Tag Archives: management

No Danger From COP21 For Airline And Shipping ETFs

The world is striving to arrest the rise in the global temperature to 2 degree Celsius by the end of this century. In that vein, global leaders assembled in Paris at the COP21 meet – which was the 21st annual conference of parties – to chalk out an elaborate and comprehensive plan to lower carbon emissions and moderate the warming of the planet. In any case, efforts to check global warming have been constant across countries. Not only developed economies, but the emerging ones too are pushing themselves to attain this goal. However, following two weeks of sharp diplomacy, 196 countries agreed upon a historic agreement on climate change last Saturday. Per the agreement, developed economies will provide a minimum of $100 billion to developing nations a year to finance the needed reforms they can’t pay for to restrain greenhouse gas emission. Needless to say, clean energy stocks and ETFs as well as fossil-fuel free investments will enjoy a huge benefit in the coming days. Is There Any Loophole in COP21 Treaty? Two key pollution causing sectors, international shipping and aviation were excluded from the COP21 treaty. International shipping emits 2.4% of global greenhouse gas emissions, almost the same that the whole of Germany does. Total aviation gives up about 2% of global GHGs, and international flights make up about 65% of that number, per the source . These emissions do not come under the territory of any specific country and thus is out of the COP21 treaty. In fact, greenhouse emissions are estimated to rise exponentially by 2050. However, International Civil Aviation Organization (ICAO) has indicated to that it will plan a global market-based measure to lower carbon emissions. The agency has vowed to perk up fuel efficiency by 1.5% each year until 2020 and ‘to halve 2005-level emissions by 2050’, per citylab.com. International Maritime Organization also “has set an energy efficiency requirement for ships built in 2025, but not an overall carbon emissions target.” Needless to say, technological advancements are being tested rigorously in the aviation and shipping industry for decarbonization, but it has a long way to go. As of now, these two sectors are not as vulnerable as the fossil-fuel related sectors from Paris climate summit. Investors can safely play or dump airline and shipping stocks and ETFs on their inherent sector strength or weakness. Below we highlight two sector ETFs in detail. Airline – U.S. Global Jets ETF (NYSEARCA: JETS ) This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 34 securities with double-digit allocation going to Southwest Airlines, Delta Air Lines, American Airlines and United Continental. Other firms hold less than 4.44% share. The ETF has a certain tilt toward large-cap stocks at 62% while small and mid caps account for 24% and 14% share, respectively, in the basket. The fund has gathered $48.4 million in its asset base while sees moderate trading volume of nearly 40,000 shares a day. It charges investors 60 bps in annual fees. The fund added 13.2% in the last six months (as of December 15, 2015). Guggenheim Shipping ETF (NYSEARCA: SEA ) The $30.2 million fund tracks the Dow Jones Global Shipping Index and holds 26 securities in its basket. The index reflects high dividend-paying companies in the global shipping industry. As far as the sector breakdown goes, the fund is concentrated on the industrial sector with about 58.8% exposure while the rest is attributed to the energy sector. In terms of geographic distribution, the U.S. takes the top spot with more than 36% of focus, followed by Denmark (19.1%), Japan (13.5%) and Greece (9.5%). The product charges 65 bps in annual fees for this diversified exposure. However, the fund was off about 31% in the last six months (as of December 15, 2015). Original Post

Exelon: Utility Selling At 10-Year Lows, Again

Exelon’s share price bottomed in 2013 at $26.91, rose to $36.83 in Aug 2014 and Dec 2014, only to drop to $26.60 this month. The long-term investment thesis remains the same. Exelon’s profitability is still dependent on competitive wholesale prices driven by natural gas pricing. Two years ago, almost to the day, I penned an article discussing Exelon (NYSE: EXC ) trading within a hair’s breath of its 10-yr low. Unfortunately, I can write a follow-up as this is the case again. It seems EXC is just as controversial today as it was back then, and uncertainty remains the major obstacle. New income investors looking for higher relative yields should review EXC and current shareholders should continue to hang in and even add to their position. In the previous article, the investment thesis was laid out: Management and investors are making a huge bet that demand will increase, wholesale pricing will increase, and base-load capacity will decrease. Demand will increase with strengthening economic activity in the Northeast and Midwest. Pricing will pick up with a turn in natural gas pricing. Base-load capacity will decrease as coal-fired plants are retired and as more intermittent-load wind replaces investments in additional base-load capacity. When these three events positively influence EXC’s bottom line, share prices will be substantially above their current 10-year lows. However, these events have not happened, and the timeframe continues to get pushed out. With the growth of natural gas as a generating fuel, electricity pricing continues to be influenced by the price of natural gas. As we know, natural gas is once again sub-$2.00, applying pressure on electricity pricing. Below are three graphs from sriverconsulting.com that tell the story. The first is the Forward Market price for electricity in ISO New England. The most recent forward price matches its 10-yr low of March 2012. The second shows the relationship of the 5-yr forward price of natural gas and electricity and the third shows the same relationship on a 1-yr basis. The last two charts demonstrate the correlation between natural gas pricing and electricity pricing, and the trend over the previous 12 months has been for tighter correlations. As of the week of Dec 9, the forward 12-month NYMEX price for natural gas was $2.34. (click to enlarge) Source: sriverconsulting.com (click to enlarge) Source: sriverconsulting.com (click to enlarge) Source: sriverconsulting.com Natural gas pricing will continue to be a key factor in PJM markets. According to ISO New England, in 2000, natural gas represented 15% of the fuel used to generate power in the Northeast, and this percentage grew to 44% in 2014. The growth has been at the expense of coal and oil, with these fuels declining from 18% to 5% and 22% to 1%, respectively. Nuclear remained almost constant at 31% and 34%. The following 17-yr chart shows the growth in MW capacity by fuel type in the Northeast, as offered by the ISO New England 2015 Regional Electricity Outlook. (click to enlarge) One advantage of merchant power generators in other parts of the US is many utilize 20-yr purchase power agreements with electric distribution utilities, usually including a “fuel cost plus” formulation. However in the Northeast, Mid-Atlantic and eastern Midwest, pricing is controlled by the Regional Transmission Organizations RTO, of which PJM Interconnect is the largest. The silver-lined underbelly of the auction process is the premium PJM now allows for “reliability,” and EXC’s nuclear generation qualify for these premiums. During the Polar Vortex of early 2014, power generation along the East Coast was dangerously close to falling under demand as frozen coal stocks and frozen natural gas valves caused an uncomfortably large amount of generating capacity being off-line. In response, PJM instituted an added premium for power generation with higher commitments to remain online, backed by huge fines for those who take the premiums but can’t deliver during similarly stressful times. Nuclear power, of which Exelon is the largest provider, is a qualified fuel for this premium. Over the next two years, this premium will be implemented and will help EXC realize a bit higher price for its commodity product. Demand and capacity retirements have been progressing along as expected, with additional nuclear plants announcing their retirement. Even after the acquisition of Pepco Holdings (NYSE: POM ), which is now expected to be EPS-neutral over the short-term, power generation sold mostly using the PJM 3-Yr Rolling Auction process will still represent about 50% of EXC’s earnings. While this exposure to the merchant market has declined from 80% in 2008, the graphs above have a large impact on earnings for EXC. Concerning the proposed merger with Pepco, management seems to have satisfied DC regulators with the move of some executives and their offices to the Washington area, along with $78 million in payments to DC customers. Exelon agreed to relocate 100 jobs from outside D.C. into the city and create an additional 102 union jobs. The company also agreed to co-locate its headquarters in D.C. Exelon has six months after the merger is approved to relocate elements of its corporate headquarters from Chicago to D.C. It will shift the primary offices of CFO Jack Thayer and Chief Strategy Officer William Von Hoene Jr. to D.C., as well as the entire Exelon Utilities division, which is now based in Philadelphia, along with divisional CEO, Dennis O’Brien. The merger could be finalized before management’s commitment to walk away if not completed by April 2016. Over the longer term, management estimates the merger can increase earnings by $0.25 a share over the next 4 years, or about 9% of the estimated $2.57 2016 EPS. Management believes the acquisition of Pepco will accomplish two important goals: the ability to fund the dividend entirely through its regulated businesses and the ability to gain sufficient critical mass to separate the regulated and unregulated businesses, if advantageous to shareholders. On a valuation basis, EXC offers an inexpensive entry point. Below is a comparison of fundamentals for EXC vs. the utility average, as offered by Morningstar.com: Source: morningstar.com, Guiding Mast Investments Consensus earnings estimate for next year have been increasing since June 2015. Below is a chart of 12-month consensus EPS estimates for 2015 and 2016, as offered by 4-traders.com. Insidermonkey.com wrote a positive article on EXC earlier this month. In summary: It’s been a down year for most utility companies as big mutual funds rotate out of the sector due to normalizing yields. Although Exelon Corporation shares are down 23% year-to-date because of the Great Rotation, Exelon’s decline has made it an attractive dividend play. Shares now yield 4.57% and trade at a reasonable 10.6 times forward earnings. Seeing as the company’s payout ratio of 0.55, Exelon’s dividend is secure and has room to expand given the company’s predicted next five year average EPS growth rate of 5.03%. Hedge funds are certainly bullish as the number of elite funds long the stock jumped by 10 during the third quarter. According to morningstar.com, in 2014, EXC’s total return was +39.9% while year-to-date total return has been a negative -23.0%. This compares to +20.3% and -11.3% for Diversified Utilities and +28.7% and -6.9% for the S&P Utility ETF (NYSEARCA: XLU ), respectfully. While the past 2 years have not been as profitable for EXC shareholders as the average industry investment, the current yield of 4.9% should be sufficient for income investors to buy and hold for the “eventual turnaround” in the same investment thesis outlined above. These 10-yr lows in share prices only come around every 10 years… or every 2 years in the case of EXC. Author’s note: Please review Author’s disclosures on his profile page.

No Respite For Oil And Energy ETFs In 2016?

The vicious trading of oil and the energy sector is likely to persist for more months especially after the Fed finally pulled its trigger on the first rate hike in almost a decade. Higher interest rates will drive the U.S. dollar upward, making dollar-denominated assets more expensive for foreign investors, and thus, dampening the appeal for the commodity. In addition, it will make the borrowings, in particular for high-yield firms, costlier and result in less money flows into capital-intensive shale oil and gas drilling projects. This in turn will lead to higher bankruptcies, hitting the already battered energy sector. Following the rate hike announcement, U.S. crude dropped nearly 5% to $35.52 per barrel, just a few dollars away from $32.40 that it hit during the financial crisis in 2008. Meanwhile, Brent oil tumbled to the nearly 11-year low of $37.11, which is not very far from the December 2008 low of $36.20. Analysts expect breaking the 2008 levels could take oil prices to levels not seen since 2004 given fears of growing global glut and weak demand that have been weighing on the oil prices. Weak Trends The latest inventory storage report from the EIA for the last week showed that U.S. crude stockpiles unexpectedly rose by 4.8 million barrels against the expected 1.4 million-barrel drawdown, underscoring further weakness in the energy sector. This is because production has been on the rise across the globe with the Organization of the Petroleum Exporting Countries (OPEC) continuing to pump near-record levels of oil to maintain market share against non-OPEC members like Russia and the U.S. Additionally, Iran is looking to boost its production once the Tehran sanctions are lifted. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook. Further, a warm winter in the U.S. will depress demand for energy and energy-related products. Adding to the grim outlook is the International Energy Agency’s (IEA) expectation that the global oil supply glut will persist through 2016 as worldwide demand will soften next year to 1.2 million barrels a day after climbing to a five-year high of 1.8 million barrels this year. ETF Impact The Fed move and the bearish inventory data have battered the oil and energy ETFs and are expected to continue doing so in the coming months with bleak oil fundamentals. In particular, the iPath S&P Crude Oil Total Return Index ETN (NYSEARCA: OIL ) , the United States Oil ETF (NYSEARCA: USO ) , the PowerShares DB Oil ETF (NYSEARCA: DBO ) and the United States Brent Oil ETF (NYSEARCA: BNO ) lost over 3% in Wednesday’s trading session. All these products focus on the oil futures market and are directly linked to the U.S. crude or Brent oil prices. In the equity energy ETF space, the First Trust ISE-Revere Natural Gas Index ETF (NYSEARCA: FCG ) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) were the worst hit, shedding 2.7% and 2.2%, respectively. These were followed by declines of 2% for the Market Vectors Unconventional Oil & Gas ETF (NYSEARCA: FRAK ) and the PowerShares S&P SmallCap Energy Portfolio ETF (NASDAQ: PSCE ) . FCG This fund offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 30 stocks in its basket that are well spread out across each component with none holding more than 6.95% of the assets. The fund has amassed $161.1 million in its asset base while charging 60 bps in annual fees. Volume is solid with more than 1.8 million shares exchanged per day on average. XOP This fund provides equal-weight exposure to 66 firms by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. Each holding makes up for less than 2.3% of the total assets. XOP is one of the largest and popular funds in the energy space with an AUM of $1.5 billion and expense ratio of 0.35%. It trades in heavy volume of around 12 million shares a day on average (see all the energy ETFs here ). FRAK This ETF provides exposure to the unconventional oil and gas segment, which includes coalbed methane, coal seam gas, shale oil & gas, and sands market. This fund follows the Market Vectors Global Unconventional Oil & Gas Index, holding 57 stocks in the basket. Average daily volume at 39,000 shares and an AUM of $41 million are quite low for the fund while expense ratio is at 0.54%. PSCE This fund provides exposure to the energy sector of the U.S. small-cap segment by tracking the S&P Small Cap 600 Capped Energy Index. Holding 32 securities in its basket, it is heavily concentrated on the top two firms that collectively make up for one-fourth of the portfolio. Other firms hold less than 5.8% of total assets. The fund is less popular and less liquid with an AUM of $33 million and average daily volume of about 19,000 shares. Expense ratio came in at 0.29%. In Conclusion Investors should stay away from the above-mentioned funds as more pain is in store for oil and the energy sector. FRAK and FCG have a Zacks ETF Rank of 5 or “Strong Sell” rating while XOP and PSCE have a Zacks ETF Rank of 4 or “Sell” rating, suggesting their continued underperformance going into the New Year. Original post