HCLP just cracked a move from its “pullback” to $48. Currently trading for $54 again.

Sorry, I’m out in client meetings this afternoon.

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Resting from the moist heat in a leather chair, I look out from the 9th floor window with nothing but quiet apathy for the weeks of summer. It is my prerogative to enjoy myself in comfort and relaxation; thus I will do little or nothing this summer, opting instead to roam about my countryside, engaging in the luxuries befitting me; sniffing flowers, swimming in cold springs, drinking dew and honey, tending to my garden.

I shall find it quite difficult to care for much else at all.

But you can rest easy knowing that I will be here, with you, in near silence. Making small trades. Pretending summer news stories matter. Why, I might even make a mountain out of some yet to be precisely labelled mole hill? The possibilities are endless.

But as I am not paid to be sensational, my primary occupation will be leisure. My second occupation will be trading. And I suppose I’ll fit my occupation in there somewhere if there’s time.

Throwing you a bone, I made another small round of purchases of ETP, closing in on a full position.

You’re welcome.

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Basic Energy Services is down 5% on me after they announced a secondary offering good for about a 5% dilution.

This pain is never welcome, but I’m not necessarily concerned. I have a long standing policy of not getting puffy over equity raises so long as they are put to good use. What I want to see is what BAS intends to do with the money.

So long as they aren’t hoarding cash or using it to pay existing expenses, there’s no problem here. I want payrolls to grow, lines of business to expand, revenues to increase (and it better be above current per share growth rates)…I want to make money.

If that means selling a little stock, what’s the issue?

I’m not sure I’m a buyer of this drop, because I own a lot. But I’ll be taking a look at the numbers later.

(Interestingly, HCLP is also getting hooked today, probably because automated correlation programs lack subtlety)

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What is working for me is pretty obvious to anyone following. HCLP and BAS are setting my year, single handedly. Even factoring in my biggest misses so far, my gains stand back above 10% YTD.

But I’m not going to just steadily publish a slew of feel good pieces, brushing my ugly ducklings under the mat. So this post will focus on them, why they aren’t performing, and what I intend to do about it.

First up is NRP. NRP is a debt ridden resource MLP whose largest assets are comprised of metallurgical coal deposits. The partnership has been hammered since I bought in at $20, currently standing just below $14. Back in January, I cut a lot of this position for around $16, but recently added back above $15. The position stands at around 6% of assets and I have a big loss attached to it.

As for why NRP is down more than 40% this year, there are two big factors driving the outcome. The first is the obvious hatred of all things coal, based on falling global demand and unfriendly domestic politics. The second is that people generally mistrust this position specifically and are betting they’ll have to raise cash through dilutions. The company has a lot of debt coming due.

My opinion is that NRP has already suffered enough to justify the prices at $20, and my opinion hasn’t changed much at $14. I’m not knee jerk afraid of shareholder dilutions and like the steps NRP has taken to diversify their assets away from a pure coal play. I also think coal is set to rebound. In the meantime, even if they slash their distribution by 25%, that would leave it paying out 7% annually, which is far above market yield. However, I will not be adding more until I see market sentiment shift, preferring instead to add other coal related investments and keeping company specific risk low – building my coal thesis out of many smaller parts. BTU is my first secondary choice, and I’ll probably follow up with a third play next year if coal names are still depressed then.

My second ugly child is CCJ. This is kind of amusing, as I really haven’t lost money on CCJ this year. Cameco and related names rallied hard starting around February helping press my gains to 15% early on, and CCJ’s unceremonious relapse was one of the biggest contributors to those gains sliding back below 10% a month ago. CCJ stands at $19, 5-10% below my average cost per share.

CCJ’s problem is also bicausal. The market for uranium remains abysmal, and spot prices have plunged another 20% this year. That’s the pricing for when there are uranium trades at all. My smaller, half scaled position, UEC, made ZERO sales in the first quarter of this year. The market for uranium is near-totally dead. CCJ has largely fended off impact from this pricing issue through their long term supply agreements. However, that can only get you so far.

But CCJ has a second big problem, which is a very large (and growing) deferred (some may say dodged) tax liability to the Canadian government. The price tag is set to cross $1 billion shortly and will probably be almost three years worth of earnings when we’re set and done here. This is why CCJ’s stock is performing so much worse than its dumber, small peers this year.

And I am not at all concerned about CCJ. I’m electing to sit back and do nothing. The tax bill is a non issue. Without question, Canadian corporate governance is much harsher than the US, and there will be consequences for CCJ. They will be made to pay up, and someone will probably get punished. However, even given the magnitude of the bill, it’s hard to see how this changes the stock dynamics.

To put this into perspective, consider APC back when the oil well blew up. People freaked out at the billions of dollars they would owe in damages and bid the stock down an absurd amount. And then, it no longer mattered. The company made a full recovery in a hurry. As then, CCJ’s market prospects look bright on the horizon. They will be made to pay past owed taxes and that hit will sting, but it’s a one time issue and when you consider how stock multiples are priced into shares, the truth is CCJ’s larger problems (business) when worked through will more than totally swallow this blip on the radar. From the perspective of shareholders, at this point and at this price, CCJ’s only problem is the uranium market. The tax liability will be worked through and take care of itself shortly, if only the damn uranium market can recover.

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I found the terminal position I want, but it has nothing to do with coal. I bought a half sized position in ETP for $56.64.

Energy Transfer Partners, LP is a storage and distribution partnership that specializes in a diverse number of business lines, including (1) midstream, interstate and intrastate transportation and storage natural gas operations, (2) gathering, compression, treating, conditioning and processing of natural gas, and (3) purchasing and marketing natural gas and NGLs.

They’ve been making a flurry of acquisitions, their cash flows seem proper, and they seem cheap relative to peers. They also are paying me 6% in annual distributions to hang out. I like their market position and think the next 10 years will be big for them (same as BAS, same as HCLP).

This is right where I want to be. I’ll refocus energy on coal later – for the moment, I have half assembled positions in NRP and BTU.

Of course, at this stage in the game, it’s going to be hard to hit the kind of returns I got for BAS and HCLP. The market was just so negative about those positions and now since September of last year, it’s getting so expensive. But this is still a good buy here.

I admit it is getting a little harder to find positions to buy. Price to book of companies certainly looks heated, although that’s not the only measure. There are certainly some positions out there priced to fail, like EPD. And coal companies in general look terrible. It wasn’t just tech that got bid up last year.

But there are still lots of positions that are growing revenues and earnings just fast enough to keep that risk threshold around a 10 year horizon. It’s not the 5 year break even points you could have picked up in ’08, but what do you want?

Some of these positions are going to be stealth winner. I think coal names are artificially expensive, but really quite cheap. You have to consider how much of the “expensiveness” is being driven by low coal prices forcing write downs on entire proven reserves. So is the company selling the whole operation for that price level? That’s the big question isn’t it. If you get a coal price recovery, suddenly these operations are all trading <1X book with robust earnings growth.

95% invested.

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I added a small, 5% position to my book in BTU for $16.10, to commemorate the EPA issuing new power plant emission regulations.

My guess is the equity position is worth about $7 now. And they’re losing money every quarter. But this is investing, not guaranteeing. Market forces will either correct through higher electricity prices for consumers, rebalancing the coal market. Or, a third of the US grid goes offline and gun/ammunition manufacturers become the new Coca Cola.

I’m also looking at a few distribution terminals I think might see big volume increases as struggling coal producers – coupled with natural gas exporters looking to Europe – try and tap foreign markets for trade.

I’m moving slow here, not in any rush to push the limits. This is going to be very volatile; lots of room to play individual names sawing 25% up and down, but the overeager will lose a finger if they don’t give themselves room to back off.

The US is about to be the world’s biggest energy exporter for the next century. You can quote me on that. It’s just a matter of edging in and building position.

Your move.

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