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  • Roger S. Conrad

Issues

Oil Prices Back Off But We’re Not

It’s been roughly two weeks since the September 14 attacks on Saudi oilfields took about 5 percent of global oil production temporarily offline. And the North American benchmark price per barrel has already retreated to its long-held mid-50s trading range.

This is the clearest indication yet of how the rise of US shale production has dramatically shifted the global oil market. And it’s why, as we pointed out last issue, energy investors need to rise above the noise of geopolitics.

When it comes to energy prices that means focusing on supply and demand. And it’s why energy companies we own must be able to prosper in the same lower-for-longer price environment that’s existed since mid-decade.

Positioning Today for Tomorrow’s Energy Prices

Through much of August and early September, benchmark US oil prices continued to defy conventional wisdom of an impending decline, hanging in the same mid-50s per barrel trading range they’ve held since late January. Meanwhile, natural gas has rebounded more than 20 percent from early August lows, squeezing the elevated ranks of short sellers.

Energy prices’ resiliency this summer hasn’t convinced too many investors to jump back into sector stocks. But a number of producers, midstream operators, service companies and even MLPs have now made noticeable bounces off last month’s nadir even before last weekend’s drone strike on Saudi Arabia.

Sector Fear Takes a Breather, Quality Still Key

The fear factor appears to have lessened a bit since our previous Energy and Income Advisor issue. But with all eyes still on the global economy, these still aren’t especially good times for energy stocks, many of which are pricing in a big future drop in oil.

The Alerian MLP Infrastructure Index, for example, is lower by more than 10 percent in barely a month. That’s despite the generally robust second quarter results of most index components, as well as multiple dividend increases.

For readers interested in betting on a rebound through mutual funds or ETFs, we suggest taking a look at closed-end funds like Kayne Anderson MLP Midstream (NYSE: KYN). Not only are its top holdings arguably over-discounted to otherwise solid prospects but it trades at a discount to net asset value of more than 10 percent. That’s double leverage to a recovery in MLPs, though there’s risk as well: The fund cut its monthly payout by 20 percent at the start of 2019.

When Emotions are High Expect a Reversal

Once again, fear has the energy sector in its talons. Benchmark WTI Cushing oil has yet to break its mid-June low. But the S&P 500 Energy Index has already dropped by nearly 9 percent this month alone.

The Alerian MLP Infrastructure Index is down more than 11 percent. Worst hit of all have been mid-sized independent producers and the midstream companies and MLPs that serve them.

For example, Antero Midstream Corp (NYSE: AM) and Antero Resources (NYSE: AR) are off by 14.5 percent and 19 percent so far this month, respectively. Oasis Petroleum (NYSE: OAS) and Oasis Midstream Partners (NYSE: OMP) are lower by 49 percent and 22.6 percent, respectively.

Services: International Growth, Shale Changes

The rapid growth in US shale fields like the Permian Basin has dramatically altered the outlook for global oil supply and demand.

It’s also forever changed the industry’s competitive landscape at all levels including upstream (producers), downstream (refiners) and midstream (pipelines and storage).

However, arguably the industry to see the largest impact is oilfield services – these companies are in the business of supplying mission-critical services and equipment to global oil producers related to the exploration and development of oilfields.

Some five years ago, we warned that these changes would not be kind to erstwhile high-flyers like deepwater driller Seadrill and sand miner Hi-Crush Partners.

However, the selling pressure has extended far beyond these shaky names to include some of the industry’s largest and most enduring franchises. In this issue we take a closer look at some of the trends and changes underway in the global oil industry and how to play it.

Finding Value in Canada

The big oil price collapse that prompted a bear market in energy stocks and Master Limited Partnerships (MLPs) started 5 years ago this summer.

There were two crucial changes – discussed at length in these pages in late 2014 – that prompted the collapse. First, the US shale revolution kicked into high gear as improvements in technology and efficiency helped propel US oil production to all-time record highs. Just consider: the US is now the world’s largest producer of crude oil, a fact that would have been considered inconceivable a decade ago.

Second, OPEC recognized this shift and was unwilling to continue to accommodate shale’s rising shale production through a never-ending string of production cutbacks and lowered quotas.

These two key changes, not fully appreciated by most market participants, were behind our 2014 sell calls in crude oil and many popular energy stocks.

Today, 5 years post-collapse, we believe the market is once again failing to appreciate 2 crucial changes now underway.

Voting Machine or Weighing Machine?

Two of the biggest challenges facing energy investors so far this year have been extreme volatility in oil prices and the historic disconnect between the path of oil prices and the performance of energy stocks.

In this issue we take a closer look at both issues.

In particular, we’ll review some of the fundamental factors and narratives that have catalyzed major speculative inflows and outflows in the oil market so far in 2019 and our latest assessment of the outlook for oil in the second half of this year.

Inside MLPs: Our Mid-Year Review Part II

Not so long ago, a tanker on fire in the Persian Gulf would have spiked the price of crude oil. But despite the potentially destabilizing standoff between the US and Iran, West Texas Intermediate crude oil still sells for about $10 a barrel less than a month ago.

That’s in large part due to concerns about global economic growth. But generally flat oil prices are also the most compelling evidence yet of the immense changes in global energy politics wrought by the rise of US shale oil and gas. And don’t forget this is happening as Venezuelan output is imploding, Iran is embargoed and unrest is again threatening Libya.

Inside MLPs: Our Mid-Year Review Part I

As we write this issue, the yield on 10-year US government bonds is just 2.12%, down from north of 3.2% as recently as November 2018.

Against that pay-nothing interest rate backdrop, you’d think MLPs with an average yield closer to 8% would be attracting attention from yield-hungry investors.

However, returns from MLPs have been mixed at best over the past year as investor fret about several issues including potential exposure to energy commodity prices, rising cost of capital, and MLP-to-corporation conversions.

In June each year, we conduct a detailed deep-dive analysis of the MLP industry timed to coincide with the conclusion of the annual MLP Association Conference. And we reveal the results of this analysis in the pages of Energy & Income Advisor.

This week, in Part I, we present our discussions surrounding 6 crucial, hot button “talking points” that are receiving the most attention from MLP investors these days and offer some of our top recommendations in the industry.

Around the middle of the month, we’ll be back with Part II of our Inside MLPs Mid-Year Review.

There’s Deep Value in Energy

For the past five years, it’s become an all too familiar refrain for energy investors: Oil and gas prices drop, but sector stocks fall harder. Then when prices rebound, the shares lag the recovery.

The pattern has also largely held this year, despite the fact that the S&P Energy Index has consistently shown up among the top performing S&P 500 sectors. No matter how positive underlying conditions have become, many investors still favor the commodities to energy stocks.

On the other hand, it’s much harder to ignore the good news that’s increasingly flowing from American energy companies. First quarter 2019 results once again showcased the recovery up and down the energy value chain. And as highlighted in the previous issue, the macro outlook strongly suggests this will continue.

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  • Live Chat with

    Elliott and Roger on Sep. 27, 2019

  • 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