Energy stocks have rallied hard in the month of May. The S&P 500 Energy Sector Index is now up more than 70 percent from its March 18 low. The super majors-focused NYSE Arca Oil Index (NYSE: XOI) is higher by 82 percent plus. And the midstream-heavy JP Morgan Alerian MLP Index ETN (NYSE: AMJ) is now better by 140 percent.
None of these indexes is as yet anywhere close to where it started the year. The S&P Energy Index is 60 percent under its all-time high in mid-2014, the last time oil sold for more than $100 a barrel.
True, benchmark WTI Cushing crude will run you about one-third of that now. The same is true for natural gas at Henry Hub, and prices are lower still at hubs in Appalachia and Canada. Unlike oil, gas has not rebounded appreciably from the March low.
The environment is changing but the super major business model is alive and well.
It’s been a week since the most recent issue of Energy and Income Advisor went to post. And already 15 more energy companies have announced distribution cuts, stretching from wellhead to burner tip.
Back in 2017, financially recovering Kinder Morgan Inc (NYSE: KMI) promised investors three dividend increases. But this week, it offered up a 5 percent lift for 2020, just 20 percent of what was promised. Under normal conditions, I’d view a shortfall like this as a potential warning of underlying business weakness - here's why in this case, it's not.
Nothing incites investor panic like a fast-falling safe haven. But the Federal Reserve's Monday announcement abruptly calmed what had been a growing rout in corporate as well as municipal debt. What’s left now is a massive supply of bonds with the highest yields since 2008.
Saudi Arabia’s decision last weekend to crank up production was the last straw for oil prices, already depressed by demand concerns resulting from global reaction to the spread of COVID-19.
In our May 15, 2020 roundtable discussion “Q1 Earnings and Guidance: Here’s What’s Critical” we flagged US independent refiners as a well-positioned group at this stage of the cycle. In this issue, we’re adding Valero Energy (NYSE: VLO) to the Actively Managed Portfolio as a new buy recommendation.
The entire EIA coverage universe has now announced their distributions for calendar Q2. Two more companies reduced their payouts since the previous issue: Halliburton Company (NYSE: HAL) and PBF Logistics LP (NYSE: PBFX).
Shortly after the previous issue of EIA went to post, contract renewable energy company Northland Power Inc (TSX: NPI, OTC: NPIFF) concluded Q1 earnings reporting season for Model Portfolio companies with its own solid results. Highlights included a 34 percent lift in revenue, with asset expansion the primary driver of growth. EBITDA advanced 43 percent, net income 35 percent and free cash flow per share by 39 percent from a year ago.
Results and guidance updates are now in across the energy industry, from drillers and producers to pipelines and refiners. We discuss our most important takeaways, and how they’re informing our strategy going forward of accumulating positions in sector survivors to ride the eventual recovery.
COVID-19 fallout has aggravated all of the Endangered Dividends List critical factors at multiple companies. As a result, distribution cuts across the energy spectrum have continued at a rapid pace, with 11 more companies reducing their payouts since the previous issue of EIA.
Elliott and Roger on May. 28, 2020
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Roger Conrad’s coverage of more than 70 dividend-paying energy names.