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Issues

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.

Oil: It’s Not October 2018

Brent and West Texas Intermediate (WTI) oil prices have fallen around 9% from their late April highs to their early May lows amid a spate of concerns including: Trends in US oil production, OPEC’s commitment to recent supply reductions, rising US oil inventories, the health of the global economy and the pote ntial for a destabilizing US-China trade war.

All told, some of these factors appear eerily reminiscent of last October, the start of a serious sell-off in oil that saw WTI prices plummet from $76.90/bbl to the low $40s and Brent to fall from $86.74 to under $50/bbl.

Late last year, we took a look at supply and demand conditions in global oil markets and (correctly) predicted that the selling pressure was near an exhaustion point and that prices would see a sharp recovery into 2019.

With our targets for crude now achieved, and market volatility on the rise, it’s time for an updated deep dive into the oil markets.

Our conclusion: This is not the beginning of another late 2018 style market swoon nor are we seeing any evidence of excess global oil supplies. Rather we see the recent sell-off as a correction driven largely by hedge fund profit-taking following a record-setting start to 2019 for crude.

In this issue, we update our outlook for crude and explain some of the surprising factors behind last week’s larger-than-expected build in US oil inventories.

Don’t Let Energy Politics Derail Your 2019 Profits

“Badly needed energy infrastructure is being held back by special-interest groups, entrenched bureaucracies and radical activists.” That statement this week from President Trump is bound to elicit more than a few “amens” from oil and gas pipeline developers.

The president announced two sweeping executive orders aimed at jump-starting projects stalled by adverse court rulings and state permitting delays. One would rein in state governments’ power to use Section 401 of the Clean Water Act to deny construction permits. It would also direct US agencies to loosen regulation on shipping LNG by rail and truck, seek measures to limit shareholders’ ability to alter companies’ environmental policies and challenge ESG focused retirement funds on the grounds they’re neglecting fiduciary responsibility.

We’re watching closely for any sign of revived activity at delayed natural gas projects such as the Atlantic Coast Pipeline and the Mountain Valley Pipeline, as well as challenged oil pipes like Enbridge Inc’s (TSX: ENB, NYSE: ENB) upgrades of Line 3 in Minnesota and Line 5 in Michigan.

Regulatory Risks: Real and Rising but so is Opportunity

Last November, Colorado voters defeated Proposition 112, a ballot measure that would have imposed significant new limits on oil and gas drilling. This month, the state’s senate advanced legislation that would have much the same impact, if the state house and governor give their assent as expected.

By no means will the new law end energy production in Colorado. But it will for the first time allow city and county governments to use planning and land-use powers to regulate drilling, and with a mandate to prioritize public health and the environment. At a minimum, that means more hurdles for companies to jump through before they drill or build new midstream infrastructure, at least in some jurisdictions.

As our feature article highlights, the “Centennial State” isn’t the only place in the US that’s tightening regulation of energy companies. Even Oklahoma has ramped up industry oversight in recent years, following a dramatic increase in earthquakes.

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

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      Our assessment of every energy-related master limited partnership.

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    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