Wed, Jan 7, 2015|Sean Goldsmith

Europe is one step closer to easing...

Europe is one step closer to easing... The U.S. trade deficit plunges... China is stockpiling oil... A boon for tankers... Almost the cheapest gas in history... Why this company's 6.4% dividend is safe...

Macroeconomic pressures continue to taunt European Central Bank President Mario Draghi, who to date has only teased the world with talk of easing.

Consumer prices fell in the European currency union for the first time since 2009, dropping 0.2% in December compared with the same period a year ago. Remember... the ECB has a mandate of 2% inflation.

The euro weakened to a new nine-year low of 1.18 on the dollar. Meanwhile, things continue to look better for the dollar...

The U.S. trade deficit – the difference between imports and exports – dropped from $43 billion in October to $39 billion in November, an 8% drop. That's the lowest deficit since December 2013... And it's all thanks to oil.

The decline came from U.S. shale producers increasing production to combat falling prices... As a result, the U.S. imported the least amount of oil in November since 1994.

But low oil prices aren't only helping the U.S...

Brent crude oil (the international benchmark) fell to less than $50 a barrel today for the first time since May 2009. China is taking advantage of the low prices to stockpile oil.

As of mid-December, a record number of supertankers were sailing to China...

According to IHS Maritime data compiled by Bloomberg, 83 large crude carriers were headed for China. And those ships were transporting approximately 166 million barrels of oil – the highest amount based on data starting in October 2011.

Increased demand for tankers have caused daily shipping rates to soar. As of late December, the daily rate for tankers on the Middle East to Japan route hit $97,489, according to Baltic Exchange data compiled by the Financial Times. That's the highest level since 2008. Six months ago, day rates weren't high enough to cover daily operating expenses of $20,000.

Tanker stocks have acted accordingly. Below is a one-year chart of shipping company Frontline...

One other note about oil...

Professor Mark Perry at the American Enterprise Institute (AEI) think tank posted his 10 favorite energy charts for 2014. One of them showed how gas is close to its cheapest prices in history...

Since last April, gas prices have fallen from $3.70 a gallon to $2.18. Considering the increase in fuel economy of automobiles and higher wages, the metric Perry refers to as the "time cost of gas" is near its lowest level in history.

The graphic above – adapted from the AEI website – shows the number of minutes the average American earning the average hourly wage would have to work to buy enough gas to drive 100 miles. (This also assumes he is driving a car with the average fuel economy of 25.1 miles per gallon.)

Today, it takes 25 minutes of work to buy enough gas to drive 100 miles. That's near its all-time low of 24.3 minutes back in 1998. If gas drops to $2.10 a gallon, we'll have the cheapest gas in history (based on Perry's calculation).

One blue chip is yielding a 6.4% dividend thanks to falling oil prices...

Shares of oil giant BP recently got whacked because the company owns a stake in Russian-owned oil company Rosneft. The market was worried that Rosneft's value was impaired. And given the strength of the dollar versus the ruble, Rosneft's payments to BP were declining.

But Dr. David "Doc" Eifrig doesn't think BP's Rosneft deal is as troublesome as the market would make you believe. He holds BP shares in his Income Intelligence portfolio. As Doc explained...

First off, BP's Rosneft investment was far from a disaster. BP got started in Russia in 2003 by investing $8 billion in a joint venture called TNK-BP. In 2013, TNK-BP disbanded and BP ended up with its stake in Rosneft, which is now worth $6 billion. That's not a good return, but there's more...

Over those 10 years, BP collected $19 billion in dividends from the joint venture. And when the venture disbanded, BP got $12 billion in cash, in addition to a $6 billion stake in Rosneft.

So BP earned $21 billion in cash and dividends and a $6 billion stake in Rosneft – all from its initial $8 billion investment. That's a home run. But where does it stand today? More from Doc...

With falling oil prices and the ruble collapsing, Rosneft is bringing in less income, and the dividends it pays back to BP – after converting to dollars – are worth less and less.

The payouts BP receives from Rosneft have declined substantially, from $810 million in the third quarter of 2013 to just $110 million in the third quarter of 2014. That's before the biggest moves in oil or the ruble. But as the ruble declines further, it will actually have a smaller effect going forward.

The big question surrounding BP is whether the company cut its large dividend. Doc doesn't think it will...

Rosneft accounts for about 6% of BP's valuation ($7 billion out of $109 billion), so the drag from Russian operations may weigh on the share price, but I don't expect the company to cut the dividend.

First off, the annual dividends collected from Rosneft totaled $693 million in the most recent report. BP paid $5.3 billion in total dividends. It generated $30 billion in cash flow from operations over the last 12 months. Rosneft's payouts were substantial, but BP has plenty of breathing room should Rosneft's payments continue to decline.

As Doc explained, BP has an easier time maintaining its dividend than other companies. Because oil production is so capital-intensive, BP can easily cut back on that and save money to pass on to shareholders...

The company spends $23.4 billion per year in capital expenditures. If BP cuts or postpones projects to reduce that by 5%, it frees up more than $1 billion. That's enough to make up for Rosneft and keep the dividend afloat.

That's not only how I would personally run the business, but it's also what BP is going to do. As Chief Financial Officer Brian Gilvary said in October, "Our first priority within the financial framework will always be the dividend... Where we have room at the margin to pare back or re-phase spend without compromising future growth, we will do so."

Rosneft's troubles just aren't large enough to take a bite out of BP's dividend. And with Saudi Arabia attempting to drive prices down and put U.S. shale producers out of business, it will be the large conglomerates with the resources to buy cheap assets from failed producers that win in the end. It will just take a bit of patience for that to play out.

This isn't the first time BP's dividend was in danger...

The company cut its dividend in June 2010 following the Deepwater Horizon oil spill disaster. It faced immense pressure from President Obama to halt its 9% dividend payments. The company also created a $20 billion fund to help clean up the oil spill.

The Deepwater spill was much more serious for BP than today's scenario is... And BP doesn't have Obama breathing down its neck this time.

At the time of the Deepwater disaster, BP paid 12% of the total dividend income in the UK. Almost every UK pension fund owns BP shares... So a dividend cut has major implications. But BP will do everything in its power to maintain it... including cutting capital expenditures (as Doc said).

New 52-week highs (as of 1/6/15): Deutsche X-trackers Harvest China A-Shares Fund (ASHR), Invesco Value Municipal Income Fund (IIM), Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Municipal Opportunity Fund (NIO), Osisko Gold Royalties (OR.TO), Constellation Brands (STZ), and ProShares Ultra 20+ Year Treasury Fund (UBT).

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Regards,

Sean Goldsmith

Baltimore, Maryland

January 7, 2015