The 'American Industrial Renaissance' hits Louisiana... Toll Brothers' big numbers... New high for a Florida landowner... A way to collect 6% payments from 'the best business in the world'... The new Digest Premium
Other than the U.S. becoming the dominant player in the global energy market, one of the major benefits of the U.S. shale boom is a resurgence in domestic manufacturing.
Natural gas is a major cost for manufacturers (from steel to chemicals). And as a result of oversupply, low natural gas prices will attract manufacturers to the U.S. My colleague Dan Ferris calls this phenomenon the "American Industrial Renaissance." He wrote about it in today's DailyWealth.
The American Industrial Renaissance is a simple-but-powerful wealth-building trend...
Thanks to new drilling technologies, we are unlocking vast new supplies of natural gas in underground shale formations across the country. The increased supply has pushed prices lower. And lower natural gas prices improve the profitability and competitive edge of many American industries – including chemicals, plastics, cement making, steel, power generation, and transportation.
Cheap natural gas produced from the U.S. shale revolution has transformed America into "the low-cost industrialized country for energy," according to the Wall Street Journal. Savings on input costs can increase profits... which gives U.S.-based manufacturers a huge competitive advantage.
In the essay, Dan points to companies like Royal Dutch Shell, Dow Chemical, and Chevron moving manufacturing back to the U.S... And we're seeing more and more companies announce manufacturing investments in the U.S. every day. For example, today, the Financial Times reported South African oil giant Sasol would invest $21 billion in two plants in Louisiana.
The company began engineering and design work for the two plants... One would convert gas to diesel fuel and lubricants. The other would turn ethane into ethylene and other chemicals.
This will be the biggest investment to date in manufacturing in Louisiana. And the two plants will create 7,000 construction jobs and support around 1,200 ongoing jobs once it's in operation.
"Two or three years ago, we would not have been talking about these projects," Sasol CEO David Constable said. "What cheap natural gas and [natural gas liquids] have done for this country is dramatic."
Toll Brothers, the largest luxury homebuilder in the U.S., announced solid fourth-quarter earnings... The company earned $411.4 million, compared with $15 million a year ago. Earnings included a $350.7 million tax benefit from deferred tax assets from the housing crash.
Revenue was $632.8 million for the quarter, an increase of 48% from a year ago. Net contracts signed jumped 75% to $684.1 million. And Toll's backlog of properties under contract increased 70% to $1.67 billion.
"Pent-up demand, rising home prices, low interest rates, and improving consumer confidence motivated buyers to return to the housing market," Toll Brothers CEO Douglas Yearley Jr. said in a statement.
And the company's momentum is only increasing... From the company's earnings statement (emphasis added):
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Sequentially, over the four quarters of [Fiscal Year (FY)] 2012, the value of net signed contracts rose 45%, 51%, 66%, and 75% compared to FY 2011's same four quarters. Our net contracts per community ("same store sales"), which increased 33% and 60% respectively versus FY 2011's full year and fourth quarter, were the highest for a fiscal year since FY 2006 and the highest for a fourth quarter since FY 2005. Now, five weeks into FY 2013, our contracts are up 34% versus FY 2012's same period. |
Digest readers know Steve Sjuggerud has been bullish on housing for years. His True Wealth readers are up 56% on the U.S. Dow Jones Home Construction Fund (ITB) – an exchange-traded fund comprised of homebuilders and other housing-related stocks like home improvement chain Home Depot – since February 2011.
And another real-estate-related stock Steve recommended – Alico (ALCO) – hit a 52-week high yesterday. Due to its small market cap, Steve recommended Alico in Phase 1 Investor, our exclusive "venture capital" service that focuses on micro-cap stocks and early-stage technology and mining companies.
Steve originally recommended Alico in July 2010. Buying Alico at that time gave you partial ownership of 135,000 acres of South Florida real estate at $1,600 an acre. The company owned the only major privately-held section of South Florida... And the government wanted to buy it. The government wanted Alico's land (which is immediately south of Lake Okeechobee and north of the Everglades) to supply clean water to a growing population and to save the Everglades' fragile ecosystem.
As part of the Florida Forever program, started in 2001, the state government had a $300 million-a-year budget to buy lands for conservation. And at the time of the recommendation, Florida Forever had spent $2.7 billion to acquire 648,000 acres – paying roughly $4,200 an acre.
Also in 2010, Florida Governor Charlie Crist spent more than $500 million to buy 72,800 acres just south of Lake Okeechobee from U.S. Sugar, a Florida-based sugar manufacturer. That was a payday of $7,400 per acre to U.S. Sugar.
Why, Steve asked, was Alico's land (which is just as desirable as the land the government had been buying for between $4,200 and $7,400 an acre) worth only $1,500 an acre? He concluded:
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If you priced Alico's 135,000 acres at what Crist is paying for U.S. Sugar's land, then Alico's land would be worth roughly $1 BILLION. Yet the stock market value of Alico is just roughly $150 million. |
The company was cheap due to bad management and the greater Florida real estate crisis. But Steve thought it was too cheap. And its shares have recovered with the rest of the real estate market... Readers are now up 62% on the recommendation.
Porter calls it "the best business in the world."
It's the only business in the world that routinely enjoys a positive cost of capital. In every other business, companies must pay for capital. They borrow through loans. They raise equity (and most pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.
But a well-run business in Porter's favorite sector will routinely not only get all the capital it needs for free, it will actually be paid to accept it.
We're talking about insurance... And the best insurance companies make sure the premiums they charge are greater than the risks they accept by extending insurance. These companies make a profit on underwriting. That's why Warren Buffett loves insurance so much and used it as the building block for his $217 billion holding company, Berkshire Hathaway.
In his 2011 letter to investors, Buffett wrote:
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Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers' compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call "float" – that will eventually go to others. |
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Meanwhile, we get to invest this float for Berkshire's benefit... If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit occurs, we enjoy the use of free money – and, better yet, get paid for holding it. |
Stansberry's Investment Advisory subscribers have already received Porter's list of recommended insurance stocks. But Stephen Smart, the editor of our True Income newsletter, found another way for you to gain exposure to the insurance sector. And unlike with Porter's recommendation's, Stephen's investment is legally obligated to pay you nearly 6% a year.
If, like us, you think insurance is a great business... And you'd like to collect a super-safe 6% each year investing in the sector, you should read the latest issue of True Income. We're currently offering the service at a 50% discount... But that offer ends tonight at midnight. Click here to learn more...
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New 52-week highs (as of 12/3/12): iShares Australia Fund (EWA), Alico (ALCO), and GenMark Diagnostics (GNMK).
We're already receiving feedback about our newest service, Digest Premium. We launched this service yesterday for our Alliance members and "Capital Level" Stansberry's Investment Advisory subscribers. We expect to open it to everyone soon. And if you're one of those receiving Digest Premium, we'd love your feedback... Send your notes to feedback@stansberryresearch.com.
"I'm delighted that you are developing the Digest Premium – more education is better. The test will be whether you can produce enough insightful material that it lives up to the "Friday Digest" standard – Porter sets a pretty high bar." – Paid-up subscriber Al Hammond
"Please let me know how to subscribe to 'Digest Premium'..." – Paid-up subscriber Ches Penney
Goldsmith comment: We'll make Digest Premium available to all our subscribers later this month. And we'll be sure to make an announcement in the Digest for everyone who would like to sign up.
If you're not familiar with Digest Premium, it's a new service focused on delivering education, actionable recommendations, and special insight from Porter on a daily basis. Think of it as the Friday Digest – where Porter tries to teach you something of value – everyday... And you'll receive this content in addition to everything included in the regular Digest.
And Al, we're up to your challenge... For example, yesterday, we delved further into the U.S. shale boom and explained how the huge amount of oil and gas we're producing will destroy a particular sector of the oil market.
Regards,
Sean Goldsmith
New York, New York
December 4, 2012
The oil and gas boom in the U.S. is creating lots of "winners"... especially the businesses that will help build the infrastructure needed to transport gas around the world.
However... it's also creating a whole bunch of "losers"... businesses that bet their future on producing other expensive sources of petroleum. Yesterday, we looked at one… Brazil's offshore exploration and production giant Petrobras. Today, we'll discuss another… Notably... Canada's "oil mud" companies are in big trouble...
The massive amounts of oil and gas coming from domestic shale plays (like the Bakken in North Dakota, Eagle Ford in Texas, and SCOOP in Oklahoma) will hurt our oil-producing neighbors to the north.
Canada exports approximately 2 million barrels of oil per day to the U.S. And much of that oil comes from Canadian oil sands, or what we termed "oil mud." Shale oil will hurt Canadian oil sands in two ways...
First, the crude from oil sands is expensive to produce. All the oil coming from the U.S. will drive down the price of oil, decimating (perhaps eliminating) any profit margin from producing oil sands.
Second, Canada's biggest customer, the U.S., doesn't need that oil anymore. And Canada could lose access to oil pipelines as shale oil fills the available capacity.
We'll discuss the first issue in today's Digest Premium...
The heavy oil trapped in the sand of places like the Athabasca region of Alberta is expensive to produce. You have to dig the tarry sand out of the ground and super-heat it to separate the oil. The finished product is still lower-quality than the light, sweet crude produced in places like Texas' oilfields.
Until June 2008, the U.S. Securities and Exchange Commission (SEC) wouldn't allow Canadian oil-sands promoters to call their assets "oil reserves." Instead, the SEC required them to be classified as "mining reserves." The distinction is arcane... but what's important is that classifying them as oil reserves would increase the value of the producers' stock.
But high oil prices and the lobbying efforts on behalf of the Canadian oil sands caused the SEC to change its mind. One June 26, 2008, only 20 days after oil hit a record price of $142 per barrel, the SEC recognized oil sands as official reserves.
Today, oil costs $88 per barrel (38% below 2008 prices). And Canada is stuck with billions of barrels of "reserves," which are still expensive to pull out of the ground. Meanwhile, the U.S. is sitting on billions of barrels of higher-quality oil that is cheaper to produce.
Total extraction costs for oil sands can exceed $50 a barrel. Extracting shale oil can cost half that (or less). Because of the extra cost and lower quality, Western Canada Select (WCS) – another name for oil mud – trades at a discount to West Texas Intermediate (WTI) crude, the U.S. benchmark.
Over the last year, WTI has sold at a discount of more than $20 compared with the international standard, North Sea Brent crude. WCS sells at a historical discount between $12 and $15 per barrel to WTI. And the spread is only getting wider...
Today, oil sands producers receive less than $60 per barrel. That's nearly a $30 discount to WTI.
The advent of cheap, high-quality oil has destroyed the value of the lower-quality stuff… The following chart shows a ratio of WTI prices to WCS. We expect the gap between the two to grow… and that's bad news for Canada's oil mud producers.
A recent report from Wood Mackenzie, an energy research and consulting firm, says the "breakeven costs for building new steam-driven projects [in the oil sands] are in the $65-$70 a barrel range and mining developments need at least $90-$100 oil."
Existing, steam-driven oil sands projects can still be profitable with WCS at $45 a barrel. But one-fifth of all oil sands operations, those that rely on conventional mining for extraction, aren't viable.
'Oil mud' producers are doomed...
The shale boom is making expensive deep-sea drilling operations huge white elephants... In today's Digest Premium, we look at another sector of the oil industry that's in deep trouble...
Click here to continue reading.
'Oil mud' producers are doomed...