Course preview – How to trade oil, natural gas and energy
The information below is an excerpt from Rick Rule’s Investing and Speculating in Natural Resources course.
Oil, natural gas and energy investments are volatile. There’s no guarantee of safe returns. But your chances of a safe return increase significantly over the course of time – and learning practical strategies. Despite new technologies in clean energy, the world will need natural gas and oil for quite some time. Thanks to the oil price plunge of 2014, now is the time to brush up on your skills in energy investments and take advantage of low prices while they last.
Building an energy investment portfolio
The construction of an energy investment portfolio begins with the major multinational energy companies. These companies are behemoths by any measure with tangible book values in the hundreds of billions and profits and capital budgets often in the tens of billions. Relative to other resource industries, the multinational oil company markets are very stable. This stability is partially a function of their size but also is a function of their integrated operations. Many of these companies participate in the entire energy value chain from oil field discovery through production, transportation, and refining all the way to retail sales at the gas pump.
In constructing an energy portfolio, we start by considering the short and medium-term debt of multinational oil companies, the largest intermediate oil companies, the large infrastructure companies, and the hydro-utilities. The cash flows and debt servicing capabilities of these entities are justifiably legendary. Owning them means we are searching for very stable income. Our big risk here is low current interest rates which mean that the dividends you receive do not cover the destruction of your purchasing power through inflation.
Energy infrastructure is another sector to consider in the construction of an energy portfolio. These investments might be in pipelines or terminals or processing facilities or even the storage of natural gas in depleted reservoirs or salt dumps. These businesses often resemble utilities. Some pipelines are in fact regulated as utilities. They often enjoy local monopoly or oligopoly status which can lead to extremely stable cash flows and very predictable debt service and dividend-paying capabilities. Investors buy these entities for their stability and the predictability of their yields. The chief risks include regulatory change, excessive leveraging, and a rising interest rate climate.
Like what you see so far? Preview Rick Rule’s Investing and Speculating in Natural Resources course here.
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