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Issues

Picking the Pockets of Opportunity

Although the S&P 500 has endured its fair share of volatility over the past week, the energy sector endured the deepest selloff, reflecting a 21 percent decline in the price of West Texas crude oil and a 23 percent drop in Brent crude oil since the end of the second quarter. The selloff accelerated quickly on Oct. 9, prompting us to issue an Alert to subscribers highlighting our top seven stocks to buy during the energy bloodbath. After today’s rebound, the Alerian MLP Index is down 7.8 percent since the start of September, while the Philadelphia Oil Service Sector Index has given up 18.4 percent of its value and the Bloomberg North American Independent E&Ps Index has tumbled 25.6 percent. In this issue, we explain why our best ideas in today’s market include refineries, airlines and midstream operators.

Tackling the Big Issues

In this issue, we tackle two of the topics about which readers frequently ask: our outlook for crude-oil prices and our assessment of the major integrated oil company, including which ones are our favorites. The recent collapse in the price of Brent and West Texas Intermediate (WTI) crude oil has investors running scared and trying to figure out exactly what's going on. We dig into the complex dynamics driving this trend, from surging North American output and declining US imports of crude to trends in the futures markets and regional oil imports, and explain our near-term forecast for WTI and Brent. When casual investors think of the energy stocks, one of the Seven Sisters—BP (NYSE: BP) NYSE: BP), Chevron Corp (NYSE: CVX), Eni (NYSE: E), Exxon Mobil Corp (NYSE: XOM), Royal Dutch Shell (NYSE: RDS B), Statoil (NYSE: STO) and Total (NYSE: TOT)—likely springs to mind. But these Western energy giants have come in for a great deal of criticism over the past several years, as investors lose patience with the industry’s massive capital investments and limited production growth. We dig into each of these names, assess their growth prospects, potential to unlock value for shareholders and highlight our favorites.

Deepwater Drillers Revisited and an International Update

The most recent boom and bust cycle in the tanker market provides useful insight into the deteriorating fundamentals in the offshore drilling market.

Consider the similarities between Frontline (NYSE: FRO), a formerly high-flying tanker owner, and SeaDrill (NYSE: SDRL), a leading offshore contract driller.

Both companies levered up aggressively and paid a generous dividend. Like Frontline at its peak, SeaDrill offers a double-digit dividend yield, has posted impressive gains over the past several years and remains a popular stock among income investors. Readers also frequently ask me about the name and its prospects.

Moreover, SeaDrill and Frontline both took advantage of surging demand to expand their fleets dramatically and reaped the rewards of a tight supply-demand balance.

Although we don’t expect the market for offshore rigs to collapse in the same manner as the tanker market, an influx of new drilling units has skewed the supply-demand balance in customers’ favor, putting the day-rates that these vessels earn under pressure.

MLP Roundup

Since their inception on Nov. 15, 2013, our MLP Model Portfolios have generated solid returns.

Our Conservative Allocation has delivered an average total return of 29.2 percent over this period, outperforming the 23.1 percent return generated by the Alerian MLP Index.

Meanwhile, Our Aggressive MLP Portfolio has delivered a total return that's on par with the Alerian MLP Index, as the big gains posted by our turnaround picks have been offset by higher-yielding fare that has lagged the market.

In this issue, we assess each holding’s second-quarter results and update our outlook for their future growth prospects.

Going Green

Can investors still make money in renewable energy? High-flying renewable-energy stocks like SunPower Corp (NSDQ: SPWR) and SolarCity Corp (NSDQ: SCTY) routinely garner headlines but also entail significant risks.

Our Portfolio holdings with exposure to renewable-energy have generated an average return of more than 26 percent since last fall.

And we see further upside for all five stocks, fueled in part by the bullish near-term outlook for renewable energy in the US. Our favorites should continue to generate reliable earnings and grow their dividends through acquisitions and organic-growth opportunities.

What sets our favorites apart from SolarCity Corp and other overhyped names?

These companies generate a profit and pay reliable dividends. Even better, our picks have the wherewithal to survive a slowdown in renewable-energy development, thanks to their contract-backed revenue and exposure to other business lines.

Despite these advantages, these stocks still trade at reasonable valuations, making them solid bets for investors looking to build wealth over the long term.

The MLP Class of 2014, Part 2

Investors flock to MLPs for their above-average yields and exposure to the US shale oil and gas revolution. But instead of simply picking the highest-yielding stocks, investors should consider the potential for price appreciation.

Over the past three years, investors seeking differentiated returns have found recent initial public offerings (IPO) in the MLP space to be a fruitful hunting ground.

In 2011, two fledgling MLPs--Golar LNG Partners LP (NYSE: GMLP) and Tesoro Logistics LP (NYSE: TLLP)--cracked the list of that year's top 10 performers. This number increased to six in 2012 and four in 2013. And thus far in 2014, recent IPOs have accounted for four of the top-performing MLPs.

In this issue, we highlight three forthcoming IPOs that investors should put on their shopping lists and delve into the remainder of this year’s debutants.

We covered GasLog Partners LP (NYSE: GLOP), Cypress Energy Partners LP (NYSE: CELP), Viper Energy Partners LP (NSDQ: VNOM) and Foresight Energy Partners LP (NYSE: FELP) in the July 18 issue of Energy & Income Advisor.

The MLP IPO Class of 2014, Part 1

Energy-related master limited partnerships (MLP) have completed seven initial public offerings (IPO) thus far in 2014, bringing the universe of publicly traded partnerships to an all-time high.

Although some of these fledgling partnerships operate assets familiar to most investors, the class of 2014 also continues the expansion of this security class to several niche industries, including renewable energy, wastewater management and pipeline inspection.

Meanwhile, recent IPOs have included Foresight Energy Partners LP (NYSE: FELP), the first coal producer to debt as a publicly traded partnership since 2010, and Viper Energy Partners LP (NSDQ: VNOM), a spin-off of Diamondback Energy (NSDQ: FANG), which has reignited investors’ interest in mineral rights.

Distributions May Vary: The Smart Investor’s Guide to V-MLPs

Many energy-related masted limited partnerships (MLP) own assets that generate reliable cash flow and exhibit limited sensitivity to commodity prices, credit conditions and the state of the economy.

Names that own midstream assets--pipelines and other infrastructure that transport hydrocarbons from the wellhead and prepare them for sale--often generate their cash flow from multiyear agreements that guarantee a minimum payment. Of course, investors must keep tabs on when these contracts end and whether expiring contracts can be renewed at similar, or more favorable, terms.

Whereas publicly traded partnerships usually privilege reliable cash flow and distribution growth, variable-rate MLPs (V-MLP) offer a different value proposition and make no effort to hedge their exposure to commodity prices or economic conditions.

These publicly traded partnerships deliver distribution coverage of 100 percent each quarter, but their payouts will vary depending on the performance of their underlying business.

Most V-MLPs own and operate downstream assets such as refineries or chemical plants--industries where earnings fluctuate with commodity prices and exhibit greater volatility than in the midstream segment.

When V-MLPs’ underlying businesses are in the sweet spot, these names can deliver big-time price appreciation and stratospheric yields of 20 percent to 30 percent; however, if business conditions deteriorate, it’s not unheard of for a V-MLP to omit its quarterly payout entirely.

Here's our guide to the high risks and rewards in this niche segment of the MLP market.

The Search for Yield Compression

Despite the dramatic changes that have occurred in the universe of publicly trade partnerships since the 1980s, the basic appeal of this security class to investors has remained the same: above-average yields and significant tax advantages. 

But from  2011 to 2013, price appreciation accounted for an average of 87 percent of the total return posted by the top-performing MLPs from each year. Thus far in 2014, climbing unit prices have contributed about 93 percent of the total return posted by the top 10 publicly traded partnerships.

Roger Conrad and Elliott Gue’s Top Energy Takeover Targets

Whole-company takeovers in the energy sector peaked in 2011, when companies completed almost $192 billion worth of deals.

Mergers and acquisitions activity in the energy patch has slowed in subsequent years, declining by 41 percent last year; however, the premiums paid in these deals have steadily increased in recent years--a boon for investors who own these names.

Over the years, we’ve amassed a solid track record of identifying takeover targets, including mining equipment producer Bucyrus International, Bakken operator GeoResources and artificial-lift specialist Lufkin Industries.

More recently, Energy XXI (NSDQ: EXXI) offered to purchase Model Portfolio holding EPL Oil & Gas (NYSE: EPL) for a premium of 33.4 percent.

Our Secret: Focusing on high-quality names that trade at reasonable valuations. Holding a name that can’t stand and grow on its own in the hope of a takeover isn’t a winning strategy.

  • Live Chat with

    Elliott and Roger on Nov. 6, 2014

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Coverage Universe

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLP Ratings

      Our assessment of every energy-related master limited partnership.

    • International Coverage Universe

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.

    Experts

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Peter Staas

      Managing Editor: Capitalist Times and Energy & Income Advisor