Analysis of Natural Gas Storage

1. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
Independent Investment Advisor
$ price per BTU, (or British Thermal Unit, a
Natural Gas Transport Industry unit of heat equal to the amount of heat
required to raise one pound of water one
This week I would like to focus on the natural degree Fahrenheit at one atmosphere pressure),
gas transportation industry. Crude will take $17.56 to do the job. Natural
Gas will take $3.96 to do the same job, and
Natural gas is trading at one of the lowest levels Bituminous coal will take $3.50. Both Coal
in years, especially if one compares the BTU and Crude have refining costs and clean up
content of natural gas to that of other fossil costs. All have transport costs. The United
fuels, notably crude petroleum and coal. States now has, according to the EIA 2,587
trillion cubic feet (Tcf) of technically
In order to maximize econmic performance of a recoverable natural gas reserves. Annual
country like the United States, there is a consumption is currently in the region of
requirement that we utilize the most efficient
energy input for our economy. Measured in US
Natural
Gas
Indutry
continued
in
page
3
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2. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
Gnostam LLC performance Graphs
Gnostam
was
established
in
February
2004.
Since
inception
the
annualized
rate
for
return
for
a
client
portfolio
managed
by
Gnostam
LLC
has
returned
a
total
9.56%.
For
the
period
from
January
2007
to
date,
the
managed
portfolio
has
returned
an
average
of
1.53%
vs.
-­‐2.55%
of
the
S&P
500.
Please
see
table
below.
2

3. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
22.839 trillion. The number of current year illustrates quite clearly the fact that while gas
reserves is in the region of 91 years current prices at the well-head have been declining, gas
consumption, [figures from 2009]. I contend prices at the end consumer level have held steady
that this represents once of the greatest and oscillated in a seasonal capacity around $12-
investment opportunities for us, and that as $16 per thousand cubic foot [000/ft3]. Any
eventually the US turns away from the crude business in which the margins are almost entirely
petroleum based economy, and substitutes dependent on the monopolist supplier, [as gas
natural gas for crude distillates in areas such pipelines really are] is a great business. In
as private and public transport, those of us addition, as we move to a transport economy
who have positioned correctly will make a based on natural gas, which I think is inevitable,
substantial return on our investment. these transport pipelines will have a far greater
throughput, and therefore as they are paid on a
However I do not believe that investors toll basis, their cash flows will grow, as they are
should focus on natural gas producers such as essentially a fixed cost business.
Chesapeake, [CHK] which have
underperformed, mainly due to corporate If there ever has been a time to buy gas pipelines
governance issues. CHK is a long term it is today.
accumulate.
If one looks at the US pipeline supply network,
The outright buys are the gas pipe lines, and (see on page 5), one see how much of the
gas storage players. This is because most of country is currently served by the existing
the margins in gas are made up from infrastructure. There is a very solid basis for
transport, and not from production, as can be
seen in the charts below. This chart
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4. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
Portfolio
Changes
and
Recommendations
for
February
15th
2011
Gas
pipeline
strong
buys
are
as
follows:
Kinder
Morgan,
[KMI]
El
Paso,
[EP]
Williams
Partners,
[WPZ]
Plains
All
America,
[PAA]
Most
of
these
will
be
subject
to
consolidation
in
my
view.
I
would
add
the
following
utility,
UGI,
which
is
a
liquefied
natural
gas
play.
In
genomic
equipment
and
services,
Life
technologies,
[LIFE]
while
expensive
has
an
almost
unique
exposure
to
the
high
quality
earnings
from
genomic
research
and
genomic
tools.
If
I
were
a
Pfizer,
this
is
the
type
of
company
I
would
want
to
acquire.
The
recommendations
from
last
week
are
still
valid
and
these
are
listed
again.
Semiconductor
Equipment
has
great
potential
for
producing
superior
returns
in
the
first
quarter
of
2011.
The
following
is
a
table
of
our
best
buys:
• Photronics
[PLAB]
12.2
x
multiple;
• MKS
Instruments
[MKSI]
9.9
multiple;
In
the
Oil
and
Gas
exploration,
the
valuations
of
the
deep
sea
drillers,
[<4,000
feet]
are
attractive.
With
the
new
Petrobras
find,
there
has
been
a
redeployment
from
the
GoM
to
the
deep
offshore
drilling,
and
rates
are
expected
to
climb
by
11%
in
2011.
Best
choices
are:
• Helix
Energy,
[HLX]
12.7
x
multiple;
• Diamond
Offshore
[DO]
11.33
x
multiple;
4

5. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
expanding this network. Most of our buys material in the Energy market. As such, I think
have had large price appreciations since the that crude will trend down short term, but that
crash of 2009. However, they do offer good longer term it will remain at a premium to the
value, both in multiples of earnings terms and gas market. Given that we buy energy for its
in terms of price appreciation potential. BTU content, I do think that both resident and
Kinder Morgan has just been spun out again commercial buyers will migrate steadily to
from the Private Equity group Carlyse. It is natural gas for more than just heating, cooling
rare that there is such a difference in the raw and electricity generation. Liquified Natural
material and the distribution price of that raw Gas, [LNG] becomes liquid at -161 Celcius, and
is 600 times more dense than in its liquid form.
This makes LNG cost effective to transport over
long distances by ships. It is more expensive to
move than coal, [coal is denser and has a greater
energy content, but is dirty and is mainly used in
5

6. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
electric power generation and metallurgical If we expect the price of gas to stay under
furnaces, [different type of coal for metallurgic $4.00 for 2011 and 2012, the place to be in in
furnace use]. LNG is mainly used for what is PAA, KMI and EP. I would also add UGI to a
termed supply peak shaving. It can be stored portfolio, as I think this company will most
cost effectively and therefore can be released likely be acquired by a larger player.
into the energy supply chain for satsfying peak
demand, [read higher prices].
Natural Gas consumption is expected to increase
by 12 fold over the next 10 years. Currently
Natural Gas is trading at $3.91, while the
government of Quatar, the largest LNG exporter
in the world is setting a long term supply price of
LNG at $10/mm BTU for a 20 year contract, [2.1
million tons per annum supply].
6

7. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
7

8. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
8

9. Gnostam
LLC
February
14th,
2011
5731
Kirkwood
Place
N
Seattle,
Wa
98103
USA
Newsletter
Disclaimer:
The information and any statistical data contained herein have been obtained from sources which we
believe to be reliable, but we do not represent that they are accurate or complete, and they should not
be relied upon as such. All opinions expressed and data provided herein are subject to change without
notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or
short positions or deal as principal in the securities discussed herein, related securities or in options,
futures or other derivative instruments based thereon. The securities mentioned in this report may not
be suitable for all types of investors. ALL investments involve different degrees of risk. You should be
aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all
transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully
before making any investment decisions. You are free at all times to accept or reject all investment
recommendations made by the Gnostam LLC. As you know, a recommendation, which you are free to
accept or reject, is not a guarantee for the successful performance of an investment and we are
expressly prohibited from guaranteeing accounts against losses arising from market conditions.
Past performance is no guarantee of future results, and current performance may be lower or higher
than the performance data quoted.
Investment Disclaimer All investments involve different degrees of risk. You should be aware of
your risk tolerance level and financial situations at all times. Furthermore, you should read all
transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully
before making any investment decisions. You are free at all times to accept or reject all investment
recommendations made. All products sold are subject to market risk and may result in the entire loss to
the client's investment. (For example: excessive withdrawals may result in the depletion of your
account). Please understand that any losses are attributed to market forces beyond the control or
prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject,
is not a guarantee for the successful performance of an investment and we are expressly prohibited
from guaranteeing accounts against losses arising from market conditions.
Gnostam
LLC
5731
Kirkwood
Place
N
Seattle,
WA
98103
USA
E-­‐mail:
pcorsano@gnostam.com
www.gnostam.com
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