Through much of August and early September, benchmark US oil prices continued to defy conventional wisdom of an impending decline, hanging in the same mid-50s per barrel trading range they’ve held since late January. Meanwhile, natural gas has rebounded more than 20 percent from early August lows, squeezing the elevated ranks of short sellers.
Energy prices’ resiliency this summer hasn’t convinced too many investors to jump back into sector stocks. But a number of producers, midstream operators, service companies and even MLPs have now made noticeable bounces off last month’s nadir even before last weekend’s drone strike on Saudi Arabia.
Eagle Ford, Texas-based midstream company Sanchez Midstream Partners (NYSE: SNMP) eliminated its quarterly distributions this week after the bankruptcy filing of its largest customer and general partner, Sanchez Energy Corp (OTC: SNECQ). The important question for most energy sector investors now is where the hammer will fall next.
Kinder Morgan Inc (NYSE: KMI) kicks off earnings reporting season for the US energy midstream sector with no real surprises.
In an industry where time equals money, permits for new US oil and especially natural gas pipelines were once basically a formality. But the Federal Energy Regulatory Commission's lack of quorum in early 2017 led to delays that allowed record fundraising by pipeline opponents and legal challenges to projects on an unprecedented scale.
Fair value is always in the eye of the beholder. But it’s clear big money is now seeking value in energy, despite fluctuating oil prices.
In addition to Antero Midstream Corp (NYSE: AM) discussed above, we’re also adding Dynagas LNG Partners (NYSE: DLNG) and Summit Midstream Partners (NYSE: SMLP), less than a year after they came off the EDL following deep dividend cuts.
Talking Point #1: What's the risk of recession and a demand led collapse in oil prices over the next 12 months?
EG: I continue to believe fears of recession are overblown in the US. In fact, I’m seeing some tentative signs the US economy is stabilizing and we may see some improvement in data over the next few months.
Talking Point #1: How much should we worry about the possibility of stalling or even falling production growth in North America for producers, drillers, midstream and downstream companies we own?
EG: Ironically, I think falling US production would be a huge positive for most of the upstream (producers) and services companies we recommend.
As we pointed out in our August 14 Energy Commentary “The Hammer Falls on Sanchez: Who’s Next,” Sanchez Midstream Partners (NYSE: SNMP) has eliminated its quarterly dividend. We now believe there’s a better than even chance it may have to follow its general partner Sanchez Energy (OTC: SNECQ) into bankruptcy.
There have been no dividend cuts in our Energy and Income Advisor coverage universe in the brief time since the previous issue went to post. Rather, the majority of EDL members have elected to maintain the same payout rates for at least another quarter.
Elliott and Roger on Aug. 27, 2019
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