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Reducing exposure to Oil and Gas MLPs

I sold a couple holdings to harvest some tax losses among other reasons.

music selection:  “Shine” — Collective Soul

A large part of my core strategy, after holding a healthy allocation to closed end bond funds is to have equity holdings that pay fat dividends to ensure there is steady income coming in.  Historically, this has included a lot of oil and gas MLPs especially in the pipeline space.  With my double normal size investment in the double leveraged AMZA, holding onto individual company MLPs makes less sense especially when they are underperforming.

I sold two holdings today and am left with about 20,000 of AMZA plus about 10k in exposure to SDLP (which is attractively priced around 3.50 a share).  I am making a long term strategic decision to have less oil and gas exposure for the foreseeable future.  This is going out on a limb a little maybe but I think the long run picture for oil and gas is dark.  Shale oil fracturing has brought enormous new supplies online that suppress pricing. At the same time, I think the electric car revolution, which is still in its infancy, is going to strike a mighty blow to demand.

Early reports from ride sharing services in California that run Teslas are that battery efficiency after 200,000 miles is a loss of only 6% capacity.  There are people who believe electric car batteries will soon have an effective 1,000,000 mile lifetime.  The economic proposition for the lifetime cost of owning and operating an electric vehicle will soon eclipse that for an internal combustion engine vehicle.  I expect we will in the next few years see the mass adoption point where sales of the old technology falls off a cliff.  When the mix of ICE vehicles in operation becomes trivial, demand for crude will fall about 30%.  Many O&G operators will find themselves with stranded assets.  The time to get out may be a few years ahead but I want to be too early instead of too late.

To that end I sold CNNX for 16.43 a share.  The position was initially entered at 20 dollars a share on 22JULY2017.  I book a short term capital loss of 1,785.  The net return on the position after all distributions and options premiums is a smaller loss of 437.65.  I recover 8,215 in cash for redeployment into more attractive opportunities.  I also sold GEL for 20.69 a share.  The position was entered on 19AUG2016 at 37.50 a share.  I book a long term capital loss of 3,362.  The return after all distributions and options premiums is a loss of 2,327.  I recover 4,138 in capital for redeployment.  Both positions are left with naked calls on them that expire on the 15th.  Neither is likely to be exercised.

I hope to raise some more capital by exiting ADM with an options trade.  Sirius XM is also near the money and could see cash returned.  Cash on hand with my main broker is up to 36,064.  That should provide some wiggle room for writing  puts in the new year.

Devour your prey raptors!

{ 10 comments… add one }
  • Chris B November 30, 2017, 7:14 pm

    I’m uneasy picking favorite industries for the same reason I’m uneasy with stock picking and market timing. There’s no clear reason to suggest we have any kind of an edge in doing so. Best of luck despite my skepticism!

    Question: If you wrote a put today, and it expired unexercised in 2018, wouldn’t the
    income be 2018 income? Why not write some of the puts now – if for no other reason than calendar diversification?

    Also, have you watched/read Kirk Duplesse at optionsalpha.com? He thinks options are generally priced efficiently, except for implied volatility. He thinks our opportunities lie in selling options on high-IV days and buying those positions back when IV reverts. Thoughts?

    • The Lizard King November 30, 2017, 11:37 pm

      You are right that puts written today with Jan expiries would be 2018 income for tax purposes. I’ve already written one such position. I’ll be on the lookout for more opportunities but my net exposure is already sufficiently high so most of the action will come when I roll the positions that expire on the 15th and 22nd.

      I haven’t followed Kirk Duplesse. I’d agree that most of the options are probably efficiently priced (EMH). I wouldn’t know if that is inherently less true on days the ^VIX is rising. It makes a certain amount of sense because the science of technology has proven people are more influenced to act on emotion out of fear than greed. And it follows what I do with UVXY in reverse. Buy on low-IV days and sell into high-IV if a spike causes a short term (irrational) gain that can be exploited. I’ll have to check him out.

  • David December 1, 2017, 1:55 pm

    We’re not quite there yet for mass adoption of EV. Range is slowly getting there, but there are still no large SUV announced. The use case for battery EV is a secondary car and it’s a hard sell when it costs as much as an entry level luxury car.

    Fuel cost savings is starting to make sense over here with hydro electricity at 0.10/kWh and gas at 1.20/l (that’s CAD) and we have one of the best spreads in NA. My Soul EV is at around 16kWh/100km in summer and 22 in winter, so it’s around 1.75 in summer and 2.50 in winter in electricity cost. It’s the worst efficiency in EV, but I still get around 0.10 per km in savings. I’ll reach breakeven at around 80000km.

    You guys have a much closer spread on electricity and gas to the point where there’s barely any savings. It will require breakthrough in solid state batteries to bring the cost down to the same level than ICE. We still have 5 to 10 years before that happens and then manufacturers need to integrate it in their production chain, which means gas will still be flowing for 10 to 15 years.

    • The Lizard King December 1, 2017, 4:04 pm

      David,

      There is much more to the cost equation than the price of fuel vs. electricity. ICE cars have thousands of moving parts. They break. The typical repair costs about 300 dollars and some run into the thousands. And the most common required repairs center around emissions. An electric car averages three moving parts. And no emissions parts to break. Also, no oil to change. You are getting more savings than you realize!

      • David December 1, 2017, 4:46 pm

        Yep maintenance is included in the $0.10 per km figure. Point is it’s still very low and I live in the best case scenario. Car costs $8000 more upfront and high maintenance repairs will happen in 5 to 10 years. Average Joe does not see this as a good investment if you throw in the limited range. You can get more range, but the car will cost you 10 to 15k more. Hard sell…

    • Chris B December 1, 2017, 6:01 pm

      Read “The Innovator’s Dilemma” by Clayton Christenson if you have not already. His examples illustrate that new technologies and product platforms usually start as lower-quality, lower-margin niche products with tiny market shares. However, if their rate of improvement exceeds the rate of improvement of status quo technologies, the new tech will eventually eclipse the old tech in terms of adoption. I’d say that’s the case with EVs vs. ICEs.

      Also, the elements like lithium in batteries all have to be expensively mined today. However, as the first generation of batteries starts getting cheaply recycled an increasing % of that material in new cars will be recycled. If all cars were electric, the elements would be in a continual recycling loop, with mining only required to make up for various causes of loss and economic growth. This is one way EV costs could fall far below the cost of ICE vehicles.

      Would I bet the farm on it. Nope. But I sure wouldn’t bet against it.

      • The Lizard King December 1, 2017, 10:11 pm

        “Would I bet the farm on it. Nope. But I sure wouldn’t bet against it.” — Well said brother~! I’ll see if I can get that book from my local library.

  • Luis December 2, 2017, 8:46 am

    And where will the battery power come from? Oil and coal will continue to be the greatest sources of energy for the 21st century, because there is simply nothing with so much energy density.

    • Chris B December 8, 2017, 7:30 pm

      Maybe, but as pointed out here, overall functionality and cost are more important to consumers than the energy density metrics engineers use. That’s why we don’t drive cars powered by volatile compounds that are even more energy-dense than gasoline.

      https://cleantechnica.com/2016/05/13/ev-battery-energy-density-parity-gasoline-2045/

      More importantly, the price-per-unit of performance is falling more rapidly for battery vehicles than for oil burners. Real world performance and cost parity may arrive in 10-15 years.

  • Mr. Tako December 2, 2017, 9:10 pm

    Interesting Velociraptor! I have some exposure to both upstream and downstream oil companies, but haven’t sold anything yet.

    I agree with you that the upstream side is going to continue to be challenged due to excess supply. However, the data indicates no decline in oil or gas demand (it’s actually growing).

    Electric cars are pretty cool, but it’s important to remember that hydrocarbons are used for more than just gasoline.

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