The energy sector rally that began in the last days of 2018 has continued into early January. The long-suffering Alerian MLP Index is 15 percent higher than its post-Christmas Day low. The S&P 500 Energy Index is better by almost 14 percent, as is North American oil benchmark WTI Cushing.
Natural gas by the Henry Hub benchmark is flat after plunging more than one-third last month. But by and large, buyers are pushing up prices of energy stocks, including many of the higher yielding fare that took the biggest hits in late 2018.
Is this a rally with legs? Or will it prove to be just a bounce in a continuing decline?
That’s the big picture question we address in this issue’s Roundtable discussion. As the headline of our previous Energy and Income Advisor indicates, this is not 2014. And there are several encouraging signs that the energy sector has not only bottomed, but will be a strong outperformer in the New Year.
Certainly not every sector stock will prosper. For example, since our last EIA issue, two Endangered Dividends List members have eliminated distributions. And a company third is set to do the same later this month.
With North American oil and gas drilling activity expected to wane in the first half of the year, the door to accessing capital markets on economic terms remains slammed shut in the faces of all but the largest and strongest energy companies. That’s forcing companies up and down the energy value chain to self-fund virtually all capital spending, and in many cases debt refinancing as well.
The good news is four and a half years after oil cracked under $100 a barrel, the survivors of this battered industry are doing the job. Shale focused producers will adjust output with price swings. But the big capital investments continue to move forward, driving sector earnings and dividend paying power.
The only question is when a critical mass of investor dollars will flood back to the energy sector. We believe what we’ve seen so far presages a solid 2019.
We still smell investor panic in the air. But the trading action of the past couple days is nonetheless encouraging, as the stock market has reversed big intra-day selloffs to finish higher.
Antero Midstream Partners' (NYSE: AM) merger with its general partner is the latest "simplification deal in the MLP sector.
Dominion Energy's (NYSE: D) offer could do a lot to resolve uncertainty surrounding Dominion Midstream Partners LP's (NYSE: DM) future.
Last week, two more members of our Energy and Income Advisor Endangered Dividends List cut distributions. We strongly suspect they won’t be the last to do so before second quarter earnings reporting season is over.
Over the past two weeks the big story in energy markets has been oil price differentials, which was a major theme at this year's MLP and Energy Infrastructure Conference (MEIC) conference. However, scratch beneath the surface and there’s a lot more going on.
Q: Why will the energy sector outperform in 2019? Will it matter if the overall market has a bad year? Roger Conrad (RC): In my experience, no sector can wholly withstand an overall market meltdown, particularly if it brings a recession with it. And as if we needed a reminder, the last four plus years have shown quite clearly that energy is a cyclical business. That said, the economy’s still growing by any useful measuring stick. This remains one of the slowest tightening cycles for the Federal Reserve I know of.
American Midstream Partners (NYSE: AMID) will eliminate its distribution this month. That follows a 75 percent cut announced in July, which was preceded by a more modest 12.7 percent trimming two years earlier. The immediate catalyst is a restated credit agreement, which based on expected fourth quarter financials would preclude management’s ability to pay a distribution.
Since the end of September, WTI and Brent oil prices have experienced one of the most violent and rapid sell-offs in history. Over the short term, energy stocks typically follow commodity prices particularly on the downside. Thus, the S&P 500 Energy Index is off 19.6% this quarter, the Alerian MLP Index is down about 12.8%, the SPDR Oil & Gas ETF (NYSE: XOP) is down 34.8% and the Philadelphia Oil Services Index (OSX) has plummeted over 40% led on the downside by the deepwater and onshore contract drillers.
Altagas Ltd (TSX: ALA, OTC: ATGFF) cut its monthly dividend to 8 cents Canadian from the previous 18.25 cents, starting with the January 15 payment. We highlight the move as part of a strategic reset by management in the December 13 Alert “Altagas Resets for a Hostile Capital Market.” Kinder Morgan Canada (TSX: KML, OTC: KMLGF) announced its 2019 financial projections, which reflect the now closed sale of the Trans Mountain pipeline system to the Canadian government.
How have MLPs recommended in Energy and Income Advisor fared year-to-date? Is there any reason to expect a better performance in 2019? The table “EIA Energy MLP Performance” highlights master limited partnerships recommended in three places: Our Actively Managed Portfolio, the Focus List and the “legacy” portfolios that we continue to track on the EIA website.
Elliott and Roger on Jan. 29, 2019
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Roger Conrad’s coverage of more than 70 dividend-paying energy names.