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  • Roger S. Conrad

Issues

Natural Gas Shows its Value

Plunging temperatures this winter are doing in Texas what scorching weather did in California this summer. That’s mainly proving natural gas is absolutely indispensable to America’s energy needs, and most probably will be for decades to come. In California last summer, prices for electricity spiked and blackouts loomed as the state’s solar-heavy power grid was unable to handle the demand surge. In this Texas’ winter, the combination of unprepared infrastructure, a nuclear plant shutdown, frozen wind power facilities and massive demand for natural gas heating triggered basically the same thing.

Energy Stocks: Bullish on Dividends

The vast majority of energy companies have yet to report Q4 earnings and to update investors on guidance. Most have, however, now declared their dividends for winter quarter 2021. And encouragingly, all that have so far have elected to either maintain or increase payouts.

To be sure, the number of energy companies growing dividends is still small, especially relative to a few years ago. We continue to expect more of the best in class companies and MLPs to follow Enterprise Products Partners’ (NYSE: EPD) lead in returning to a policy of regular increases. But given concerns about the economy and the sector’s inability to raise capital on reasonable terms, managements will likely stay conservative with their cash this year.

Energy: Ready, Set, Buy!

Since our previous issue of Energy and Income Advisor, oil prices have ticked back over $50 a barrel. And the combination of last year’s literal industry-wide investment freeze with energy demand rising faster than expected means they’ll stay there in 2021, with a possible run into the 60s at some point.

How much of what we’ve already seen for energy prices is priced into sector stocks? The last time oil was firmly over $50, back in February 2020, Enterprise Products Partners (NYSE: EPD) traded roughly one-third higher than it does now. The same was true for fellow Model Portfolio holding ExxonMobil (NYSE: XOM).

So was high quality midstream Magellan Midstream Partners (NYSE: MMP). So were leading oilfield services company Schlumberger Ltd (NYSE: SLB) and Concho Resources (NYSE: CXO), which fetched what’s since become a high premium takeover bid from ConocoPhillips (NYSE: COP).

Rock Bottom Prices Ready to Rise

The year just passed will go down as one of the most turbulent for energy investors. There were dramatic ups and downs for prices of the raw commodities, including a brief but for some devastating period of negative benchmark oil prices.

Share prices up and down the oil and gas value chain dramatically underperformed the broad stock market, even while anything smelling of renewable energy was bid to the sky. There were also more sector dividend cuts than any period in history, in large part because the year was a final reckoning for many of the companies launched during the IPO boom of the previous decade.

It was a year when many investors threw in the towel for oil and gas entirely. In fact, tax selling is likely responsible for stalling what had been a respectable rally from early November.

Eyes on the Energy Cycle

Sustained crude oil prices in the $50 to $60 per barrel range next year might not sound like a big deal. In fact, it wouldn’t represent much of a gain from the mid-to-high 40s range held by North American benchmarks lately. And Brent crude is already mostly there, depending on what measurement you use.

A return to that level of oil prices in 2021 would, however, represent a massive change from the environment of the past year. And it would be a major departure from the generally downtrending direction of prices since the energy bear market began way back in 2014.

More important, our view is 50s oil would also be a powerful catalyst for a shift in investor psychology regards the energy sector. It’s true that we’ve seen that level before many times in the past six years. And while a bounce to $50 plus was enough for many energy stocks to stage a big recovery in 2016-17, staying there wasn’t to prevent flat lining and later falling share from second half 2019 into 2020.

Fresh Money Buys for Increasingly Bullish Times

Since the end of October, North American benchmark oil prices are up by nearly $10 a barrel, a percentage gain of 26 percent. And for once, energy stocks performed even better, with the S&P 500 Energy Index returning nearly 30 percent.

The Portfolio section highlights winners in our Model Portfolio and High Yield Energy List during a November when even the weakest scored percentage gains of close to 20 percent. And there’s every indication of a lot more to come in a sector we believe is shaping up for one of the fastest returns to favor in memory.

We’re taking advantage by adding some fresh picks to the Model Portfolio. See the Feature article for more on these stocks to buy now.

Of Earnings and Elections

Ok, we’ll admit it. Keeping up with the current daily news feed of election results is far more exciting than scouring companies’ Q3 earnings for clues on their business health. And if you’re a media outlet, Elections 2020 has been the gift that keeping on giving.

But when it comes to positioning for an energy sector comeback in 2021, your time is going to be much better spent focusing on key numbers and management guidance. In fact, we doubt results of this election will wind up mattering much if at all when it comes to investor returns for the stocks we recommend here in Energy and Income Advisor.

In Energy It’s Economics over Politics

At first glance, this may seem to be the US oil and gas industry’s darkest hour. The S&P 500 Energy Index’ -46.8 percent year to date return is a stark contrast to the broad S&P 500’s 8.7 percent. The first sector companies to report Q3 numbers have delivered a rather somber outlook. And just days before November elections, the presidential candidate ahead in opinion polls appears to have endorsed phasing out the use of fossil fuels.

It probably won’t surprise you that we see things a bit differently at Energy and Income Advisor. Running down our three coverage universes—“MLPs and Midstream,” “E&P and Services” and “Canada and Australia”—it’s hard not to notice prices and yields for stocks that reflect a worst case scenario of many more dividend cuts and even bankruptcies. And the clear takeaway is that investors are expecting the worst.

We’ve pointed out in the past that negative sentiment is usually at its most extreme at market bottoms. But equally, recovery requires the facts behind the gloom to change enough to bring back buyers.

A Rebirth of Energy M&A

Low cost capital, compelling valuations and building evidence on the ground that a bottom is in, or at least very close: Those are the necessary conditions for a resurgence of mergers and acquisitions activity in the energy sector.

At this point, cost of equity capital is high even for best in class companies. Debt capital, however, is a far different story. Model Portfolio member’s ExxonMobil (NYSE: XOM) bonds of April 2051 yield just 2.9 percent to maturity, while Williams Companies’ (NYSE: WMB) May 2050 bonds yield less than 3.7 percent. And private capital has rarely if ever been this flush.

NatGas: Another Winter of Disappointment

Record-setting heat across the western US has sparked a surge in cooling demand and threatened large-scale power blackouts in California for the first time in 20 years.

Meanwhile the US Gulf Coast has been hit by significant hurricane activity this year, interrupting natural gas production from the Gulf of Mexico as well as liquefied natural gas (LNG) exports.

Those forces have helped spark a near-doubling in US natural gas prices from multi-year lows in June, a surge that’s understandably caught many investors’ attention. And, there are some longer-term developments, such as the recent decline in associated gas supply due to an historic decline in drilling activity, that could help finally put a floor under this long-suffering market.

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  • Live Chat with

    Elliott and Roger on Feb. 25, 2021

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Producers and Drillers

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLPs and Midstream

      Our assessment of every energy-related master limited partnership.

    • International Coverage

      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