Sep. 4, 2014 8:55 PM ET | About: Cushing Renaissance Fund (SZC), Includes: XLE
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SZC over the next 72 hours. (More…)
Horizontal drilling and hydraulic fracturing are increasing North American energy production.
Domestic energy prices are lower than international prices increasing the competitiveness of domestic companies in industries with high energy costs.
This fund trades at a 10.84% discount to NAV while paying a 5.6% distribution.
New technology and techniques like horizontal drilling and hydraulic fracturing have allowed companies to access oil and natural gas trapped in shale resources. The ability to access the shale reserves has driven increased energy production in North America causing domestic energy prices to trade at a discount to international prices. The availability to access lower cost energy is leading to structural advantages for energy-intensive companies operating in America. The Cushing Renaissance Fund (NYSE:SZC) is a closed end fund launched on 9/26/2012 that is invested to benefit from this trend. SZC invests in companies that produce, move, and refine the energy as well as companies that will benefit from the lower energy and feedstock costs. The fund’s advisor believes we are in the early innings of this trend and the trend should fuel U.S. economic expansion. The thesis has been playing out as the fund has posted 24.1% annual returns since inception. The attractiveness of SZC is increased by its 10.84% discount to NAV and 5.62% distribution.
Key Investment Highlights:
North American Shale Revolution: Hydraulic fracturing and horizontal drilling are allowing energy companies to exploit hydrocarbons trapped in shale formations. This has rejuvenated the North American energy business and allowed increased energy production. The increased production has driven demand for new infrastructure to move the products from where they are produced to where they are used.
Energy Cost Advantage: The increases in domestic energy production have also lead to geographic price differences. Natural Gas is a key example of this, with domestic costs around $4/mmbtu compared to $9/mmbtu in Europe. Companies operating in the U.S. that have natural gas as a major input have a cost advantage over competitors that operate overseas with higher input costs. This cost advantage should allow them to increase profitability and gain market share, driving company share price higher.
Not Reliant on Energy Prices: The profitability of many energy companies rises and falls with the commodity prices. However, SZC is able to invest in companies that would benefit from lower energy prices. This reduces the fund’s reliance on energy prices and providing a natural hedge.
Potential to Export LNG and Oil: Natural gas prices are based on local market conditions. Domestic natural gas prices have declined due to the large amount of shale gas available. New natural gas export facilities are under construction. Once completed, these export facilities will allow domestic natural gas to be shipped overseas and sold at international prices. SZC is able to invest in the companies building the export terminals as well as shipping companies that will benefit from the increased demand for transportation.
Discount to NAV: SZC is trading at a 10.84% discount to NAV and offers a 5.62% yield. Fund performance has been strong and could serve as a catalyst to narrow the discount.