Keystone pipeline, not a simple political picture

[Walt34]

Whatever stock I usually buy falls in price immediately so I am not an authority in the game. Although I feel I have a special power over the market and can cause a drop in any stock just by me purchasing it.

So... would you share what stocks you are buying so the rest of us can short it?

 

[Ed_The_Gypsy]

So the US would pay more for oil and gas? It seems one of the promises is that it would lower prices.

But aren't prices determined by global supply and demand, not local supply and demand?


Regarding refining capacity, I heard that the US already exports a lot of refined products to other countries already. So maybe that's why there hasn't been new refineries built?

That along with NIMBY and environmental concerns.

I said nothing of the kind. But here are my 2 cents:

The immediate economic benefit would be the construction in the US. Ongoing would be taxes paid to the states of transit. The tolls are taxable in the US. The pipeline companies will make money in the US.

The US would benefit from oil supplies from a politically stable, relatively friendly neighbor as opposed to, for example, Venezuela or Saudi Arabia or Nigeria. The route is entirely contained on our continent and not exposed to external risks of interruption (e.g., war or piracy).

Today, Hardisty Heavy (bitumen from Alberta) trades at a deep discount to WTI. Bringing it south should lower crude prices in Texas, to our benefit. In addition, a large, steady native source should have a stabilizing effect on oil prices on the Gulf Coast.

Economically, it should be a solid benefit to the US. Strategically as well.

Yes, the oil market is international, but transportation costs have a big impact, which is a big reason why Canadian bitumen sells at a discount to WTI. Have you noticed that North Sea Brent is typically $10 to $20 more per barrel than WTI? Why do you suppose that is?

 

[Ed_The_Gypsy]

My understanding is that these heavier crudes, especially from Canada, depend on the price of oil being at a certain level because of the higher extraction costs.

So while the prospect of lower oil and gas prices is being dangled to push for the approval of the pipeline, the economics won't work if there is indeed greater supply than demand and prices fall drastically.

Don't worry about that. When this kind of money is being invested, such sensitivities are taken into account.

Also, I had heard that they have to use a lot of energy to get this thick crude extracted, that at the end, you might end up using more energy than you get out of the end product?

You are thinking of ethanol.

 

[Ed_The_Gypsy]

Oh cool I love experts*, if any of you want to hazard a guess as to companies that would be winners and loser if the northern portion of the Keystone was built I'd be interested. I also promise to say nothing bad if your predictions turn out badly, and praise your brilliance if they are right.


I'll start
Loser: Berkshire, BRKB Burlington Northern is owned by Buffett and it is a significant source of revenue, hauling oil has been a real profitably business for the railway.

I own the following related stocks are they winners or losers?
Kinder Morgan (KMP) The largest pipeline company is Keystone good bad for them.
Magellan Midstream Partners MMP? operates in the region
Buckeye Partners pipelines BPL are primarily in the midwest and northeast
Crosstex Energy XTXI and Devon (DVN) These two firms are merging lots of pipelines and operations in Texas and Louisiana. Primarily a natural gas distribution and processing.

*Expert anybody who know more than twice as much as I do about a subject.

I know a little about oil and gas, much less than other posters on this thread. Enough to imagine that I can avoid poor investments that an energy index fund would have to buy. Imagine is the operative word. LNCO gave me butterflys earlier this year.

I like the pipeline companies. I own
DUK, Duke Energy,
EEQ, Enbridge Energy Management,
KMI, Kinder Morgan Inc,
LNCO, LNNCO LLC,
SE, Spectra Energy (run by Duke),
TRP, Transcananda Corp
EEQ and TRP should make money no matter which way Canadian 'dirty oil' goes. Canadian production will increase with better access to markets.

I am also making a bet on the oil sands long-term for the same reason:
SU, Suncor,
COSWF, Canadian Oilsands LTD (a v-e-r-y long-term bet), and
RDS-B, Shell (as much as I do not like Shell, they look like a decent investment)

I do not short anything. Not that smart. I do own a little BRK-B. I doubt that the Keystone XL will have a big impact on Warren.

 

[Ed_The_Gypsy]

Our company does work on site selection and permitting for new facilities. No real big (throughput wise) refineries have been built in N.A. many years, but we have been working with several companies on development plans for new refinery complexes. This effort changes from hot to cold from time to time. Right now, the latest interest in permitting and plant completion timelines is for gas to liquids plants and refinery expansions.

Your opinion on it being a long time before a new refinery being built in N.A. is a popular one and the biggest bottlenecks for that happening are obtaining air emissions and other permits and guessing the price of crude and refined products out 5-7 years in the future. The last major refinery built in the U.S. was Marathon's Garyville, Louisiana one in 1977. ARCO built one in Cherry Point, Washington just before that (I worked there briefly). These were 100,000+ BBL units and have been expanded. There were several small (less than 30,000 BBL) refineries built in the U.S. in the last 20 years.

While N.A. seems to be OK with refining capacity (thanks to less refined product demand), at some point in the future, this may change and our need for additional capacity will be there. Not sure how this will be managed, though.

Interesting information. BTW, I worked at Cherry Point briefly as well. I can see the plume from their cooling tower from my house.

There are many reasons that work against a new refinery being built in the US. The biggest one seems to me to be the low margins vs. the large long-term investment required and a volatile, uncertain market for refined products. Simply investing in an easy little debottlenecking of a single unit in a refinery is a major economic study and many projects never get built. There have been many plans for new refineries in the US but they never go anywhere. Years ago there were plans to build two refineries on the Columbia River. Just talk.

The next refinery I see being built is at Manta, Ecuador--long after I am out of the business.

 

[meierlde]

Actually if the Baaken boom continues in ND, I next see Keystone breaking the northern half of the pipeline into a phase to North Dakota and a phase to cross the border. Given the increasing production in ND you could fill the pipeline for a while and wait until the climate for a cross border approval is better. (They have already done this once by building the pipeline from Cushing OK to the Gulf.)

 

[aja8888]

Every time there is a world event that threatens to push oil prices through the roof, we get inquiries from rich clients that are interested in resurrecting an old, abandoned 30K BBL (or smaller) refinery in some weed patch in West Texas or Mississippi. Huge waste of time, but they want to run the numbers. So we do the math and send them a bill.

Then we tell them it will all be contingent in getting an air emissions operating permit and upgrading controls to MACT (maximum achievable control technology). And the process may take years. Then the effort ends.

Besides Ed's discussion on questionable financial economics associated with building a big refinery for Billion$ and making a call on future pricing, getting approvals to start construction is solely dependent on receiving an approved federal air emissions permit, and that will take 5 years +.

It's so much easier to amend a current operating permit to add capacity to an existing refinery (except in California). That's why in the last few decades, we have only seen refinery expansions through upgrades.

 

[Ed_The_Gypsy]

Maybe we can vier towards the investment implications. Is there any reason one should overweight the energy sector in one's portfolio?

I think I'm pretty close to the total market benchmark for energy which according to M* is something like 11%.

I am very overweight energy and in individual stocks besides, but I do not recommend it to anyone else. ANY company can have a disaster like BP or Northwest Pipelines. There are two large plants in northern Alberta that scare the s**t out of me. There is a pipeline company that has at least one H2S pipeline. There are big, scary risks that most people cannot even imagine. I have picked a few companies that I have confidence in but there are others that I wouldn't go near. I do not plan to add any new ones either unless Exxon takes a big dive.

 

[Lsbcal]

If one plots VGENX (Vanguard Energy sector fund) vs the VEIEX (Emerging markets index) they moved the same way since 2002. Coincidence ? See chart below. The last 3 years have seen the SP500 outperform either of them.

I'm not up enough on the industry to pick individual stocks as some have here. Maybe some of them will do quite well. I worked in the electronics industry for 30+ years and lived in Silicon Valley. But I couldn't pick the winners in that industry either although I really didn't have the nerve to try too hard. The picture was always slightly blurry to me. Too bad I didn't believe in Apple.

 

[Ed_The_Gypsy]

I got about the same graphs of adjusted closes (includes dividends and distributions) for all 3 funds since Jan 1, 2002.
VFINX up 95%
VEIEX up 292%
VGENX up 362%
I'll take oil long term. I also have some emerging markets, but heavy into O&G.
I switched out of a Canada index fund when I realized it tracked VGENX pretty close. An extractive economy. Then I decided to do O&G myself. Some day I have to go back and track my results.

S&P is 'doing better' lately? Nuts to that. 10 years from now, I'll bet O&G still outperforms.

 

[Lsbcal]

...(snip)...
S&P is 'doing better' lately? Nuts to that. 10 years from now, I'll bet O&G still outperforms.

I admire your spunk Ed.

 

[Ed_The_Gypsy]

Just for grins, I dug a little deeper. For some reason Yahoo's record of VFINX (Vanguard's S&P 500 index fund) only goes back to March, 1987. Interesting. Does everyone remember what happened in Oct, 1987?

VGENX (Vanguard's energy index fund) goes back to September, 1987. Good.

VEIEX (Emerging Markets index fund) only goes back to 1995, so I didn't bother with it.

From Oct, 1987, it took both VGENX and VFINX about 18 months to get back to where they started (dividends included). They were pretty much neck-and-neck until about 2000, then they both took off but one did better than the other.

In the 26 years since 1987, VFINX grew 847% (including dividends). VGENX grew 1844%. (Someone please check my numbers.) This is why I have a bias against large caps as a class.

Unless fusion becomes economical or unless the population of the world declines radically (either one I would applaud--unless the decline includes me, of course), I figure oil and gas will perform better than the S&P over time. It is not my only asset class by any means, but it is the biggest. Will my stock picks do as well as VGENX? Maybe. XOM has not done as well as VGENX, so since I don ont own XOM, I am betting against it AND VGENX. Probably not a high probability of success, but I am not betting the farm on O&G and I figure to reduce exposure when I am not in the accumulation phase anymore.

Besides, I can always go back to work. O&G pays REALLY well these days.

 

[Lsbcal]

Energy seems to have phases. Booming in the 1970's, bust in the early 1980's, etc. What's next? Who knows.

For retirees I would guess most would be well advised not to overweight the energy sector unless they are really wealthy in which case it probably is just play money investing. Doesn't mean one cannot take specific energy investments on, just that one might keep the weighting reasonable.

 

[meierlde]

Just for grins, I dug a little deeper. For some reason Yahoo's record of VFINX (Vanguard's S&P 500 index fund) only goes back to March, 1987. Interesting. Does everyone remember what happened in Oct, 1987?

VGENX (Vanguard's energy index fund) goes back to September, 1987. Good.

VEIEX (Emerging Markets index fund) only goes back to 1995, so I didn't bother with it.

From Oct, 1987, it took both VGENX and VFINX about 18 months to get back to where they started (dividends included). They were pretty much neck-and-neck until about 2000, then they both took off but one did better than the other.

In the 26 years since 1987, VFINX grew 847% (including dividends). VGENX grew 1844%. (Someone please check my numbers.) This is why I have a bias against large caps as a class.

Unless fusion becomes economical or unless the population of the world declines radically (either one I would applaud--unless the decline includes me, of course), I figure oil and gas will perform better than the S&P over time. It is not my only asset class by any means, but it is the biggest. Will my stock picks do as well as VGENX? Maybe. XOM has not done as well as VGENX, so since I don ont own XOM, I am betting against it AND VGENX. Probably not a high probability of success, but I am not betting the farm on O&G and I figure to reduce exposure when I am not in the accumulation phase anymore.

Besides, I can always go back to work. O&G pays REALLY well these days.

Went to Vanguards web site, the 500 index investor class shares came on the market 8/31/1972 and today have a lifetime yield of 10.93%
The energy 5/23/1984 at 12.56%

 

[NW-Bound]

... I worked in the electronics industry for 30+ years and lived in Silicon Valley. But I couldn't pick the winners in that industry either although I really didn't have the nerve to try too hard. The picture was always slightly blurry to me. Too bad I didn't believe in Apple.

I have never lived or worked in SV. But between Intel and AMD, I believed in AMD, the David against Goliath. Lost too much money, so I am not taking side anymore.

 

[Lsbcal]

I have never lived or worked in SV. But between Intel and AMD, I believed in AMD, the David against Goliath. Lost too much money, so I am not taking side anymore.

To me when I invest in very specific companies or even sectors, I feel great when I'm ahead of the market and really bad when my "team" looses. So now I try to own both teams i.e. broad market indexes.

I sort of treat sports like the now too. Who wants to be a looser?

 

[NW-Bound]

Though I still invest in individual companies, now I tend to spread out among a sector. I can do the same with sector ETFs, which I am also doing now.

However, when peeking inside a sector, it's hard to resist picking up an individual stock that you perceive as undervalued. I keep these positions fairly small though, like less than 1% of portfolio, and usually 0.5%.

 

[haha]

However, when peeking inside a sector, it's hard to resist picking up an individual stock that you perceive as undervalued. I keep these positions fairly small though, like less than 1% of portfolio, and usually 0.5%.

Why bother? No matter how successful a position like this may be, it won't move the needle. IMO it is not worth the mental and administrative overhead.

Ha

 

[NW-Bound]

Oh, if only I could be surer of myself...

Yes, smaller bet, smaller risk, smaller potential reward. However, I have many of these smaller bets, not only one, and spread out among different industries. If I am right more often than wrong, then they will add up to a bit of an advantage. About the extra work, well, it's a pastime of mine.

By the way, many MFs have several hundred positions. Yet, depending on the execution, they still add up to either a significant lead or lag to the market.

 

[clifp]

Though I still invest in individual companies, now I tend to spread out among a sector. I can do the same with sector ETFs, which I am also doing now.

However, when peeking inside a sector, it's hard to resist picking up an individual stock that you perceive as undervalued. I keep these positions fairly small though, like less than 1% of portfolio, and usually 0.5%.

I'm sort of the opposite. I buy a fair number of individual issues .5% to 10% (Berkshire) but almost never a bought a sector fund. Especially when I am buying dividend stock I care less about them beating the market or their sector. Pretty much I'm focused is these three questions is dividend adequate ~3+%, is it safe, and will it grow at rate better than inflation..

 

[NW-Bound]

I personally like sector ETFs (not sector MFs) which allow me to get diversification into an industry that I do not know enough to pick individual stocks.

Or, I would use them to do "sector rotation", or to try to rebalance between them. It's also a lazy way to "slice-and-dice".

 

[Ed_The_Gypsy]

update

This thread has prodded me to review my energy holdings. I went back and investigated the different Vanguard energy funds and one iShares ETF, IXC.. They track each other pretty closely (see graph), so a table was built to compare them. I discovered that they duplicate several of my individual stock holdings.



VENAX and VDE are basically the same fund but you don’t have to spend $100,000 to get into VDE.


My original holding was VGENX, about which I was mistaken--it is not an index fund but an actively managed international energy fund.


IXC is ‘global’ with about a 50/50 US/foreign balance, which is my general equity ratio, but it has not done as well as the US-only types. An indication to be more selective internationally—or not at all? (for energy).


I can’t see any reason to buy anything except VDE. I have liquidated my duplicated holdings and bought VDE for the bulk of my energy AA. As it is a US-equity-only fund, I will continue to play with individual international and a few smaller US energy stocks (mostly pipelines). I am also reducing my energy overweight--a little. I still think it is a great sector in the long run.