Energy Exploration Production & Distribution Fund
Despite the rise of Alternative Energy sources the traditional energy sector is still a dominant part of the energy portfolio of developed nations. The Energy Production and Distribution Fund aims to give investors access to this sector which includes many of the largest companies in the developed world with very stable cash flows and strong balance sheets. In addition the discovery of new exploration techniques such as fracking and the discovery of shale gas reserves in the US provide great growth prospects to the sector.
Another attractive investment view is that many of these companies are very asset heavy and therefore need access to credit markets. The European Financial Crisis of 2011 has dried up the credit markets in Europe and therefore has brought down share prices of some of the large European utilities way down. The Energy Production and Distribution also aims to use this opportunity to accumulate shares of some of these high-quality European energy companies to benefit from the recovery when the crisis is solved.
The Energy EP&D Fund will invest on a stock specific basis. While there will be a certain bias towards expectations of a long-term rise in the sector, the Fund will strive to exploit stock specific opportunities. Some of this analysis will be based on technical analysis while others might be based on M&A potential, dividend yield and valuation multiples. The Fund will also accumulate and maintain as considerable position in US Crude Oil (USO). This position in USO will be managed more passively; however it will still be adjusted for expected major market moves as needed.
June 22nd’ 12 10:54
My concentrated USO exposure in this Fund has definitely crushed this Fund. I had never expected oil to break below $80. I still think that the weakness in USO is a result of market sentiment and it will rocket higher once market sentiment solidly improves. I do expect a serious market correction in August 2012 though, and if oil does not improve until then I will have to close my position at a serious loss. However, since there is considerable leverage in the Fund and I have incrementally averaged down my cost, if USO improves the Fund will rapidly turn very profitable.
May 18th’ 12 15:57
I have bumped up my USO position to almost twice its size. Oil is down almost 15% from where I started accumulating it. It just is too correlated to the market and the market is not holding up well. As the market recovers oil will probably go back up to at least $105 so I decided to cost average down and also use some leverage in USO position to take advantage of that increase. If oil goes back above to $105 this sell-off and this increase in my position will prove to be very profitable for this Fund. It should be a fairly less risky trade since market selloff is way overdone and a relief rally is almost inevitable.
May 7th’ 12 15:54
The position in oil (USO) has definitely proved to be too much correlated with the stock market. The deterioration of the situation in Europe and the pullback in the stock market has hit oil quite considerably. Medium-term, oil is definitely a buy as some sort of European QE is almost inevitable. However, I will probably not be able to hold on for the medium-term without trading the position. My price target to close the oil position is $120, so approximately $47 on USO. I expect some sort of a relief rally from the pullback before an eventual summer 2012 swoon. I will try to close the position before that swoon.
Mar 28th’ 12 12:26
Unfortunately UNG has not yet made the capitulation formation that I expect. So I rather initiated a position in oil (USO). The position is quite large but I kept my long Treasury positions so they should balance each other out. I expect oil prices to benefit from the latest comments from Bernanke and his commitment to ZIRP policy even if markets decline.
Jan 23rd, 12 11:26
I will probably start trading the Fund with a long position in UNG (US Natural Gas) as it has set itself up for a major capitulation. A few days ago it made a daily 7% decline that capped a nearly 30% decline in 9 days. However, I will wait for a truly shocking daily decline most probably more than 10% before I initiate a long position. Natural Gas is very volatile so a anything less than 10% does not yet mark the start of a capitulation in my opinion. I should also note I might have missed the buying opportunity as UNG has recovered some of its losses. Still I plan to wait for the true capitulation before I get long.
Dec 8th, 11 14:52
I wanted to start the Fund by accumulating shares of some Italian and Spanish utilities which are trading at very low valuations, but the European crisis does not seem like will be resolved very soon. As a result I have bought some long term Treasuries for the Fund to take advantage of an expected decrease in Treasury yields while the European situation goes about.
Dec 3rd, 11 13:34
Let’s go over the general strategy of the Fund. The two main aims will be to take advantage of the high dividend yields in the European utilities and the general upward trend in the oil prices. Also relevant will be to invest in the exploration stocks such as Schlumberger (SLB) and Transocean (RIG) as the rise in oil prices leads to more and more exploration and drilling of oil in formerly non-feasible fields. Although perceived as a volatile market, the mega-cap energy stocks are very correlated to the general markets and does not have the added volatility of some other related sectors such as refiners or alternative energy. Therefore, while this will be an actively traded Fund, the aim will be to simply accumulate shares of the mega-cap energy stocks and some utilities at reasonable levels. The majority of active trading will probably occur in the USO (United States Oil) to protect against market corrections in the price of oil and related stocks.