Fracking Ban: “Is President Obama About to Start a New Civil War?”

Checking out a teaser for Income & Dividend Report

By Travis Johnson, Stock Gumshoe, April 22, 2013

One thing all newsletter teaser ad copywriters know for sure is that controversy gets attention.

You can predict the continuing slow decline of the US dollar as the world’s reserve currency … or you can predict the END OF AMERICA.

And you can predict that the federal government will issue new regulations on hydrofracturing after the EPA reports on their latest study next year … or you can shout that President Obama is going to ban fracking and “Start a new Civil War.”

Obviously, predicting a new civil war, or the end of America, or the “One stock you need to own forever” is the way to go if you want to get the attention of a fickle email-reading public … it’s cheap to send email ads to all and sundry, but it’s also easy for readers to scan those ads for a moment and quickly lose interest if it doesn’t titillate or tease something really tasty.

So that’s what we’ve got today — an ad for Jim Nelson’s new Income & Dividend Report that gets our attention thusly:

“Is President Obama About to Start a New Civil War?

“In the next 12 months, an executive order from the president could change the course of American history and possibly spark an armed conflict on U.S. soil….

“When he strides to the White House podium to announce this executive order, 1.7 million Americans will immediately lose their jobs.

“The most important industry in the country will see its collective value chopped in half…

“The fragile American economy will collapse, and the stock market with it.

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“Even worse, Obama’s decision will lead to a Civil War in one very specific part of the country — which I’ll reveal in a moment….”

There’s a long spiel after that, but basically it comes down to this: Nelson says he thinks “the most likely outcome” is that Obama will ban fracking, and that will spark a revolt in Texas that will turn into an armed revolt and a military intervention to stop fracking (and Texas splitting itself into five states, among other things).

Which is pretty crazy on the face of it, but there you have it. That’s the backdrop. And I suppose crazier things have happened, though not in my lifetime.

And what investment does he think will benefit from this?

The infrastructure MLPs.

Here’s the logic, in his words:

“The Only Winner From a National Fracking Ban….

“One very specific part of the American oil complex is likely to thrive…

“If you’re invested in this subsector, you could see your investment jump immediately if Obama signs a fracking ban.

“Over the first few months of the ban, you could potentially double or triple your money…

“So which oil sector actually stands to profit from this ban?

“Refineries and pipelines.

“If gas prices skyrocket to $10 per gallon or more — heck, even $6 per gallon will do the trick — refineries will collect a huge premium between the price of gas going out and the price of oil coming in.

“At the same time, pipelines connected to the remaining legal oil will also charge a premium for the newly expensive cargo.

“Now — you could play this situation by buying shares in one or two particular refinery and pipeline companies and trying to guess which one will thrive.

“Or you could follow my recommendation and get a stake in 23 different pipelines and refineries.”

I don’t understand why he believes that an immediate halt to fracking would cause gas prices to rise faster than crude oil prices, but apparently that’s the argument — likewise, it’s hard to see why a plan that shuts in production in many shale areas, thereby cutting US production of oil and gas substantially, would lead to more income for the infrastructure assets who move that oil and gas around the country.

There could be short-term benefits for some regions, there would be unstable pricing if something big like this were to happen (I don’t personally believe it will, given the reliance of all politicians on the industrial renaissance being made possible by cheap natural gas, which itself is made possible by fracking), but I don’t see how refiners or pipelines particularly benefit from dropping production volumes and rising prices …

… if fracking is halted, I’d look at oil sands producers, offshore rig owners and producers, and oil tanker owners to benefit in filling the gap from US oil production that would again start to fall (after growing for several years), and I’d look at coal to benefit from the dramatically rising natural gas prices that we would see. And, of course, you’d want to reconsider that plan to build a luxury apartment complex in Williston, ND … and short Cheniere Energy (LNG), since if we stop fracking we’re going to have to start importing natural gas again instead of planning to export it.

Lest you reflexively agree with Nelson that Obama is going to issue an executive order to halt fracking by next year, here’s his far more nuanced commentary from the State of the Union address a couple months ago:

“After years of talking about it, we are finally poised to control our own energy future. We produce more oil at home than we have in 15 years. We have doubled the distance our cars will go on a gallon of gas, and the amount of renewable energy we generate from sources like wind and solar – with tens of thousands of good, American jobs to show for it. We produce more natural gas than ever before – and nearly everyone’s energy bill is lower because of it. And over the last four years, our emissions of the dangerous carbon pollution that threatens our planet have actually fallen.

“But for the sake of our children and our future, we must do more to combat climate change. Yes, it’s true that no single event makes a trend. But the fact is, the 12 hottest years on record have all come in the last 15. Heat waves, droughts, wildfires, and floods – all are now more frequent and intense. We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgment of science – and act before it’s too late.

“The good news is, we can make meaningful progress on this issue while driving strong economic growth. I urge this Congress to pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago. But if Congress won’t act soon to protect future generations, I will. I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.

“Four years ago, other countries dominated the clean energy market and the jobs that came with it. We’ve begun to change that. Last year, wind energy added nearly half of all new power capacity in America. So let’s generate even more. Solar energy gets cheaper by the year – so let’s drive costs down even further. As long as countries like China keep going all-in on clean energy, so must we.

“In the meantime, the natural gas boom has led to cleaner power and greater energy independence. That’s why my Administration will keep cutting red tape and speeding up new oil and gas permits. But I also want to work with this Congress to encourage the research and technology that helps natural gas burn even cleaner and protects our air and water.”

So, as befits a politician, that reads to me as firmly down the middle of the road — more oil, more gas, more renewables, need for emissions reductions and climate change action … nary a word about groundwater and fracking, though I suppose that could become a far larger issue if the EPA does indeed issue a report that causes more people to worry about their water (or earthquakes). I have no idea what will happen … but it’s awfully hard to put a genie back in a bottle, particularly when that genie generates a lot of jobs in both red and blue states and cuts the energy bills of millions of registered voters.

But what is Nelson talking about? Well, from his description he must be recommending a fund that owns pipelines and refineries — a midstream infrastructure fund. There are both Exchange Traded Funds (ETFs) and Closed End Funds (CEFs) that invest in these (as well as traditional mutual funds), about 25 of them if you ignore the traditional open-ended funds, and he doesn’t particularly clue us in as to which one he’s touting — though frankly, other than the slightly different strategies, levels of leverage, and management fees they all tend to move together, so if you want to buy a basket of midstream oil and gas assets like pipelines and refineries and storage facilities you’ll get similar results from most of ’em.

There is one major index for infrastructure MLPs, the Alerian index, and you can fairly easily trade it through an ETF with the ticker AMLP. It yields about 5.75% right now, and there are now 25 MLPs in the index and in the ETF. There aren’t really an refineries in this ETF, so that’s not a direct match, but there are plenty of refinery-related MLPs that have been spun out of their refining parents over the years (Tesoro Logistics, TLLP, owns the tanks and pipelines used by Tesoro, TSO, to collect crude oil and distribute refined products, for example).

There are also some slightly different but also quite concentrated ETFs out there, like the Global X Junior MLP ETF (MLPJ)– that’s got about 24 companies in the portfolio now, mostly smaller MLPs, or the new Yorkville ETF (YMLI) which equal weights 25 infrastructure MLPs that are screened for their payouts and distribution strength.

With any fund, whether a closed-end fund or an ETF, you lose the tax advantage of the MLPs that is a major reason for individual investors owning these assets — the fund is a corporation, so they don’t get to pass along tax deferral to you. If you buy an MLP you can defer taxes on most of the distributions, but if you own an MLP ETF you lose the headache of the partnership form (K-1) for taxes but also then owe taxes in the current year on the dividend you receive from the fund. (Most MLP distributions are largely return of capital, since accounting income is swamped by depreciation that far outpaces the cash these companies put toward maintenance, and expansion is done by raising new funds — cash gets pushed out the door to MLP unitholders, and the return of capital lowers your tax basis when you sell your shares but doesn’t incur an immediate tax liability).

Still, getting rid of the recordkeeping hassle of the MLPs, and of the worries about holding them in IRAs or other tax-advantaged accounts, is worth something, and the MLP ETFs have been quite popular … probably also because MLPs have so dramatically outperformed the broader market over the last 15 years. Given the increasing variety and strength of the ETFs in the sector, I’d avoid the wide variety of leveraged closed-end funds, in my experience their management fees tend to be huge and their performance not notably better than the sector as a whole, and almost all of them are trading at a substantial premium to their net asset value right now. You can scan the offerings currently available through the CEFConnect site here if you like (under “US Equity” there’s a button to choose just MLP-based funds).

Given that many of the MLPs are actively investing to expand into the hot shale areas like the Marcellus or the Bakken or the Eagle Ford to help improve transport of this new oil and gas, I’d be shocked if the sector did great in a fracking ban … those new gathering systems would then be worthless. But I’ll also be shocked if we see a federal fracking ban, I expect we’ll see more regulation of chemicals and more testing requirements over time, but that fracking will continue to thrive and that bans will be localized and pushed through by probably a small number of states and municipalities. Just my guess.

And I don’t personally own any MLPs right now, but they (the big interstate ones, at least) do tend to be very steady and reliable, and to increase those distributions — it’s a toll business, so as long as more oil and gas moves through the pipes (or the processing plants, or the storage facilities), the fees these companies collect can increase.

So thankfully, Nelson also pitches another income investment — one with a higher yield, and that is poised to benefit if fracking continues … here’s the spiel on that:

“I want income. I want companies that deliver steady profits over a long-term period. And I want to see them give large amounts of those profits back to shareholders.

“That’s why I’m so excited about this backdoor North Dakota play.

“It has a royalty stake in the Bakken fracking operations — and a vast asset base generating a consistent cash flow.

“And just like the pipeline and refinery companies I mentioned earlier, this company is required by law to pay 90% of its profits to shareholders.

“Even better, this company will send you a cut of its profits EVERY MONTH.

“Over the last five years, the company has returned 145% — and it’s currently yielding 8.8%.

“Those are great numbers…

“But if fracking continues and 24 billion barrels of Three Forks’ oil starts coming online, you can imagine how much fatter those dividend payments could be.

“If the EPA releases its study and Obama still decides to keep fracking — you could make a fortune over the long haul while collecting almost 9% income every year.”

So … we toss that one into the Thinkolator, and though it’s a wee bit rusty after a week of sand and saltwater we get a decent (not 100% sure) surmise out of the ol’ ‘olator — best solution running here is Vanguard Natural Resources (VNR).

There are only a few companies I’m aware of that have any kind of substantial exposure to the Bakken and pay a monthly dividend … and when you add on that the stock has to have provided returns of better than 100% over four years and sport a current income yield of 8.8% or thereabouts, it’s tough to make the clues fit anyone else.

Enerplus Resources (ERF) and Baytex (BTE), two former Canadian Trusts that converted to corporate form, both pay monthly dividends and have some Bakken exposure (ERF has more) — but BTE doesn’t have a high enough distribution to get it over 8%, and ERF has been very weak over the past five years so you can’t squeeze in a 100%+ gain for them (BTE and VNR both did pretty well recovering from the 2009 crash, ERF still hasn’t recovered). Also, though all three of these companies pay out far more than they “earn” in their distributions, Enerplus and BTE are taxed as corporations and their dividend “requirements” are self-imposed … Vanguard Natural Resources is a publicly traded partnership that has elected to be taxed like a MLP, so they have to distribute earnings to shareholders.

Which is splitting hairs — they don’t have any actual earnings, so they could get away with not distributing anything if they want to (depreciation and depletion, among other things, are non-cash charges that don’t cut into the distribution of cash flow but do cut into the accounting profits). Assuming they wanted the share price to crater. But they’re clearly focused on increasing the dividend at a gradual rate if they can, including operating an active hedging program to try to make their cash flow somewhat more predictable even with fluctuating commodity pricing. They switched over to a monthly dividend last August and they’ve raised the dividend once since then. The current yield is just about 8.4%.

VNR is a producing partnership — they operate oil and gas production facilities and distribute earnings to unitholders of the partnership, so it’s not technically a MLP but it works like one. Producing partnerships are inherently more volatile than midstream partnerships, because instead of a fee-based business or a spread-based business like refining, processing or transportation of petroleum products, your partnership actually owns oil fields (or pieces of ’em) and produces the oil and gas, so you have to deal both with reserves depletion (and replacement) and with fluctuating oil and gas prices that can, even with good hedging, make earnings very bumpy. Other partnerships that fall into this category include longtime investor favorite Linn Energy (LINE — though they’ve been beaten up a bit over their accounting lately) and Legacy Resources (LGCY), and there are a few more in this list from the Dividend Detective.

We’ve only looked at one other teaser for Nelson’s Income & Dividend Report in its relatively short life, so if you’ve tried it out yourself feel free to click here to review it for your fellow investors — we did cover Nelson quite a few times back when he was helming the Lifetime Income Report for Agora Financial, so you can see some info about his past ideas (and subscriber opinions) here.

So … we come up for air after vacation without a lot of certainty, perhaps tomorrow will lead to more black and white revelations and opinions. Are you interested in getting exposure to a basket of infrastructure MLPs? Or in buying just one producing MLP with a stronger yield? Let us know with a comment below.


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c14824
Member
c14824
April 22, 2013 9:13 pm

This is all petroleum company propaganda tom ruin our envirtonment!

Jake
Irregular
Jake
April 28, 2013 11:14 am
Reply to  c14824

We have been, are, and shall remain (for many years to come) direct beneficiaries of the petrochemical cornucopia that is integral to our economy, energy supply and standard of living.

KennyG
Guest
KennyG
April 22, 2013 9:49 pm

It might be worth checking a bit firther into your statement that “With any fund, whether a closed-end fund or an ETF, you lose the tax advantage of the MLPs that is a major reason for individual investors owning these assets — the fund is a corporation, so they don’t get to pass along tax deferral to you. If you buy an MLP you can defer taxes on most of the distributions, but if you own an MLP ETF you lose the headache of the partnership form (K-1) for taxes but also then owe taxes in the current year on the dividend you receive from the fund. “. If you check out both the applicable IRS regs as well as AMLP’s own distribution schedule, you will see that for calendat year 2012, AMLP distributed $.995967 per share in “dividends”. Of this divivdend, even though it came to you from a corporation 99 5/8% of it was a non-taxable return of capital which only reduces your cost basis, and not subject to current taxation. Even though you do not receive a K-1 from AMPL, but a 1099, on that 1099 it will show your taxable dividends amounting to $0.003135 per share owned and it will show non-taxable distribution amounting to $0.992832 which will reduce your cost basis per share by that amount. WHen the MLP’s that AMLP invests in provides AMLP with its K-1’s, it does not turn a return of capital to AMLP into a regular dividend when AMLP passes that on to you. AMLP simply passes that ROC thru to you. This is no different than many other ETF’s which pay dividends (actually distributions) in excess of their earning and are therefore return of capital (and show up as such on the 1099 that they distribute). You can check out AMLP’s distribution characteristics at http://www.alerianmlp.com/documents/pdfs/amlp-8937-20121130.pdf

HTH

Ken

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mick
Member
mick
April 26, 2013 10:53 pm
Reply to  KennyG

Travis:
My bet is that fracking will continue as big business owns governments and always gets its way. That’s why even the machine gun massacre of children did nothing to change gun laws….well nothing that means anything, and even those changes are being watered down.

So do you really think that fracking is going to end. The fact that this process is reputed to destroy the water table and leave valuable farmland next to useless does not seem to matter. I mean who cares about food production because you can go buy imported food can’t you. And then you won’t see fracking in any of the areas or towns where the well off live. That is out of bounds.

So lets not kid ourselves. Big business controls politics and the decisions which come out. Add to that some media outlets (which are also owned by big business) and you get a very perverse view of the world. It is not a wonderful place and I can fully understand why the French revolution came about. It was the total abandonment of the population whilst the very well to do owned almost everything and were the masters of the universe and as masters of the universe do they abused their position because the opinion that they can do as they please is an incorrect premise. But try telling that to the frackers. They see only money and their political stooges do as they are told lest re-election money dries up.

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Jake
Irregular
Jake
April 28, 2013 12:31 pm
Reply to  mick

Fracking will continue because it works and America needs the resources, profits and taxes.
This is a huge net benefit for America.

Re your rambling political commentary, I hope you are simply being provocative in order to initiate a debate in this forum. I will therefore respond accordingly.

Big government – and the corruption, waste, fraud and abuse it directly enables – is a huge part of the problem. Too many politicians and bureaucrats deliberately and willfully work hand in hand with big business, big labor, and myriad special interest groups including so called “non-profits” – yes including “big environment” – to enrich themselves and increase their power.

“Machine gun massacre”???
You clearly do not understand what a machine gun is.

Further, you assume that “Passing a Law” further diluting the second amendment will somehow translate to preventing future similar tragedies. Yet, if you bother to read what was proposed and then examine the actual facts, you will find that legislation would not have prevented the heinous actions of this mentally disturbed individual.

If “Anti-gun” legislation worked, then cities like Chicago would have long ago fixed their problems; instead, we see the opposite. Crazy people – oddly enough – don’t always act rationally. And, criminals – again, odd as it may seem to some – don’t tend to respect or comply with laws and in fact frequently seek to violate the rights of others, including life, liberty and property.

If you really want to effectively address infant and child mortality rates, start with the leading causes of same. Otherwise, if you – or anyone else – simply want to further dilute and/or circumvent the Second Amendment, then we have a constitutional process that must be followed.

Meanwhile, do feel free to continue to express your opinions – albeit preferably with more facts – and to voluntarily give up free exercise of your rights if you feel so strongly that is the best solution; but do not assume you have the right to deprive others of theirs.

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hipockets
Irregular
April 29, 2013 3:15 am
Reply to  Jake

— I think Mick meant “assault rifle” instead of “machine gun”.

I know that this isn’t the right forum to say this, but I have to tell you that NO ONE that I know wants to pass a law that would infringe upon a person’s right to own a gun or guns.

But EVERYONE I know would like to see a law that balances that right with some common sense about what types of guns (and magazines and bullets) a non-police-officer or non-armed-forces-person can own.

What would a sane non-police-officer or non-armed-forces-person do with an assault rifle, anyway? If he/she is a hunter, he/she can only shoot an animal so many times. If it has to be shot it more than twice, some other sport should be considered..

According to a recent report from the Centers for Disease Control and Prevention, here in the States three people are killed by a gun every hour, and seven people are wounded.

I grant you that there can be no law that would prevent all of those people from being killed or wounded. But a common sense law would prevent SOME of them. And SOME of those would be innocent bystanders or innocent children.

Here in the United States, about 90 out of every 100 people own a gun. In Canada, it’s about 40 out of 100; in Italy, Sweden, France, and Germany about 30; in Australia 15, Great Britain 7.

The total deaths caused by guns here in the States is over 32,000 per year. It is less than 1000 in those other countries, usually a lot less. ***

A ratio of thirty two to one or more tells me that, if we are to think of ourselves as a civilized nation, we MUST do something about gun regulation.

It’s common sense. But as my gran-pappy told me more than once, “Common sense ain’t too common”. I desperately hope it becomes more common in the very near future.

Getting back to the reason for subscribing to The Stock Gumshoe — learning about stocks — can you recommend any stocks for companies whose main focus is dealing with and preventing gun violence?

***You can find similar statistics for almost any other country you can name.

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Louie
Member
Louie
April 29, 2013 6:13 am
Reply to  hipockets

According to Wikipedia, “In 2010, there were 19,392 firearm-related suicide deaths, and 11,078 firearm-related homicide deaths in the United States.[7]”
So with more gun control, more people would have to jump off buildings and bridges to kill themselves, instead of using a gun. Do you think gun control would prevent suicides?
The percentage of gun homicides is lower in the U.S. than many countries.
And if you were really concerned about human life, you’d be fighting for the 1 million babies killed, with knives instead of guns.
“#2 When you total up all forms of abortion, including those caused by the abortion drug RU 486, the grand total comes to more than a million abortions performed in the United States every single year.”