I had shifted my large (for me) positions in MTGE and WMC over to CVRR about a month ago, and sold my remaining WMC after the company posted an SEC filing for a large insider SPO, buying NTI. Do not like my refiner sector concentration, but the increasing Canadian and domestic oil supplies ought to greatly reduce what hjad been extreme volatility in refiner earnings, and both NTI and CVRR have locations with undersupply of refined product and oversupply of crude.
I'm avoiding all E&P, including LINE and VNR, as oil and gas supplies are growing faster than demand, and with the world's economies in structural weakness (aging demographics and overleveraged debt for governments and banks, and deficit spending by all major economies increasing, thus reducing private sector income from taxation), demand is not increasing, so there will be over-supply for years. The refiners are a reasonable way to play the domestic (USA and Canadian crude) supply-demand imbalances.
After the Flood – Gulf Coast Light Sweet Crude Pricing Beyond 2013
published by Sandy Fielden on Wed, 12/05/2012 - 19:05
[So to sum up - we have shown that light sweet crudes currently caught up in the Midwest logjam are being discounted unless they can reach the Gulf Coast by rail or barge. LLS crude produced at the Gulf Coast is priced higher against the Brent international benchmark. Crude flowing on the new pipeline infrastructure coming online in the next two years will push out imports of light sweet crude – as early as next year. The result will be a changing price environment for the benchmark light sweet WTI and LLS crudes.
WTI prices in Houston will become more important than they are today and Midland WTI prices will be higher than Cushing.
On the Gulf Coast LLS prices will be linked to WTI and Brent prices will disconnect from the US domestic market. ]
A veritable flood of more than 3 MMb/d of new crude production from the US and Canada will come into the Houston region by 2015 via long awaited new pipeline infrastructure. The most immediate impact will be to back out light sweet crudes from the Gulf Coast region – as early as 2013. Today we assess how the changes will affect light sweet crude pricing.
After The Flood
Now lets turn to what happens to light sweet crude prices after the flood. WTI will no longer be stranded in the Permian Basin and reliant on passage through Cushing to get to market. New capacity on the reversed Longhorn Pipeline among others (see New Adventures of Good Ole Boy Permian for the full list of additions and dates) will open up routes to Houston and further along the Gulf Coast to St James LA. To assess the impact we looked first at tariff rates on the new pipelines in place after the flood (see map below). For our analysis we assume that producers can find capacity on the new pipelines at the tariff levels publicized in their open season documents. The cost to ship WTI crude from Crane (close to Midland) to Hous
ALDW is benefiting from crude supply back up, but pipes nearing development will enable produces to get a premium over WTI with a short flow distance to the Gulf, giving a disadvantage for ALDW crude supply.
NTI crude costs will hold up well, despite pipe and rail transport improving for their Bakken and Canadian crude, because they can buy the crude with little transport cost added. CVRR will lose some WTI-Brent spread as the Seaway reversal is expanded, but they yet have a good and growing local crude collection system (insignificant transport costs).
NTI and CVRR are good high yield refiners with good prospects for maintaining their crack spreads high, but ALDW will run into a reduced crack spread.
Last quarter's BV was hurt when the MBSs dropped much more than the rise in long rates that were hedged to protect the BV. But this time around, the hedging ought to be working. However, I wonder how well the large, new TBA type investment is hedged to protect BV?
THe article was on balance positive. Easy to the reason for today's drop, which is across all of the MREITs--higher long rates. For example, the ten year treasury interest rate is around 5% higher, and that's an obviously large move (but predicated on an improving economy--that is not really improving, with real unemployment around 18% (U6 measure adjusted for drop outs)).
There is irony here, because the hurt to book value last quarter was from MBSs being sold off far beyond what the modest rise in long rates would power, so the hedges did not work to protect book value, but this time the hedges ought to work, and the higher long rates with the short interest rate near zero, will propel a higher profit spread.
Tucker, Credit you with a keen sense of humor if not investing savvy, Any assessment made in mid Feb, four months ago, become ancient history in the internet age, and with world financial markets continually roiling. Myself, I sold out a bit before TWO went XDiv for its special SBY distribution-- and have stayed out.
Give you two good investment tips though for your trouble. Buy now for high yield with safety that is much higher than implied by the yield: CVRR (structural change for Midwest refineries with abundant domestic, S Alberta, and Tar sands crude readily accessed at discounts), and another hybrid MREIT, WMC, whose recently reported loss is only unrealized GAAP BV from a market aberration when it was guessed in March that QE forever was suddenly ending, and whose earnings quality and level are very good.
Suggest getting out of NTI. As the new pipes and rail transport cut in for the Bakken and S Alberta Canadian production that had been backing up, and selling for less than WTI for their refinery, these crude supplies the NTI relies on are also pricing higher, reducing NTI's crack spread. The NTI insiders have run three SPOs for themselves in quick order, and you have to think that they feel they are selling at a near term high.
ALDW has been making unusually high profit from low cost WTI from near the Midland terminal where oil has been backing up, but pipes will soon be in place that opens this oil for delivery to the Gulf , and their crude is expected to then cost more than WTI set at Cushing. CVRR is much bette positioned to continue to benefit from increasing oil supply from the Midwest and Bakken.
Grousing over the use of TBA is a mistake. The presentation slides for the Monday CC are now available from their website and show that their use increases profit rate spread. The decrement in earnings came from using the full number of shares outstanding as a divisor after the large SPO, while the SPO money was only available for about half this quarter.
The unrealized decrease in BV has been reversed as the relatively high mortgage rates that decremented portfolio value, when calculated for March 31, have since reversed back to the lower rates of 2012-- bet the BV as of today is higher than $26 per share.
Sentiment: Strong Buy
Funds from the large SPO not yet fully deployed for the whole qtr, as well as TBA not included.
90 cent qtr divi is perfectly safe. As mentioned by Kain at the AGNC CC, the drop in BV as of the March 31 report date has since reversed as the market realized the Fed was not about to abandon QE Forever, and in fact long rates have dropped. The good news for employment reported on Friday is hokum, as the U6 data showed a tiny INCREASE in unemployment for April. QE Forever is sell in place and will not de relaxed as our administration increases deficit spending paid for by the Fed buying treasury notes backed by thin air.
Relax, MTGE is doing fine.unless you are short.
Sentiment: Strong Buy
The poor results as of Mar 31 reporting reflect an irrational mortgage trading market that suspected the Fed was bout to end QE Forever, and sold off mortgages, before, they thought, interest rates would go higher--but the Fed is not about to end QE, and all of the other major central banks are forcing low rates and monetizing their increasing debt, fearful of the rioting (as in Greece) that would follow from reduced welfare and entitlements.
The poor economy reflects decreasing consumer demand as Baby Boomers retire, the over leveraged consumer, Banks, and Gov, and business hesitation to invest over fear of higher taxes and more costly regulation.
The Fed will be forced to maintain QE forever at least thru the current Socialist , deficit spending Administration, and likely beyond because of structural problems (aging demographics and excess borrowing). As Kin indicated in his AGNC CC, the value of the mortgage portfolios has rebounded since the Mar 31 reporting date.
Oh, about the employment data the mass media heralded on Friday-- a fiction. The more important U6 measure showed a slight increase in unemployment (when those who have stopped looking and those who are forced to take part time jobs are also counted).
The 90 cents per qtr divi is safe, and MTGE trading will rebound when the divi is declared unchanged in June.