A Break-up Play, an MLP and Syria

08/30/2013 10:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Energy specialist Elliott Gue, Editor of the Energy and Income Advisor discusses the impact of Syria on oil prices, as well as one favorite oil stock with break-up potential, and a favorite MLP for income-oriented investors.

Steve Halpern: We're here today with Elliott Gue, editor of Capitalist Times and the Energy and Income Advisor. How are you doing, Elliott?

Elliott Gue: Good, thanks for having me on.

Steve Halpern: In recent days, oil prices have jumped sharply, primarily due to geopolitical tensions. Do you think these gains are sustainable, or is this is a temporary spike that you don't think will stay in place?

Elliott Gue: I think it's more of a temporary spike. I mean, I think the experience of the last few years, whenever we've seen some conflict or unrest in the Middle East, we've seen oil prices, energy prices, spike up temporarily, but ultimately that's reversed, and in this case, if you look at Syria itself, it's not an important oil producer at all.

It produces somewhere around 50,000 barrels a day, which is pretty much insignificant and so, really, you know, if Syrian oil production were disrupted, it would have little or no effect whatsoever on the global oil market.

The concern is clearly that unrest there, that a conflict there, could spread to other countries around the region—and we've seen the same type of a domino effect idea in place in the past, such as when, you know, the Arab Spring started in Tunisia, which is also not an important oil producer.

The fear then was also that it would spread beyond Tunisia's borders, but if you look at the history, the big producers in the region; places like Saudi Arabia, the gulf state, you know, typically, those governments there have very deep pockets.

And, particularly in Saudi Arabia, they're able to spend big on social spending, on housing, just sort of quell any unrest before it really gets going, and that's certainly what we saw a few years ago with the so-called Arab Spring and I think that's what you'll see this time.

So, I think the fears that it's going to spread into a wider conflict are somewhat overblown, and I think you might see even a little bit of the sell on the news' reaction. You know, as the invasion really gets going, you know, I think that could be, that could actually be a top for oil prices in the short term.

Steve Halpern: You point out that one company that is benefiting from our rising oil prices is Occidental Petroleum (OXY) and you mentioned that you see break out potential for the firm to unlock some value. Could you share your thoughts on that?

Elliott Gue: Sure. Occidental Petroleum is, really, has operations in the US and primarily outside the US. They're in Abu Dhabi.

They have a liquefied natural gas or LNG project there and in the US, their main areas of operation are California, where oil prices have historically been higher than in other parts of the US, mainly because California does not have access to significant pipeline capacity going into the state to bring oil from other parts of the country.

And that's one of the reasons why California hasn't yet really benefited from growth and production from places like the Bakken Shale in North Dakota.

They really have no way of importing oil from those regions right now in meaningful quantities, although that will change in coming years, so the advantage of that is that Occidental enjoys higher than normal realizations for the oil that it produces in California.

A lot of interesting plays in California. I think a lot of investors are unaware that the largest oil shale play in the United States is the Monterey shale, which is actually located in southern California—so it's estimated by the US Geological Survey that that contains almost two-thirds of US shale oil reserves—so they're a producer there.

They're also a producer in a number of conventional plays there and have been reporting pretty solid production results. Elsewhere in the United States, the Permian Basin in west Texas enhanced oil recovery there, again, a lot of growth potential there using carbon dioxide to help produce more oil and gas from this place.

Abu Dhabi, a long-term project, basically predicated on long-term contract in places like Asia, where they're able to fill the gap at pretty much fixed prices, and so I think the returns from that will be very solid long-term.

What I think you might see is actually Occidental break up into its US component, which is a little bit more growth orientated, and its international component, which may be a little bit more of a dividend vehicle, the long-term steady, return dividend vehicle, and I think that could unlock a lot of value for shareholders. I think you could even see the stock get up as high as $150 a share in the coming years in the event of a break-up.

Steve Halpern: Another thing that you've recommended for investors with an income focus is Mid Con Energy. What's the attraction with that?

Elliott Gue: Yeah, Mid-Con Energy, symbol (MCEP)—they produce oil. This is actually a master limited partnership, or MLP, so it's one of these kind of securities that tend to carry high yield. Currently the yield on that is around 9%, so it's well above the average for an MLP.

They're what we call an upstream MLP, meaning they're actually involved in oil and gas production. In this case, they're primarily involved, 99% of their reserves are oil; southern Oklahoma, parts of Kansas, and Colorado is where they produce. Most of their projects are water flooding projects.

Now what that means is that the company injects water, sort of, on the edges of the field, to help re-pressurize the field and also sweep oil towards production wells, and I think what's really attractive about them is two things:

First of all, they're heavily focused on oil. Oil prices have been relatively high—relative to natural gas and natural gas liquids.

Secondly, their general partner, which is a private equity firm called Yorktown, has actually created a couple of different funds, which basically buy up mature oil producing properties that they think are suitable for water flooding.

They put water flooding infrastructure in place, and then, what they're doing is, they're actually selling those projects to the MLP, in what we call, drop down transactions, where the general partner is essentially selling a project or an asset to the MLP.

Every time they do that, typically the MLP is able to boost their distribution, so here I think you have an oil levered MLP, which has benefited greatly from the reduced price differential between US oil prices and international oil prices, because US oil prices have been rising relative to international for most of this year, and also, the company has the potential to grow their distributions a lot over the coming years as a result of these drop down transactions.

Steve Halpern: Well, thank you for joining us today. We really appreciate your investment ideas.

Elliott Gue: Thank you for having me.

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