Investing - dennis mccain

June 2014 Investing Articles

6/30/2014

Half Time

6/28/2014

The first half of the year is just about over already and it has been a mediocre year by just about any measurement, but dividend growth investors have been doing rather well. That's mainly because dividend growth investors accentuate the dividend rather than the capital gains. They know that over time they've accumulated stock in great companies that pay great growing dividends. They're not dependent on an increase in the price of a stock to pay their bills.

As long as the company increases revenues, earnings and dividends, it really doesn't matter which way the traders temporarily push the markets. In the long run, revenues, earnings and dividends win every time.

The DJIA ended last year (2013) at the 16,576.66 level. The highest the average has gotten so far this year is 16,978.02 and that was an intraday high six business days ago. That's an increase of just 401.36 points, or 2.42%, for the year so far. Not exactly something to write home about. And by this past Friday, 27 June, the average had pulled back about 125 points from that high.

Many dividend growth investors, and most income investors, did a lot better than that simply by doing nothing other than sitting back and quietly collecting their dividends.

So if you're still one of those investors investing for capital gains, I truly do wish you the very best. You're putting in a tremendous amount of effort for so very little return this year.

You may want to rethink your strategy and consider this idea of dividend growth investing.

Chevron - When High is Too High

6/25/2014

Most dividend growth investors never sell. They spend hours and hours scouring over fundamental data looking at valuations to figure out just the exact security to buy. And they do a pretty good job of that. But for most of them that's the end of the story. They buy and then they never sell. I think that's a mistake. Sometimes stocks get over valued and need to be let go.

If a value investor researched a security and concluded that it's over valued and shouldn't be bought, why wouldn't he also conclude, if he owned the stock, that it was time to sell it and wait for it to become undervalued once again. And the only answer I can come up with is that an investor would lose the dividend if out of the stock. I easily counter that argument with the idea that a stock that is overvalued and about to fall to a more normal valuation will lose more than the value of the dividend when it falls. For those that say you haven't made or lost any money until you sell, they're living in a dream. Believe me, it's real money.

Take Chevron. Just looking at the historical P/E ratio it's obvious to me that it's on the high end of the valuation scale. It looks like it's traversed between approximately 7 and 14 over the last few years and today it's P/E ratio is almost 13. It's obviously not the best time to buy, but is it the best time to hold? Not for me but it's something each investor needs to think about.

On 6 January of this year I wrote an article for this site titled "Big Oil" and another article for Seeking Alpha suggesting that "It's Time To Exit Exxon and Chevron Stock" and I was severely criticized. Initially. A month later people were backtracking after the stock had fallen from $123 to $107. From there it's moved back up and today CVX looks equally extended at $132 (see chart below). The price has moved up rather quickly, the RSI is above 70 and falling, the MACD is beginning to roll over and looks to head down, and the ADX is starting to roll over too. None of these momentum indicators are pointing up and in reality they're all starting to point down.

Now I'm not saying that CVX is about to tank because I don't have a crystal ball and I can't see into the future any better than anyone else can. What I am saying is that when things get overvalued and the charts start to look this way, stocks tend to be dead money at best, and at worst they'll cost you.

Daily Chart

Weekly Chart

If you're thinking of buying this stock any time soon, or if you're simply holding this stock for the dividend, this may be something to think about.

Too Many Ideas, Not Enough Money

6/24/2014

I'm amazed at how many great companies I find every time I run a screen. If you don't know what a screen is, or you've never used a screener, you're in for a real fun surprise when you finally get around to it.

In fact, here's your 'Round Tuit. I hope it gives you that little extra push to experience a screener.

My favorite screener can be found at FINVIZ.com, but there are plenty of others. It's a great site, and it has a great screener. It's where I find a lot of my great ideas. And once I start to accumulate all those great ideas, I begin to feel just like I did when I wrote the article "Like A Kid In A Candy Store". A great screener just seems to spew out ideas at will and you'll be surprised.

But if you've just totally run out of ideas, anyone can do what I always do when I'm stuck. I go back and read some of my earlier articles. I find that most of my ideas are still relevant to my investing style today. I also have the added benefit of having not only given an opinion but of having documented many of the fundamental and technical reasons for my opinions. That pretty powerful information and pretty much draws a line in the sand.

As time has passed, I can re-check those ideas and see how prescient I really was. Because one thing is for sure, if you stick your neck out on the internet even the least little bit, someone will eventually come along and hand you your head on a platter. And we all get our performance reviews each and every day at the closing of the markets.

Trade for today, invest for the future.

Whirlpool Corp

6/23/2014

The Whirlpool Corporation is the largest home appliance maker in the world today. It got that way by swallowing up many of the other home appliance manufacturers over the years. Today the company markets appliances under the brands Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Gladiator GarageWorks, Inglis, Estate, Brastemp, Bauknecht and Consul.

Whirlpool also manufactures certain appliances under the Kenmore label for Sears Holdings Corporation, Inglis appliances for Best Buy stores, IKEA brand appliances for IKEA, Top Load laundry appliances for Crosley and Admiral appliances for Home Depot.

Whirlpool is the world wide leader in the manufacture of home appliances and the company manufactures those appliances under all the leading brand names.
Poducts are intertwined with the new housing industry and the home improvement industry, both of which are steadily improving.
Estimates for revenues, earnings and dividends are all dramatically improving in the next two years.
Freeze-dried ice cream was developed by the Whirlpool Corporation under contract to NASA for the Apollo missions.

The Company

Whirlpool Corporation (WHR) manufactures and markets home appliances and related products worldwide. The company’s principal products include laundry appliances, refrigerators and freezers, cooking appliances, dishwashers, mixers, and other portable household appliances. It also produces hermetic compressors for refrigeration systems. The company markets and distributes its products under various brand names, including Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Roper, Estate, Admiral, Gladiator, Inglis, Acros, Supermatic, Consul, Brastemp, Eslabón de Lujo, Bauknecht, Ignis, Laden, Polar, and Privileg in North America, Latin America, Europe, the Middle East, Africa, and Asia. It sells its products to retailers, dealers, distributors, builders, and other manufacturers. Whirlpool Corporation was founded in 1898 and is headquartered in Benton Harbor, Michigan. (Daily Chart) (Weekly Chart)

22 June 2014
Price $138.87
1yr Target $172.38
Analysts 8
1yr Cap Gain 24.13%
Dividend $3.00
Yield 2.16%
1yr Tot Return 26.29%

Market Cap $10.80 Bil
3yr EarnGR 8.62%
5yr EarnGR 13.23%
3yr DivGR 13.13%
5yr DivGR 7.76%
Payout Ratio 32.85%
Beta 1.67
EPS (ttm) $9.13
EPS next yr $14.11
P/E 15.21
PEG .73
Debt/Equity .64
ROA 4.70%
ROE 15.30%

Once simply just and American appliance company, Whirlpool today is truly an international company with nearly fifty percent of its revenues originating outside of North America. Going forward there are significant opportunities for continued international growth where populations are high but appliance penetration rates are low. And as economies improve, Whirlpool is well positioned to take advantage of both the ongoing upswing in housing sales as well as the trend to update older homes with new appliances.

This demand in housing and home improvement is global but it's being led by strong demand in the United States. In Europe, Whirlpool sales have recently stabilized and have now begun to increase as the ongoing economic turnaround begins all across the continent. In the emerging markets, and particularly in India, Whirlpool is continuing to manage with some success the rampant inflation and currency fluctuations that are impacting consumer sentiment in those countries. Brazil, as well as thirty-five other Latin American countries, continue to experience a strengthening domestic market combined with a rising middle class. This middle class now has an increasing level of discretionary income that most likely will be spent on homes and home improvement projects. Finally, in China Whirlpool will continue to experience continued excellent growth as their economy continues to grow.

The Fundamentals

As can be seen from the fundamentals below, this company has been treading water since about 2008 but is now once again increasing revenues and earnings. The reason is obvious. Whirlpool is securely tied to a world economy that has been under severe stress for half a decade primarily due to the recession in the mortgage and housing industries. As the world economies improve, so will the fundamentals of this company.

Looking at estimates going forward I see revenues and earnings increasing dramatically as we see estimates for the world economy also improving. As with most other past recessions, economic upswings begin in the US and spread internationally. And this is exactly what we're seeing in the company's projections. We're seeing estimates of sales improving quickly in the US followed by improvements in Latin America, Europe, China and the rest of Asia.

Fortunately for income investors Whirlpool has maintained its dividend throughout this period of stress despite the fluctuations in its earnings. They have done this by allowing the payout ratio to rise from the low 20% area up to just over 40% in 2011. As earnings have improved the company has been able to let the dividend increase while at the same time letting the payout ratio decrease. This decrease will ensure that future dividends are more likely to occur and increase. I expect, as estimates below confirm, that as the economy improves, sales, earnings, and dividends will improve also.

Year
2015 Est
2014 Est
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003

Revenues
$20.67 Bil
$19.42 Bil
$18.76 Bil
$18.14 Bil
$18.66 Bil
$18.36 Bil
$17.10 Bil
$18.90 Bil
$19.40 Bil
$18.08 Bil
$14.31 Bil
$13.22 Bil
$12.17 Bil

Earnings
$14.11
$12.20
$10.24
$5.06
$4.99
$7.97
$4.34
$5.50
$8.01
$5.67
$6.19
$5.90
$5.91

Dividends
$3.53
$3.05
$2.50
$2.00
$2.00
$1.72
$1.72
$1.72
$1.72
$1.72
$1.72
$1.72
$1.36

Payout Ratio
25.01%
25.00%
24.41%
39.52%
40.08%
21.58%
39.63%
31.27%
21.47%
30.33%
27.78%
29.15%
23.01%

Revenue growth rates over the last 3, 5 and 10 year periods are mediocre but they merely reflect the overall world wide economy. Fortunately earnings growth has been somewhat better but that's due to process management and cost cutting as the company assimilated other companies and squeezed out the inefficiencies. Luckily prior to the beginning of the recession (2007) the company had held the dividend payout ratio down in the low 20% level so they were able to let it rise and maintain the dividend rather than cut the dividend. It now appears that as the economy improves and the company's fundamentals improve, the dividend will begin to make some exceptional increases higher.

Revenues Growth Rates
3yr = 0.71%
5yr = -0.15%
10yr = 4.42%

Earnings Growth Rates
3yr = 8.62%
5yr = 13.23%
10yr = 5.65%

Dividend Growth Rates
3yr = 13.13%
5yr = 7.76%
10yr = 6.27%

The Technicals

The technicals show a stock that's pulling back and finding support on the daily chart while moving sideways on the broader weekly chart. Based solely on the MACD on the daily chart this stock looks well positioned for a strong move upward. The weekly chart is also showing support in the area of the mid to upper $130s, which confirms the turn in the daily chart. The RSIs are in the low 30s on both charts and look positioned to move higher also. As for the ADX, it appears that the downward pressure identified in the daily chart is beginning to subside and in the weekly chart it shows little pressure either up or down. Normally I would wait for a pull back into the lower $130s but I'm not sure it'll pull back that far before it starts to move higher. Combined with the information from the fundamentals above that this company has an upward consensus target of $172.38, or 24.13%, I see no reason to get greedy here.

Daily Chart

Weekly Chart

The Competition

Whirlpool Corporation is part of the Appliances Industry which is part of the Consumer Goods Sector of the economy. Below are a few of the major corporations included in this industry. They are listed in the order of their market capitalization.

Whirlpool Corporation
iRobot Corporation (IRBT)
National Presto Industries Inc (NPK)

Conclusion

If estimates are correct, this may just be one of those special instances where I've identified a company on the verge of a strong move upward. The one year estimated price target of $172.38 may eventually end up being a very conservative estimate. Assuming earnings reach their estimate of $12.20 in 2014 and the P/E ratio remains at a very conservative 15, I could easily see the price of Whirlpool stock rising to a price of $183.00. Looking at the estimate for 2015 of $14.11 and estimating a moderate P/E ratio of 15, I can easily come up with a price of $211.65, which is 52.40% higher than it is today. These are very compelling numbers for a number cruncher like myself. I just don't think I'll be able to resist accumulating a position in this stock for very long.

Additional Articles of Interest
"Hate Laundry Love Dividends" by DivHut

Weekend Reflections

6/22/2014

Weekends were made for relaxation and for quiet reflection and understanding. It's a time when the markets are frozen, stress has faded, and reflection suddenly becomes possible. It's the time for slowing down the brain and viewing the world in a more relaxed and longer perspective. It's the time when the serious money is made. And it's on the weekends that I often realize my best ideas.

"There are three methods to gaining wisdom. The first is reflection, which is the highest. The second is imitation, which is the easiest. The third is experience, which is the bitterest."
--Confucius, Chinese Philosopher and Teacher

On the weekends I like to wander through all that rich data that screeners so easily spew out with a couple of quick clicks of a mouse. The whole exercise usually ends up being a rather lengthy but leisurely activity accompanied by great coffee and great music (see below for music by pianist Doug Smith titled "West Texas" with photographs by Wyman Meinzer, the official photographer of Texas).

I also like to review the dividend increases that were announced in the past few weeks. Companies that have recently increased their dividends can quickly get my attention because these are the kinds of companies that have the potential to eventually become real winners. By using the dividend increases portion of this web site I'm able to quickly and easily sort through the many companies that raise dividends each year. And over the years I've found that this simple exercise can be a very interesting and financially beneficial activity.

What I've noticed the most when reviewing those dividend increases is that the companies that have increased their dividends greater than the current rate of inflation, plus have a forward dividend yield of 2% or greater are potential candidates for accumulation. These two things alone are generally a good indicator that these companies have the "right stuff" and should be investigated further. In addition, if these companies are not currently included in the lists of Dividend Aristocrats or Dividend Kings, I may have just found some diamonds in the rough.

I also like to review the current list of Dividend Aristocrats and Dividend Kings for bargains. These are the ones that are fundamentally sound but technically weak. Generally I can find a dozen or so companies that fit this description. These are the ones that make up my list of potential buys for that week, depending on the amount of dividends residing in my accounts. Buying dividend growth stocks at bargain prices is the best way I know of to obtain financial freedom and independence. Since the limited amount of money available to me each week limits my buying to usually only one security, I spend my weekends drilling down into the fundamentals of that week's candidates. The best places to do just that are Yahoo! Finance, FINVIZ.com, and the individual company's own website.

Enjoy the weekend and good luck investing next week.

Pure Entertainment Companies

6/20/2014

Like most Americans I probably spend way too much of my disposable income on entertainment. The majority of that money is spent on watching cable television, surfing the internet and attending theme parks. So I'm always looking for companies in this industry to invest in that can grow their stock price as well as increase their dividend. Three companies that do just that are Comcast Corporation, Time Warner Inc, and Viacom Inc. Accumulating shares in any or all of these great companies could provide me with a certain level of satisfaction that I'm getting at least a small fraction of that money that I spend on entertainment returned to me.

Tonight I'm comparing the fundamentals of these three companies in an attempt to determine which company provides me the best value for my investment dollars. It's important to know that while all three of these companies are involved in the entertainment industry, that industry is extremely diverse and these three companies are not organizationally identical. A comparison like this has always been a good starting point for my analysis but before I commit my hard earned money I usually dig deeper into the data. I would stress that everyone else should do the same.

When comparing similar companies like these, I often like to lay out the information in a side by side comparison to see what interesting information I can discover. When I do this I push away all the unwanted opinions and simply look at the few fundamentals I'm interested in for insight. Next I look at the stock chart of each of the companies and see what insight I can gather from the price action and the momentum indicators I follow (see the hot spots in the company descriptions below for links to the daily and weekly charts). This process provides me with a simple and clear comparison among the companies and I get to see just how accurately they stack up against one another. In the past I've found this to be a very useful exercise.

Comcast Corp

Time Warner Inc

Viacom Inc

19 June 2014
Price $52.94
1yr Target $60.77
Analysts 24
1yr Cap Gain 14.79%
Dividend $0.90
Yield 1.70%
1yr Tot Return 16.49%
Market Cap $137.63 Bil
3yr EarnGR 25.37%
5yr EarnGR 24.37%
3yr DivGR 27.90%
5yr DivGR 25.55%
Payout Ratio 32%
Beta 1.20
EPS (ttm) $2.73
EPS next yr $3.28
P/E 19.39
PEG 1.14
Debt/Equity .92
ROA 4.60%
ROE 14.40%

19 June 2014
Price $69.35
1yr Target $76.07
Analysts 25
1yr Cap Gain 9.69%
Dividend $1.27
Yield 1.83%
1yr Tot Return 11.52%
Market Cap $61.17 Bil
3yr EarnGR 20.10%
5yr EarnGR UNK
3yr DivGR 10.62%
5yr DivGR UNK
Payout Ratio 28%
Beta 1.19
EPS (ttm) $4.41
EPS next yr $4.58
P/E 15.73
PEG 1.17
Debt/Equity .68
ROA 7.40%
ROE 16.60%

19 June 2014
Price $87.00
1yr Target $94.54
Analysts 28
1yr Cap Gain 8.67%
Dividend $1.32
Yield 1.51%
1yr Tot Return 10.18%
Market Cap $37.39 Bil
2yr EarnGR 16.11%
5yr EarnGR UNK
2yr DivGR 19.89%
5yr DivGR UNK
Payout Ratio 24%
Beta 1.07
EPS (ttm) $5.34
EPS next yr $6.34
P/E 16.29
PEG 1.25
Debt/Equity 3.02
ROA 10.70%
ROE 47.00%

Comcast Corporation (CMCSA) operates as a media and technology company worldwide. It operates through Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment, and Theme Parks segments. The Cable Communications segment offers video, high-speed Internet, and voice services to residential and business customers under the XFINITY brand name. This segment also provides business services, such as cellular backhaul services to mobile network operators; Ethernet network services; and online advertising services. The Cable Networks segment operates national cable networks, which provide entertainment, news and information, and sports content; regional sports and news networks; international channels; and cable television production operations, as well as owns digital media properties. The Broadcast Television segment operates NBC and Telemundo broadcast networks, NBC and Telemundo owned local broadcast television stations, and broadcast television production operations, as well as owns digital media properties. The Filmed Entertainment segment produces, acquires, markets, and distributes live-action and animated filmed entertainment under the Universal Pictures, Focus Features, and Illumination names. This segment also develops, produces, and licenses stage plays, as well as owns digital media properties. The Theme Parks segment operates theme parks; studios; Island of adventures; and a dining, retail, and entertainment complex. Comcast Corporation was founded in 1963 and is headquartered in Philadelphia, Pennsylvania.
(Daily Chart) (Weekly Chart)

Time Warner Inc. (TWX) operates as a media and entertainment company in the United States and internationally. The company operates in four segments: Turner, Home Box Office, Warner Bros., and Time Inc. The Turner segment operates cable networks; digital media properties; free-to-air networks; and entertainment and news networks that offer sports, movies, classic films, reality programming, and news, as well as produces its own programs and acquires rights from third-parties to air programs on its networks. This segment serves cable system operators, satellite service distributors, telephone companies, Internet protocol television system operators, mobile device operators, broadcasters, and other distributors. The Home Box Office segment provides premium pay and basic tier television services comprising HBO and Cinemax; and sells its original programming via DVDs, Blu-ray Discs, and electronic sell-through, as well as licenses its original programming primarily to international television networks. As of December 31, 2013, this segment had approximately 127 million subscribers worldwide. The Warner Bros. segment produces and distributes feature films, television programming, videogames, and other programming; distribute home video products; and licenses rights to its feature films, television programming, and characters. The Time Inc. segment publishes magazines, including People, Sports Illustrated, InStyle, Time, Real Simple, Southern Living, Entertainment Weekly, and Fortune, as well as titles and books; licenses its magazines for print or digital publication to publishers; operates Websites, such as People.com, SI.com, and Time.com.; and offers content marketing, targeted local print and digital advertising programs, and marketing and support services. Time Warner Inc. was founded in 1985 and is headquartered in New York.
(Daily Chart) (Weekly Chart)

Viacom Inc. (VIAB) operates as an entertainment content company in the United States and internationally. The company creates television programs, motion pictures, short-form video, apps, games, consumer products, social media, and other entertainment content. It operates in two segments, Media Networks and Filmed Entertainment. The Media Networks segment provides entertainment content and related branded products through approximately 200 TV channels, including MTV, VH1, CMT, Logo, BET, CENTRIC, Nickelodeon, Nick Jr., TeenNick, Nicktoons, Nick at Nite, COMEDY CENTRAL, TV Land, SPIKE, Tr3s, Paramount Channel, and VIVA, as well as through hundreds of online, mobile, and app experiences. The Filmed Entertainment segment produces, finances, acquires, and distributes motion pictures and other entertainment content under the Paramount Pictures, Paramount Vantage, Paramount Classics, Insurge Pictures, MTV Films, and Nickelodeon Movies brands. It exhibits the motion pictures theatrically, and through download-to-own, download-to-rent, DVDs and Blu-ray discs, video-on-demand, pay television and subscription video-on-demand, broadcast television, basic cable television, and syndicated television. The company is headquartered in New York. Viacom, Inc. operates independently of CBS Corporation as of December 31, 2005.
(Daily Chart) (Weekly Chart)

Stocks Of Interest

6/19/2014

At least once a week I like to screen a select group of stocks for their estimated one year capital gain and their annual dividend. The estimated one year capital gain is calculated as a percentage difference between the current price of the stock and an estimated mean target price as calculated using the best analytical guesses from a number of brokerage firms. I then select the top 7 to 10 companies and post them on the column on the right under the title "Stocks of Interest".

The Austin Marathon Starting Line with the Texas State Capital in the Background.

From the screen I ran today, I selected nine companies from the group to list under the heading "Stocks of Interest". These are the stocks that I would be most interested in investing in today. The list below contains the top nine companies in that group. In addition to simply listing the names of these companies, I've also listed their current price, their estimated target price, and their annual dividend distribution amount. I've also made the companies' names hot spots so in the days ahead I can check the then current prices and determine the differences.

Company
Comcast Corp
Lowe's Companies
Proctor and Gamble
Aflac Inc
T.Rowe Price Group
VF Corp
Ecolab
The Coca-Cola Co
Emerson Electric

Price (Jun 18)
$52.66
$45.84
$79.79
$63.03
$83.50
$62.36
$108.48
$41.56
$68.07

1 Yr Target
$60.77
$52.23
$87.32
$69.06
$91.58
$68.38
$118.94
$44.59
$73.04

Dividend
$0.90
$0.92
$2.57
$1.48
$1.76
$1.05
$1.10
$1.22
$1.72

The information above by itself can be very helpful to investors like myself in trying to evaluate the investment quality of an individual company. What I like to do in addition to simply looking at the raw dollar amounts is to calculate the estimated one year capital gain percentage, the dividend yield based on todays stock price, and the total (combined) one year percent return on investment. It's one way for me to standardize the comparison across diverse companies. Once this exercise is complete, it's just a simple matter to prioritize the potential investment outcomes based upon their expected percentage return (see below).

Company
Comcast Corp
Lowe's Companies
Proctor and Gamble
Aflac Inc
T.Rowe Price Group
VF Corp
Ecolab
The Coca-Cola Co
Emerson Electric

1 Yr Cap Gain
15.40%
13.94%
9.44%
9.57%
9.68%
9.65%
9.69%
7.29%
7.30%

Yield
1.71%
2.01%
3.22%
2.35%
2.11%
1.68%
1.01%
2.94%
2.53%

1 Yr Tot Return
17.11%
15.95%
12.66%
11.91%
11.78%
11.34%
10.71%
10.23%
9.83%

While this may be a rather shallow or crude analysis, it's just one of many I use and it's a prioritizing exercise for me. It allows me to scope down or sort through a long list of stocks and to zero in on just a few select companies that I can then concentrate on for additional research and analysis. It's just one more way I try to save time and sharpen my focus toward great companies.

Good Luck and Good Trading.

Live Feed Tracker

6/18/2014

As some of you may have noticed, I have added a live feed tracker in the right hand column of this site. Just scroll down a little and you'll see it. It lists the recent visitors to this site and everyone visiting this site can see the same feed that everyone else sees. If you look close you may even see where you yourself just logged in at the top of the stream.

I've been fascinated for some time with the huge number of individuals (10.000+) who currently visit this site each month. I'm truly overwhelmed by this number. I've also been very curious about where all these people were located. Hence the addition of the live feed tracker. Be assured that I have no way of knowing who these people are unless they leave a comment on my site and identify themselves. I am simply curious as to where they are when they visit this site.

To my surprise people from all over the world are reading this site. They literally live on every continent and in many places I've never heard of. In fact, I'm getting quite a geography lesson by googling some of these locations and seeing how diverse and wonderful this world really is.

So I hope that everyone who finds this site finds it to be of some value to them. I created it for me and I laid it out in a manner that I find useful for my type of investing, and hopefully others will find it useful also. A year ago when I started writing these articles my only hope was to crystalize my methods and thoughts on investing. I also thought that if my kids ever became interested in investing, there would be a written stream of consciousness for them to consider, discuss and maybe even follow one day.

For all those investors and traders out there that are simply trying to find that financial freedom and security that every human on this earth is seeking, I only wish you the very best in your journey.

The Changing Oil Industry

6/17/2014

There's a secular shift going on in the oil sector that's realigning the entire industry. It's a technique known as hydraulic fracturing or "fracking" and it's the fracturing of rock by a pressurized liquid in order to separate the petroleum products or hydrocarbons from the rock. The result of this process is to release vast amounts of hydrocarbons that were formerly inaccessible using traditional methods. This "fracking" technique today is most often applied to wells drilled for shale gas because this fracking techniques can easily separate the gases and the liquids from the shale rock. This technique can also often be repeated over and over in the same well as the oil becomes slowly depleted over time. As today's oil industry shifts away from those traditional drilling methods to this newer technique, hydraulic fracturing will begin to spread internationally. And this secular shift will only accelerate.

Shale Gas Formations in the Continental US.

The big oil companies that for decades have had the strategic and financial advantage to drill offshore wells in the world's great oceans while onshore wells were slowly being depleted throughout the 20th century, have today found themselves slow to redirect their efforts toward this new technique of hydraulic fracturing. They apparently don't have the necessary financial means to operate everywhere simultaneously while entering into this new area of oil and natural gas exploration. To fund their shale gas expansion, the major oil and gas companies are being forced to sell off their more mature, conventional acreage and the upstream MLPs are buying. This supply of mature, onshore US assets for sale keeps rising each year and the sales to the MLPs will continue for decades.

I believe that this secular shift has been underway for a couple of years within the energy sector, wherein the large integrated oil companies and large capitalization exploration and production (E&P) companies have sold their mature E&P assets to the smaller upstream MLPs for cash. These older, mature assets are especially suited for the organizational and tax structures of the upstream MLPs but that they fall far below the rate of return required of the larger corporate oil and gas producers. If I'm correct that the current strong demand for yield by older investors will continue as the general population ages, and that the growth of upstream MLP assets will also increase while at the same time maintaining their high yields, I think that MLPs will be a great investment for individual investors like myself for years to come.

It's currently estimated that it will take more than $2 trillion to fully develop the known potential shale formations. The Bakken Formation is still undeveloped, the Eagle Ford Formation has just gotten started, and the Marcellus Formation's abundance of natural gas will ensure that it can be drilled for decades even with low natural gas prices. These three shale plays alone will demand every cent the big oil companies can obtain for years to come. And that money will come from selling off those mature properties to the MLPs.

In addition, if the Utica, Monterrey or Permian Formations yield huge liquids discoveries, it will only increase the pressure on producers to sell off additional acreage and redirect those funds into shale expansion. Since the sale of Big Oil's mature assets is ultimately connected to this shale revolution, I believe there will be a continuous and abundant supply of available acreage for at least a decade and probably longer. And the upstream MLPs will continue to take advantage of this situation.

There are a number of MLPs that fit into the category of upstream oil and natural gas exploration and production companies. Most of them can be discovered with the use of a simple screener on any number of stock screeners located throughout the internet. The master limited partnerships that I'm most interested in are those listed and located in another section of this website entitled "Exploration and Production MLPs". My favorites are those that are the most agile and aggressive since this industry lives and dies by acquisitions. The nature of this business is such that oil and gas fields will eventually become depleted so companies that aren't aggressive in their acquisitions or aren't interested in pushing the technology for retrieving oil and gas from mature oil fields are companies that won't be around ten years from now.

BreitBurn Energy (BBEP) has been both selective and predatory. In the last few years, it has picked up multiple producing fields at great sale prices. It's mostly gone after properties in the Permian Basin while building an impressive asset base in the Niobrara. Its acquisitions from Whiting Petroleum have also added lots of oil intensive acreage in Oklahoma and New Mexico to their inventory. The stock yields 9.06% in dividends annually and it has a market capitalization of $2.63 billion.

Mid-Con Energy Partners (MCEP) also has extensive mature acreage containing generous amounts of conventional oil. Up until recently MCEP has added only small but iconic acreage in Cushing and the Hugoton Basin, but going forward it is expected to grow at a more aggressive pace. This relatively small company has a market capitalization of $416 million and yields 9.24% annually.

Legacy Reserves L.P. (LGCY) has an extensive footprint within the Permian Basin as a result of many years of highly economic acquisitions of small-scale mom-and-pop acreage positions. Because the partnership has reached a scale where it would be challenging to screen, negotiate and execute a sufficient number of small deals to sustain growth, Legacy has shifted its focus to acquiring larger asset packages. Legacy Reserves has a market capitalization of $1.73 billion and yields 7.71% annually.

Vanguard Natural Resources (VNR), arguably the most conservative of all the upstream oil and gas MLPs, has taken the opposite strategy of Mid-Con Energy Partners. Instead of going for costlier oil assets, it has scooped up gas acreage on the cheap in the Niobrara, Permian and Arkoma areas where it's gotten a particularly good deal. Vanguard yields 8.06% annually and has a market capitalization of $2.49 billion.

Linn Energy (LINE), the largest of all upstream MLPs at $10.17 billion, does acquisitions in a class of its own. Two years ago it purchased assets from BP at fire sale prices over a series of transactions. Last year it bought Berry Petroleum, whose oil producing assets in the Midway-Sunset field of California are among the best in that state. Linn used to trade at a premium to most upstream MLPs, but has since become a battleground stock with the short-sellers allowing for great entry points. It now yields 9.31% annually.

These and other upstream oil and natural gas companies are a great place for a person interested in dividends (like myself) to look for investment opportunities. In the future, I believe upstream MLPs will continue to acquire highly desirable mature oil and gas assets and develop them into stable and predictable sources of income for many years to come. This is exactly the kind of investment I'm looking for and it's what makes their story so attractive to income investors. I really believe the MLP unitholders/shareholders of today will enjoy financially stable and increasing distributions for a very, very long time.

Good Luck and Good Trading.

Author

I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.

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