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Checking Up But Not Checking Out

There remains a great deal of confusion and misinformation about US trusts and how to value these securities.This misunderstanding often leads to mispricing, giving savvy investors opportunities to buy high-quality royalty trusts at attractive valuations and elevated yields. 

The two royalty trusts in our Focus List pulled back after announcing disappointing production and distribution numbers. Although we anticipated SandRidge Permian Trust’s (NYSE: PER) fourth-quarter hiccup, SandRidge Mississippian Trust II’s (NYSE: SDR) shortfall came as a surprise. In this issue, we update our valuation models and buy targets for both stocks.

We also do a deep dive into our favorite capital equipment company’s fourth-quarter and full-year results and revisit our investment thesis for the stock–a name that stands at the nexus of a number of growth trends related to the end of easy oil.

Profits by Air and Sea

For decades, few investors took the airline business seriously. In addition to decades of unprofitable operations, the industry’s reliance on periodic bankruptcies–though an effective means of labor negotiation and lowering borrowing costs–has the unfortunate side effect of wiping out shareholders’ stakes.

But change is in the air. In this issue, we explore the factors driving the US airline industry’s turnaround and explain why the group serves as an ideal hedge for the oil-levered names in an investor’s portfolio.

We also highlight on one of our favorite integrated oil companies, a name that is driving exploration and development in frontier basins and enjoys higher price realizations on its oil and gas production relative to upstream names that operate solely in North America. 

The Big Review

Every investor, no matter how seasoned, makes mistakes and buys stocks that end up underperforming. You should be wary of anyone who touts his or her perfect track record or infallible investment strategy.

Successful investors routinely reassess the validity of their investment theses, especially the rationale for holding names that have underperformed. Although focusing on your portfolio’s laggards can be an ego-bruising experience, this exercise helps to stop the rot and prevent the damage from worsening.

In this issue, we take an in-depth look at Focus List holding SandRidge Permian Trust (NYSE: PER), explore why the stock has struggled as of late and revisit our investment thesis. We also review our outlook for all the stocks in our extensive Coverage Universe.

Initial Public Offerings: Catching up with the Master Limited Partnership Class of 2012

Thirteen energy-focused master limited partnerships completed initial public offerings (IPO) this year–three shy of the all-time record set in 2006.

In the past, investing in fledgling publicly traded partnerships has proved to be a winning proposition and an opportunity to find value when the market bids stock prices up to frothy levels. However, investors should be forewarned selectivity is critical to this strategy’s success.

MLPs often grow their distributions at an accelerated rate in their first two years as a publicly traded entity. These rising quarterly payouts, coupled with a raft of research reports from Wall Street analysts, tend to attract investors’ attention and drive the stock price higher.

At the same time, brokerage and financial websites often misreport recently listed MLPs’ yield until the firm has paid a full year’s worth of distributions. This quirk gives investors an opportunity to buy these stocks before the herd realizes how much the units yield.

In this issue, we catch up with the class of 2012, focusing on the newest downstream operators and one publicly traded partnership that operates in a nontraditional business line.

Moving to Canada

Canada’s energy sector is home to promising growth stocks and a large number of dividend-paying securities that offer elevated yields.

Our neighbors to the north boast some of the world’s largest oil reserves, from Alberta’s vast oil sands to emerging shale basins and a series of heavy-oil plays across western Canada. Our favorite upstream operators have the wherewithal to grow oil production significantly in coming years, while the surge in drilling activity and output has created opportunities in the midstream and oil-field services segments.

And US investors shouldn’t overlook the benefits of exposure to the Canadian dollar. The nation’s financial system avoided the excesses of the US credit bubble and emerged from the Great Recession in solid shape. Canada’s strong economy and fiscal strength should support the value of its currency relative to the US dollar and the euro–an appealing prospect for many of our readers.

In this issue, we explore our top Canadian energy stocks.

The Big Picture

The health and trajectory of the global economy play a key role in determining the supply-demand balance for energy prices.

Although developed economies such as the US and Western Europe contribute little to incremental growth in global oil demand, these end-markets still account for a substantial proportion of global energy consumption. We expect the US economy to expand by 2 percent to 3 percent in 2013–assuming that President Obama and Congressional leaders eke out a compromise to avoid the so-called fiscal cliff–while trends in recession-hit EU should at least stabilize over the next 12 months.

More important, Chinese authorities successfully engineered a soft landing for the Mainland economy, setting the quintessential emerging market on the path to grow its gross domestic product at a sustainable annual rate of 7 percent to 8 percent.

This forecast for steady, if unspectacular economic growth, informs our base case for oil prices.

Profit is Apolitical

We assiduously avoid political commentary in the Energy & Income Advisor; subscribers don’t pay us to share our political views. But judging from the sheer number of questions we received about how the recent US presidential election will affect energy stocks, we’d be remiss not to apply the same rational, dispassionate lens that we apply to our coverage universe to the implications of President Obama’s victory.

Every four years, investors must endure a barrage of half-baked articles and sales promotions touting stocks that will benefit if the Republican or Democratic candidate ascends to the White House. True to form, at least two investment banks promoted baskets of stocks that would benefit if Barack Obama retained the presidency and another group that would outperform if Mitt Romney prevailed.

Given the passions that the quadrennial election stoke, these trite stories tend to attract significant attention and, unfortunately, prompt investors to make their fair share of bad decisions.

Trusts and Hedges

There remains a great deal of confusion and misinformation about US trusts and how to value these securities.This misunderstanding often leads to mispricing, giving savvy investors opportunities to buy high-quality royalty trusts at attractive valuations and elevated yields. No two royalty trusts are alike, so investors who sort through filings and quarterly reports can identify the best values.

At the same time, unwary investors who gravitate toward the highest-yielding names with little regard for underlying fundamentals can and will get burned.

We prefer names that are in the early stages of their life spans and have the potential to grow their distributions in the near term.

Just Passing Through

With 47 fund products offering one-stop exposure to energy-focused master limited partnerships (MLP), it’s safe to say that the market has caught on to the appeal of this security class: high yields and low taxes.

But investors’ desperation to find above-average yields in a low-yield world has bid up the prices of many high-quality MLPs to frothy valuations. Despite the recent rally in stocks, the halting US economic recovery and ongoing concerns about the EU’s still-unresolved sovereign-debt crisis suggest that the market hasn’t suffered its last growth scare.

For investors wondering which MLPs they should buy now, the names on our Focus List offer the best combination of value and potential upside.

Start to Profit from the End of Easy Oil

Welcome to the inaugural edition of Energy & Income Advisor, your complete guide to energy investing. We hope you enjoy the new website; we will roll out additional features in the coming weeks, including an absolute-return portfolio and ratings of every publicly traded oil and gas royalty trust.

In this issue, we examine the end of easy oil, one of the key secular tailwinds for the oil-field services sector, and the cyclical trends that are currently driving valuations in the space–namely, the divergent outlook for the North American and international markets.

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  • Live Chat with

    Elliott and Roger on Jan. 29, 2019

  • 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.


    • 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