Energy Stock Investing Course for Beginners (Oil, Gas, Coal, Uranium)
for this energy Stock Investing course the plan is to provide a beginner’s overview specifically the four most important Global energy sources oil natural gas coal and uranium so let’s start with the big one oil now the oil energy sector has many Subs sectors so there’s multiple components you could potentially invest in though when most people think of oil they likely think of the oil producers which are likely you’re integrated in Exploration and production companies but in terms of all sectors you have exploration and production the people making and producing the oil Midstream which is transporting the oil refining and marketing which is turning the crude oil into more usable products integrated which is all of the above so basically your Exxon mobils drilling companies that help drill the oil wells and equipment and services companies that provide equipment and services to these oil companies in terms of use cases there are too many to count but it is really the primary fuel that runs the world particularly when we’re talking about Transportation so when it comes to oil petroleum products about 66% is used for transportation at least in the US and another quarter of that is specifically used for industrial use because of how important transportation is in the economy the price of oil has a major impact on the prices of many other Goods as a byproduct in terms of Transportation specifically it’s used for gasoline diesel fuel jet fuel and other heavy fuels for cargo ships and bul carriers and industrially it’s used in the production of other products and chemicals like asphalt plastic synthetic Rubber and other chemicals in addition to Transportation oil is necessary for a wide variety of products they use petroleum or petroleum byproduct in their production so when you hear people say that we’re going to completely remove the use of oil they just don’t know what they’re talking about which gives us to the investment thesis which is demand for oil will continue to grow and as the most globally used commodity it also serves as an inflation hedge additionally us oil companies now seem to focus more on Capital returns which as BuyBacks and dividends than they had in the past this means compared to perhaps in the past where oil companies would drill for new wells at almost any cost in efforts to increase production oil companies are now a bit more sensitive on Capital allocation and won’t reinvest back into capital projects unless they have a high enough return generally we’ll see there may be some exceptions later as for market dynamics oil like we mentioned before is a global commodity and it’s a global commodity Market with both many producers and consumers well there is some Regional differences in price generally the oil prices all tend to move together at least in the same direction and given this commodity pricing lowcost producers or producers that can generate or produce oil at the lowest unit cost tend to have an advantage from a profitability standpoint so how to invest in oil companies or oil stocks now that you have many options you have integrated stocks versus Pure Play you have large caps versus small caps and there’s many sub sectors you can choose from as we discussed before generally the main decision you might make will probably be do you want to own oil and gas integrated companies which is basically every aspect of oil production and marketing or would you rather own the Upstream Midstream or Downstream operations specifically now most of the time you’ll be likely be looking at large cap stocks but small cap stocks can be interesting if you know what you’re looking for generally in the energy space small caps trade at lower valuations compared to some of the larger caps but that isn’t without drawbacks given their smaller size often times funding can be much more difficult at a smaller scale compared to a much larger company you need to make sure liquidity is taken into account at those small cap companies otherwise if they run into financial trouble or liquidity trouble and low cash then that’s going to be a rough time as a shareholder on the flip side small caps can be targets for acquisition by larger players particularly when merges and acquisition is in an active period though unlike maybe in other sectors where mergers and Acquisitions will likely Garner a large premium to the current market price don’t expect significant premiums in the energy space there’s a recent large round of merges and Acquisitions with Exxon Mobile buying Pioneer Natural Resources and Chevron buying Hess so given the recency of these large acquisitions by the integrated players Exxon and Chevron I think it’s unlikely that they purchase anything at large of that scale anytime soon with that all being said let’s let’s take a look specifically at Exxon Mobile and Chevron as the two main oil and gas integrated players in the US so as integrated oil and gas companies they are the most robust oil companies that are involved in Upstream Midstream and downstream operations Exxon and Chevron are pretty similar Exxon is the larger of the two technically and has more Downstream refining capacity so they benefit a bit more marginally when you see higher Diesel and gasoline prices Chevron on the other hand has greater natural gas production so you could potentially see more upside from Chevron relative to Exon when there’s higher periods of natural gas prices and potentially worth noting that of the two Warren Buffett of Burkshire hathway has been buying and accumulating a fairly large sizable stake in Chevron from a more historical price perspective pulling up the uh price chart for axon mobile as an example generally speaking longer term investors at least from the early 2010s haven’t really been rewarded Ed much part of that is due to as we mentioned previously oil and gas companies weren’t quite as focused on Capital returns as they are now Additionally you can see just how volatile and cyclical energy and commodity investing can be there’s a funny little meme online that describes commodity investing through these pain diagrams we have headache stomach ache value investing and then there’s commodity investing so when it comes to energy investing whether you’re betting on the commodity super cycle looking to hedge against inflation or hoping to diversify with a sector least correlated to the market investing in energy stocks can potentially provide an attractive asset for your portfolio you have to be aware of the potential volatility and how that fits in with your risk tolerance and the rest of your portfolio though given that energy is cyclical if you’re able to get in at low prices in the sort of downswing of each cycle energy can provide some very attractive return there are some people arguing we may be in a super cycle here as part of a much longer term upward cycle which may be Poss and might be part of your thesis but even so it’s important to keep in mind that short-term commodity prices are nearly impossible to predict though there will still be short-term volatility at least moving on to the upstream or exploration and production oil and gas companies these are probably what most people think of when they think of oil and gas these are the companies that actually extract the oil from the ground now for this I’m actually going to pull up the finis S&P 500 heat map we’re going to zoom in on the energy sector just to get a closer look at the companies that are here so when it comes to all the energy stocks in the S&P 500 this square is basically your shorish board of what you’re choosing from there are others as we’ll get to but these are probably the main ones as we mentioned before we have the Exxon Mobile and Chevron as your oil and gas integrated then over here to the right we have the oil and gas exploration and production as mentioned before Pioneer Natural Resources and hes both got purchased by the oil integrated players but the remaining still stand and as independent companies now what’s important to note for us-based exploration production companies is that most of the companies large in size in this group primarily operate in the Shale oil fields in Texas like the perian Basin they use a technique called fracking to drill long horizontal Wells into the ground inject water and sand at high pressure and use that to pump out the oil now the technology has gotten better over time so now Wells can be nearly 3 m long or more this is a slide from one of Pioneer Natural Resources past presentations which describes how using longer Wells can produce better production yield and more oil output per well this in turn also lowers the cost of production a byproduct or sort of second level thinking about this is that companies within the perian Basin that have large contiguous acreage so large plots of land that are all connected to each other have the best ability to build and create these long horizontal Wells across a wider area so having contiguous acreage is a competitive advantage in this space compared to companies that have a lot of spotty unconnected acreage within the Midland Basin Pioneer Natural Resources was one company that I actually did invest in and primarily for two aspects one of them was this contiguous acreage as well as their best inclass Capital returns program which this is why Exxon Mobile was so interested in Pioneer is because Pioneer had had such a large swath of the Midland Basin and it actually lined up fairly well with the sort of scattered Holdings that Exxon Mobile already had and additionally when you are an oil producer you do need to replenish your reserves either by exploring and looking for new oil or by purchasing and acquiring other oil companies with proven reserves in this case that’s what Exxon Mobile did here with Pioneer so when it comes to oil and gas exploration and production why would you want to buy one of these companies well these are the companies that have the most most upside when it comes to oil prices because these are the first in line first producers of oil in the value chain they get the most direct upside when oil prices rise but conversely when oil prices decline they will also see the most downside at least compared to the Midstream and downstream also known as refining and marketing which are later down in the value chain of oil if you’re looking for an inflation hedge against specifically the rise in price of oil then oil and gas exploitation production might be right for you on the other hand if you’re looking for maybe a more stable form of income or returns generated from the oil and gas industry oil and gas Midstream could potentially be an option for you most oil and gas midstreams own a large network of oil and gas pipelines and storage tanks to help transport the oil produced in Texas and other regions through refineries or Downstream operations where then the crude oil will be processed into more usable fuels and products so you can think of midstreams as sort of like a toll road for the oil and gas industry these vital pipelines make transportation of crude oil much more economical for EMP companies without their own pipeline infrastructure so those Upstream oil producers are very happy to pay for using these pipelines what this means from an investor perspective is that the income from Midstream oil and gas companies is very stable but the drawback to this is that there’s much less upside should crude oil prices rise sign signicantly this can make midstreams quite appealing to income investors or those who want a steady and predictable dividend or distribution payment that is likely somewhat protected from inflation and to give an example of what these pipeline networks look like we’ll take a look at Enterprise product Partners which is one of the largest oil and gas Midstream companies in the US as you can see they own a vast distribution Network which helps transport both crude oil and natural gas to varage storage sites as well as refined and marketing companies where they’re eventually processed for further use now there is one extremely important caveat or thing you should know before investing in oil and gas Midstream companies and that’s whether or not the company is set up as a corporation or as a master limited partnership master limited Partnerships or MLPs are business structure where the business income of the company isn’t taxed directly but it’s passed on to you on your personal income tax return if this sounds a bit complicated to you you’re not wrong it is in fact if you invest in a master limited partnership at the end of each year typically late in the tax season it will be issued what is called a K1 tax form so for us investors that K1 tax form is a relatively complicated tax form compared to others that you may be familiar with but this basically breaks down the portion of the business’s income and or net Lo loss that is passed on to you to your personal tax return there are several main takeaways here but one of them is that if you invest in an MLP it’s going to make your taxes a lot more complicated this on its own is enough for many investors to say I’m going to pass on this because it just isn’t worth the extra hassle especially if it’s relatively small or only a moderate size position in your portfolio it may just not be worth the extra effort given the potential for other alternative investments in the space that don’t require a K1 form potentially though one of the maybe advantages of MLP structures is that because these pipeline companies have large Capital expenditures they have large depreciation expenses which means those get passed down to you on your taxable income which if large enough allow the distributions normally call dividends but for MLPs their distributions those distributions may end up not being taxed as long as it’s less than the depreciation for that year however you shouldn’t consider it a fully tax-free distribution because when that distribution occurs it lowers the cost basis of your account in other words when you eventually do sell that MLP you’re going to realize more capital gains because those prior distributions lowered the cost basis so in other words it’s like instead of paying dividend tax on the large dividends from MLPs you’re now paying capital gains taxes Instead at a later point in time if you’re a tax guy and that all sounds extremely exciting to work through those challenges then investing in MLP might be okay for you but if you’re like most of us who really don’t want to deal with the extra tax headaches MLPs probably aren’t a good investment to choose from now I have personally owned Enterprise product Partners limited partnership in the past and from a return standpoint I did like the low volatility energy investment with a large and increasing distribution yield on the flip side I was not extremely excited to deal with a K1 tax form and it did add significant effort in preparing taxes each year overall I was happy I invested in it but I decided to eventually sell to eliminate the need to process that K1 tax form for future years when you look at the longer term chart for Enterprise product partners and many other MLPs the returns over the last 12 years or so at least from the 2010s onward likely probably don’t look that great and part of the reason for that was in the early 20 I say say 2010s there was a large run up in price and valuations for these MLPs so basically by 2014 before the oil crash in 2015 these MLPs were extremely overvalued if you were investing near that top in that 2014 you probably didn’t make much money you still got your distributions over these years which likely puts you ahead but overall compared to other Alternatives it was not a great bet like we saw though with the Exon price chart if you’re able to buy at a low enough price it can be a worthwhile investment providing not as much capital appreciation or Capital returns these levels providing a very significant distribution percentage you notice in the oil and gas Midstream companies in the S&P 500 Enterprise product Partners is not on this list and that is because it is a limited partnership or MLP only the oil and gas Midstream setup as corporations are in the S&P 500 so this is basically a list of a few of them that you could consider investing in if you wanted oil and gas mid-stream exposure but didn’t want to deal with a K1 tax headache and another important thing to consider for midstreams especially if you’re looking at one that’s an MLP or requires that K1 tax filing is s are two things one is that if you’re a us-based investor do not invest in MLPs within retirement or tax protected accounts because of the way MLPs are taxed if you have distributions above a certain level is going to cause a lot of headache and problems if you have them in your retirement account I don’t want to spend too much time explaining that but you can look into it basically only invest in MLPs if you do invest in them in a individual taxable normal brokerage account not in any retirement accounts and the second thing is if you’re a non-us investor or International investor investing in MLPs is likely something you do not want to do and the reason for that is when you invest in MLPs as an international investor your distribution s get withheld at the highest marginal tax rate possible for the US in this case currently that’s 37% though the Biden Administration is trying to raise that potentially as high as nearly 45% so either way a large portion of that MLP distribution income that you might be expecting as an international investor you’re not going to see because that’s going to be automatically withheld basically cutting your dividend or distribution amount by a third and potentially in the future by almost 50% so for MLPs don’t invest if you’re an international investor if you’re a US investor don’t invest in a retirement account or tax preferenced account and also don’t invest if you don’t want to deal with a K1 tax filing which is perfectly fine and a valid reason for not wanting to invest in specifically an MLP Midstream for the corporate midstreams or the midstreams they’re set up as a corporation those are just fine and don’t have to deal with any of the constraint TRS I just mentioned now the next sort of section you can look at is oil and gas refining and marketing these are a downstream oil and gas operations the reason it’s Downstream is because the oil in the Upstream is produced that’s the crude oil it’s moved transported through the Midstream and then through the refining and marketing gets turned into more refined products and then marketed out to other companies and and users one way to think about this is all the gas stations in the US and really in the world get their gasoline diesel whatever fuel they provide from these oil and gas refining marketing companies in the US s&p500 there’s three Refinery companies here one is uh Marathon petroleum Corporation the next is Philip 66 as well as Valero Energy Corporation so I’m going to pull up Marathon petroleum Corporation in finis real quick to sort of show the financials of the company and the main thing I want to take away here is that uh these guys process a lot of petroleum products in this case Marathon has sales of roughly 150 billion and trailing 12month income of roughly 8 billion this is a lot of money but one thing to keep in mind is that the margins for oil refining and marketing are much lower than the Upstream producers in this case profit margin for MPC is about 5% if we compare that to Exxon Mobile an integrated player they have a profit margin of 10% or roughly double that now keep in mind Exon Mobile has all pieces of the value chain for oil but if we compare to a pure play oil and gas exploration and producer like Pioneer Natural Resources which we’ve discussed their profit margins are 25% five times more than Marathon petroleum Corporation that’s one of the main takeaways from a business perspective for Marathon petroleum Corporation as well as oil and gas refining and marketing companies in general is that they’re a high volume low margin business but that doesn’t necessarily make them a bad investment part of the reason is that due to onerous and restrictive environmental regulations it makes it very unlikely that another Refinery will ever be built in the US again because of this all us oil gas refining capacity will effectively be restricted to the companies that already exist which means these refineries become rather strategic assets potentially you could own which are necessary to help Supply the country and the world with the refined fuel products it needs looking at Valero as another example these companies have generally seen more steady long-term price increases than both the Midstream and Upstream counterparts this may be slightly due to the fact that at least domestically in the US there are limited new entrance into the space while these companies still do compete on a global scale against other oil and gas refining marketing companies given the difficulty in time to build new refineries it’s unlikely there’ll be a significant influx of new competitors so if you’re interested investing in refining markting compan companies specifically for increases in let’s say gasoline or diesel prices or other byproduct fuels or like the aspect that these will be relatively rare Assets in terms of an oil refinery which likely won’t be reproduced again in the US in that case then oil and gas Downstream companies might be a compelling investment for a portion of your portfolio additionally although I won’t go into as much detail on these you do have oil and gas drilling companies which help drill and create the rigs that many of the integrated and Upstream companies use as well as oil and gas equipment services companies they provide as the name implies both the equipment and services for many of the companies above as well on the drilling side it’s important to know that oil wells aren’t meant to last forever this is a graph of annual production of oil wells for the year that they were drilled and as you can see for each cohort the oil produced starts out high but then gradually reduces over time because of that over half of the production we have today is effectively from New Wells that are under 18 months old because as time passes the amount of oil extracted from the wells decrease you have to continuously drill new wells if you want to maintain a certain production level the way to imagine this is think about a full gallon of milk and now take off the lid and just put the gallon on its side a lot of the pressure from the milk will spill out at first but as that pressure releases the flow is going to slow down to almost a trickle over time the rate of flow from an oil well will follow a similar pattern just over a longer time Horizon it’s going to be Max flow at the start followed by a gradual decline at a certain point it becomes more economically viable to drill a new well to restart that oil extraction process at that higher rate again it’s these drilling companies that help the Upstream & companies drill these Wells now some specialize in onshore versus offshore and there are many more onshore rigs than there are offshore however one thing to keep in mind sort of going back to that Pioneer resources slide again is that as technology and Industry practices have improved Rigs and their placements have gotten more efficient so fewer rigs are needed now than are needed in the past to maximize that rate of economic oil extraction what this means for investors as s of a second level thinking is that if this trend continues it could potentially mean a declining need for Drillers beyond the location of old Wells another way to put that is that if fewer Wells are needed to get the same amount of oils then fewer Wells need to be drilled that being said oil and gas drilling is still an essential service for these oil companies so even if the number of Wells being drilled is declining they likely can and should be able to make that up through pricing over time on the oil and gas equipment and services side these are companies that provide equipment and services for oil exploration and extraction this is a more Niche angle to invest in oil and most probably are better served with simpler thesis of the either Upstream Midstream Downstream or just going with an integrated player like Exxon Mobile or Chevron however there are some use cases where equipment and services might make sense to express a targeted belief or thesis about oil so for instance if you look at Global oil supply growth over the last decade or so from say 2012 to 2024 almost all of that production has come from us Shale oil like in the perian Basin like the Midland and Delaware Basin and it’s important to note that these reserves aren’t infinite and the economic reserves are the oil that you can extract at an economic or profitable price are even less than that so over time we’re talking sort of a much longer time Horizon so over years and decades but over time those economic oil reserves will gradually be depleted as that happens in order to satisfy the new demand Supply will likely need to come from somewhere else in this case most likely offshore drilling and exploration so a more Niche targeted thesis would be that companies that provide those offshore drilling rigs and supplies may have a long-term Tailwind as offshore starts to become the new oil supply to replace and supplement the gradually declining production from the peran Basin though tide water is one example of this who has been benefiting from The increased offshore demand though I will say that this stock price chart from 2021 to 2024 for is a little misleading in terms of the longer picture here because oil and gas equipment and services is a very volatile business and many of these companies are highly or were highly leveraged so if you look at the longer term returns they aren’t pretty for Tidewater and the reason for this is in this 2014 period this is when oil prices were still quite high at over $100 a barrel but then we saw the oil price crash in 2015 and all of a sudden it’s no longer profitable to be drilling new wells because of this equipment and services companies saw a massive decrease in Revenue as Upstream companies stopped drilling Wells assuming that oil would be at $100 forever they realized well the price is now lower and a lot of the wells we drilled are not profitable so Revenue collapsed and also because these companies were often highly levered they had to significantly dilute shareholders through share issuance in order to stay afloat that’s why there is such a significant decline in the stock price here so effectively the company almost went bankr rup but avoided that through massive stock delution The Leverage is something you definitely want to keep in mind uh with these oil and Equipment services companies though perhaps if there is going to be a long-term Trend towards increased offshore drilling over the long term that may provide a Tailwind for that the Leverage is definitely something to keep in mind for these companies so that is basically the full overview I have for investing in oil energy stocks and hopefully that provides you a better more holistic View view of the energy sector at least for oil there are many different routes you can go to investing depending on what your specific investment thesis is and what you think the long-term oil price likely ends up being as mentioned before with that Meme uh commodity prices are very unpredictable and impossible to predict in the short term but you may be able to express long-term views on Energy prices if you believe that oil demand will continue to grow and Supply may be limited as companies focus more on Capital returns at least in the near future now when talking about oil it’s also important to talk about natural gas the next main sector I want to look at is natural gas so investing in natural gas energy stocks this is a much smaller sector compared to oil oil is massive and huge but a lot of times the oil companies will also be producing natural gas as well if not directly than as a byproduct of the oil production process within Natural Gas it’s a little bit smaller of a Subs sector setup there’s fewer options in terms of natural gas since there’s fewer dedicated natural gas producers but it’s split up a bit like before you have your Upstream exploration and production companies as well as a few mid-stream companies then you have the decision whether you want an integrated or Pure Play natural gas producer now the use cases for natural gas is that it’s a very clean burning fuel for electricity generation Heating and Industrial use the investment thesis for natural gas might be that demand will grow as a base load energy paired with Renewables replacing coal for electric Generation Now what that means is effectively natural gas serves as what’s called a base load energy another way to look at this is that natural gas is likely going to replace coal for electric generation and since Renewables have on and off periods where they generate energy whether that’s solar or wind you have to pair it with some kind of Base load energy producer but another way Renewables like solar and wind just simply aren’t consistent daytoday with their energy production solar being the most obvious example of this when the sun is not out you’re not generating any energy so because of that you need to pair these Renewables with base load Supply so that source of energy has historically been coal as you can burn that at any time and so you can use that for most of your primary energy demand however over time that’s gradually being replaced with burning natural gas and as more renew Ables are put onto the grid you’re naturally going to need more base load a natural gas serves as one very potential option that can easily ramp up and ramp down help serve some of that base and even variable load you can see this dynamic in the electricity markets in California which is probably one of the more broken electricity markets in the US in this case given the significantly high level of solar and wind in the California grid they produce so much solar energy in the afternoon that a good portion of that is simply curtailed or completely wasted but given that this solar energy drops once the sun sets they have to replace that energy generation with primarily natural gas generation and importing energy from other areas likely generated by natural gas wind generation is also variable but a bit more stable than solar and hydro energy is fine that’s very stable but the main issue is that since solar energy is so inconsistent which is predictably consistent but still inconsistent you have to have the built up gas infrastructure or some other way that you can absorb this energy demand when the sun sets that’s the benefit use case of using natural gas for more electricity generation and yes the prices do go negative midday because of the ridiculous amount of excess solar energy and this is one of the major problems with solar that isn’t discussed enough is that not only do you have to chop down acreages of fresh for land to build these solar plants and then eventually replace the panels and put them in the landfills where toxins leech over time even discarding those aspects your electricity generation is still limited to the solar Cycles so when the sun sets you still need the underlying fossil fuel generation so theoretically you could have saved yourself all the effort and environmental destruction of building those solar pels and cutting down all those trees to make space for the solar panels by just keeping and utilizing the natural gas generation you have during the midday in which case you would be burning a clean burning fuel not using coal and you’d also stabilize your energy grid and make it much more resilient but that would make too much sense and is California so you know that’s not going to happen getting back on track to market dynamics natural gas is a byproduct of crude oil production so when oil is being drilled for the most part a portion of that is going to be natural gas coming with it something to keep consider at least in the US market where we have a large supply of natural gas is that we really depend on pipelines to get natural gas to where it needs to go in terms of electricity generation or industry use because our natural gas or liquefied natural gas export capacity is relatively small additionally natural gas pricing is very sensitive to weather so if we have a particularly cold winter season much more natural gas is used to heat homes and prices will rise much more significantly if you have a relatively warm winter because not as much as being burned for heating homes you have a relative over supply of natural gas and prices can come down very quickly this is somewhat even more exacerbated by the fact that we have limited storage capacity for natural gas to get an example of this we can take a look at sort of the long-term natural gas Futures prices from 2008 to 2024 and as you can see it is very volatile periods that typically go up periods that typically go down and many spikes in between in particular during the energy crisis 2021 2022 we had a very significant increase in the price of natural gas part that is due to you know Europe cutting off the supply uh of Russian gas so that has to be replaced with other gas or other fuel supplies that caused a significant increase in the price of natural gas for both us as we export it to Europe and then as we’ll learn and go in later also increased significantly the price of coal but since the last couple winners in 2023 2024 or quite warm not a lot of natural gas was needed or not as much as uh was potentially could have been needed so the price dropped significantly almost 80% from roughly $10 to $2 looking at the more longer term view again this is often times why the natural gas is referred to as the Widowmaker trade in the commodity space because of just the extreme potential for volatility this is an even more longer term chart of the US natural gas price as you can see uh even back in 2000 and 2005 you have some very significant spikes as well as declines in the price and this is really reflecting when natural gas is in short supply so if you understand that natural gas prices are quite volatile but still believe potentially that they may increase in the future you might consider investing natural gas now there’s a couple ways to do this you can go your play natural gas producers or you can go a bit indirect through an oil company there’s also the Midstream opt option but one thing that I will say is definitely avoid leveraged and futurist products like boil due to the Decay and contango now Decay and contango are things to deal with both options and Futures contracts won’t get into too much detail on that but I’ll show you what the price chart for boil looks like and that’ll sort of explain the effects of those two so boil is the pro shares Ultra Bloomberg natural gas 2x shares and what that effectively means is that it’s trying to track the daily price of natural gas on a 2X leverage so basically whatever natural gas price moves in a day this exchange traded fund is trying to double that uh each day there’s many problems with this this fund probably suffers from both de K and contango and also just the inherent fact of Leverage as well which is that losses are going to hurt more than gains so if you have let’s say natural gas goes up 100% And then goes down 50% overall after that the natural gas price should be the same however with a leveraged position the natural gas price ETF will actually be significantly lower than before so this is from like 2021 to 2024 so if you invested in boil I actually let’s take that back there’s no investing in boil it’s basically speculation if you speculate on natural gas prices increasing and let’s say you did that in 2021 you might have been able to sa 5x your money which sounds great great but the thing is the volatility of that is so insane and the risk is basically let’s say you were a little late and let’s say you bought at 2,000 you go up to let’s say 2500 they’re up 20% Which is not that great in a leverage product you then lose almost immediately in the course of 1 month 50% that’s how extreme these leverage products are and then say you go back to 2,000 but then after this point if there’s a decline in natural gas prices like you saw you basically get completely wiped out so the split adjusted price of boil at that point would have been equivalent to 2,000 compared to what the share count is today so at the September 2022 owning boil you have basically a price of 2,000 and then in the course of less than 1 2 3 four five five months even even go six months so in less than in a basically half a year you lose you lose 95% so you’re down 95% in a year and you never get that back because of how the way the ETF is structured and this is due to the triple whammy of Leverage making the losses worth more Decay which is a natural feature of options products like this where you you’re guaranteed to lose money over long periods of time and also cono which can happen in Futures markets which will also start to continuously erode at the value in the ETF and just to get a view of this long term uh these numbers are hard to see but I think this is is 700,000 which would be the equivalent starting price of boil back in 2012 and so you would have gone from 700,000 to $13 today if you held for 12 years so these products are you know designed to lose money in the long term uh but they’re basically for speculators and short-term traders to try and bet on natural gas spikes that’s all this product is for this is not a product designed for long-term term bets on natural gas I see this a lot in like new investors that think oh well I want to invest in natural gas I’ll just buy boil that’s not what you’re doing you’re not investing you’re just speculating for a spike without knowing it because these products are toxic to long-term investors and they will completely erode your Capital over extended periods of time that may sound like a big off tangent but I’ve seen many investors uh buy shares in boil thinking oh it’s going to go up because natural gas prices go up and it will in the short term but the problem is you can’t hold this very long and you need to be right in the short term for it to be profitable if you’re wrong and say oh I’ll just keep holding on a little more just wait it’s going to spike any day it could be you know a few months and then 6 months later you’ve lost 90% of your money in a bad case scenario in a worst case scenario you might lose like 97% of your money it may be an OK scenario you only lose 50% of your money but still still that’s like an unacceptable loss to most people especially if they don’t know exactly what they’re investing in when they invest in boil so large tangent aside do not invest in boil if you want to speculate and boil because you think something imminent is going to happen to natural gas price understand that you’re speculating and understand you’ll probably lose your money there or at least a portion of your money when it comes to relevant stocks there are a few natural gas producers that Focus primarily on natural gas and Tarot resources and a few others I put CVX here which is Chevron uh which is the integrated oil and gas producer we discussed before and the main reason I have them here is that they are one of the larger players in the natural gas space so despite being mostly oil focused they do have a large natural gas presence as well so if you’re looking maybe for a balance you want to invest maybe with a little more tilt to natural gas or a little more allocation towards natural gas Chevron could be a more Diversified way of doing this now there are a few dedicated natural gas Midstream companies but I’m not quite as familiar with these so I would suggest taking a deeper look into them if that’s something that interests you I think natural gas exporting to Europe is one thesis that some people have believing that it’ll be a longer term structural source of demand as Europe will continuously need us natural gas to replace the gas they were getting from let’s say Russia in the past I have invested in Anor resources and actually lost money on that part of the reason is I was not fully prepared and ready for both the natural gas volatility and also the volatility that comes with some of these uh equities or stocks uh dealing with natural gas so that’d be one sort of maybe warning caveat to keep in mind is that uh unlike maybe oil which is you know still volatile uh it’s oil is more of a stable uh Market whereas natural gas at least natural gas prices in the US we Supply so much that the demand can really swing quite wildly given the limited storage capacity and limited export export capacity if you have a cold winter prices can Spike quite High uh if you have a warm winter uh prices can crash ridiculously low if you’re investing in natural gas stocks make sure you’re comfortable with the volatility that comes with natural gas pricing at least in the US as well as understanding why specifically in terms of the energy Commodities you’re investing in why you have that portion specifically for natural gas compared to let’s say oil or coal or uranium as we’ll get to in a bit if you were looking for maybe just more of a tilt towards natural gas then Chevron might be a reasonable way to express that view that’s what buff it’s been Buy in terms of an integrated oil and gas player and it’s a little bit more of a diversified option where you get some upside if natural gas Rises but you don’t see as much downside compared to the Pure Play natural gas producers so now I want to talk about about coal and coal is probably the most hated energy asset there is I’m trying to think if there’s one that’s more hated than coal I don’t think there’s one that comes to mind so when it comes to Coal maybe most people aren’t familiar with the types of coal but there’s two main types of coal that are being used in the world today and one of them is thermal or steam coal and the other is metallurgical coal now the use cases are very different for both thermal coal is much more common and it’s the most common electricity generating fuel globally so when we think about across the entire Globe what is the most common way that people get electricity it’s burning thermal coal now that’s been declining significantly in the US as a percentage of electricity generation but even to this day coal is still the number one production of electricity generation for the world the other coal which is much more rare is metallurgical coal and this is required for large scale steel making in what are called Blast furnaces and specifically the metallurgical coal is used to make a component called Coke and that is used within this Blast Furnace process so the investment thesis for each of these types of coal is actually quite different so for thermal coal the investment thesis would be that transitioning from coal electric generation will take longer than expected especially in developing countries growing output so in this case let’s say IND India so another way to think about that is that it’s not like you can just flip a switch and turn off all the electricity generated from coal and then we can find some other way to do that tomorrow you simply can’t do that coal is still producing the majority of the energy for most countries especially for developing countries and not only is it the most used fuel for electricity generation it’s actually growing so in countries like India they’re producing more coal and producing and building more coal plants same with China so the thermal coal will still be used for quite a while that being said there’s still lots of headwinds for thermal coal especially as developed Nations try to transition away from it metallurgical coal on the other hand is a different story and the thesis is pretty simple there is no substitute for Coke or met coal in the blast furnace steel making process if you don’t have met coal you cannot use blast furnaces for steel making and the issue is you might say oh well we have eaf furnaces which can use recycled steel you can but that is not not going to meet the Global Steel demand and there are many applications whether it’s for automobiles or for steel beams for buildings or other parts where you simply need new steel constructed and for situations where recycled steel from eaf furnaces simply won’t fit the job given this there’ll likely be strong met coal demand as long as demand for steel remains high now I will point out there have been some talks of trying to use hydrogen as a substitute for met coal within the blast furnace steel making process without is likely a long way away and even so if it does the technology gets better over time it’s unlikely to have the same efficiency level as metallurgical coal currently has in the blast furnace steel making process so long story short well thermal coal likely will be pushed and moved out of developed countries in terms of electricity generation metallurgical coal will always be used and will always be with us now the investment Theses for us coal becomes sort of interesting because you have most of the US coal companies now focused very heavily on Capital returns primarily through BuyBacks with the exception of warrior coal which we’ll get to in a bit because many of the US coal companies are trading at very low valuations remember that this is the most hated asset class in the energy sector many of these companies have been able to significantly reduce their share count through these BuyBacks much faster than maybe most companies running a share buyback program whether or not this will continue to provide outsize returns for coal investors depends largely on the coal price in the future and on that price speaking on market dynamics compared to the oil Market which is a very Global Market coal is more of a localized markets and there are many different grades of coal within both thermal coal and metallurgical coal you can have coal at very different grades so some burn hotter than others some burn cleaner than others and what happens is that when you have electricity generating coal plants for in instance with thermal coal they are designed specifically to operate most efficiently using a certain grade of coal now they can operate at other grades of coal as well so it’s not like it’s completely inflexible but most of the time when you set up and optimize a plant for efficiency you end up using a certain grade of coal and likely will stick to that over time this makes building relationships between suppliers and and users like utilities a very important process because if you can build that relationship and they like your coal for instance if you’re a coal producing company then if you can build and establish that relationship and provide value in that respect then they may continue to purchase coal from you as you have the specific coal that they’ve now optimized for and it’s a similar story with metallurgical coal where you have different grades and qualities as well so how to invest in Coal basically when it comes to Coal you have two decisions to make either primarily met or primarily thermal now you do have all austa in comparison to the US coal miners uh that does have some pure play Coal Miners as well in this case I’m just going to focus mostly on the US coal producers and then the relevant stocks here so for thermal coal in the US the main sort of big players are Console Energy P Body Energy and then Alliance resources I will note that Alliance does require that K1 tax filing so that may be a non-starter for some investors on the metallurgical coal side you have Alpha metallurgical resources you have Arch resources which does actually still produce some thermal coal in the Powder River Basin and then you have Warrior met coal now when you take a look at the stock price of some of these coal companies you might be quite shocked especially if the one you look at is Alpha metallurgical resources so alpha or AMR went from a low in 2020 of roughly around $2 to reaching a relatively recent peak of $450 in 2024 so from $2 in 2020 to 450 in 2024 or in other words it increased over 200 times in basically four five years the question that might come to mind is why is that so extreme and why has some random Coal Company been a 200 bagger Over The Last 5 Years well if you look at prices of AMR stock in roughly 2018 2019 they were trading roughly maybe $60 $70 a share at that point what happened is in 2020 when prices significantly declined you have all sorts of issues potentially with Supply chains and things like that getting the mines to operate at a cost-effective matter effectively there were significant concerns about bankruptcy for Alpha and that’s why the stock Equity is declined so much is because people are wondering is the company even worth anything is a stock a zero we have pessimism at all-time high and which is why prices are at all alltime lows then what happens is from 2020 to 2021 we start to see inflation picking up we start to see spending picking up and we also start to see infrastructure spending picking up we have a lots new steel demand which is increasing metallurgical coal prices then as we head in we’re starting to see an energy crisis start to appear as people are realizing we’re actually don’t have enough energy electricity and this is partly due to something happening in China where there wasn’t enough electric power due to Drought so they have to make that up with increases and use of coal power in additionally there is something that happened in 2022 I think involving a country called Russia not really sure about the details of that but uh effectively that caused a significant increase in the spike of coal prices because all of a sudden Europe doesn’t want to use natural gas from Russia and in a few months later they actually can’t get natural gas from Russia something happened to the PIP pip line not really sure what happened there but you can look into it that is all to say that the prices of coal simply exploded both metallurgical coal and thermal coal in fact it got to a point where thermal coal was actually higher than metallurgical coal which almost never happens but the end result for Alpha in many of these other coal miners is that you have these companies that were almost on the verge of bankruptcy now seeing a massive inflow of cash so what Alpha did is they decided we’re going to take that cash and we’re going to pay off every single penny of debt that we have so in this case the company is now completely debt free he use that cash INF flow to purchase uh rebi back all their debt so they have no debt payments and then after that once they’re debt free they decided Well if we’re still generating all this excess free cash flow and our stock is trading at extremely low valuations let’s just buy back a large amount of our stock all the time and that’s effectively what they did buy back their stock continuously almost every day through that entire period and eventually over time they cut their share count down by around 33% or a third and the stock finally started to rate higher you can see a somewhat similar story for Arch although Arch was in a slightly better financial position heading into 2020 you can see a similar story in terms of the price chart although not as much not quite as extreme in terms of the price declines and price increases but still a similar pattern and Warrior met coal again similar pattern there for met coal now Console Energy is one of the thermal coal producers and what’s interesting about thermal coal in the US is that domestically speaking it’s on a significant decline as we discussed thermal coal is being phased out gradually by many developed countries including the US so why would there be any reason to invest in a thermal coal stock well the reason for that is that Console Energy has not just been sitting on their hands for the past 5 years they’ve realized that if they continue to focus on domestic sales of coal that they’re going to go extinct pretty quickly what they’ve done is they’ve actually shifted a very significant portion of their production to being sold overseas in the export market so in this case from 2017 to 2013 sales to domestic power generation decreased from 61% to 133% of overall sales and over that same period export sales have increased from roughly 28% to almost 60% in 2023 as this trend continues Console Energy will become more and more focused on being an export provider of their highquality thermal coal product and the other Main Attraction of coal is typically the very low valuations so in this case console Energy is trading at a price to earnings ratio of the last 12 months of earnings of roughly four expected to be a future 12-month priced earning ratio of roughly six which compared to many other stocks and sectors even for cyclicals and energy stocks is quite low now one potential risk with Console Energy at least temporarily right now is that with the closure of the Francis Scott Key bridge in the Baltimore port of Maryland console’s main terminal which they own completely is the console marine terminal in this port so this is basically all of consol’s coal you can sort of see the different grades of coal that they have here in different piles but this is their uh Marine Port that they own completely and right now this is their primary way of exporting coal to the world and since they’re now primarily an export company with this port shut down for at least temporarily right now they’re not able to get their coal out from this port so they have to redirect most of this coal to other ports uh currently it’s not certain when exactly the port will open up again but given that coal uh bulk carriers are one of the heavier ships it likely will be one of the last ships to be available to leave once the wreckage and debris from the bridge is dredged and completely cleared from the channel so that is a short-term risk to consider with console it may impact valuations shortterm which could potentially be a long-term buying opportunity once it clears up but that’s up for you to determine for yourself given the risks and the prices but just one thing I should bring up given that that is something that’s preventing their coal to reach the market at a more uh economical way obviously this is much easier than having to ship it to other Rail lines and other ports that they don’t own I actually own or have owned four of these stocks console Peabody Alpha and Arch with the exception of Peabody most of those worked out fairly well for me they were bought at relatively low prices compared to where they are today now that the stock prices of many of these coal stocks are higher and generally coal prices are lower than they were a couple years ago I’m not quite as excited on coal as I used to be but it’s still something I keep an eye on on as it is one of the cheapest energy sectors by most traditional metrics investing in these coal stocks speaking from personal experience here can be very volatile so just understand what you’re getting into if you decide to invest in Coal make sure you understand the thesis whether it’s thermal coal so say thermal coal export with console or if it’s long-term metallurgical coal with let’s say Alpha Arch or or your metco understand why you’re buying and why the what’s the reasoning behind that and that way if you see the price going down you take a look back at your investment thesis and it hasn’t really changed they can provide you a little more sense of stability even though short-term volatility can be quite high and I mentioned Warrior met Cole as sort of an outlier in the Met Cole space uh primarily for the lack of share BuyBacks and despite this the prices still increased quite significantly part of the reason for that is uh they are sitting on a large pile of cash but the cash isn’t just meant to sit there what they’re doing is actually build out their production of met coal so effectively later maybe in 2026 roughly or so depends on timing and delays if things go on schedule they’ll be able to significantly increase their production of met coal so effectively instead of buying back stock and sort of quote unquote reinvesting in the coal mines they already have through these BuyBacks like AMR and Arch are doing what they’re doing instead is they’re physically using that cash to build out new mines new production which will will add to cash flows not today but hopefully later down in the road in a couple of years through significantly more production than they’re producing today so effectively they are still reinvesting it’s just not directly through BuyBacks they’re actually building out new mines and capacity so for those that like that thesis rather than necessarily counting on BuyBacks to increase the price through sort of eps some people say EPS manipulation earning per share manipulation by lowering the share count to increase earnings Warrior met Co is taking a different approach in that they’re just going to increase those base earnings by actually just producing more met coal and selling more met coal hopefully make more profit so a slightly different strategy some people really like this some people are saying I really wish you know Warrior met Cole would still buyback stock here because they think it’s cheap but it’s just one one different way of doing things compared to let’s say Alpha who’s primarily doing BuyBacks and Arch who is also mostly BuyBacks and some dividends that is basically the coal space if you’re brave enough to invest in Coal hudos to you it’s a rare breed of investors even for a portion of portfolio if you do uh take a look at coal I would recommend checking out the coal Trader they have some nice charts in terms of tracking the Met coal prices uh in the case here as well as tracking some of the Seaborn thermal coal prices the Newcastle thermal is basically Australian thermal coal pricing API 2 is thermal coal to Europe and then the South Africa I’m not quite as familiar with but I assume that’s sort of pricing from South African coal on the Mets side Australian and Chinese cocing coal Futures generally trade fairly similar to each other but there are some discrepancies and these are generally probably for prices for what you would see as like the highest grade of coal so some of the US met coal producers like Alpha and Arch might see realized coal prices that are below uh the Australian cing coal future prices that isn’t something necessarily to be concerned about that’s just naturally the lower grade of coal met coal that they’re producing just doesn’t have quite as high of a premium as the hard Australian cing coals and if you want to know what thermal coal prices are in the US uh you can check out the eia Energy Information Administration where they post weekly what the thermal coal prices are depending on your region I mentioned earlier about the Powder River Basin this is where arch resources still has some thermal coal production and Peabody also has thermal cold production in the Powder River Basin as well what’s interesting about those two is Arch is actually trying to wind down or reduce completely over time the thermal Co cool operations in the Powder River Basin well Peabody is uh St stated that they’re maintaining their commitment to producing coal in that region so sort of different approaches there one saying they want to divest from thermal coal Focus primarily on metallurgical and that’s Arch resources whereas key bodies saying you know we’re going to maintain our presence producing thermal coal see how that goes in the future I think generally speaking it probably would be more profitable for both companies if one of them left because right now you have two companies producing in the Powder River Basin at least two large you know us coal producers uh with Arch and PE body and with both of them producing and competing it lower the prices for both given that there’s more Supply in that region so it doesn’t really make as much sense if Arch is like let’s say not making much money in Powder River Basin why are why are they mining there in the first place just focus on metallurgical coal so if Arch leaves eventually then PE makes more money on the thermal coal side there’s less direct competition in that area and also Arch makes more money because they aren’t spending costs trying to mine thermal coal at low margins when they can just focus on their higher margin metallurgical coal segment and for a reference the pow River Basin sort of this area in the West Wyoming Montana where there’s very large thermal coal reserves and in terms of basins or areas where coal is produced in the US it’s by far the largest or area that produces the most coal that’s why when we’re looking at the prices for each dollar per short ton of coal is why the Powder River Basin prices are so low compared to the other basins is because one there’s so much coal being produced but two it’s kind of in a landlock area so there’s not a lot of easy ways to transport or export this B coal to other areas and that gets a bit to sort of the market dynamics of coal is that you’ll notice that in many cases even though it’s a global market for coal obviously there’s a lot of localization within those markets so certain coal in certain areas may have very different pricing from other coals in other areas okay with all of that let’s move on to the last section which is uranium now uranium is a very different Market from these other three and particularly most different from oil in the sense that well oil is globally traded every day every second every minute trades are happening around the world uranium is almost the polar opposite most uranium contracts are done privately they’re done over long periods of time we’re talking about years and they’re negotiated far in advance as well we’ll get more into that in a bit but first we’ll take a look at the sector overview sort of ways to invest in uranium uh you basically have mining stocks you have some exploration stocks which uh I wouldn’t really consider as investment that’s more speculative but they can be correlated with the price of uranium and then you have spot physical uranium which we’ll get into a bit with the physical uranium trust which is basically investing in the commodity itself mostly focused on price movements in terms of expecting that the price of uranium will increase rather than going the mining route just buying the physical the use case for Uranium I me if we’re not talking about you know nuclear weapons and things like that the primary use case is it’s Earth’s most energy-dense fuel so it’s ideal for base load electricity generation so if we go back to that California electricity generation chart for that period in time you notice this sort of neon green is the nuclear that is the uranium Fuel and you notice see how much variation there is for the other fuels nuclear is the most ideal for base load energy You’ll See This Bar it’s almost completely straight that’s because when these nuclear power plants are turned on they turn on and they generally stay on and stay in operation continuously so this is energy that’s exceptionally good for base load and it’s clean energy too as long as the nuclear waste is disposed of properly properly which in most cases it is but given that nuclear runs continuously at full capacity there is no real ability to scale up or scale down power generation from Nuclear So you need let’s say natural gas as a complement to that to be able to meet the variable electricity demand that comes in and out but that being said in terms of Base load nothing really beats nuclear the investment thesis is that there’s more Global demand for uranium than there is Global Supply especially at current prices under $100 per pound so what this means is that it’s implying that the prices must eventually rise for this Supply demand mismatch to be solved and the thing is demand from utility companies is effectively in elastic I don’t have the exact quote or statistic so you can trust me or you can look it up yourself but I think for most utility companies operating at least in their nuclear segment the cost of fuel is something like maybe 5 maybe 10% of the budget so even if at like let’s say $100 per pound of uranium let’s say the price goes to $200 per pound if that was originally 5% of the budget it’s now 10% of the budget which to be fair is still a significant increase but it’s not necessarily something that’s totally out of the question compared to what it seems like when you see the price doubling you think oh my gosh that’s a huge increase utilities are just they’re not going to buy that when in reality they if they need the energy they need the energy they can’t just not have uranium because then they’re not going to produce energy so they’ll have to pay whatever price is available in the market and if that’s 200 well then their cost of operations increase by you know 5% it is what it is so that’s what I mean by inelastic demand the utility companies are the ones that are really the purchasers and many of these companies uh May maybe not necessarily so in the US but in other jurisdictions are state-owned utility companies so what they end up doing is they’re ending up buying the uranium or when they buy the uranium they will just pass on the price to either taxpayers or I guess in the case of uh privately owned and operated utility companies that price just gets ended up passing on to Consumers so either way demand is inelastic from the perspective that these utility companies need uranium to operate and they can’t operate without it so they have to buy it and it’s also inelastic from the perspective that they aren’t even the ones that are taking on the full brunt of the price increase of uranium because they simply pass that on to the downstream customers whether that is the customers themselves or if it’s a state-owned utility the taxpayers or however they decide to pass on those costs and even so all that maybe as a third point the price of the fuel uranium isn’t even a large portion of the operating budget of most of these utility companies nuclear operations so it isn’t even that large of an impact even if prices let’s say double so now we go to market dynamics which is another reason why uranium is so different from oil uh is that production is highly concentrated just by a few countries and companies it’s also a very low liquidity market and most sales are done through long-term Contracting so in terms of production of uranium 2/3 of the world’s production ction is from just mines in Kazakhstan Canada and Australia and you also have Namibia as a top four producer as well but if you look at that those four countries yeah that makes up about 70% of the world’s Supply and you’ll notice as you go down the list the production drops significantly so in terms of market dynamics very concentrated by just a few countries and companies so how to invest in uranium basically there are not many options it’s very limited so you have in terms of if you’re want to invest in a stock or a company your primary option is camoo that’s the largest uranium minor in Canada and the largest publicly traded uranium company that one can invest in in the US on us exchanges the other option potentially more direct option is through the Sprat uranium trust the US overthe counter ticker symbol is SRU UF this is a physical uranium trust that holds currently about $6 billion worth of uranium so when you’re buying a share in the uranium trust you’re buying a fractional ownership of this big pile of uranium that they have stored in Canada and the purpose of this trust is to generally track the price of uranium though it does sometimes trade at a premium or discount to their net asset value or the current market price of that uranium Supply that they have most of the time time the uranium trust is trading at a discount but there are some periods where it is trading at a premium so this is something to keep in mind if you’re considering adding to a position or opening a position is that ideally you want to buy not at a premium and you want to buy at a discount particularly if you buy at a large discount say then you have potential upside from not only uranium price increasing but also from that discount closing over time historically it has traded at discount but does tend to get to zero or premium at some points in time as well so unlike some trust ETFs where uh the discount continues to decline and Decline and it seems like it’ll never get back to net asset value in this case uh although it does trade at a discount the majority of the time it does or or there are periods where it gets back to net asset value or at least reasonably close to it another thing to consider about discounts is it may not be just maybe negative sentiment on the trust but it may be more of a reflection on where investors in the trust are thinking uranium prices are going in the short-term future so as an example of this I think in March of 2024 the net asset value or the sort of true market price of the uranium that they were holding in the trust was around $23.50 per share whereas the actual share price was let’s say around around maybe $20 or so per share so a fairly significant discount there but in reality what potentially was happening was investors were selling off in anticipation of the market price of uranium coming down which in fact it did come down that decreased that discount significantly so it was a discount of 15% then decreased to basically minus 1% or almost at net asset value that’s an instance where the discount was actually sort of uh showing some foresight into thinking that the uranium Market will decrease however that’s not always the case as let’s say going back to just a year prior to that in March of 2023 where the net asset value and the trust of the uranium was around 1250 per share the market price was around $11 so in that case there was a discount of if we go back to March yeah there’s a discount of roughly 11% or 12 to 11% in some cases maybe even 14 15% and what happened there is that it may be they may be investors may be anticipating a decrease in the uranium price but here the uranium price kept increasing so this discount actually persisted for some time until eventually it started to close as investors realized oh you know what the uranium price is actually not going down it’s going up there’s no reason for the discount to be this large and investors see that and say oh well then if that’s the case I’m going to buy now and capitalize on not only the increasing price of uranium but but also this discount which will eventually close as it did over the next several months or so and then you get more upside and sort of a little bit of Leverage there not actual leverage but a little bit of extra enhanced return from the discount closing closer to net asset value that’s some of the Dynamics there um when investing in the spot uranium trust I sort of skipped over camoo for a bit but camoo is the largest minor of uranium in Canada and one of the largest miners globally and the L publicly traded Miner that you can purchase on a US exchange and Cho will do their sales of uranium not necessarily on the spot Market which is uh what this blue line is tracking monthly but they price most of their Uranium on the long-term Market which is this sort of Gray Line that they’re tracking monthly but what you’ll notice though is that while the spot Market is volatile the longterm market and the spot Market generally move in the same direction we can get a longer term view of this and see the Dynamics here so in the case where we had the last uranium sort of bull run from 2000 to let’s say 2007 or so we had the uranium spot price and uranium long-term price very highly correlated and then afterwards there’s a little bit of Divergence as the long-term price seemed to be a bit on a lag compared to the short-term spot price so in other words while the spot price decreased significantly and did it at so at a faster rate the long-term price also decreased just at a slower rate following the short-term price and it looks like from 2017 where the uranium spot price bottomed has been increasing steadily ever since although the long-term price only started the bottom of 2018 a bit later and then has started to increase since then following the spot price so if the uranium spot price continues to stay at or around 100 or even goes through 100 and higher like it did in 2007 then one would naturally expect that the long-term uranium price would follow as well just on a bit of a lag and continue to increase and Ratchet up that’s going to be useful for camoo later on as more of these contracts start coming in for renegotiation they’re going to be based and looking at that long-term price so effectively the longer the uranium spot price stays high and or continues to go up the more that it will benefit CCO as they renegotiate these longer term contracts all that is relatively pretty obvious stuff I mean if Cho is a uranium producer uh if uranium prices go up they’re going to make more money it’s not too complicated from that perspective however it is important to sort of understand the dynamic between the spot price and the long-term price because let’s say if spot price immediately spikes to 200 for example uh if the spot price spikes and then comes back down significantly like let’s say it’s something like this that happened in 2007 if that occurs then what may happen is we might see a similar pattern with the long-term price where it goes up but it’s not going to go up all the way to that high peak on the spot price it’ll go maybe partially the way but then most people won’t be willing to pay long-term contracts at whatever that Spike Peak price is in that case Cho may be able to lock up some long-term contracts at an elevated rate but they may not be able to lock up anything at that high spot price if you compare that to the physical uranium price this might actually much more closely track the spot price of uranium because effectively that’s what the trust is designed to do and in this case if we look at the spike of price that happened in 2021 we saw the price of uranium Spike fairly significantly and in that case even the price of the trust went over nav in that case creating a premium in this case a very significant premium at one day whereas almost 30% premium which is way too high so if it if you see premium like this you want to sell and take advantage of the extreme price over nav that the trust is trading at now that may have had something to do with the fact that this trust was recently introduced and there’s not a lot of liquidity and people are entering into the trust since it’s new and exciting and willing to pay premium even though it’s not really a good long-term strategy now that that premium is sort of dissipated and we’re in a discount again that may not occur to as such an extent but it is possible if there is a significant rise in the spot price that investors who are looking for a vehicle and especially speculators who may be willing to pay a premium will be jumping into the BR uranium physical trust as a way to express views that they think the short-term uranium price will go even further in that case it wouldn’t be totally unsurprising to see the uranium spot trust be at a premium if the price were to spike significantly like it did in 2007 all this is to say is the depending on where you think your uranium price is going to go and for how long it’ll be at that Peak price or at a higher level price can maybe influence whether or not let’s say you invest in chemo as a mining company of uranium or as a spot trust directly if you think that we might get a scenario where there could be let’s say like a short squeeze so to speak of uranium not necessarily saying this will occur but if let’s say Global Supply is less than Global demand and eventually utilities need to Reby it almost make sense that they’re going to have to pay a higher price if they want to get the uranium they need so if you think that there’s going to be a sudden Spike but eventually that’ll get resolved out then you might consider opting for investing with let’s say the spot uranium trust because you might be able to capitalize on more of that full upside swing to the price increasing whereas if you investing in Cho you definitely would get some upside as people expect that uranium prices will be higher but the long-term price which will ultimately affect the long-term business fundamentals of Cho might not increase as much as the full spot price spike however if you’re under the belief that uranium prices might not see a sudden Peak but is more of a gradual increase in price that is more steady and takes a longer time and likely won’t dissipate as fast as it did in 2007 to 200 like 8 and 2009 and it’s maybe it gets to a higher price and then sort of stays there gradually increases then it might make sense to potentially invest with camoo because in that case camoo will be able to benefit from a longer term uranium spot price or excuse me a longer term uranium price they’ll be able to sign more deals at that higher price make more margin make more profit they’ll be able to do this for a long period of time which maybe is longer than the market is currently anticipating so if the market thinks it’s going to be a spike like this in the spot Market it might be underpricing cico if it actually ends up being a longer term or gradual increase in the uranium price so I know that was sort of a lot on the difference between camoo and the Sprout uranium trust but there’s there sort of just two different ways to view and express an an interest in uranium and how to potentially invest in that I will mention though that for the Sprout physical uranium trust the management expense ratio is 0.71% or 71 basis points and for ETFs that is actually quite High uh one could argue you it’s understandable that a company that is holding and storing physical uranium uh like a radioactive substance is going to have a higher expense ratio than you know let’s say like a Index Fund ETF so from one perspective that’s understandable on the other hand 71% is still fairly sizable expense ratio so you do need to keep that in mind if you’re planning to hold this for a longer period of time that that will start to eat up and take a chunk of your Returns the longer you hold it now hopefully if uranium prices increase then that really doesn’t matter as much because there aren’t really too many other investment vehicles asides from camoo which you could express you know a positive or long-term bullish view for Uranium but just keep in mind that if you know uranium prices tread water uh then your uranium per share will decline over time as that management ratio gets taken out of the per share value for the net asset value there are some uranium ETFs uh specifically provided by Sprat I think there’s a few other ETFs as well I think yeah the global X ETFs uranium ETF is another one but those generally have either what are called miners or Junior Miners and maybe a bit more speculative which we discussed here up front I wouldn’t necessarily have these be my first choice for investing in uranium they are a bit more quote unquote Diversified as you have more exposure to different companies but if more of those exposure is to more exploration and speculative companies then it May net net be less beneficial for some compared to like let’s say okay I’ll just invest in camoo as the main uranium minor just something to consider I mean you can take a look at the Holdings within each of these ETFs for instance like the sprot uranium miners ETF and they do have some of the largest Miners And even have exposure to as Tom prom which I’m probably mispronouncing but that is the main producer of uranium in Kazakhstan so that is one way to gain exposure to that company which you likely would be unable to get exposure to directly if you want to track the spot and term uranium price uh camoo has charts on their website which is what we were looking at before with the monthly spot and monthly long-term uranium price if you’re looking for sort of the day-to-day Market Price Market spot price of uranium then uh numerico has a website where you can check out the latest trades for uranium and in this case you can sort of see and track what the most recent price is based on the latest trade that went through there are some periods where you have days where there no trades are made at all and that’s actually completely normal for a uranium Market which is relatively a liquid low volume market so don’t be too surprised by that also given that at it’s you know low volume uh low liquidity Market don’t also be surprised by significant swings up or down in the r uranium price in the short term but this is one sort of helpful tool to keep uh tabs on the uranium Market especially day-to-day uh although longterm you don’t really need to worry too much about the day-to-day volatility especially given it’s a a low low volume Market but just a tool that’s in your toolkit if you want to be able to use and help track this for your own investment thesis so I personally have owned or own the Sprat physical uranium trust as a way to potentially invest in uranium and bet on a l long-term increase in uranium price primarily on the thesis that at least over the next four or five years Global demand is higher than the global Supply currently so price likely will have to increase if uh utility companies are able to get their supply they’ll have to pay more just my thesis might be wrong but that’s how I’m thinking about it at least as a portion of my portfolio and that is your energy Stock Investing course for beginners hopefully you found this helpful to navigate at least some of the oil natural gas coal and uranium markets and investing options you have for them if you’ve invested in energy stocks before I would love if you would leave a comment and express what you’d invested in or what you learned from that investment as well I think that really helps new investors a ton is to see the experience of others and learn learn from either their mistakes their successes and their experiences in general and help get a better holistic view of the energy Market in general if there’s things I missed or things I made a mistake on feel free and please do correct me in the comments below I’ll take a look at those and try and upot those as I can and if you made it all the way to the end definitely consider subscribing I’m going to be doing much more long form heavy value based educational content like this going forward so if you’re interested in that and want more useful information like these kinds of videos definitely consider subscribing again hope this was helpful for you guys and thank you for watching
This energy stock investing course for beginners covers the four key energy resources: oil, gas, coal, and uranium. We cover as sector overview of each and details on how to invest in each of these types of energy stocks.
► Get direct access to me through my membership group here: https://michaeljay.teachable.com/p/michael-jay-s-investor-membership-group
Timestamps / Chapters
00:00:00 Intro
00:00:13 Oil – Sector Overview & Use Cases
00:01:45 Oil – Investment Thesis
00:02:49 Oil – How To Invest
00:04:29 Integrated Oil Companies
00:06:40 Upstream Oil Companies (Exploration and Production)
00:10:02 Midstream Oil Companies
00:11:33 Tax Complications of MLPs (K-1 Form)
00:14:45 Returns From Midstream Oil Companies
00:16:06 More Tax Complications of MLPs (Retirement Accounts, International Investors)
00:18:00 Oil Refining and Marketing Companies
00:21:19 Oil Drilling Companies
00:23:45 Oil Equipment and Services Companies
00:27:32 Natural Gas Sector Overview, Use Cases & Investment Thesis
00:28:35 Natural Gas Role in the Eclectric Grid
00:30:43 The Problems with Solar Energy
00:31:42 Natural Gas Market Dynamics
00:34:09 Natural Gas How To Invest
00:34:49 Why NOT to Invest in BOIL (Leverage, Contango, Decay)
00:39:20 Natural Gas Producers and Midstream Companies
00:41:56 Coal Sector Overview & Use Cases
00:43:10 Coal Investment Thesis
00:46:02 Coal Market Dynamics
00:47:18 Coal How To Invest
00:51:53 Thermal Coal Stocks (Consol Energy – CEIX)
00:55:01 My Personal Experiences with Coal Stocks
00:56:07 Warrior Met Coal – HCC Stock, Why No Buybacks?
00:58:08 Tracking Coal Prices
01:01:57 Uranium Sector Overview and Use Cases
01:04:22 Uranium Investment Thesis
01:07:05 Uranium Market Dynamics & How To Invest
01:12:29 Uranium Spot Price vs Long Term Price
01:19:11 Sprott Physical Uranium Trust Expense Ratio
01:20:24 Uranium ETFs
01:21:38 Uranium Price Tracking
01:23:28 Share Your Energy Investment Experience
DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.
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Michael Jay – Value Investing
9 Comments
Feel free to use the playback speed settings in YouTube to have the course play at your preferred pace!
(I have been told in the past that I talk slowly 😅) Timestamps in the description too.
I talk slowly too, and play Factorio.
This looks interesting. Will have a watch
You really put a lot of work into this. Nice video.
Great overview. Saw the whole thing. Learned something new
Thanks for this educational video, I like how deep you dove into each flavour of energy. I might've missed it but mentioning types of oil could be interesting for viewers too, sweet, sour ,etc.
Though I don't invest in energy, I remember seeing CONSOL being mentioned on some forums just before corona. Though the price seemed fair, I refrained from investing because coal seemed a thing of the past. Now look at that tremendous growth 🙂
I wonder what video you're planning to do next, perhaps minerals or renewables? Either way I'll be looking forward to it.
Very insightful. Nice to see that you do new videos again.
very helpful
I'm 15x up on my coal investments, my best investment ever. But, it was all about timing the take up of the position.