Recent improvements in global oil inventories and stronger-than-expected demand growth have bolstered oil prices—especially outside the US—and prompted value-focused investors to return to cyclical segments of the energy sector.
Meanwhile, the Energy Information Administration’s downward revisions to its outlook for US oil output and the decline in the oil-directed rig count have provided early indications that drilling and completion activity may obey the speed limits imposed by commodity prices.
Although these trends have lifted upstream-related energy stocks in recent weeks, the break-neck volatility of the past few years and the likelihood of shorter cycles in the energy sector argue for diversification into secular growth stories that depend less on commodity prices and timing your entry and exit points.
This approach has served us well over the years, with our exposure to that own renewable-energy capacity delivering particularly strong returns relative to the S&P 500 Energy Index over our extended holding periods.
To varying degrees, all the stocks that we highlighted in December 2014 that stood to benefit from lower oil prices also outperformed in a challenging tape. (See The Demand Side Beckons.)
We cashed out of Portfolio holdings Delta Air Lines (NYSE: DAL) and Royal Caribbean Cruises (Oslo: RCL, NYSE: RCL) for solid gains in November 2015, while anyone who followed our lead on Casey’s General Stores (NSDQ: CASY), Alimentation Couch-Tard (TSX: ATD/B, OTC: AQUNF) and Berry Global (NYSE: BERY) also fared well. (See Trimming Some of Our Hedges.)
With oil prices likely to range between $40 and $60 per barrel over the next few years, our playbook for late 2014 and early 2015 no longer holds the same appeal. At the same time, many of the renewable-energy companies in our Portfolios have rallied above our buy targets.
Fortunately, the ever-shifting energy landscape isn’t bereft of secular growth stories, including the specialized engineering and construction company and precision-power specialist highlighted in this issue.
Massive distribution cuts from the likes of Plains All-American Pipeline LP have severely damaged midstream master limited partnerships' (MLP) reputation among income investors. But our favorite MLPs trade at favorable valuations and offer exposure to compelling volumetric growth stories.
The divergent performance between Noble Midstream Partners LP and Hess Midstream Partners LP since their initial public offerings demonstrates what investors value in an environment where energy prices remain lower for longer.
Break-even rates continue to fall across the board in US shale plays, but the efficiency gains that come from exploiting multiple oil-bearing formations with the same infrastructure give the Permian Basin an edge in the battle for market share.
Over the past 12 months, the difference between the top and bottom performers in the Alerian MLP Infrastructure Index amounted to about 60 percentage points. Capturing this upside requires on-the-ground intelligence, which is why we attend the MLPA Association's annual investor conference every year.
Expansions to the Gulf Coast refinery complex will translate into higher ethane demand in the US, creating opportunities for short-term trades and longer-term wealth building.
The recent rally in upstream oil and gas stocks has bolstered our Focus List.
We highlight two energy companies that offer exposure to secular growth stories outside the oil and gas market.
The challenging energy market has taken its toll on our Focus List, with our poorly timed picks from the upstream segment and oil-field services absorbing the hardest hits. Our lesson from these missteps: We need to remain disciplined and adhere to our own advice about trading these cyclical industries more adeptly, buying when oversold and paring exposure when valuations and sentiment reach the top of their range. These tactical errors are inexcusable and particularly grating when our skepticism toward oil prices at the outset of the year was spot-on.
Within the upstream space, we continue to focus on names with low costs, solid balance sheets, high-quality acreage in the STACK and Permian Basin, and the flexibility to monetize noncore assets or retain cash flow through captive midstream MLPs. Although our outlook for oil prices and the US energy patch favors an overweight position in core midstream holdings, nimble investors can generate alpha in upstream names by buying when oil prices retreat to the low end of their range and taking some profits off the table when they recover. Timing and stock selection—easier said than done with shorter cycle times—will be critical to producing differentiated returns. Adhering to our Dream Prices can help in this regard.
We review our investment strategy and second-quarter results from the names on our Focus List.
Elliott and Roger on Aug. 29, 2017
Balanced portfolios of energy stocks for aggressive and conservative investors.
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
Our assessment of every energy-related master limited partnership.
Roger Conrad’s coverage of more than 70 dividend-paying energy names.