Higher for Longer: How to Profit from Sustained High Energy Prices AAII DC Metro Chapter May 2012 Elliott H. Gue

The Big Picture

Credit Spreads

Seasonal Distortions

A Few Additional Uncertainties US and French elections. Fiscal Cliff Statistical distortions caused by autumn 2008 collapse in data. Oil prices remain elevated, natural gas prices outside the US still high. US housing market is bottoming but not booming and more foreclosures ahead. Europe far from healed.

US and ICE Natural Gas Prices

Supply is Too Healthy

Less Gas Drilling Won’t Help

More Efficient

Energy: Oil, LNG over US Gas

Teekay LNG Partners (NYSE: TGP); 7% Yield Teekay LNG owns: 20 liquefied natural gas (LNG) carriers, 5 liquefied petroleum gas (LPG) carriers and 11 oil tankers. Long-Term Charters with an average remaining duration of 16 for LNG, 15 for LPG and 10 for tankers. With charters fixed, TGP grows by increasing the size of its fleet. Day-rates for LNG carriers at near record highs. Surging international natural gas prices, growing demand from Asia and Europe

Cheapest Gas is in Marcellus

Inergy Midstream (NRGM); 7.5% Yield 42 bcf of natural gas storage 1.5 million barrels of natural gas liquids (NGLs) storage 90% of storage booked under LT agreements 2.1 mbbl new NGLs storage capacity due June ‘12 MARC I Pipeline due July ‘12

Linn Energy (NSDQ: LINE) Linn is an LLC, similar advantages to an MLP but no General Partner or IDRs. Most important regions are Mid- Continent (KS, TX, OK; 65% of reserves), and Permian Basin (TX, NM; 18% of total reserves) About 50% oil and NGLs, 50% natgas Significant drilling upside in Granite Wash, Permian and Bakken Growth via Acquisitions, benefit from low cost of capital. Hedges covering 100% of natural gas production through 2015, 100% of oil through 2013.

US Royalty Trusts: SandRidge Permian Basin Trust (PER) Royalty Interest in 16,800 gross acres in Permian Basin of TX. 87% oil and 9% NGLs. 509 producing wells, 888 development wells before March 31, % proceeds from existing wells, 70% from new wells. Hedges and subordination structure insulate from commodity prices. 12-Month forward yield: 12.5% to 14% Buy Under $26.

Other Royalty Trusts SandRidge Miss. II (NYSE: SDR) owns wells in OK and KS Anadarko Basin 85% of expected revenues from oil. 80% of proceeds 67 existing wells, 70% from 206 development wells. 10.5% yield in 2012, 15% in Pacific Coast Oil Trust (ROYT) 80% of proceeds from developed properties, 25% from remaining properties, 7.5% from Orcutt properties. Plans to develop wells is shallow, porous Diatomite (fossilized algae) formation using cyclic steam injection. Whiting USA Trust II (WHZ) 90% of net proceeds from 1,300 gross wells Terminates 12/31/2021 or after million bbl oil produced. 72% crude oil.

Deepwater Boom Cobalt Energy (NYSE: CIE) announced Cameia – 1 Discovery in Angola, opens up new pre-salt field Gulf of Mexico deepwater drilling coming back sooner than expected. Brazil’s Petrobras ramping up deepwater BZ spending Shortage of ultra-deep rigs developing, sending rates >$600,000/day Rig signed at $648,000 per day in rigs due off contract in 2013 Yields around 8 to 9 percent Possible MLP listing to offer even more yield potential. Pacific Drilling (PACD) – 4 drillships under long-term contract, 2 new drillships for delivery in 2013.

Pacific Drilling (PACD)

The Bakken Shale

A Few Shale Recommendations EOG Resources (EOG) – Well-diversified producer with exposure to the Bakken Shale, EagleFord Shale, Barnett Combo and Niobrara Oasis Petroleum (OAS) – 300,00 net acres in the Bakken Shale, produces about 11,500 bbl/day and will spend as much as $850 m drilling in 2012

US Silica (SLCA)

Value in Services and Coal US thermal coal prices to remain pressured by weak gas prices. Met coal market more promising. Peabody Energy (BTU) strong met and Australian exposure an advantage. Long-term value in PRB. Avoid US-focused services companies like HAL and BHI. International business showing signs of picking up. Benefits Schlumberger (SLB) and Weatherford (WFT).