast that central bank buying for the full year could be 450 million tons. This implies a further 90 million tons will be purchased in the fourth quarter of 2011.

Do not be surprised if the total purchased for the year comes to 500 million tons. The people in the emerging markets are not fools...they see the how the U.S. and European economies are “burning” while the politicians are “fiddling”.

In addition to buying physical gold (the best method), investors can also exposure to gold through the use of exchange traded funds (ETFs) such as the ETFS Gold Trust (NYSE: SGOL).

Monday, November 14, 2011

Iran Pushing Oil Prices Higher

It's been deja vu lately for the oil market as fear factors regarding Iran have returned.

Iran is very important to global oil markets as it is the world's third biggest exporter of black gold after Saudi Arabia and Russia. Last year, the country sold an average of 2.6 million barrels of oil a day, mainly to the Asian countries of Japan, China and India.

The price of Brent crude oil, the global benchmark, has rallied to almost $115 a barrel as tensions rise in the nuclear triangle between Iran, Israel and the United States.

Of course, there are factors at play here besides Iran which is pushing prices higher. These other factors include continued supply disruptions from Libya, Yemen and Syria along with sharply lower oil inventories in Europe (the lowest level in almost 9 years).

This combination of tight fundamentals and rising geopolitical tension has driven up oil prices more than 16 percent from the eight-month low set in early October at $99.70 for Brent crude oil.

The geopolitical tension comes from the fact that Iran controls the Strait of Hormuz, the gateway for Middle East oil where 15.5 million barrels a day passes through. That is equivalent to a third of all seaborne traded oil.

The Strait has added significance because all the world's spare production capacity is in Saudi Arabia, the United Arab Emirates and Kuwait. All of these countries ship their oil through the Strait.

If the Strait of Hormuz is shut down, even briefly, oil prices would skyrocket. Independent energy consultant Philip Verleger says “It is the $200-a-barrel scenario.”

Investors can protect themselves several ways against such a scenario such as buying companies with large exposure to oil from other regions of the globe. Statoil ADR (NYSE: STO) and Petrobras ADR (NYSE: PBR) come to mind.

Another way to play it is through an exchange traded fund (ETF) based on the Brent oil futures contract. It is the United States Brent Oil Fund (NYSE: BNO) and is up 25% year-to-date.

Thursday, November 10, 2011

Cash Cow for Media Companies - Netflix

Not long ago, media companies were wondering whether Netflix (NASDAQ: NFLX) was going to be disruptive to their traditional models.

It turns out that Netflix was not and, in fact, turned into a cash cow for the industry. But now the question is for how much longer will it remain so.

Three media firms - CBS (NYSE: CBS), Time Warner (NYSE: TWX) and Discovery Communications (NASDAQ: DISCA) – reported strong quarterly results last week. All three companies said it was benefiting from a windfall of cash from online video services such as Netflix, Hulu and Amazon (NASDAQ: AMZN).

These three digital distributors are battling for market share now and ahead of the entry into the market by both Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). So each company is aiming to set itself apart from the competition by spending large amounts of money for the rights to stream popular movies and TV shows and even older “library content”.

This new source of revenue represents a very lucrative third revenue stream for media companies, supplementing advertising along with cable and satellite operators.

Nomura analyst Michael Nathanson called Netflix “the gift that keeps giving” and summed up the situation this way, “Netflix has been a friendly contributor to everyone's year.”

That is great for shareholders of media companies, but not so good for Netflix shareholders as they have found out recently with the stock falling some 70 percent.

Especially the deals reached with the media companies in many cases are not exclusive...the media companies have sold their content, in some cases, several times.

Add to that, the loss of 80,000 subscribers in Netflix's most recent quarter and a rational investor will see nothing but losses for the company in the quarters.

Like many other technology stocks, Netflix seems like a shooting star across the night sky whose light is quickly fading.

Tuesday, November 8, 2011

Rare Earths Demand and Prices Fall

China produces over 97 percent of the world's supply of rare earths, so any news coming out of China is important for the industry. Rare earths are essential raw materials for many everyday goods, especially electronic items.

Beijing's reforms of its domestic rare earths industry has thrown into turmoil the market for these metals. Citing concerns about the environment, Chinese authorities have this year closed mines, severely tightened environmental regulations on rare earths processors and cut back on exports.

Prices have slid more than 30 percent just since July on many of the rare earths. This prompted China's largest rare earths producer, Baotou, to suspend its operations for a month beginning on October 18.

Why did Baotou do this? Simple, demand is weakening. Already analysts have cut their forecasts sharply for rare earths demand outside of China.

Dudley Kingsnorth, from rare earths consulting firm IMCOA, lowered by one-third his estimate for this year's non-China demand to 40,000 tons from a 58,000 ton forecast a few short months ago.

This seems to be a long-term trend according to Mr. Kingsnorth. He believes that in 2015 non-China demand will be about 50,000 tons, down from his earlier estimate of 74,000 tons.

At these still-high rare earths prices, we are starting to substitution of rare earth metals by cheaper alternatives. For instance, rare earth magnet makers have seen demand plummet this year. Cars can use cheaper iron magnets in their electronics. Magnets account for one-fifth of rare earths demand.

Although it should be mentioned here that not all rare earths can be substituted in all applications.

Of course, the falloff in demand does not necessarily mean that we will see a steep further falloff in prices.

Bautou's production halt is a stark reminder that, for now, China still controls the industry.

It is conceivable that Chinese producers could coordinate their efforts, lowering production, in order to keep prices higher than they otherwise would be.

In addition, Chinese stockpiling of rare earths may help keep a floor under prices. Baotou itself is steadily building up its 55,000 ton stockpile. Its goal is to inventory enough rare earths so as to have roughly half China's annual production.

Investors interested in playing the rare earths industry in a wide, diversified basis can do so through an exchange traded fund (ETF). It is the Market Vectors Rare Earth/Strategic Metals Fund (NYSE: REMX).

Friday, November 4, 2011

Kinder Morgan - El Paso Deal Makes Sense

We recently saw the biggest proposed acquisition in the oil and gas industry since the $41 billion purchase of XTO in 2009 by ExxonMobil (NYSE: XOM).

The proposed acquisition, of course, was the $38 billion bid for El Paso (NYSE: EP) by Kinder Morgan (NYSE: KMI, KMP, KMR). It was a bold bet on the future of the natural gas industry in the United States based on the extraction of shale gas and oil with fracking technology.

The deal highlights an emerging trend in merger & acquisition activity in the sector. As jon Wolff, an analyst at ISI, says: “It's the infrastructure era.”

Bidding is shifting away from companies with upstream assets such as XTO and toward midstream pipeline and processing businesses that will benefit once the large shale gas reserves come onstream.

Just look at the prior $7.9 billion bid for Southern Union (NYSE: SUG) by Energy Transfer Partners (NYSE: ETP) or the $2.9 billion sale by Energy Partners of its propane operations to Amerigas Partners (NYSE: APU).

Why are such companies like El Paso so attractive to potential suitors?

At a time of uncertainty and high volatility, these businesses offer stability. They earn relatively stable, often regulated returns from shippers paying to use their pipelines. Yet they have growth prospects thanks to the large investment in gas processing and transportation that will be need in the years ahead.

The Interstate Natural Gas Association of America has published forecasts showing that the United States will need $205 billion of investment in new gas pipelines and processing facilities (in 2010 dollars). And a further $46 billion in new pipelines will be needed for oil and other liquids, in order to meet the expected increases in supply and demand.

This forecast means the industry will have to invest roughly an average of $10 billion a year on such infrastructure. The easy way to do this is simply to buy existing pipelines.

This is just what Kinder Morgan. It already has 23,600 miles of gas pipelines and if successful, it will add El Paso's 43,000 miles of gas pipelines.

The deal also puts Kinder Morgan in a prime position with exposure in all the key areas where gas production is expected to soar – namely, the Marcellus shale in Pennsylvania, the Utila shale in Ohio and Pennsylvania, and the Haynesville shale in Louisiana.

Look for the Kinder Morgan bid for El Paso to inspire even more potential buyers of midstream assets.

Wednesday, November 2, 2011

Oil Companies' Production Lags

The world's biggest oil companies, such as ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP), are flush with cash.

So all looks well for the oil industry...but it is not.

If investors drill beneath the surface, they will see these companies are stagnating when it comes to their oil production. ExxonMobil, for example, reported that in the third quarter its oil production fell 4 percent to 4.282 billion barrels of oil per day.

This trend though is hardly new and points to a long-term challenge for the industry.

Paul Cheng, senior analyst in the US for BarCap, said “The supply outlook for global oil production for the next 12 months is challenging.” He expects “very slow growth, if any” from the major oil companies through 2012-2013 “at least”.

A study of oil production for the 2011 second quarter for 40 large oil companies in the OECD countries showed an average year-on-year drop in production of 8 percent. And this was despite the incentive of high oil prices – Brent crude oil averaged about $120 a barrel.

There are two macro trends which account for this poor performance from the oil companies.

The first is that a lot of the oil recently discovered has been in difficult and expensive to access areas...areas such as the deep water areas of the Gulf of Mexico and offshore western Africa.

Another issue is the lack of investment by the major oil firms. Companies like Exxon have been notorious for underestimating the price of oil. Their assumptions on the oil price have not been aggressive enough in order to justify their spending additional funds on exploration.

In the words of Mr. Cheng, “They [oil firms]did not plan for sustained $100 per barrel plus Brent [oil].”

This may all change, of course, if the industry proceeds full speed ahead over the next five years with development of shale oil in the United States.

But the environmentalists may have a lot to say about that.