I don't spend much time looking for very short-term trades. But staring at my screens and trying to find a great long-term trade hasn't been a breeze either. It's not that the trends aren't there to be found; it's more that I see few ways to put them in actionable motion right now.
But noting those trends is the first step. I see three of them, with the actual trades following later. They are:
- The inexorably rising price of crude,
- The relative advantage of U.S. exploration and production and
- The liquid natural gas (LNG) opportunity.
Finding trades to go with these energy trends is the trick (and one I'd like to hear your opinions on), so let's go through the trade opportunities on each of them as I see them today.
I have written dozens of columns on the trade opportunity in oil itself. With an increasing global demand profile and a rising cost in procuring the average barrel of crude, it is far more likely we'll see a per-barrel price of $125 oil before we see $75 oil -- and $150 oil after that.
One opportunity I have continued to see (and hold) is back-month crude futures, which continue at a (lesser but still holding) backwardation. This means that crude priced two years from now is actually trading more cheaply than right now. That still presents to me as perhaps the best trade in the investment world. But most investors aren't comfortable with a long-term futures position.
The stock opportunity that follows from a long-dated higher crude price are the exploration and production (E+P) companies. U.S. E+Ps hold a distinct advantage over the rest of the world because of new shale opportunities, first-rate technology and advantaged government leasing and tax policies.
I have gone through my favorite E+P names and spoken about them often, so no further discussion is needed here. I would like to find a sleeper E+P working in a newer shale area that hasn't already experienced the exponential share price rallies that so many successful companies in the Bakken and Eagle Ford shales have.
That hasn't been easy and it has forced me to find target prices to increase positions in already bloated shares of E+P names, including Cimarex (XEC), Pioneer Natural Resources (PXD), EOG Resources (EOG) and Continental Resources (CLR).
Finally, natural gas has shown a longer-term opportunity that is somewhat negative. Although it might experience moments of strength caused by a very bad winter (which is what happened last year), it looks destined to stay at a price far lower than anywhere else in the world. Sure, natural gas could see $6/mcf at times, but it seems far likelier that it will hover around it current level of $4. That's in contrast to $12 euro prices and $16 prices in Japan and implies a tremendous opportunity in liquid natural gas (LNG) exports.
I have written many times of the financial hurdles to building an LNG export plant and finding forward contracts to support it, an act of financial suicide if you ask me ¿ and the Apache (APA) walk-away from the Kitimat project in Canada is another example of the "smart" corporate move away from LNG. You would have to be crazy to continue to pursue an LNG export plan ¿ or, perhaps, just crazy like a fox.
That is how I have always viewed Cheniere (LNG), whose managers were either brilliant or knew so little about global energy economics that they wouldn't be sidetracked. And now that they are going to be the only company "dumb enough" to get to the LNG finish line first (or maybe at all). They are absolutely going to clean up.
Two years ago, that was a reason to recommend it (which I did, as well as Golar (GLNG), running a LNG gasification tanker model). But, despite its fantastic prospects, I can't possibly recommend the company now. Cheniere, for example, is still at least a year from shipping its first cargo. The shares are trading at $84, which is a more than fourfold increase in the last year and a half.
I sadly sold my holdings in Cheniere months ago and cannot get back on the bandwagon -- the stock is nothing but a momentum play now. But I cannot find a similar LNG opportunity anywhere.
So, here are my three sure-fire energy trends, all needing some trades to go with them. Help me find them -- send your best ideas on these trends to me at firstname.lastname@example.org and we'll talk about them next week.