Josh Young: Transition Can Deliver Value in E&Ps

Author: George Mack (Energy Report)
Posted: April 12, 2011

Portfolio Manager and Founder Josh Young of Young Capital Management (YCM) looks for value in oil and gas exploration and production (E&P) companies. In this exclusive interview with The Energy Report, Josh discusses some of his best ideas—strategies that could well deliver the significant upside and reduced risk investors might not expect from natural gas producers.

The Energy Report: Are you overweighted to natural gas right now?

Josh Young: Yes, at the moment, I am. It’s challenging right now because natural gas prices are low, so companies aren’t making a lot of money drilling for gas. In such an environment, there are strong incentives for nat gas companies to diversify their product mix and improve margins by drilling for oil; and the market is rewarding companies that manage to increase oil production and improve their margins with substantially higher stock prices. As gas companies have transitioned a portion of their production to oil, their stocks have outperformed significantly; in fact, they’ve been the highest-performing stocks across this space over the last year or two. And, generally, the ones that have transitioned have retained their upside potential from exposure to gas prices, which, historically, are cheap versus other energy sources like oil. That is part of what has driven their stock price outperformance.

TER: I hate to overuse the term “value,” but I’m guessing that your investment theory here is that gas is a value-rich universe.

JY: Yes. Actually, it’s sort of interesting because there’s been a bifurcation in valuation based upon the size of the company. The larger companies that are followed closely and are better understood have started pricing in fairly high natural gas prices, and that correction is already priced in. The market is already expecting gas at $5–$6 per thousand cubic feet (tcf)—and higher in some cases, depending on the stock. So, for me, it’s almost like getting a free ride on the backs of smart, large investment funds that are bidding up the stocks of these big companies based on expectations of the natural gas curve. Typically, these large investment firms can’t invest in the smaller companies that I follow.

Smaller investors have been slow to follow this investment trend, so the shares of smaller natural gas companies haven’t gotten bid up in a same way similar to the larger ones. That’s part of what’s created this tremendous, and I think temporary, dislocation. Also, despite superior performance versus the market and other larger hedge funds, it is a very challenging time for small funds to raise capital—especially in the oil and gas (O&G) space.

As capital has flowed to larger funds, it has been deployed to buy stock in larger-cap companies. This has helped feed the current valuation discrepancy. It has been a temporary phenomenon, as allocators to funds are beginning to overcome their inhibitions toward investing in smaller funds in favor of the (generally) higher returns and lower risk available in those funds. Between additional funds flowing into smaller funds that invest in smaller companies, and larger funds “stretching” and starting to buy stock in smaller-cap companies, there is the chance for a substantial correction in this valuation gap. Of course, many of the companies I’m invested in are going through a transition process, which should drive substantial value creation and share price improvement regardless of fund flows into the space.

Full Article

Josh Young: Transition Can Deliver Value in E&Ps is news story from: News and Stories from Energy Editor

By Fawzia Sheikh, www.oilprice.com

After nearly 40 years, BP is returning to Libya amid widespread controversy about an alleged link to the Lockerbie bomber’s release and fears about a potential oil disaster in the Mediterranean Sea.

Yet despite the oil giant’s enthusiasm, its future in Libya – a country boasting the largest crude oil reserves on the continent — may end up as murky as competitors that have ventured there.

Three years ago, BP signed a $900-million exploration and production deal with Libya, decades after Muammar Gaddafi’s government nationalized 100 percent of the oil company’s holdings. BP, which has not been involved in the country since 1971, announced in late July that it would begin drilling in the western part of Libya and in the deep waters off the coast in a matter of weeks.

Although BP presumably believes the agreement will be good for business, Libya’s terms of attracting foreign investment is “so convoluted and corrupt, I don’t think anybody gets a real advantage,” said Ronald Bruce St John, an analyst for Foreign Policy in Focus, a Washington-based think tank.

http://oilprice.com/Geo-Politics/Middle-East/An-Uncertain-Homecoming-BPs-Return-To-Libya-Decades-After-Gaddafis-Revolution.html

An Uncertain Homecoming: BP’s Return To Libya Decades After Gaddafi’s Revolution is news story from: News and Stories from Energy Editor

Well that was a big waste of time. I am referring to this week’s quarterly OPEC (Oil’s Perpetual Enmity Coalition) no decision meeting . None the less, a pivotal meeting in several ways.

This meeting used to be a very easy read simply by knowing the OPEC committee meeting’s proposal recommendation held the day before, a crude trader would be reasonably sure of the following day full member OPEC meeting concenses results. Unfortunately with the strong rift between Sunni and Shiite sects within OPEC, committee recommendations are no longer guaranteed of receiving approval. This was the reason OPEC was not able to agree on increasing crude production quotas.

Saudi Arabia, (Sunnis), rightly argued that current crude oil production needs to increase 2 million bbls per day to meet projected demand. Iran, (Shiite), realizing that Saudi’s crude is of a higher sulfur and more expensive to refine quality, understands that the world does need more crude but not the kind coming out of Saudi Arabia. They along with other Shiite dominated OPEC countries decided not to agree to the production increase.

Several television business commentators were arguing that this infighting ultimately means OPEC is no longer relevant and has lost its power to control crude production and ultimately crude pricing. On the contrary, OPEC is more relevant than ever and will continue to be so until alternative energy sources begin to compete with crude as a transportation fuel.

Saudi Arabia understands that even if they produce more crude, it is of the quality that refiners do not want. What refiners need is more production of lighter sulfur crude produced by Libya and Nigeria. As long as Libyan production remains off line, there is no country having excess capacity that can fill the demand gap.

Barring the entire global economy sinking deeply into a deep recession, CL futures will remain on its endless bid and higher crude prices should be anticipated.

Check out the original source here.

OPEC (Oil’s Perpetual Enmity Coalition) is news story from: News and Stories from Energy Editor

Having come just short of targeted $117 crude price goal with a $114.95 high print, is it time to follow short term swing momentum with the bears? It all depends on where the selling on crude will stop and longer term players deem crude a value buy again.

With the US dollar seeming to put in a floor on strong euro selling due to Greece announcing it is considering leaving the 17 nation European Currency bloc, US unemployment climbing to 9% and June oil futures down nearly 15% for the week, it might seem wise to run with the heard and get heavily shorted energy.

Despite the massive sell off this week, Fund managers remain net long on NYMEX crude futures and options. Whatever, the bottom may be on crude; analyst vary between $92 and $94, the one great fundamental supply issue remains with Libya. With worldwide global recovery continuing, demand for crude will continue to rise. Going into early next year, should Libya’s crude remain out of the market, tighter supplies will keep the longer term crude bull market securely in place.

It is possible this year’s high in crude has been achieved. However, should Libya’s supply remain off the market crude prices will easily surpass this year’s current high.

Check out the original source here.

Where Is the Floor on Crude? is news story from: News and Stories from Energy Editor

Check out the original source here.

Egyptian/Israeli 1979 Peace Treaty in Jeapordy is news story from: News and Stories from Energy Editor

The advance in crude futures slowed a bit this week, but the positively sloping trend is clearly intact. Even Portugal’s well publicized financial difficulties failed to trigger a sell off in crude or the euro. Energy markets continue to remain fearful of the potential supply disruptions in the Middle East and possibly even Nigeria pricing in a premium on these global risks.

We now have crude poised above $105. A figure it has not seen since 2008. A pull back below $100 is quite possible. However, strong support will come in at $97, should swing traders be fortunate enough to see this number enter their variable algorithmic formulas.

The high probability trade will be to add to long positions on any pull backs and be prepared to ride the volatility to a $117 take profit target.

Check out the original source here.

Geopolitical Risk Premium Supporting Energy Futures is news story from: News and Stories from Energy Editor

Japan’s increased energy import needs along with turmoil in Libya, Bahrain, Saudi Arabia, and Yemen, will continue to support higher crude prices. Crude and products pulled back slightly this week on temporary demand destruction from Japan. The reality is that Japan will have to find ways to make up for the 10% of nuclear energy production destroyed by recent events.

Evidence of continued crude pricing strength can be seen in the term structure of Brent crude futures becoming completely backwardated. Even well supplied WTI crude futures have turned backwardated from December 2011 onward. Stronger evidence on higher crude prices are evident on year spreads for WTI and Brent. One month ago the spread was at a $3.51 contango. On Friday this spread has gone to a $1.95 backwardation.

Backwardated pricing will continue to bring crude out of storage and into the market on stronger demand. When near months on WTI futures follow Brent trend, pricing will become even more supported.

If this was not bad enough news for anyone seeking lower crude and refined product prices, Nigeria is scheduled to hold elections in April. The trend on these elections is for rebel troops to destroy pipelines, squeezing supply of valuable light sweet crude and adding additional upward pricing pressure.

Check out the original source here.

Backwardated Crude Term Structures Evidence Continued Positivley Sloped Futures Trend is news story from: News and Stories from Energy Editor

Crude and its refined products, like any commodity, are ultimately priced on supply and demand. Sounds simple enough. The one complication added to these pricing inputs; expectation of future supply and demand. The sharp run up in crude prices the past few weeks shows how big a role expected supply and demand plays. The one buffer that will temper or exasperate expectations is spare production capacity.

No one really knows for sure how the problems in North Africa and Middle Eastern countries will resolve. We could experience a swift and peaceful change of these governments to stable democracies, continued prolonged unrest, or a combination of the two. What is known is the world is consuming 88 million bbls per day, up 2.7 million bbls per day from last year and expected to grow an additional 1.7 million bbls per day this year. At current crude production rates there are 4 to 5 millions bbls per day of spare capacity.

Even without turmoil in the Arab countries, the rising world demand for crude will cut into spare production margin bringing it down to 3 million bbls per day. Factor in potential production disruptions and the world could easily find itself with fuel supply shortages.

The narrowing of marginal crude production capacity is what is driving crude to multi year highs. Until more crude production capacity is added, or world economies collapse under the weight of higher crude prices, expectations will remain for supply not being able to outpace demand.

Check out the original source here.

Middle East Uprisings Highlight the Importance of Supply Margin is news story from: News and Stories from Energy Editor

The transformation of global capital markets ramped up quickly this week with the disclosure of Deutsche Borse in talks to acquire NYSE Euronext. Should the proposed merger be approved, the combined entity will dominate derivatives trading in Europe and America and has the potential of dominating stock trading. Germany will become the epicenter of global capital markets.

The driving forces behind the merger are economies of scale and market share. Trading system costs and regulatory expenses will be reduced in direct relation to scale of trading volume. The combined Deutsche Borse/NYSE will be an unassailable global market share growth monster dominating both continents. Costs will be reduced and pricing power will increase as competition evaporates.

How are the Chicago exchanges along with Nasdaq going to compete against this new dominant force? Joining forces and fighting to keep and expand market share appears to be the best solution.

The Chicago Mercantile Exchange already dominates US futures trading. Increased trading volume will have to come from growth in Europe. Nasdaq has an exchange in Sweden, but will find it very difficult to grow in Europe with a combined Deutsche Borse/NYSE.

The Chicago Board of Exchange, CBOE, is the largest US options mart, with several extremely valuable, exclusively traded large volume options. Because of its US options dominance, the CBOE is a very likely, though very expensive, take over target.

A combined Nasdaq, CME, CBOE, with perhaps an Asian exchange added, would make a formidable competitor to a united Deutsche Borse/ NYSE.

Deal makers will probably wait to see if the proposed Deutsch Borse/ NYSE merger becomes reality. If and when it does, additional exchange market merger announcements will be forth coming.

Check out the original source here.

Will the Chicago Markets Follow the Deutsche Borse NYSE Lead? is news story from: News and Stories from Energy Editor

During an economic recovery, future demand expectations trumps current supply data bidding up futures for crude and refined products. This is why the energy complex has been on a relentless upward trend for the past two years. Seasonal refinery output factors that normally temper price movements have had little effect this year. Why is this happening?

The simple answer is that speculators have gone all in on long positions, taking profits at resistant levels and then repositioning long trades at support levels. This has prevented any sustainable sell off. It has also positioned term structures to move from a well supplied backwardation market to a high demand contango market.

The EIA released gas supply data last week showing gas supplies have been steadily increasing. Despite the ample supply, they are giving a 10% probability that retail gas prices will hit $4.00 per gallon, with a 50% chance of gas prices hitting $3.50 per gallon in 2011.

One hope for consumers is that everyone is leaning heavily to one side of the ship. Should a major demand or several demand reducing events occur in 2011, there will be a lot of traders trying to exit through a small door at the same time. Such an event would be China overshooting on its attempts to dampen its inflation. Another listing of the ship event would be the failure of several Eurozone banks.

Since neither of these events are highly likely to occur, traders will not try to rock the boat and continue positioning for the likelihood of a continued bull market.

Check out the original source here.

10% Probability of $4.00 Retail Gas In 2011 is news story from: News and Stories from Energy Editor