I like Oil

[aja8888]

Jamie Dimon said barring a recession, which he doesn't believe is going to happen this year, oil is suppose to end at about $40 by the end of this year.

But he says he's not an oil expert, just something JPM's economists/experts are forecasting.

Let's see, that is 11 1/2 months from now and oil companies can't forecast out one month. Gotta love those talking heads.

 

[Running_Man]

The devastation of the BDI index of falling nearly 80% off of a prior 80% decline from the 2008 top shows what deflation can do to an industry, this fall is just as bad as the 2008 fall only no-one is paying any attention to it, but I think it is showing severe drop of economic activity

 

[OrcasIslandBound]

In early December I bought $11k of VDE, a Vanguard index of oil. It was down 18% the other day so I bought another $11k. Still down overall, but I feel better.

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[Brat]

BDI is picking up the drop in natural resource mining.

 

[audreyh1]

BDI is also reflecting a huge increasing in capacity - a lot of new ships.

You have to look at the supply story, as well as the demand. Just like with oil. There is some demand drop, but far more oversupply, and expectation of more oversupply, driving down the price.

This is 10 months old, and I understand many more freighters have come online since: Why the Baltic Dry Index is at an all-time low http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-7

 

[Brat]

My son, a maritime academy graduate, told me several years ago that maritime shipping is cyclical. I think he was implying that it is a trader's stock and not a suitable investment for his father and I.

More new ships, less demand for cargo, BDI will drop until shippers decide that it costs more to sail than set anchor.

Most of those newer ships were constructed with borrowed money, lenders will 'arrest' them should their owners default, put them up for sale at a discount. Shipping companies with cash in their pocket will buy at the right price.

 

[Mulligan]

My son, a maritime academy graduate, told me several years ago that maritime shipping is cyclical. I think he was implying that it is a trader's stock and not a suitable investment for his father and I.

More new ships, less demand for cargo, BDI will drop until shippers decide that it costs more to sail than set anchor.

Most of those newer ships were constructed with borrowed money, lenders will 'arrest' them should their owners default, put them up for sale at a discount. Shipping companies with cash in their pocket will buy at the right price.

I agree....If you want a fail safe systematic system that can separate you from your money.... Be a buy and hold investor in shipping companies.


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[Brat]

Woe be to the lender who 'arrests' a ship as they are responsible for costs until the vessel is sold.

 

[Nemo2]

 

[petershk]

HP had a nice pop today. I like their management a lot and they have a strong financial position. Granted... Their stock has been pummled last year but I hope 2016-2018 is a good run for them NOV and Exxon.

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[haha]

HP had a nice pop today. I like their management a lot and they have a strong financial position. Granted... Their stock has been pummled last year but I hope 2016-2018 is a good run for them NOV and Exxon.

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HP is the class of land drillers. I have owned HP stock on and off since the 80s, and own it now.

I think the big risks in all bottom fishing investments are bankruptcy. other dilution, and going private or take-under. The fist two are not an issue here. And I think the borrowing necessary for going private might be hard to put together now.

I am impressed with their AC top drive rigs.

Ha

 

[OrcasIslandBound]

In early December I bought $11k of VDE, a Vanguard index of oil. It was down 18% the other day so I bought another $11k. Still down overall, but I feel better.

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For the first time since I made these two buys, this investment is in the green by a couple %.

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[petershk]

HP is the class of land drillers. I have owned HP stock on and off since the 80s, and own it now.

I think the big risks in all bottom fishing investments are bankruptcy. other dilution, and going private or take-under. The fist two are not an issue here. And I think the borrowing necessary for going private might be hard to put together now.

I am impressed with their AC top drive rigs.

Ha

Agree HA. Also really like NOV. I've been listening to as many old conversations with Clay Williams as I could find (in addition to old annuL reports etc). I think they are incredibly well run. Actually surprised Berkshire hasn't bought them completely. Maybe Buffett doesn't like oil THAT much or maybe they have no desire to sell .

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[ESRwannabe]

So, several MLP companies have had the chance to report their q-1 numbers and here is the breakdown on the dividends so far:

SHLX = +7.3%
MPLX = +6.4%
EQM = +5.2%
SXL = +4.6%
TLLP = +4%
WES = +3.2%
MMP = +3%
WPZ/ETP/EEP/ENLK/OKS/TCP/PAA = flat

Just to point out the obvious, there are no dividend cuts so far.

I continue to increase my shares in the alerian mlp etf (AMLP). I'm up to 19,280 shares so far. I may stop adding at 20,000 (I am OCD about numbers) or I may just keep adding as much as possible, i.e. continue to "get while the getting is good".

You can see the breakdown on AMLP share weights here:

Alerian MLP ETF - AMLP - Holdings

We have basically heard from 61.78% of the AMLP so far.

Currently AMLP is yielding 11.62%. My guess is that overall dividend growth will be positive for the year...

I will also go ahead and make the guess that the price of oil will be higher by the end of the year.

P.S. If I use .299 which was the last distribution from AMLP in 2015 as the monthly payout then I get $23,058.88 in dividends per year. Which is roughly 82% of my yearly living expenses ($28k). The likelihood of achieving dividend income equal to my yearly living expenses within the next few years is looking pretty good... My next problem will be to decrease my concentration risk... I guess this is the problem one has to face when you go all in, to take advantage of a market panic.

 

[papadad111]

What percentage of your portfolio is AMLP?

 

[ESRwannabe]

What percentage of your portfolio is AMLP?

In terms of my 401k (100% vanguard target retirement income), Roth IRA (100% vanguard managed payout fund), and state pension (15 years vested so far, pension has 3% cola and I can start withdrawals at 60 or 30 years) it is 0%...

In terms of my self managed brokerage account it is close to 100%...

brokerage account = get rich or die trying

I either retire early off of self managed investments or I work until 55 and retire off of the pension. I'm 39, 40 in a few months. I'd prefer to retire early.

 

[papadad111]

Red flag for me in this ETF is the Expense ratio of 5.4 percent - that has kept me away from AMLP.

Crazy to have such high fees. Why not buy the top 20 holdings instead. Am sure the fees would be way way less.

Eg: you have 200k in AMLP. Fees are nearly 11K /year

200k in AMLP's top 20 holdings, $4.99 per trade = less than 100 dollars to establish your position and another 100 when its time to sell.

This one is flashing danger to me.

 

[ESRwannabe]

Red flag for me in this ETF is the Expense ratio of 5.4 percent - that has kept me away from AMLP.

Crazy to have such high fees. Why not buy the top 20 holdings instead. Am sure the fees would be way way less.

Eg: you have 200k in AMLP. Fees are nearly 11K /year

200k in AMLP's top 20 holdings, $4.99 per trade = less than 100 dollars to establish your position and another 100 when its time to sell.

This one is flashing danger to me.

Well the fees are misleading. The management fee is .85%, the rest is paying for taxes. All mlp etfs have to be run as a c-corp. Same for cefs if they go over 25% in mlps. So because of this they have to pay the capital gains taxes on what you could otherwise defer.

You could buy an ETN which lets you defer the taxes but then you have credit risk with the sponsoring bank. You could also buy individual mlps but then you have to deal with K-1s, which if you were going to own 20-25 companies like the ETF does it would be onerous.

I do not mind paying .85% for the convenience of the ETF, and I do not mind giving up the option of some tax deferral.

 

[Running_Man]

It was interesting to hear from my old pal T Boone Pickens, On January 6th of this year he declared that by year end oil would be at $70 per barrel. Now before the market opened on Monday he stated that the low is in for oil and that the price would be $55 by year end based on how average recoveries occur. Immediately following that call oil has dropped from $33.60 to $30.00 so be interesting to see how a retest of the oil low goes. If oil price stays low, counterparts to the mid stream MLP's will begin to go bankrupt and then the contracts re-written leading to lower revenues and slashed dividends.
For a long time, I have been hearing generally consensus of experts on how oil can't keep dropping and therefore oil stocks, financials and emerging markets are actually great buys. A great summary of this position, which has been incredibly wrong for an extended period of time, is best illustrated by this article by Mark Mobius from December 2014 as promoted by Templeton Funds for emerging markets.
I like to read these old articles to aid in my thinking, if this is a well though out thesis of investing in these what happens when the absolute inverse of the well reasoned thesis occurs. It cannot be merely a delay of what was expected in December of 2014. Instead I think a 5 year decline in the emerging market index of 35% over that time does not necessarily signal a great investment opportunity but instead a warning that financing in general of the global economy may not be what it seems. In any case even if my caution is unwarranted and EEM is set for a major recovery, I think I miss little until the EEM can trade consistently over it's 200 day average. Until then I will let EEM try and figure out what is going on there....

http://mobius.blog.franklintempleton.com/2014/12/19/oil-emerging-markets-double-edged-sword/

 

[OrcasIslandBound]

The oil ETF that I bought a while back, a Vanguard product called VDE, has fees of (.1%) , that follows my philosophy of using low cost index ETFs.

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[Running_Man]

The oil ETF that I bought a while back, a Vanguard product called VDE, has fees of (.1%) , that follows my philosophy of using low cost index ETFs.

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I would be more worried about the -1.56% annual return over the last 5 years versus the 6.09% average increase in the index they compare themselves to. Or the comparable one year returns of -23% vs -2%. That is a hell of a lot of "tracking error"
http://finance.yahoo.com/q/pm?s=VDE

 

[OrcasIslandBound]

They compare themselves to us IMI energy index, and and far as I can tell, are spot on. I bought into this index because it was "on sale". The companies are names like ExxonMobil, chevron, etc

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[Running_Man]

Yahoo is probably comparing against the wrong one, I see where MSCI allows clients to create their own index and brag about how they have created 7000 "indexes" for ETF creation. I suppose it is convenient to get any group of stock accumulated together and declared an index.

As for what they are invested in 36% in Exxon and Chevron and 60%, including Exxon and Chevron, is in the 10 largest oil companies so this is a low cost way to diversify into the 10 large oil companies with a smidgen of interest in other smaller players.

 

[OrcasIslandBound]

VDE composition

Composition

 

[Running_Man]

Looking like T Boone's guarantee of at least $70 oil by end of the year will not be reached, but not to worry he is sure that the fact it is not $70 means it will only be so much higher next year, they are now repeating that for 2016 on CNBC from Raymond James. Chevron CEO stated as much today, that global production will be cut in 2016, and Chevron which will produce 6% more next year will be beneficiary. Based on likely earnings I see Chevron increasing debt by 50 billion in the next 2 years if they are determined to keep their dividend as they pledge which is nwt absorbing more than 100% of earnings. Story is the same for Conoco, Exxon and every other large producer including OPEC. As a group they all exude confidence the industry will all be cutting production, but individually they all plan on increasing production based other own singular improved productivity.
Conco expects oil production in the US to drop by 500,000 barrels next year but Conoco will be beneficiary because they have learned how to make their wells more productive to be able to get more oil out of less capital and the same production costs.

There are these assumptions because the companies know they cannot continue to have stock prices where they are if oil price stays at $40 or below. Though if prices do not rebound on the oil front it will be the capital markets that will force discipline into these companies. Because if they are hedged at oil $45 they do not earn enough to pay the dividends they claim to defend with the vigor of an aging warrior at the Alamo.

I do not have a forecast for the price of oil for 2016, the effect on these companies on continued pricing at it's current level, which to me seems totally in the realm of possibilities and even more likely than not, is devastation for their balance sheets. To buy these companies you have to believe oil will begin that move up to $70, which I am not willing to gamble on yet.

And of the majors, Conoco (COP) today announced it is cutting it's dividend by75% instantly turning it into a 3% dividend company, and unless this oil rally gets oil up and over $55, COP can't really even keep that level of dividend going. Chevron and BP have pledged to borrow to maintain their dividend, which seems to indicate they are in the Boone Pickens camp for expected oil prices.