Are You Protected from Crude Oil Price Downside?
Commodities / Crude Oil Jun 26, 2013 - 10:53 AM GMT
Remember when oil shot up to $148 a barrel? Chen Lin does, and he sees potential for Wall Street market manipulation to push the oil price in the opposite direction—as low as $47 a barrel. Plus, he's bearish on China now. The good news is that Lin, publisher of What Is Chen Buying/Selling?, was willing to share his personal investment strategy in his interview with The Energy Report. Find out where Lin booked profits this year and get the names he's turning to for protection against oil price downside.
The Energy Report: What have been the most important changes in the oil and gas markets since your last interview in February?
Chen Lin: Yes, there has been a major change: I turned bearish on China, and I warned my subscribers about that in Q1/13. I shorted copper, the Australian dollar and U.S. government bonds and I just booked a nice profit after the Fed decision. I also shorted oil as a hedge. I have short positions in both copper and oil.
TER: Where's the downside risk?
CL: It's very hard to say. Commodities, I believe, are highly manipulated by Wall Street. I told my subscribers that there were Wall Street firms that pushed oil all the way to $148 per barrel ($148/bbl) in 2008. These same firms can push oil down to $47/bbl. It's very hard for individual investors to see what is going to happen and when it will happen. I personally recognize the conditions for a major, potentially sharp decline for the oil price, but I just don't know if or when it will happen. For example, China is slowing down rapidly and has huge pollution problems. The smog cover is a thousand miles long. So there is a great possibility that the Chinese government will control car registrations and force people to drive smaller and more energy-efficient cars. That will reduce oil demand.
Furthermore, in the U.S., we have a shale oil boom and the dollar is getting stronger. Both of these factors could trigger a price decline in oil. Most energy investors I've talked to are quite complacent. They all seem to believe that high oil prices are here to stay. But that actually makes it quite dangerous. I'm not saying oil will crash this year. I just see that the ingredients for a potentially sharp oil decline are here and I personally want to play it safe in my oil portfolio.
TER: What do you think about the natural gas situation?
CL: Right now the U.S. has a lot of natural gas. The only question is how high the price needs to be to get all of it out of the ground. I expect prices to climb gradually as the demand increases, but not by a lot and not quickly.
TER: There's a lot of talk about exporting liquefied natural gas (LNG), yet the Energy Information Administration's (EIA) recently published Short-Term Energy Outlook states that the U.S. is exporting a record amount of gas by pipeline to Mexico, which saw its usage rise almost 29% from a year earlier to an average 1.6 billion cubic feet per day in early May. How soon could new LNG terminals realistically have a significant impact on domestic production and gas prices?
CL: I see LNG exports as likely, especially to Europe. Every winter, Europe is living at the mercy of Russian natural gas exports. So if the U.S. could export its natural gas to Europe to help it through the winter, I think it would be a win-win situation. As for the impact on the natural gas price, I believe there are so many reserves in the U.S. that it will have some impact, but not too much.
TER: What are the most attractive investment opportunities in the energy sector today?
CL: Energy exploration companies or energy juniors were hit very hard this year. Investors have really been throwing the baby out with the bathwater. Personally, I would play it safe and choose energy companies that have strong balance sheets and can produce at a very low cost. I also want to emphasize that I try to stay with companies with no leverage. When the oil price goes up, leverage can be very good. But when it goes down, leverage can be ugly. I want to remind people of Oilexco Inc. and ATP Oil & Gas Corp. as two examples of companies that went bankrupt when oil went down because of high leverage.
TER: Who have been your best performers this year?
CL: I had a very nice run with refiners this year. I discussed it a little bit in our last interview. I invested heavily in refiners at the beginning of this year. The refiners had quite a few home runs. I got a tenbagger out of Valero Energy Corp. (VLO:NYSE) call options; I bought the call options at the beginning of the year. When it came out with a huge earnings report, the stock exploded. Right now, I'm completely out of refiners because I wanted to put that capital in biotech.
TER: Which companies are you still holding?
CL: My favorite is still Mart Resources Inc. (MMT:TSX.V). It's doing very well and paying about a 14% dividend. We can see production at least triple later this year when the new pipeline is built, which it expects in Q3/13. It could be delayed a month or two, which is normal in Nigeria. My plan is just to hold onto my shares, collect the dividend and wait. It's one of the few stocks that you're getting paid on while waiting for it to turn around. The stock has actually declined along with many of the energy stocks. It was over $2 at one point in January. Now it's $1.50, but the good thing is the dividend rate is going much higher because it's paying a $0.20/year dividend.
TER: What's the political situation in Nigeria? Anything positive or negative that might have an influence on the company?
CL: Nigeria is trying to pass a new petroleum law that could actually reduce the tax the company is paying by up to 65%. That's quite positive. Let's hope it gets passed and the company continues paying the dividend.
TER: What other stocks are you sitting on?
CL: Pan Orient Energy Corp. (POE:TSX.V) has been hit extremely hard lately. It was over $4/share at the beginning of the year. Now it's $1.60. That tells us how pessimistic investors are. However, it's drilling a very high-impact Indonesian well right now. If successful, we'll be looking at a very different company. The insider buying has been strong. This company really reminds me of one of my biotech stocks,Vanda Pharmaceuticals Inc. (VNDA:NASDAQ). Vanda was trading below cash just three months ago, and it has quadrupled since then. So I'm holding on to the shares and hoping for good news.
TER: Do you have any new energy holdings you're excited about?
CL: One of my recent major pickups in energy is Coastal Energy Co. (CEN:TSX.V). The stock recently came down a lot, making it quite a bargain. It was way over $20 at the beginning of the year. Right now, it's trading around $13-14. It was one of the brokers' top picks in the past year or two, but the stock didn't really have a lot of success in the past year and a half. It looks as if a lot of people got frustrated. One of its issues is that Thailand has a windfall tax that makes the company not very sensitive to the oil price. That makes it a very good stock to own right now, especially if oil declines. Also, Coastal Energy is a very good takeover target because of its very large oilfield in Thailand, which would be attractive to a Chinese company.
TER: How would you sum up your energy outlook?
CL: I have to say that I'm not extremely positive on the energy sector and believe energy investors need to be extra careful this year and next. I personally would examine every stock I own to see if that company can survive if oil goes to $70 or $80/bbl. Investment-wise, I'm sticking with a strategy of buying low-cost producers with strong balance sheets. I'm also shorting oil as a hedge for any potential decline in the oil price.
TER: Thanks for bringing us up to date on your thinking, Chen.
CL: Yes, thank you.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
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DISCLOSURE:
1) Zig Lambo of The Energy Report conducted this interview and provides services to The Energy Reportas an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Energy Resources Inc. and Pan Orient Energy Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Chen Lin: I or my family own shares of the following companies mentioned in this interview: Mart Energy Resources Inc., Coastal Energy Co. and Pan Orient Energy Corp. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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