Feb 15 2011 Newsletter
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Feb 15 2011 Newsletter

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Analysis of Natural Gas Storage

Analysis of Natural Gas Storage

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Feb 15 2011 Newsletter Feb 15 2011 Newsletter Document Transcript

  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter     Independent Investment Advisor $ price per BTU, (or British Thermal Unit, a Natural Gas Transport Industry unit of heat equal to the amount of heat required to raise one pound of water one This week I would like to focus on the natural degree Fahrenheit at one atmosphere pressure), gas transportation industry. Crude will take $17.56 to do the job. Natural Gas will take $3.96 to do the same job, and Natural gas is trading at one of the lowest levels Bituminous coal will take $3.50. Both Coal in years, especially if one compares the BTU and Crude have refining costs and clean up content of natural gas to that of other fossil costs. All have transport costs. The United fuels, notably crude petroleum and coal. States now has, according to the EIA 2,587 trillion cubic feet (Tcf) of technically In order to maximize econmic performance of a recoverable natural gas reserves. Annual country like the United States, there is a consumption is currently in the region of requirement that we utilize the most efficient energy input for our economy. Measured in US Natural  Gas  Indutry  continued  in  page  3     1  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter   Gnostam LLC performance Graphs Gnostam  was  established  in  February  2004.   Since  inception  the  annualized  rate  for  return  for  a  client  portfolio  managed  by  Gnostam   LLC  has  returned  a  total  9.56%.   For  the  period  from  January  2007  to  date,  the  managed  portfolio  has  returned  an  average  of   1.53%  vs.  -­‐2.55%  of  the  S&P  500.    Please  see  table  below.       2  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter   22.839 trillion. The number of current year illustrates quite clearly the fact that while gas reserves is in the region of 91 years current prices at the well-head have been declining, gas consumption, [figures from 2009]. I contend prices at the end consumer level have held steady that this represents once of the greatest and oscillated in a seasonal capacity around $12- investment opportunities for us, and that as $16 per thousand cubic foot [000/ft3]. Any eventually the US turns away from the crude business in which the margins are almost entirely petroleum based economy, and substitutes dependent on the monopolist supplier, [as gas natural gas for crude distillates in areas such pipelines really are] is a great business. In as private and public transport, those of us addition, as we move to a transport economy who have positioned correctly will make a based on natural gas, which I think is inevitable, substantial return on our investment. these transport pipelines will have a far greater throughput, and therefore as they are paid on a However I do not believe that investors toll basis, their cash flows will grow, as they are should focus on natural gas producers such as essentially a fixed cost business. Chesapeake, [CHK] which have underperformed, mainly due to corporate If there ever has been a time to buy gas pipelines governance issues. CHK is a long term it is today. accumulate. If one looks at the US pipeline supply network, The outright buys are the gas pipe lines, and (see on page 5), one see how much of the gas storage players. This is because most of country is currently served by the existing the margins in gas are made up from infrastructure. There is a very solid basis for transport, and not from production, as can be seen in the charts below. This chart   3  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter   Portfolio  Changes  and  Recommendations  for     February  15th  2011   Gas  pipeline  strong  buys  are  as  follows:     Kinder  Morgan,  [KMI]   El  Paso,  [EP]   Williams  Partners,  [WPZ]   Plains  All  America,  [PAA]     Most  of  these  will  be  subject  to  consolidation  in  my  view.     I  would  add  the  following  utility,  UGI,  which  is  a  liquefied  natural  gas  play.     In    genomic  equipment  and  services,  Life  technologies,  [LIFE]    while  expensive  has  an   almost  unique  exposure  to  the  high  quality  earnings  from  genomic  research  and   genomic  tools.    If  I  were  a  Pfizer,  this  is  the  type  of  company  I  would  want  to  acquire.     The  recommendations  from  last  week  are  still  valid  and  these  are  listed  again.     Semiconductor  Equipment    has  great  potential  for  producing  superior  returns  in  the   first  quarter  of  2011.     The  following  is  a  table  of  our  best  buys:     • Photronics  [PLAB]  12.2  x  multiple;   • MKS  Instruments  [MKSI]  9.9  multiple;     In  the  Oil  and  Gas  exploration,  the  valuations  of  the  deep  sea  drillers,  [<4,000  feet]  are   attractive.    With  the  new  Petrobras  find,  there  has  been  a  redeployment  from  the  GoM   to  the  deep  offshore  drilling,  and  rates  are  expected  to  climb  by  11%  in  2011.    Best   choices  are:     • Helix  Energy,  [HLX]  12.7  x  multiple;   • Diamond  Offshore  [DO]  11.33  x  multiple;         4  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter   expanding this network. Most of our buys material in the Energy market. As such, I think have had large price appreciations since the that crude will trend down short term, but that crash of 2009. However, they do offer good longer term it will remain at a premium to the value, both in multiples of earnings terms and gas market. Given that we buy energy for its in terms of price appreciation potential. BTU content, I do think that both resident and Kinder Morgan has just been spun out again commercial buyers will migrate steadily to from the Private Equity group Carlyse. It is natural gas for more than just heating, cooling rare that there is such a difference in the raw and electricity generation. Liquified Natural material and the distribution price of that raw Gas, [LNG] becomes liquid at -161 Celcius, and is 600 times more dense than in its liquid form. This makes LNG cost effective to transport over long distances by ships. It is more expensive to move than coal, [coal is denser and has a greater energy content, but is dirty and is mainly used in   5  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter   electric power generation and metallurgical If we expect the price of gas to stay under furnaces, [different type of coal for metallurgic $4.00 for 2011 and 2012, the place to be in in furnace use]. LNG is mainly used for what is PAA, KMI and EP. I would also add UGI to a termed supply peak shaving. It can be stored portfolio, as I think this company will most cost effectively and therefore can be released likely be acquired by a larger player. into the energy supply chain for satsfying peak demand, [read higher prices]. Natural Gas consumption is expected to increase by 12 fold over the next 10 years. Currently Natural Gas is trading at $3.91, while the government of Quatar, the largest LNG exporter in the world is setting a long term supply price of LNG at $10/mm BTU for a 20 year contract, [2.1 million tons per annum supply].   6  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter     7  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter     8  
  • Gnostam  LLC     February  14th,  2011   5731  Kirkwood  Place  N     Seattle,  Wa  98103  USA   Newsletter   Disclaimer: The information and any statistical data contained herein have been obtained from sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or short positions or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The securities mentioned in this report may not be suitable for all types of investors. ALL investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions. Past performance is no guarantee of future results, and current performance may be lower or higher than the performance data quoted. Investment Disclaimer All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made. All products sold are subject to market risk and may result in the entire loss to the clients investment. (For example: excessive withdrawals may result in the depletion of your account). Please understand that any losses are attributed to market forces beyond the control or prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions. Gnostam  LLC   5731  Kirkwood  Place  N   Seattle,  WA  98103  USA     E-­‐mail:  pcorsano@gnostam.com     www.gnostam.com       9