“Canada’s $35 Billion Giveaway” Tease from Keith Schaefer

Oil & Gas Investments Bulletin Pitch: "Why Is Canada Handing Out $35 Billion in 'Foreign Aid' to the Richest Country in the World?"

By Travis Johnson, Stock Gumshoe, March 19, 2013

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This latest spiel from Keith Schaefer ties in so many of the things we love to see in a hypetastic ad — international intrigue, conspiracies, companies with unfair advantages and, of course, windfall profits. Who can resist, right?

The basic idea is that Schaefer has found a company that’s benefitting from the fact that Canada’s oil can’t easily go anywhere other than straight South to the U.S., and that his favorite refiner is making gobs of money as a result … but of course, that’s not sexy enough to get your attention. Here’s how he launches the new ad:

“Right now Canada is just… giving away… $35 billion a year.

“It isn’t part of any tariff, treaty, or trade agreement.

“It isn’t foreign aid, either… not in the literal sense.

“It isn’t anything like that.

“This $35 billion is a gift – presented right into the arms of a smiling Uncle Sam.”

So that undoubtedly serves to get some of his Canadian readers a bit riled up … and his US readers sniffing around for the beneficiaries. He gets into a bit more detail, too:

“According to the Conference Board of Canada, total oil sands production will grow by 4.8% a year from 2010 to 2035.

“And it will most likely continue as a major global energy source for the next 60 – 80 years.

“Some say it has as much as an entire century’s worth of oil.

“It is God’s gift to Canada, an incredible resource that will help keep energy prices low and stable for ALL North Americans for decades.

“So with all this new oil supply, simple economics says Canada should be benefiting royally from the oil sands.

“Instead, Canada is getting… well, let’s say – pinched.

“Short-changed, in fact, by a huge pricing gap – an oil pricing phenomenon.

“You see, worldwide crude oil prices right now are $90 to $100 a barrel.

“That’s the Brent, or international, oil price – what 60% of the world pays.

“So what is Canada getting for every barrel of heavy oil it produces?

“Canadian heavy oil producers are lucky to get half that.

“And it’s Uncle Sam who is pocketing this huge difference… a $40 – $50 dollar a barrel price difference.”

It’s the almost-landlocked nature of Canada’s oil business that’s leading to these profits:

“I want to explain why Canada is losing $35 billion a year to the United States.

“It’s simple: it has no oil pipeline to its northwest coast – the Pacific Ocean.

“In fact if there was just one, 1,000-mile pipeline from Alberta’s oil sands to the northwest Pacific, Asian buyers would pay Canada’s producers world prices, and ship it to their energy-hungry refineries.

“It sounds simple, but it’s outside the box for North American energy.

“Canada has some refining capacity, but most of its oil is piped down to refineries along the Mississippi down to the Gulf Coast.

“Right now, ALL the pipeline go to the U.S.

“NONE go to Canada’s east or northwest coast.

“Politics and community pressure have delayed and perhaps stopped the one proposal that would bring tens of billions of dollars to this country every single year.”

He then gets into the conspiracy part of the story — that US environmentalists are backing the Canadian environmental movement in its efforts to stop export via new British Columbia tanker ports … and that, to take it a step further, the US oil majors and refiners are also secretly plotting to make sure Canada doesn’t develop a major Asian export capacity.

I suspect the environmental stuff is true to at least some extent, since environmentalists look at the tar sands/oil sands as a hugely dangerous resource. That’s the major environmental argument against the extension of the Keystone pipeline to bring more Canadian oil the the US Gulf Coast refineries where it could get a better price, that we need to not encourage tar sands oil development by buying even more of it.

But that particular effort, whether or not you think it’s important, doesn’t make much economic difference in terms of progress in developing the oil sands if the oil sands have another willing and large customer — it does little good, in terms of slowing tar sands development, to make that spigot to the US smaller if you’re simultaneously seeing Canada open up major exports via tanker direct to an even thirstier customer in China. In fact, if you’re exporting tar sands by tanker to China that has a worse environmental impact than exporting them to the US via pipeline — both because the oil will be burned less cleanly in China, and because shipping by tanker brings more opportunity for spills and consumers more energy in the shipment.

So that’s the problem in the fungible global market for crude oil — the only real differentiating factors are the transportation system used, the transport distance, and the quality of the crude oil. Heavy crude from Canada (or Venezuela) is lower quality anyway — I’m no refining expert so I don’t know if “lower quality” is the best term, but it takes more work to turn it into gasoline and refined products, so it’s worth less than light, sweet crude oil like you get from the Bakken or from the North Sea or from much of Saudi Arabia.

Which means that Canada’s Syncrude, the heavy crude that is manufactured from the Alberta Oil Sands, can’t be handled by every refinery (each refinery has to set up their systems for particular parameters when it comes to their input stock, and switching is not particularly fast or easy), and not much of that Syncrude can get easily exported by tanker. There is an export terminal in Vancouver for Alberta crude oil, but it is capacity constrained and they’re trying to raise capacity by 500% with a port expansion and an expanded pipeline (that particular pipe is owned by Kinder Morgan) — the expansion of that pipeline is being questioned by the US government, partly because that would mean a lot more tanker traffic in sensitive US waters, including around a marine sanctuary, and there is also a thorough brouhaha running about Enbridge’s plans to build a new oil tanker export port (and the pipes to feed it from Alberta) in Kitimat, in Northern British Columbia.

However you slice it, that export capacity is not going to rapidly increase anytime soon. And even little hints about possibly maybe someday reversing the Northeastern pipelines to bring Canadian crude to New England are already getting folks twisted up in Vermont, so any changes to pipelines are quite charged these days.

So that means that the constantly increasing production of Syncrude from Alberta won’t get an international price — just like Bakken crude that’s pipeline constrained and shipped largely by more expensive railcars doesn’t get the international price (Brent Crude is the benchmark, it’s roughly what we’d pay to import from Nigeria or Saudi Arabia).

Only Syncrude is less valuable than light, sweet Bakken crude and has fewer customers who can easily refine it, so it’s cheaper still. That’s the basic situation that creates pricing differentials that can be exploited by lucky or well-positioned refiners — if gasoline or kerosene or diesel can be sold for almost the same price in Chicago or Milwaukee or Sioux Falls as in New York or Houston (before taxes, which are different), and the midwestern/northern plains states refiner gets a much cheaper feedstock, they should be able to make much more money. Here’s how Schaefer puts it:

“… when I laid everything out, I came to what I think is an incredibly sound investment strategy…

“A trade the the Street never saw coming, a play that I think is one of the safest of any energy investment you can make today…..

“Who in the U.S. is making the most money off Canada’s cheap oil subsidy to Uncle Sam?….

“It’s the U.S. refinery sector

“But it’s not ALL the American refineries… just the ones tha buy super cheap Canadian oil

“There are several such refineries.

“But I’ve found the best one.

“And once I began studying this major profit centre, I discovered an added, very profitable bonus.

“You see, not only are they getting all this Canadian oil – as much as they can handle – at the steep discounts I just mentioned…

“They’re also getting the cheapest American oil.”

So yes, that “cheapest American oil” is the North Dakota crude that’s socked with extra costs because it’s less accessible — there aren’t huge pipeline gathering systems set up, so there’s a lot of truck shipment into terminals and a lot of rail shipment by tanker car that adds significantly to the transport price. The oil is still imminently profitable and desirable, but it’s cheap enough that there are all kinds of oil company strategies in place to move the oil, mostly by tanker, to the Gulf or to the East and West coasts where they can make even stronger per-barrel profits, even with the increased carriage costs, than they can with the much-more-expensive Brent Crude as their input.

Which means, as you can imagine, that though Keith Schaefer is touting refiners in general, and he does also indicate that he specifically like Valero (VLO), he has a favorite refiner that is even more levered to the cheapest crude oil … here’s a last bit of the spiel for you:

“… my refinery stock gets U.S. oil $8 cheaper than most everyone else.

“This is a new, long-term structural advantage for my refinery stock.

“… it gave me the highest dividend payout of my investing career.

“And I expect the payouts to keep coming.

“My research shows 2, 3 years – perhaps even 5 years – of a pricing window that keeps my top refinery play happily locking in great profits…

“And churning out dividends like clockwork.

“In fact, I’m now getting more than one cent a day in dividends – every day – for every share I own.

“So when you have a business model like my top pick does:

“Buy Low, Sell High…

“And a business location that has leverage over the competition…

“You have one of the best ways to profit the energy markets have to offer, hands down.

“Like I said, it buys low-cost Canadian heavy oil – sometimes as cheap as $48 a barrel – as it did in December 2012…

“And it gets to sell its products based on $110 a barrel, making a killing on extremely high margins.

“It’s not the only game in town. It’s the best game in town.

“And now I’ll explain why this game – for sure – will last 3 to 4 years… but could last a whole decade.

“You see, 3 to 4 years is how long it will take to permit and build a huge refinery.

“But production is growing so fast in North America?more than 1 million barrels per day, per year?that it would take several refineries to kill this golden goose.”

So yes, after all that blather Keith Schaefer is still touting the same high-yielding, volatile refinery stock that he first brought to our attention back in December, Northern Tier Energy LP (NTI).

NTI is structured like a master limited partnership, which are everyone’s favorite income investments these days — most MLPs own pipelines or midstream processing assets and tend to run tariff-based and predictable businesses with steady profit margins, but NTI is a bit different. Their major asset is a refinery, so they take on substantially more commodity price risk than does an interstate pipeline operator — pipeline operators are paid a toll for each barrel moved, refiners make their money based on the spread between the price they pay for feedstock (crude oil) and the price they can get for their refined products (diesel, gasoline, etc.).

Which is why Northern Tier trades at an expected yield of something like 15-20%, and Kinder Morgan Partners (KMP) and the other big pipeline operators tend to have yield more in the 5-6% neighborhood. People are concerned about the risk of having your investment concentrated in a single refinery (their main asset is the St. Paul Park refinery in the Twin Cities — they also own a chain of SuperAmerica convenience stores/gas stations, but they don’t make a meaningful amount of money), and they’re also worried that the current windfall profits won’t last forever.

Which is probably true, they won’t last forever. Even markets that aren’t completely free and flexible don’t usually allow for substantial mispricing forever … but if they last for a long time, then perhaps Keith Schaefer will be right and NTI will continue to bank some really impressive cash flows … and direct those cash flows straight to investors like you. So if you ignore the risk that the refinery will have problems or a fire or have to shut down for more than their planned maintenance (they’re planning to have two big shutdowns for maintenance and upgrades this year, in April and October, so there will be downtime and quarters with lower cash flow), then it’s really a question of whether NTI will keep these nice refining spreads for a year, or for three or four or five years (or even a decade), as Schaefer expects. They get a lot of oil from the Bakken, where it’s flowing nicely, and they can handle up to about 30% heavy syncrude in their system, so they are profiting from those differentials in a big way now. Competition is rising from folks willing to pay the $8-15 extra to ship Bakken crude by rail to their refineries, so that differential may slip over time as more and more rail cars will with oil in North Dakota, but the Canadian Syncrude isn’t as easy to move because there are fewer refineries who are set up to use it.

Predicting long-term advantages for NTI, which are predicated on their good pipeline access to both the Bakken crude and the Canadian syncrude, means predicting either new refineries or refinery expansions and new pipelines will fail to soon push the market into something close to global equilibrium. I don’t know enough about the status of other refineries in the upper midwest or in Canada to make any judgements about capacity, nor do I know enough about pipeline plans or directions or expansion, but NTI is trying to up their capacity by about 10% with an expansion project that they think will be accretive to cash flow within a year or so.

And the rub for income investors, who prefer to see steady or steadily rising payouts, is that NTI pays a high but variable distribution, and they have very little history to indicate how they’re going to structure payouts. They’ve paid only two distributions so far, and the first one was of an odd size because it covered more than one quarter (they went public last Summer), so we can look at the most recent quarterly payout of $1.27, annualize it to $5.08 a year (“annualize” means “multiply by four, but use a fancy word so investors think you’re smart”), and say that NTI carries a yield of 17% ($5.08 is 17% of $28, the current unit price).

But investors are almost certainly not going to get $5.08 in distributions over the next four quarters — the company has gone far, far out of its way to emphasize that they pay out irregular amounts, including in the last conference call, and they mentioned their two shutdowns on the calendar and the seasonal nature of the business several times, so they’re clearly trying to get people to accept the fact that some of the upcoming quarterly payouts will be lower than the most recent $1.27. Of course, it’s also possible that the payouts could be higher — maybe gasoline prices spike and crude prices fall for other reasons, who knows.

So it comes down to a company that owns one refinery, in a sweet spot for margins, and which is investing some in expanding their capacity to make some hay while the sun shines (they’re investing in some trucking in North Dakota to help lower costs, in addition to expanding the refinery) … sound like a good investment to you? Think they can maintain the current ~$5/year distribution, or will investors see more or less than that in 2013? You pays your money and you makes your guesses — if you’ve got a prediction for NTI (or refiners in general) to share with us, let us know with a comment below.

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33 Comments on "“Canada’s $35 Billion Giveaway” Tease from Keith Schaefer"

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Roger Bond
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0
March 19, 2013 8:44 am

“master limited partnership, which are everyone’s favorite income investments these days”

Not mine.

I HATE K-1’s with a passion. Wouldn’t be so bad if they could get them out by the 1st week of March, but almost no one does that. Besides that, an “ordinary” tax “professional” (and probably every IRS auditor) is usually unclear on how to handle every piece of data on them.

Roger.

Dusty
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0
Dusty
March 19, 2013 11:45 am
On the First of March, every year, file for an Automatic Extension with IRS. You are covered. The Extension form can be downloaded and printed and mailed. Then you can make a copy and add the copy to your tax records. Or you can file for the Extension electronically. Or both? Usually the last K-1 arrives on April 14. The last corrected tax info from my brokerage arrives by mid- May. I file my return in late July (the last week) or early August (the first week). There is an automatic two-week delay at IRS and then my tax refund… Read more »
tim
Guest
0
March 19, 2013 3:13 pm

Buy ,,,,,,,,,AMLP……… NO K-1`S. !!!!!!!!!!!!! 6% Div. not bad

Drano
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0
Drano
March 19, 2013 9:20 am

I drive by NTI’s refinery occasionally. At night it is either a vision of hell, or something out of a science fiction movie — a very Star Wars feel. Really quite unbelievable, the number of very bright lights, huge pipes, towers, etc. with a big city visible just up the road.

william
Guest
0
william
March 19, 2013 10:33 am

Travis, I am always impressed with your knowledge and explanations. However, I am surprised that you either omitted or are ignorant of the fact that Venezuelan oil is dirtier than the oil sands and Californian Oil is DIRTIER than Venezuelan! And of course oil from Nigeria, Iran, Saudi Arabia, etc. is Conflict/Blood oil that is used to fund Terrorist activties against the “Western Infidals”. Not to mention that Jihadists treat women as slaves,etc. The “height of hypocrisy” in the U.S., however, is that about 50% of U.S. electricity comes from “Dirty” COAL! Let, have some truth and honesty!

66rover99
Irregular
0
66rover99
March 19, 2013 10:21 am

I have a good friend that lives in Terrace/Kitimat and is in the news media. He says he has seen a lot of environmental protests in his career, but he’s never seen as well oiled (no pun intended) machine as the pipeline protests going on right now, and its obvious big money is involved. Makes sense why if they’re able to keep the pipelines out and continue to buy at such a discount.

Peter Watts
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0
Peter Watts
March 19, 2013 10:40 am

Eminently not imminently!!

Yours pedantically,

S. Huffman
Guest
0
March 19, 2013 12:31 pm

Mr. Travis your reply to the person stating your ignorance or omission on the aspects of “dirty oil” was so eloquent that i hoped you saved that quote. I hope people go back and read that quote and think about it for a moment, this is not a political “blog”. Sometimes people forget what this website is offering, as I am sure their will be a use for that same reply in the future. Your tidbits of wisdom about the markets and not to mention the thinkolator freebies is appreciated. Thank you.
S. Huffman

investor101
Irregular
16
March 20, 2013 2:27 pm

Very much agree!!! Great job and I have learned a lot from your giving attitude to help us all. I appreciate the help, Thank You!

ronkirena
Member
0
ronkirena
March 19, 2013 11:42 am

Same guru gave us Poisedon! Caution!

Leo
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Leo
March 19, 2013 1:08 pm

Wow! I guess I get to waste other peoples time also . I did not need to get right on my daily tasks anyway, but I really did not need to look up IMMINENTLY 0R EMINENTLY or who wrote it. Geez, some people have a fetish for PEDANTIC corrections instead of sticking to the subject. OK, find my incorrect spelling in my message to indulge yourself. Sorry, Travis, you do good work.

olivan leach
Guest
0
March 19, 2013 3:01 pm
I have had some of the NTI stock for a little while and I picked up a few more last week when it fell into my buy zone. I don’t know how long they will keep getting cheap oil,but I am out to make money on my investments so as long as it keeps making the bucks I plan on staying the course. We can’t do any thing about the bad stuff that goes on in the world oil markets and producers, but we can buy stocks of good North American co’s that is doing well on our good luck… Read more »
chuck
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0
chuck
March 19, 2013 5:39 pm

Bought my small amount of NTI in January and am up about 17%, guess my ouija board is in calibration currently. We will see what happens. It does not particularly bother me that the share price and dividends may be a little volatile as I don’t have to try to live on my dividends. Think I will follow Dusty’s advise concerning the automatic IRS extension — this year’s tax filling will include a K-1 for the first time ever.

creloans
Member
0
creloans
March 21, 2013 3:43 am
Travis, Good jo in walking through Keith’s promotional info. I subscribe to his letter and fortunately have made some $ on both NTI and several of his predictions. But, just as in any sector of the market, one really does need to spend a lot of time watching the oil markets to trade oil & gas related stocks. The thing about your service that is so valuable is that you do what everyone needs – you dig into promotionals to see what is in there and save us a lot, and I meean a whole lot, of wasted time time… Read more »
Bill Moore
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0
Bill Moore
March 21, 2013 6:16 am
Re: ronivena karody’s comment on Keith Schaefer’s advice on Posidon. This disaster is what can happen when you buy something like POOSF (pink sheets) on a teaser exposure w/o the follow up from the teaser. In his newsletter Schaefer advised his subscribers to sell POOSF if it dropped below $14. Unfortunately for him, he didn’t take his own advice. I did. I sold @ $13.45 for a big profit. Re: K-1s. Yes, they are a pain in the butt but there is a way out. Several years ago I hired a “serious” tax professional w/a reputation for handling K-1s with… Read more »
Leo
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0
Leo
March 23, 2013 3:12 pm

I understand that you don’t have to worry about K-1’s if they are in an IRA. Is that correct Bill?

flyfisher
Irregular
0
May 15, 2013 1:45 pm

Leo, That is what I was wondering about also Leo: putting K-1’s into an IRA.

wileycpa
Member
0
wileycpa
May 21, 2013 9:25 pm

You can hold an MLP in an IRA, but there are special considerations. See link.
http://www.naptp.org/PTP101/MLPs_Retirement_Accounts.htm

ingy
Member
0
ingy
March 23, 2013 8:17 pm

To Bill Moore:
I too would be forever grateful if you would be willing to share that MLP K-1 spread-sheet. Thank you in advance for considering this.

Penny
Guest
0
Penny
March 24, 2013 12:35 am

Oh me too, Bill. I’d love a little informed guidance on the mysteries of K-1 forms if you could manage to spread the joy – please.

JimmyB
Guest
0
JimmyB
March 27, 2013 2:10 pm

Please add me to list of those who would like a copy of your K-1 spreadsheet. It would make tax time less painful.

John D
Guest
0
March 23, 2013 1:56 pm

Bill Moore. Can you (would you?) share that spread sheet/tabular format with us?
Thanks for you consideration.

Travis — really ‘preciate what you do here.

JOHN M CHENOSKY, PE
Guest
0
JOHN M CHENOSKY, PE
March 24, 2013 8:58 pm

William sounds to me a young idealist with the energy to pursue his ideals. As I turn into my 7th decade on this planet, my focus is to make sure I have the necessary resources to not be a burden on my family or society. With 8 billion of us, energy is almost as important as food and needed to make food. We are never going to run out of oil–period. We use it primarily to power our vehicles and as feedstock for 4000 other necessary products. A sustainable alternative is intellectual masturbation.

Blue5
Guest
0
Blue5
May 26, 2013 4:58 pm
I followed Keith and his Energy Investor straight to hell. NTI may never recover from its incredible crash, one of the worst in the sector. The 20% dividend is the act of desperate men. The idea of the TRP Keystone Pipeline was to utilize the Alberta oil sand muck in the most logical way. Valero and a few other major refiners have spent billions preparing to refine bitumin and convert a filty product into a goldmine for all North Americans. Sure its 1/2 price but they mine it not drill it at a small percentage of what it costs to… Read more »
Dusty
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0
Dusty
May 27, 2013 11:05 am
I read three little books about the “Ice Ages.” One covered reading the layers of the Greenland Ice Sheet: detailed data on the last 100, 000 years of climate. Two more books with different perspectives on the “Ice Ages.” Same stories, just presented differently. (These books are available from several online book sellers. Read easily and rather quickly.) Properly, the Ice advances and retreats in 100, 000 year cycles determined by the way the Earth orbits the sun and wobbles on its axis while doing so. We have just passed the warm end of the cycle. It is late ‘Summer.’… Read more »
jimmcbob
Member
0
jimmcbob
July 10, 2013 10:08 am

Got this new one from Schaefer, complete with all of the “hypetastic” credentials, these aren’t just wells, they’re BOOMERS!
http://www.oilandgas-investments.com/freereport/natural-gas-opportunity-2/
Note that the long boring video can be avoided by closing the tab, then clicking “Stay on page” on the popup to access the text.

DJ
Guest
0
DJ
October 4, 2013 10:50 pm

Note that Keith first started selling off NTI last March at $32 a share and sold the rest in the mid-twenties a month later. Wrote in at least one bulletin over the summer that he wasn’t interested in buying it again.

Gumshoe good at covering the buys but notso good at mentioning when Keith says sell. Which is important sometimes, methinks.

Dusty
Guest
0
Dusty
October 5, 2013 5:18 am
How many of us actually buy the stocks listed in the newsletters? Usually, in all things, I discover eventually that I am right in the middle of “average.” With most of the newsletters I have subscribed to, paid for, I only bought a very few of the stocks. Had to ‘cherry pick’ because there was not enough money to buy more. Most of the stocks I picked from the paid listing worked out badly and I sold. Trying to follow the ‘rules’ suggested by those same publishers. Cost me on my portfolio total value. Then, if I/you read enough, anything… Read more »
eyedoc
Irregular
1414
eyedoc
June 18, 2014 6:08 pm

Well, to put an extender on this great article, NTI went down to the mid $18s in September of 2013. Oil prices are heading up due to the Al-Queda armies marching on the cities of Northern
Iraq and Obama hasn’t opened up the Keystone pipeline yet. NTI closed at $27.96 today on average volume. The P/E is 14.11 and volume is a little light. The yield is 11.2%.

Those that held on got their money back and those that bought during the August to October 2013 doldrums, are doing well.

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