With natural gas prices stuck at historic lows for the foreseeable future, bored investors can look toward master limited partnerships to increase profit yields on energy portfolios. Elliott Gue, energy investment strategist of Capitalist Times, spends his day finding great energy deals in the margins and curves. In this interview with The Energy Report, Gue does the dirty work and gives us his strategy so that investors can golf, yacht, and have fun without worrying about losing the value of their savings to inflation.
Since earning his bachelor's and master's degrees from the University of London, Elliott Gue has dedicated himself to investment in the energy sector, and was been referred to in the official program of the 2008 G-8 Summit in Tokyo as "the world's leading energy strategist." He has also appeared on CNBC and Bloomberg TV and has been quoted in a number of major publications, including Barrons, Forbes andThe Washington Post.
The Energy Report: Elliott, you recently wrote in Capitalist Times that "unless last winter marked the onset of a new ice age, the underlying supply-and-demand trends that prevailed before the polar vortex are always going to win out." Based on the charts that accompany that article, what are those trends?
Elliott Gue: Last winter was really cold and, as a result, natural gas demand was very high. Natural gas stores in the U.S. were drawn down much more rapidly than normal. At the same time, there were production disruptions. It was so cold in the Rocky Mountains that producers were not able to service their wells. Natural gas production plummeted and gas prices shot up.
The underlying trend remains very bearish for gas prices, however. The demand for gas did ease after the winter heating season, lowering prices, but there has been resurgence in production, and storage levels are back up. The electric power utilities thrive on cheap gas, and production is growing even faster than rising demand. There are simply oceans of gas out there that we have not yet tapped, like the Haynesville Shale in Louisiana. I expect that gas prices in the U.S. will remain low, and, consequently, electricity prices will continue to hug the bottom relative to the rest of the world.
TER: Given the situation, who will be the winners?
EG: The biggest winners are going to be companies that consume gas, rather than companies that produce gas. A lot of energy companies are moving away from gas toward producing more oil and natural gas liquids. Electricity prices in China are twice what they are in the U.S. Reversing a long trend, Chinese companies are building out manufacturing capacity in the U.S. The aluminum smelting industry stands to benefit tremendously, because its manufacturing process is linked to the price of electricity.
TER: Who do you like in aluminum?
EG: We like Century Aluminum Co. (CENX:NASDAQ), which is an aluminum smelter. Century takes aluminum oxide and, using a process that requires a lot of power, turns the oxide into aluminum, which is then used in thousands of products. Century is buying power in the U.S. on the spot, which means that it pays prevailing market prices. As a result, it is buying power at a steep discount to what its European competitors are paying.
Demand for aluminum by the automobile industry is expanding, because the federal government's Corporate Average Fuel Economy (CAFE) standards require automakers to boost the fuel efficiency of entire lines of cars and trucks. Ford is meeting the standard by increasing the amount of aluminum used in its vehicles. The 2015 Ford F-150 pickup truck is 750–1,000 pounds lighter than the 2014 model. It is expected to sport a fuel efficiency of 30 miles per gallon (30 mpg). No standard-size pickup truck in the U.S. has ever achieved 30 mpg in terms of fuel efficiency. The low natural gas prices in the U.S. will continue to be a big boost for companies like Century Aluminum, which require an awful lot of power in their factories.
TER: Are energy investors today looking for short-term profits in the hurly-burly of the stock market, or are they looking for steady income vehicles?
EG: Steady income investments are in demand. Back in 1999–2000, you could put money into a certificate of deposit, a money-market account, or even a savings account and still get interest rates of 5–6%/year. Now, you can't even get 1%. Income-producing stock sectors, like utilities and real estate investment trusts (REITs), are yielding at near historic lows, under 3%. Investors are starved for steady-stream income vehicles. This highlights the attractiveness of master limited partnerships (MLPs), which are typically used by midstream energy companies. The MLPs own assets like pipelines and natural gas storage vehicles. They offer higher-than-average yields, which permits investors to earn better than average returns.