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Issues

Natural Gas Outlook and Portfolio Focus

The breakout of oil prices above $80 globally and $70 in North America have justifiably grabbed the headlines. But when it comes to most energy stocks, the outlook for natural gas is at least equally important to returns.

This issue of Energy and Income Advisor, we highlight current natural gas market dynamics and our near and longer-term forecast for supply, demand and prices. We then zero in on developments at several of the more natural gas heavy names in our EIA Actively Managed Portfolio and Focus List.

Our Views On Super Majors

In this issue of Energy and Income Advisor, Elliott and I highlight another Roundtable. This time, it’s our views on the giants of the energy investing universe: Super majors, the world’s biggest non-government oil and natural gas producers.

Following the template of our past Roundtables, we focused our comments on several key talking points: (1) Our general view of super majors as investments now; (2) Super majors’ success (or lack thereof) in keeping up with the latest technologies, processes and investment opportunities in the energy space; (3) The importance of super majors’ ongoing diversification efforts, (4) The relative importance of litigation, regulation and political turmoil to our analysis of super majors and (5) Our top recommendations of the super majors.

EIA Portfolios: Simplifying our Strategy For an Emerging Bull Market

In the previous issue, Roger and I shared a round table with Energy and Income Advisor readers, synthesizing discussions we’ve had on a wide range of “Big Picture” topics, including developments in the still red-hot Permian Basin, the latest on regulatory headwinds and trends and our key takeaways from Q2 earnings, including potential MLP to corporation conversions.

Subsequently, we updated our comments, numbers and advice on each of the companies tracked in our three coverage universes, which are explored in tabular form under the “Portfolios” tab on the EIA website:

• EIA Producers and Drillers
• MLP and Midstream
• International Coverage Universe

This issue, we’re putting it all together in a comprehensive discussion of strategy, including the upcoming simplification merger of the current three EIA Portfolios into one Active Portfolio.

Our Views on Q2 Earnings and More

Two months ago, Elliott and Roger shared a round table with Energy and Income Advisor readers, essentially a written transcript of discussions we had following the 2018 MLP & Energy Infrastructure Conference (MEIC). This issue, we return to that format with a wide-ranging discussion of energy sector issues affecting investors.

What follows is a condensed version of our conversations of recent days surrounding three key talking points:

1 | Developments in the Permian Basin, still the world’s hottest shale oil region and increasingly a hotbed for M&A;

2 | The latest on regulatory headwinds, including a referendum in Colorado and a first look at the potential impact of November 2018 elections on the US shale industry;

3 | Key takeaways from Q2 earnings, including the latest word from management teams on potential MLP to corporation conversions.

Oil Services: Timing the Inflection Point

We eagerly anticipate earnings results from diversified service giants Halliburton and Schlumberger each quarter because no companies have a better big picture 30,000-foot view of industry conditions and trends in all major oil and gas-producing regions of the world.

In fact, careful analysis of comments and industry “read-through” from these two companies were a major factor in our 2014 call for a major decline in oil prices. In the most recent quarter, comments on the conference calls for both companies have important implications both for existing Focus List recommendations and a new addition to our Focus List and Active Portfolio.

Canada and MLPs: Time to Buy

In this issue of Energy & Income Advisor:

1 | We offer our outlook for the ongoing recovery in Canada’s long-suffering energy patch and the emerging favorable impact of expanding takeaway transportation capacity for natural gas and natural gas liquids (NGLs), as well as oil.

2 | We look at prospects for our favorite Canadian exploration and production companies, as well as oil and natural gas midstream, and we offer an addition to our Focus List.

3 | Per our July 19, 2018 Alert, we view as very bullish for the entire MLP sector this week’s clarification of a previous Federal Energy Regulatory Commission proposal on treatment of tax items in pipeline rates. We see a “table pounding buy opportunity” for readers who are light on our favored MLPs:

Oil Prices Lead an International Renaissance

Despite talk of a trade war, an OPEC-Plus agreement to boost oil production starting this summer and a rally in the US dollar, Brent oil prices ended the second quarter just under $80/bbl, the highest level since late 2014.

Even better, energy stocks were the top-performer in the S&P 500 for the second quarter with the S&P 500 surging 13.5% compared to a gain of just 3.4% for the S&P 500.

Over the past few years, oil prices and energy stocks have experienced numerous false dawns when investor attempted to call a bottom only to get burned as it became clear supply and demand fundamentals for oil remained weak.

We continue to believe this move is for real and, unlike most rallies over the past few years, it’s supported by real improvements in fundamentals. And, ironically, the OPEC-Plus agreement to boost output in late June may be the most bullish development for the energy patch in more than 4 years.

However, dangerous abound due to rapid changes underway in the global energy patch and it remains important to be selective.

Picks, Pans and Takeaways from the 2018 MLP & Energy Infrastructure Conference

As we have for more than a decade, we attended the 2018 MLP & Energy Infrastructure Conference (MEIC) in late May.

This year, we had the occasion to listen to presentations, participate in breakout sessions and one-on-one conversations with senior management at roughly 30 of the largest midstream energy companies in the US.

This week’s issue of Energy & Income Advisor will follow a slightly different format than usual.

During and following the conference, we compared notes and discussed some of our key questions and takeaways from MEIC.

Many of these discussions were recorded and, in this issue, we present an edited transcript of our conversations surrounding 7 key talking points: General takeaways from MEIC, MLP to corporation conversions, the FERC ruling on cost of service rates, US energy infrastructure bottlenecks, our picks (recommendations) coming out of MEIC, our main pans (stocks to avoid).

What Drives Performance for Exploration & Production Companies?

When I analyze any industry group I like to start by attempting to answer one simple question:

What are investors looking for?

In other words, it’s crucial to understand which quantitative metrics and/or stock characteristics drive stock market returns over time. Answer that one question and you’ll be well-positioned to select stocks that outperform their peers and the broader market.

However, these key metrics change over time and nothing drives changes in investor preferences quite like a bear market. That’s certainly been the case for the upstream energy industry in the wake of the big 2014 to 2017 bear market in oil prices.

In the last major energy bull market – leading up to the 2008 top for crude oil – production growth was the most important metric to watch. Companies that grew production the fastest often generated the strongest stock market returns even if growing production required financing via secondary share issuance or debt. And production growth – particularly oil production growth – remained a powerful metric in the 2009 to 2014 era of steady, high oil prices.

However, that relationship has now broken down for good and investors must change tactics accordingly, throwing out the growth-driven playbook that worked so well in the last bull market for energy. Simply put, investors are now looking for a balance between energy producers’ capital spending, free cash flow and production growth.

In this issue, we develop one key metric for analyzing exploration and production (E&P) companies that’s been strongly correlated to stock market returns over the past two years. While investors should never rely exclusively on any single quantitative metric in selecting stocks, we use this research as a starting point to identify some of the best-positioned E&P stocks to buy now as well as a few names to avoid.

Reaping the Rewards and Preparing for the Future

The majority of the names on our Focus List have benefited from the recent strength in crude-oil prices, a tailwind that has propelled several stocks above our buy targets—a high-quality problem and a welcome development after the energy sector’s performance last year.

Although we’re glad that our bullish outlooks for oil prices (an out-of-consensus view in the back half of 2017) and energy stocks have panned out, the forward-looking market doesn’t reward self-congratulation and complacency. Accordingly, the big question centers on what will come next for oil prices and energy stocks.

As we noted in the April 30 issue of Energy & Income Advisor, the fundamental backdrop for oil prices appears favorable over the next few years, as recent under-investment in exploration and development outside the US results in a steepening decline rate.

We’ve launched an actively managed model portfolio to help readers prepre for what’s next.

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  • Live Chat with

    Elliott and Roger on Sep. 27, 2018

  • 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

    • Elliott H. Gue

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

    • Roger S. Conrad

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