Barrels and Benjamins
For the first time in 40 years, the US is an exporter of oil again. With the passage of legislation barely a month old, Big Oil is once again free to ship the surplus to the highest bidder, and they aren’t wasting any time. In fact, for the past several years, many of the oil and gas pipelines we have owned have been building out their infrastructure in anticipation of this policy change. Obviously, this is good for oil and gas exploration firms, as they now have a global marketplace of buyers. But given the fact that oil and gas prices fluctuate dramatically—oil prices have been as high as almost $65 per barrel in the past year, and now are barely over $30—exploration is a riskier game.
Pipelines, by contrast, derive their revenue from the throughput they carry, and with more oil and gas being exported, the volume of oil and gas being piped to the Texas coast is on the rise. Pipelines have been punished over the past year partly because their profitability had declined—the result of their investments in infrastructure. Most recently, Big Oil has been punished because of the worry that with a faltering market and a slowing economy, China’s consumption of energy will decline. With open borders for trade, a host of new buyers, and a better ability for US oil to go to the highest bidder, it appears that the pipelines’ investments—and our investments in them—will payoff well in years to come, even if the price of oil remains low.
Speaking of China, what’s the one thing they want more than the opening of Disney’s new theme park in Shanghai? Dollars to spend there. It is easy to look at the anemic growth of the US economy, the questionable spending policies of this administration, and the total disregard of tradition and precedent by participants in all three branches of government, and worry that our best days are behind us. But it is worth remembering that in spite of our challenges, the US is still the most stable, prosperous, charitable and influential nation in the world. This point was made evident just this week, as the Chinese, in watching their stock market crumble, sought not the comforts of their own currency, but scrambled to buy the one thing they felt would hold its value—dollars.
From my comments last week, I had noted two things. First, that energy prices had driven down the values of pipelines unnecessarily—a point supported by open oil trade, and further reason that at yields of better than 7%, pipelines represent a compelling value. Second, that China has great economic reach, and troubles there will have an impact here. But in the eyes of the Chinese, their influence on the US economy isn’t so dramatic that it affects their desire to “Buy American” when they are worried and wailing. Further proof that the reactions of traders to drive down US stock prices on the news of the stumbling giant are overdone. Having a long-term view, remembering that our market is struggling due to external, not internal influences, and noting that the short term volatility in the market is stretching prices lower than what is reasonable, perhaps helps put days like this in better perspective.
Travis Raish, CFA
Chief Investment Officer