The recent rally in the energy sector has lifted all boats, including the worm-ridden ones; investors should take advantage of this opportunity to exit any of the Sell-rated names in our coverage universe.
In fact, many of the weakest energy stocks have posted the biggest gains, suckering in momentum-seeking investors with a fear of missing out. These companies, many of which were raised on $100 per barrel oil, lack the balance sheet and franchise assets to survive in an environment where West Texas Intermediate ranges between $40 and $60 per barrel.
Investors must also stay disciplined. Most of our Portfolio holdings trade above our dream prices, and some have rallied beyond our value-based buy targets.
As such, investors should consider taking a partial profit off the table in any of their big winners and reserve this cash for future pullbacks.
Overall equity issued by energy-focused master limited partnerships (MLP) declined by 58 percent last year; we expect this trend to continue in 2016.
Our near-term outlook for crude-oil and natural-gas prices hasn't changed, though investors should consider taking profits on demand-oriented names that tend to thrive when oil prices dive.
The severe downdraft in the prices of crude oil, natural gas and natural gas liquids has pressured producers’ cash flow and outpaced reductions to service costs and capital expenditures. Accordingly, the cash flow shortfalls that predominated in the salad years have continued in the lean years, setting the stage for further spending cuts in 2016.
Data from the Commodity Futures Trading Commission indicates that hedge funds and other institutional investors have shorted the equivalent of 160 million barrels of West Texas Intermediate via futures contracts.
Activity levels and pricing for oil-field services and equipment will likely remain under pressure in the US onshore market this year, with early 2017 bringing a bit of a recovery on both scores. But a return to the levels witnessed during the boom years appears unlikely, especially if Saudi Arabia opts to tap some of its spare capacity to take market share and keep oil prices in check.
Too many pundits talk about a potential recovery in oil prices without considering the drivers and implications.
The utility sector's implosion in 2002 and 2003 has some important lessons for MLP investors.
The financial infotainment industry has hyped the diplomatic tension between Iran and Saudi Arabia as a geopolitical risk that will support crude-oil prices. There's a reason Monday's pop in crude-oil prices was so short-lived: this narrative just isn't true.
The financial media tends to exaggerate the influence of geopolitical developments on oil prices, especially to explain daily moves in these commodities. But today's market hold more in common with the 1990s, when the price of West Texas Intermediate crude oil actually declined at the height of the Gulf War.
Elliott and Roger on Apr. 26, 2016
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