Tag Archives: alternative

Is The Kinder Morgan Plunge An Opportunity To Buy Its ETFs?

While the collapse in oil price has battered the energy sector as a whole, pipeline operators have been the worst hit. This is because the oil rout has prompted the cash-strapped oil producers to cut their spending on projects that pipeline operators were relying on to fund investor payouts. The move has taken a huge toll on Kinder Morgan’s (NYSE: KMI ) balance sheet and dividend payout. Shares of KMI have been in a free-fall territory over the past five days, plunging nearly 30%. From a year-to-date look, Kinder Morgan has lost 60.8% of its value. The problems for Kinder Morgan started last Monday when it unveiled plans to increase its stake to 50% from 20% in a struggling natural gas pipeline company of America. The woes aggravated the next day when Moody’s Investors Service lowered the outlook for the company from stable to negative, raising concerns over the sustainability of a high dividend. Finally, the largest pipeline infrastructure company in the world slashed its dividend by 75% for the first time in its history to conserve cash. The company’s quarterly dividend is now 12.5 cents, a sharp fall from 51 cents. The new policy of reduced dividend will begin from the fourth quarter. The move negates the promise of increasing dividend by 6-10% for the next year that the company made on November 18. Since the majority of KMI’s stockholders are income-oriented, the action led to a huge decline in the share price. KMI’s shares tumbled 6.5% to a record low of $14.70 in after-market hours on Tuesday’s trading session. However, the dividend cut would be beneficial for the company in the long term as it will improve its financial position and help to maintain its investment grade status. Standard & Poor’s appreciated the move by reaffirming its stable outlook on the company. The agency believes that “the move will enable the company to continue to execute on its future growth plans and maintain a total net debt to EBITDA ratio around 5.5x for the next several years.” Additionally, Moody’s reversed its recent downgrade in outlook to stable from negative. As a result, the current slump in the stock could represent a great buying opportunity for long-term investors. This is especially true as the stock currently trades at a P/E ratio of 23, lower than the industry average of 25.6. In addition, the current yield is still impressive at 3.40% even with the massive dividend cut and the share price fall. Investors seeking to tap this opportunity could consider MLP ETFs having largest allocation to this oil and gas pipeline giant. Below we highlight four products in detail: Global X MLP & Energy Infrastructure ETF (NYSEARCA: MLPX ) This product follows the Solactive MLP & Energy Infrastructure Index and holds 39 stocks in its basket. Of these, Kinder Morgan takes the third spot with 7.4% of total assets. In terms of industrial exposure, about 84% of the portfolio is allocated to the oil and gas pipelines and distribution, while oil refining and marketing firms make up for 12% share. The fund has amassed $84.8 million in its asset base and charges 45 bps in annual fees. Volume is good at around 161,000 shares on average. MLPX was down 17.4% over the past five days. First Trust North American Energy Infrastructure ETF (NYSEARCA: EMLP ) This ETF is an actively managed fund designed to provide exposure to the securities headquartered or incorporated in the U.S. and Canada and engaged in the energy infrastructure sector. EMLP is one of the popular funds in this space with AUM of $827.5 million and average daily volume of 410,000 shares. Expense ratio came in at 0.95%. The product holds 66 securities, with Kinder Morgan occupying the second position in the basket at 5.8%. From a sector look, about half of the portfolio is allocated to pipelines while electric power companies round off the top two at 41.1%. The fund lost 9.6% in the past five days. Tortoise North American Pipeline Fund (NYSEARCA: TPYP ) This fund follows the Tortoise North American Pipeline Index, holding 101 securities in its basket. Oil & gas pipelines make up for 72% of assets followed by natural gas utilities at 17%. Here, Kinder Morgan occupies the fifth spot with a 4.9% share. The product recently debuted in the space and has accumulated $17.9 million in its asset base in six months. It trades in lower average daily volume of 13,000 shares while charges 70 bps in fees per year from investors. The ETF was down about 13% in the same period. ALPS Alerian Energy Infrastructure ETF (NYSEARCA: ENFR ) This fund tracks the Alerian Energy Infrastructure Index, holding 36 stocks in its basket. Of these, Kinder Morgan takes the thirteenth place with a 3.9% share. Oil and gas pipeline and the distribution sector dominates the fund’s return at 79%, while utilities, and oil refining and marketing take the remainder. The ETF is unpopular and illiquid having gained $10.5 million in total asset base. The fund trades in a paltry volume of 5,000 shares. It charges 65 bps in fees per year from investors and lost 13.6% in the past five days. Original Post

How A Magic Goldfish Might Short The Stock Market

Summary US equities look wobbly. Buying downside protection is in vogue. Skew is high. Let’s put it to use. Put on your contrarian boots Market participants are wired to cheer for bull markets. Anyone even marginally attached to the finance industry knows what I mean. Every trading floor has a guy with his hair on fire. He is screaming about an imminent collapse in the stock market. He spends his days reading David Stockman’s blog and cruising Zerohedge. Sometimes he mumbles things about an electromagnetic pulse. The marketing department spends at least three hours of every day thinking up ways to get him fired. Nobody likes that guy. Not even me. (Despite my affinity for Mr. Stockman. And let’s be honest, who doesn’t like themselves some good Zerohedge?) Anyway, markets are structurally wired to be long only. Bears have been earning themselves a bad rap since 2009. Here is a fun trick that you can use to avoid ridicule while showing your bearish side. Just call it “Portfolio Protection” One reasonable way to play the trick is to buy put options. Sometimes people ask me to teach them things about options. I start by warning them about the dangers of being a goldfish. It is my adaptation of the 10th Man’s explanation for why efficient market theory is nonsense . Goldfish have crappy memories. They probably don’t spend much time thinking about the future either. When the goldfish gets to the future, it doesn’t think about how it got there. The goldfish is just living in the moment. Think about that if you are using charts like this to analyze an options trade. This is what I call a “goldfish chart.” It is a slice of what the goldfish’s wallet might look like when the option expires. On expiration date, you could ask the goldfish how it got there. It’ll shrug and say something like, “I don’t care.” Don’t be a goldfish I mean, you are probably not a goldfish. You spend a fair amount of your time thinking about your portfolio. You probably care about what your profit and loss will be tomorrow. You certainly care what it will look like when you retire. You pretty much continuously care about your portfolio performance. Goldfish charts narrow your focus onto some arbitrary date called “expiration.” That’s dumb. Much to do about skew While going through the morning routine here, I came across this little gem entitled “Who’s the Bear Driving Up the Price of U.S. Stock Options? Banks” All it really says is that the implied volatility curve is highly skewed. But that sounds like rocket science. So, the author did a really nice job breaking it down. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. Get it? There are a lot of market participants with their hair on fire. They are bidding up high prices on out of the money put options. Portfolio protection is getting expensive. Let’s create a synthetic security! Sounds like fun, right? There is some magic math we could do to create something that looks a lot like buying a put option on the S&P 500 (NYSEARCA: SPY ). [Long Put] = [Short Put] + [Long Call] + [Short Stock] Let’s not think about it too much. Just take my word for it. To a goldfish, the combination of things on the right of the equals sign (the “Synthetic Put”) looks a lot like the thing on the left of the equals sign (just a normal put). Remember when that guy at Bloomberg said that buying puts cost twice as much as buying calls? Take another look at that synthetic put. [Short Put] + [Long Call] + [Short Stock] The goldfish wants to buy a put. But puts are expensive. So instead, the goldfish sells an expensive put and buys a cheap call. Short some stock and… Voilà! That my friends is magic math. How a magic goldfish might short the stock market Let’s do some magic goldfish math. We would like to buy an SPY put with a 204 strike and a March expiration. The market is asking $7.90 for that at the moment. Here is the goldfish chart again. We could just buy the overpriced put for $7.90, but that’s dumb. Let’s build a better mousetrap. We sell a 173 strike SPY put for $1.30. Then we buy two 210 call options for $4.58 each. Adding those things up we have paid $7.86 in net. Then we short 200 shares. Here is what the synthetic looks like compared to the at the money put. That is magic charting! At about the same price we are getting much more protection. How can this be? I have a couple of theories. Maybe three theories. One is that the market is structurally wired to trade long only. The typical market participant doesn’t have a margin account with permissions to go out selling put options and shorting stocks. But the banks do. Why don’t the banks jump in and arbitrage this? I have a theory for that too… First, this is not really “arbitrage.” The synthetic is very short skew. That doesn’t matter much to a goldfish, but it matters a lot to a hedge fund, or a bank, or someone like them. It should matter to you too! You’re not a goldfish. Second, if you are a bank, you are probably going to have a hard time explaining to Mr. Dodd or Mr. Frank what you are doing. Try telling a politician you want to add downside protection by selling a put and buying a call. It sounds a little bit like bullish speculation. The politician is not going to be interested in your magic math. The trade Anyone considering buying portfolio protection should be looking at a synthetic put. Skew is high. It could go higher. There are some other risks. Like, the market is not giving me an early Christmas present. Still, it feels like I would be sufficiently compensated for going short skew. Maybe you will feel like that too. But don’t go out creating synthetic securities just because a stupid chart looks attractive. Don’t be a goldfish.

Entergy Corp. Reports Solid Cash Flows From Operations

Summary This utility with a 5.14% dividend yield deserve a closer look. The decline in natural gas prices has led to a droop in wholesale electricity prices, harming Entergy’s profits. We use the company’s trailing 12 month P/E to get a better price comparison with industry peers. Regularly generating cash profits is an essential component of successful businesses. It only makes sense that’s how many investors wish to see their investments perform as well: as cash machines. Shark Tank investor “Mr. Wonderful” Kevin O’Leary agrees, emphatically stating, “cash is king.” And dividend payers like Entergy Corporation (NYSE: ETR ) churn that stuff out. The utility sector has recently crashed, with many companies trading at or near 52-week lows. Choosing the strongest companies from the lot is a fantastic opportunity to lock in great long-term deals on serious cash machines. Entergy Corp. trades at $66.69 per share, near its 52-week low of $61.27. Their dividend yield is a juicy 5.16% at this price level. During the third quarter, Jim Simons’ hedge fund increased their holdings in this company by 1.02 million shares – that means his research team concluded the company is trading at a discount to its intrinsic value. A clear indication that Entergy is worthy of further investigation. Entergy Corporation serves the growing suburban markets of Texas and operates in Arkansas, Mississippi, and Louisiana. They also distribute natural gas which is becoming more commonly looked upon as a commodity of growing importance in man’s fight against climate change, even as natural gas producers themselves are not presently thriving due to vast oversupply. The company is off of its 1-year high by 27.5% as the utility sector has generally gotten whacked by the market since February of this year. Financial Results & Removing A Big Non-Cash, One-time Impairment Charge Focusing on their operations, the company has announced the shut down of two loss-making power plants. The impairment write-offs and writedowns associated with the closure of the Pilgrim and FitzPatrick nuclear power plants took third quarter results to a net loss of $4.04 per share. I’d like to get closer to the Price-to-Earnings figure without this one-time charge baked in. After we removed the one-time charge we can easily compare the per share price ratios of Entergy Corp with its industry peers. First we’ll take a look at what third quarter 2015 results look like with and without the unusually high impairment charges, then we are going to bake-in Other Income, Interest Expense, and Income Taxes to arrive at an earnings figure that is comparable to industry peers. Note: The company’s 2012, 2013, and 2014 annual reports indicate asset impairment charges of ($ in millions) $255,524, $241,537, and $179,752, respectively. We will use the average of these three annual figures, divided by 4, to estimate the typical impairment charges per quarter. This will allow us to take a view of the profitability of the company aside from the plant write-offs associated with management’s work to improve operations. The average of the indicated impairments for 2012, 2013, and 2014 is $225,604. Divided by 4, that’s $56,401 of average quarterly impairments — the figure used in the image below. Time to review operating expenses with and without the recent quarter’s decommissioning related impairments: Taking another step closer to an industry-comparable earnings per share figure we’ll add in Other Incomes of $43,179 and subtract the quarter’s Interest Expense of $171,349. Our income before income taxes comes to $492,617. On Entergy’s very profitable 2014 they paid 38% tax on the aforementioned figure. Taking income taxes into account for the quarter we come to our net-of-decommissioning write-off 3rd quarter net earnings figure: $305,423. Finally, we will now find our remapped, industry peer comparable earnings per share and price-to-earnings figures for the 179,151,832 common stock shares outstanding: Retuned 3rd Quarter 2015 Earnings Per Share of $1.70 I selected Southern Company and FirstEnergy Corp. as they are among those enjoying profitability and similar dividend yields. Other peers in the energy utility sector include NRG Yield, Inc. (NYSE: NYLD ), Calpine Corp. (NYSE: CPN ), The AES Corporation (NYSE: AES ), and American Electric Power Co., Inc. (NYSE: AEP ). Entergy’s retuned Trailing P/E of 12.24 compares favorably to larger and slightly larger peers Southern Company (NYSE: SO ) and FirstEnergy Corp. (NYSE: FE ). Entergy enjoys a higher dividend yield and a competitive price-to-sales ratio with its market capitalization neighbor First Energy. Another favorable indicator is the firm’s Price-to-Sales ratio below the average of its peers. Cash Flow from Operating Activities Cash flows from operating activities, net of nuclear fuel purchases and resale, and net of financing costs, bring us to 3rd Quarter cash earnings of $329,628,000. This figure far exceeds their quarterly common stock dividend of $.85 per share, or approximately $154,038,000 inclusive of preferred dividends. It appears that the company can reliably generate enough cash to pay its dividends. Marketplace Interest in Entergy Corporation When a hedge fund with a small army of highly-qualified analysts and access to 3rd party consultants at costs of hundreds of thousands of dollars takes interest in a company by executing significant buy orders, I get interested too. Now, there’s no way to know the exact reasons for the following recent purchases I will outline below but you can be generally assured that these guy’s goal is to make money in a long position through the receipt of dividends and capital appreciation. As mentioned earlier in this article, Jim Simons’ hedge fund added 1.02 million shares of Entergy Corp during the second half of this year. That’s a 70% increase in the size of their position in the company, bringing Jim Simons’ funds’ total position to 2.47 million shares. Millennium Management increased their position by $54 million during the most recent quarter. They own 1,525,275 shares with a value of $99 million. Buying by Hedge Funds far exceeded selling during the second half of the year reported as of September 30th, which is a bullish indicator of smart money sentiment. Conclusion I like Entergy Corp.’s at its yield of 5% and greater. They serve a diverse geography from Texas, to Louisiana, Arkansas, and New York, among other locales. Their earnings figures are solid aside from the one-time decommissioning charge associated with the closure of money-losing nuclear power plants in Plymouth, MA and the FitzPatrick plant of New York State. The Plymouth plant closure is expected to be complete during the first half of 2019 and FitzPatrick’s closure during early 2017 at the latest. Most of the company’s production of electricity is by nuclear power plant. Their profitability has suffered with the collapse in the price of natural gas because it has brought down the wholesale price of electricity in their markets. In general, Entergy’s free cash flow should easily support its quarterly dividend for a long time coming. Utilities such as these folks are the classic example of long-term cash machines. Due to my belief that the marketplace has generally underappreciate Entergy’s ability to reliably pay its dividend, tempered by a reluctance to catch a falling knife where we don’t know whether or not natural gas prices will continue to drag on electricity prices, I rate Entergy Corporation a hold. If natural gas — hence wholesale electricity prices — start climbing again and all else stays the same, Entergy Corporation becomes a clear and even a screaming buy. Click +Follow next to my username to get the latest research beamed to your inbox in realtime Additional disclosure: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author’s interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security