Energy Total Return Strategies
Our Total Return Energy Funds are invested for a combination of current income and longer term capital gains.
We view the energy space as a continuous growth industry, one in which periodic commodity price volatility and constant technological change make longer term growth investing strategies problematic. As such we employ what we believe is a safer “value” and “high current income” strategy to energy investing.
Our portfolio generally:
- Contains a high proportion of “Royalty Collecting” entities… Trusts and MLPs that collect the royalties on oil and gas production. This is a niche space in which Lucas Capital is one of the few institutional investors, and seemingly one of the few firms maintaining long term historical tracking and valuation models. Royalty collecting securities typically have no or very low debt, and often bear none of the costs of drilling or operating wells, allowing for positive cash flow throughout the price cycles. Royalty entities typically own mineral rights in the historically productive regions benefitting from new production technologies, therefore frequently see production exceed historical forecasts.
- Contains a high percentage of energy transport and processing entities, typically organized as MLPs. These are the toll roads and utilities of the energy business. These infrastructure investments continue to earn income and pay distributions throughout commodity cycles offering a buffer to fund when oil or gas prices decline.
- Focuses our equity investments in Exploration and Production (E&P) companies with larger legacy land positions in the most productive basins, production scale economies, and lowest debt. We prefer companies with diverse “play” exposure. We have seen enough hot plays come and go to be skeptical of smaller single play companies growing with heavy reliance on debt financing. And we are generally cautious about companies undertaking massively complex, multi-year, and politically vulnerable international projects.
- Incorporates investments in companies deploying currently efficient new energy technologies, in areas such as LNG exports, Frac Sand supply, Wind and Solar generation. We do not choose to invest in early stage technology companies.
- Avoids investing in energy service providers. We have sufficient industry exposure without investing in the more volatile side of the energy business, and we observe that as technology improves less equipment and labor is often needed to generate the same or better production.
A major consideration in the creation of our funds was to enable investors to benefit from a diverse portfolio of investments in Royalty Trusts and MLPs while at the same time having the convenience of a single K-1 report, since many of the securities in which we invest would otherwise produce complex tax reporting.