Natural gas never managed to break $2 per thousand cubic foot and oil prices actually went negative. So Q2 results for energy companies were never going to be pretty. And with Covid-19 uncertainty still a threat up and down the value chain, it’s little surprise second half 2020 guidance has remained cautious.
Nonetheless, we’re seeing unmistakable signs of resilience, as well as the green shoots of recovery. And both are good reasons to buy best in class energy stocks, which continue to offer their most attractive yields in memory.
One of the green shoots is what appears to be the first monthly rise in North American hydraulic fracturing activity in months, with the final count returning to levels not seen since April. July activity has been particularly robust in the Permian Basin. But there are some signs of improvement elsewhere also, including the Anadarko (Oklahoma), Bakken, Eagle Ford (Texas) and Niobrara (Colorado) regions.
What do super major oil company Chevron Corp (NYSE: CVX) and leading US rooftop solar installer Sunrun Inc (NSDQ: RUN) have in common? They’re on the leading edge of a building wave of energy mergers and acquisitions.
After a series of rulings rejecting federal permits for new pipelines, the US District Court for D.C. actually threw out one for an already operating one. The result: An order to immediately shut down the $3.8 billion Dakota Access Pipeline, which transports oil from the Bakken shale of the upper Midwest.
Investors’ craving for simplicity and low costs is second only to desire for generous dividends and capital gains. Unfortunately, those two priorities aren’t always compatible.
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.
Q2 numbers were always going to be weak. And that was bound to be the case whether we were talking about dominant companies like Enterprise Products Partners (NYSE: EPD) and Kinder Morgan Inc (NYSE: KMI), or the biggest basket cases on our Endangered Dividends List.
Four more Energy and Income Advisor coverage universe companies have announced dividend cuts since our July 22 issue went to post. That’s actually less so far than we expected going into this season for Q2 earnings reporting and dividend declarations, though there’s still risk of multiple high profile cuts in the next few weeks.
Roughly one-third of the Model Portfolio and High Yield Energy List companies have now announced their Q2 results and updated guidance. As expected, the numbers weren’t pretty. And guidance wasn’t everything we could have hoped for either, with most companies expressing a generally cautious outlook.
For the upstream, downstream and services companies in our coverage universe, the top driver of stock market performance is likely to remain the macro picture, particularly for crude oil prices. In that regard, oil prices today are trading close to flat with their early March trading range.
There have been zero dividend cuts in our Energy and Income Advisor coverage universes since the June 18 issue. That could change quickly over the next several weeks, as the 45 companies in the Endangered Dividends List declare their dividends for the summer season.
Elliott and Roger on Jul. 20, 2020
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