Author: Investing Daily
Elliott H. Gue is editor of Personal Finance, a one-stop source for market-beating investing advice. Mr. Gue scours the world for the best investments – whether it be growth stocks, bonds, Master Limited Partnerships or commodities – to build and protect your wealth no matter what the “market” does. Mr. Gue delivers in-depth insight and analysis that cuts through the noise and hype to reveal the truth about the economy, the market and your investments. Mr. Gue is also editor of The Energy Strategist, helping subscribers profit from oil and gas as well as leading-edge technologies like LNG, CNG, natural gas liquids and uranium stocks. He has worked and lived in Europe for five years, where he completed a Master’s degree in Finance from the University of London, the highest-rated program in that field in the U.K. He also received his Bachelor’s of Science in Economics and Management degree from the University of London, graduating among the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that business school.
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Posted on 09. Apr, 2012 by Investing Daily.
The 2000 technology bust and subsequent collapse of the high-flying Nasdaq left many investors with the perception that technology is a high-risk, volatile sector that’s only appropriate for the most aggressive growth investors.
That sentiment is downright anachronistic. The S&P 500 Information Technology Index has a beta of 0.96 over the past five years; indexes with betas lower than 1.0 are less volatile than the broader market. More important, technology stocks have outperformed the broader market by a sizable margin despite their below-average risk. (See “Tech Sector Shines.”)
Technology is the most cash-rich and least indebted sector in the S&P 500. Some of the bigger tech stocks including Apple (NSDQ: AAPL) and Cisco Systems (NSDQ: CSCO) generate so much idle cash they’re initiating dividends to return value to shareholders. Tech companies now hold 30 percent of all cash among non-financial balance sheets in the S&P 500 ($360 billion out of $1.1 trillion).
What’s more, the technology sector enjoys significant growth opportunities in the years ahead. Mobile devices such as smartphones and tablet computers have transitioned from niche products into the mainstream. As first posted on Investing Daily’s Facebook page, between 2010 and 2012, total tablet sales are expected to more than quintuple. (See “The Tablet Wars.”)
Meanwhile, Facebook, Twitter and other social media websites are transforming the way consumers and businesses interact. Just a decade ago, Facebook didn’t exist. Today, this social media powerhouse claims nearly 500 million active daily users worldwide. (See “The Social Network.”)
Here’s a look at one of the more attractive names in tech.
The Nimble Acrobat
Adobe Systems (NSDQ: ADBE) develops and sells products that allow users to share information across all print and electronic media.
The crown jewel in Adobe’s product line is Creative Suite (CS), a portfolio of software tools to create online and printed documents including websites, newspapers, magazines, brochures and books. CS has become the industry standard and many creative professionals learned their craft using CS software. Designers switching to a competing product would have to learn an entirely new software platform, giving CS a high degree of customer “stickiness.”
CS product cycles historically have driven Adobe’s stock price. The company now is selling CS5, with a new version of the software due in May. According to a recent company survey, 40 percent of existing CS5 users are interested in upgrading to CS6, suggesting rapid market acceptance and immediate growth opportunities.
CS6 will introduce new features likely to be embraced by many design professionals as critical, including support for HTML5, a language for structuring content on the Internet. The new software will include tools that facilitate development of mobile applications, as well as tools designed for tablet computers.
CS6’s “Creative Cloud” offering also will allow users to subscribe to CS6 as a software-and-service bundle, reducing the upfront cost of buying the product. Creative Cloud will offer users access to both Mac and Windows versions of all software, providing the option of a subscription model for the company’s highly popular tools.
Posted on 12. Mar, 2012 by Investing Daily.
Contract driller Ensco (NYSE: ESV) boasts a fleet of seven ultra-deepwater drillships, 20 semisubmersible rigs and 49 premium jack-up rigs. The firm stands to thrive in the near term because it owns one of the youngest deepwater and ultra-deepwater fleets in the industry and has a number of deepwater and ultra-deepwater rigs available in 2012-13.
In the wake of the 2010 Macondo oil spill in the US Gulf of Mexico, the market for deepwater rigs has bifurcated. Producers increasingly favor high-specification units that feature advanced equipment and are capable of drilling deep, complex wells. These newer models are outfitted with advanced blowout preventers (BOP), a key piece of equipment that’s designed to prevent spills when an operator loses control of a well.
The Deepwater Horizon’s BOP failed to perform that function, resulting in a major oil spill in the Gulf of Mexico. Many speculate that the BOP wasn’t strong enough to overcome the well pressure in that field.
In addition, younger rigs tend to experience less downtime–an issue that’s plagued the world’s largest offshore contract driller, Transocean (NYSE: RIG). The company has incurred the expense and lost operating hours involved with upgrading its rigs to meet stricter safety standards. Rigs also must be recertified before they’re allowed to work in the Gulf of Mexico and other markets, leading to further downtime. Producers often pay a discounted day-rate when a rig’s idle time exceeds a predetermined threshold. In other cases, the operator can cancel a signed contract if the rig is unavailable for excessive periods.
For example, Transocean’s 13-year old Deepwater Expedition ultra-deepwater drillship had its contract canceled in January 2012 because of the rig’s prolonged downtime. As a result, the firm lost out on a day rate of $630,000. With many of its rigs facing expensive upgrades, Transocean decided to suspend its dividend for the next year.
Ensco’s average ultra-deepwater rig is only two years old and its average deepwater unit is seven years old. By comparison, Transocean’s average ultra-deepwater vessels are seven years old, while its deepwater rigs sport a mean age of 15 years.
Ensco’s efforts to standardize its fleet also bode well for the company’s success. Several manufacturers produce deepwater and ultra-deepwater rigs, so the parts aren’t necessarily interchangeable between models. In addition, each manufacturer has different maintenance schedules for its rigs. By standardizing the types of rigs it owns, Ensco ensures that its employees can operate more efficiently. Downtime for maintenace is also easier to schedule.
When an ultra-deepwater rigs earns upward of $600,000 daily, a few days of additional downtime across a sizeable fleet can impact the bottom line significantly.
In Ensco’s case, the company has built a fleet focused on Ensco-8500 series of ultra-deepwater semisubmersibles and dynamically-positioned drillships built by Samsung Heavy Industries (Seoul: 010140, OTC: SMSHF).
Currently, the firm has five operating ENSCO-8500 rigs and a newly built unit that’s slated for delivery in the fourth quarter of 2012. Ensco recently confirmed that Anadarko Petroleum(NYSE: APC) has secured this new rig under a 2.5 year contract for a daily rate of $530,000. This is the the third ENSCO-8500 rig that Anadarko Petroleum has booked, a sign of a satisfied customer.
Ensco owns six operating Samsung drillships and has an additional unit slated for delivery in the second half of 2013 that hasn’t been placed under contract.
Meanwhile, the most recent rig to arrive from the South Korean shipyard appears to be on track for a contract with an unnamed producer. Although Ensco hasn’t disclosed the terms of the deal, the operator will make some project-specific modifications that will keep the rig at the yard until the fourth quarter of 2012. Once released, the rig would work under a five-year contract worth more than $1 billion, implying a day-rate of almost $550,000.
Some investors might quibble that this rate is lower than recently announced fixtures that exceed $600,000 per day. However, shorter-term contracts have produced the highest day-rates. That this five-year contract involves only a slight discount to prevailing rates on two-year fixtures is impressive.
As I explained in previous article, the deepwater and ultra-deepwater markets are the strongest segments for contract drillers. Demand for these rigs will only increase.Brazil plans to develop aggressively a number of massive deepwater oil and natural gas fields discovered in recent years. In 2012 Petrobras (NYSE: PBR) aims to sink 65 exploratory wells in the deepwater, up from 47 in 2011. Meanwhile, activity in the US Gulf of Mexico continues to recover gradually from the Macondo oil spill and moratorium on deepwater drilling. Ensco’s recent experience in the region bodes well. Two of the firm’s 8500 series semisubmersibles will operate in the region and generate solid day-rates under recently signed contracts. That Anadarko Petroleum and other producers have committed to these deals suggests confidence in their inventories of drilling prospects.
Finally, Cobalt Energy (NYSE: CIE) and a number of producers have announced a series of pre-salt discoveries in the deepwater offshore Angola in West Africa. The geology of these fields resembles Tupi and Brazil’s other giant fields, leading to speculation that the Angolan play could equal or surpass these plays. Producers with stakes in the region have made inquiries about booking deepwater rigs that will be available between late 2012 and mid-2013.
As deepwater drilling activity heats up, the incremental demand for rigs is pushing up day-rates on the few deepwater and ultra-deepwater rigs that are available for contracting in the near term. Contract drillers with significant available capacity over the next couple of years could secure fixtures that approach $700,000 per day.
A number of Ensco’s rigs will be available within the next two years. In addition to the newly built drillship that Samsung Heavy Industries will deliver in the second half of 2013, the Ensco-8502 semisubmersible’s contract in the Gulf of Mexico will expire in June 2013 and the Ensco-8500’s fixture will expire in August 2013. The day-rates earned by these rigs are well below prevailing rates, offering Ensco plenty of pricing upside.
In a conference call to discuss fourth-quarter earnings, Ensco’s management echoed the bullish outlooks of Pacific Drilling (NYSE: PACD) and SeaDrill (NYSE: SDRL), both of which have significant capacity available for contracting in the coming years.
The management team emphasized that all Ensco’s operating rigs are certified to work in the markets where they’re scheduled to operate, limiting downtime for upgrades and inspection. Nevertheless, some of the company’s newly built rigs have spent additional time at the shipyard to replace faulty or substandard equipment. Management also expressed confidence in the firm’s ability to limit these delays in the future.
Ensco also owns a fleet of older mid-water rigs, floating rigs that are capable of drilling in water less than 2,000 feet deep, and jack-up rigs capable of operating in depths of 400 feet to 500 feet. The mid-water market remains under pressure because of a lack of exploration and development opportunities at that depth.
Nevertheless, some encouraging trends have emerged in this segment. Mexico’s national oil company, PEMEX, has expressed interest in contracting additional mid-water rigs. At any rate, four of the Ensco’s six mid-water floaters operate under fixtures that won’t expire until 2013, so the company has limited near-term exposure to weak demand.
Day-rates for jack-up rigs haven’t strengthened to the same extent as in the deepwater market, but pricing trends have improved. Ensco has received inquiries for its premium jack-up rigs for North Sea work in 2013 and 2014–a sign that producers are planning a longer-term shallow-water drilling program. Ensco’s emphasis on high-specification jack-up rigs should provide more exposure to any upside.
Ensco currently pay a quarterly dividend of $0.375 per share, equivalent to a yield of about 2.7 percent. Given the company’s strong contract coverage and exposure to rising day-rates, the firm could have the scope to hike its dividend. However, the stock’s primary upside catalyst remains potential fixtures for the company’s rigs that are available in 2012-13
Posted on 27. Feb, 2012 by Investing Daily.
Today, MLPs are still in the sweet spot: Not only does the nation face a critical shortage of midstream infrastructure to support growing output from prolific shale oil and gas plays, but most MLPs also have easy access to relatively inexpensive debt and capital.
My favorite MLPs continue to grow their distributable cash flow through acquisitions and organic growth projects, but all my infrastructure-related picks secure commitments from customers before turning the first shovelful of earth for new pipelines, fractionators or gas processing facilities.
In late 2011, some investors fretted that a study linking water contamination to hydraulic fracturing in Pavilion, Wyo. would prompt the government to restrict the practice and derail the shale oil and gas revolution. Fracturing, or stimulation, increases the permeability of the reservoir rock, allowing the formerly trapped hydrocarbons to flow from the reserve rock into the well. This process involves pumping large quantities of water and a small percentage of chemicals into the rock formation at high pressure, which produces a network of cracks. This production technique is critical to unlocking oil and gas isolated in shale and other “tight” reservoir rocks. For more information on hydraulic fracturing, see my Colleague, Elliott Gue’s, Seeking Alpha instablog post, Hydraulic Fracturing: What’s it All About.
In the abovementioned instablog post, Elliot debunked speculation that the Environmental Protection Agency’s “smoking gun” would lead to restrictive regulations on hydraulic fracturing, explaining why the unique situation analyzed in the report had little bearing on activity in commercial-scale shale oil and gas plays.
President Barack Obama likewise put these fears to rest during his 2012 State of the Union address, highlighting the nation’s rising output of natural gas and encouraging its widespread adoption for power generation and transportation. Such an endorsement effectively rules out overly restrictive regulations that would curtail hydraulic fracturing.
Although the government may mandate the disclosure of the chemicals used in fracturing fluid, drilling should continue apace in the Eagle Ford Shale and the nation’s other major unconventional oil and gas plays. Spears & Associates, the preeminent provider of data on pressure pumping, estimates that global spending on this critical service will surge 23 percent in 2012, to $52 billion. Much of this spending will occur in North America.
Frenzied drilling activity in the Bakken Shale in North Dakota, the Eagle Ford Shale in South Texas and other oil-rich plays has enabled the US to grow it annual oil output for the first time in decades. Even more impressive, this increase in overall oil volumes has occurred despite a sharp decline in production offshore Alaska and in the Gulf of Mexico.
Meanwhile, robust drilling in the nation’s shale plays also enabled the US to surpass Russia as the world’s leading producer of natural gas and has dramatically depressed gas prices in the closed North American market. Despite gas prices that continue to hover near record lows, US output has continued to grow. Exploration and production firms have shifted their emphasis from dry-gas fields to plays that also produce large amounts of higher-value natural gas liquids (NGL) that improve wellhead economics.
This upsurge in onshore oil and gas output has occurred in the Bakken Shale and other regions that lack legacy takeaway and processing capacity, while even the Permian Basin in west Texas–an area that’s produced oil since the 1920s–requires additional infrastructure to handle growing volumes. With ready access to capital, MLPs will build much of this midstream capacity.
Despite these strong fundamentals, recent inflows into the Master Limited Partnership space have pushed valuations to frothy levels. We can’t emphasize enough the importance of adhering to our buy targets and taking some profits off the table when a big winner throws off the balance of your portfolio.
Some investors balk at taking some profits in MLP positions that have rallied considerably–after all, no one likes to pay taxes. If you hold your MLP investments in a taxable account, you’ll likely be paying on a cost basis that’s been reduced by accumulated distributions that count as a return of capital.
Investors should grit their teeth and remember that regardless of the tax you pay on your gains, you’ll reap more profit than if you lose some of your paper profits in a correction. Moreover, the 15 percent tax rate on long-term capital gains is the lowest in decades.
If you hold your MLPs in an IRA, taking some money off the table won’t trigger a taxable event. Nonetheless, some investors will rationalize their decision not to take profits by reminding themselves that they’re earning a higher return on their original investment than they could earn by investing new money. But a 10 percent correction in the market could more than wipe out a year’s worth of income from any MLP.
Don’t equate taking profits with bailing out. In these uncertain times, taking what the market gives you will lock in hard-won gains. You can always reinvest the proceeds when stock prices inevitably pull back.