Miller Howard Investments Q1 Report


Two years ago we wrote about the problems facing the economy and the equities markets, though investors lately seem to have lost their fear in both areas—for the moment. Back then, however, the euro was still in question. The sustainability of many large banks was far from certain. The lugubrious pace of economic recovery after the shock-and-fall of 2008 was concerning, the “fiscal cliff” was imminent, tax rates were uncertain, many countries had implemented “austerity” plans that were (and are) antithetical to growth, and the Chinese economy—the most recent contributor to overall economic growth—was tottering, taking down commodity prices as well as international trade. If there was any doubt about the seriousness of economic fragility, the Federal Reserve’s zero-interest-rate policy provided an ample exclamation point on the true state of things.

We suggested that essentially all of the problems of the moment were a consequence of little or no growth, and the emotional despair that hovered over all was a product of the apparent paucity of possibilities for any kind of jumpstart. Meanwhile, there would be no “escape velocity,” as the yearning was phrased by many at the time. Economies always need something special to get in gear: technological innovation, demographic changes, a war, inspirational leadership, to name a few. Usually it’s technological innovation that provides a spark and a cascade of growth effects that move an economy beyond mere productivity improvements—and into the kind of momentum that would be needed to heal the damage inflicted by the financial crisis and Great Recession. What could save us this time?

We did not see many opportunities for economic salvation, at least in this country, save one: the North American Energy Revolution. Indeed, in 2011 we had developed an investment strategy to focus on the newly available energy resources and all the businesses touched by this astonishing turnabout, believing it to be an important and durable economic tailwind. To review, in brief, the US and Canada held 50–100 years of natural gas and oil reserves in tight rock formations unavailable by conventional means of drilling (which requires discrete reservoirs). High fuel prices incented a new generation of technological development in the drilling industry, and 60-year-old horizontal drilling techniques suddenly became refined and economically practical in broad application. Old oil and gas geographies became new again.

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Pennsylvania, Michigan, North Dakota, West Virginia, and Ohio joined the traditional roster of Western producing states, and waning fields in older mature areas became newly vibrant, as horizontal drilling released resources thousands of feet deep, below the old wells. The natural gas and oil industries have likewise become rejuvenated. Natural gas prices plummeted as the industry went from shortage to surplus. Liquified natural gas (LNG) terminals, previously built to import gas that would be needed as shortages developed, began to gain approvals as export facilities. Far ahead of earlier IEA predictions, the US will be natural gas–independent by 2016 (shale gas production has risen sixfold in the past five years) and overall energy-independent by 2020. All the dollars that used to go to countries that don’t like us will be staying home—presumably strengthening our own currency and beginning to circulate throughout our economy as well.

And it’s not just producers who benefit. All the new wells need to be connected to a centralized delivery system; this is the sphere of the MLPs, and why they are growing so rapidly and consistently. Chemical companies and other intensive users of energy are relocating to the US from overseas, with plans in motion for some $100 billion of investment. There are over a dozen large-scale ethylene crackers (refineries) under construction or expansion—the first such construction in this country in 20 years. Dow Chemical is building a major plant in Louisiana. Methanex is actually disassembling plants in Chile and rebuilding them in the US. Chevron is building, Sasol is building, Exxon is building, Royal Dutch has plans to build in Pennsylvania. Even the Saudis are scouting locations. “It is very important that SABIC [Saudi Basic Industries] not be left out from investments in the US,” said the company’s CEO last summer. Overall, shale gas development is expected to create 1 million new jobs directly, and an additional 2 million jobs in construction and related industries.

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