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  • Roger S. Conrad


Energy Earnings: Few Surprises But Good Ones

Last year, energy investors faced a perfect storm. Demand for refined products collapsed in the face of measures to contain an historic pandemic, at the same time producers abruptly began to prioritize free cash flow over output.

The result was a business meltdown for all but a handful of best in class companies. And even they were forced to dramatically shift strategy, as plunging share prices and pressured credit ratings all but cut them off from capital markets on reasonable terms.

This year is shaping up as a far different animal. Even sector leaders like Portfolio members Enterprise Products Partners (NYSE: EPD), Pioneer Natural Resources (NYSE: PXD) and Schlumberger Ltd (NYSE: SLB) still haven’t made it back to pre-pandemic levels. But we have seen some very impressive gains across the board off the late October 2020 lows. And that price momentum has accelerated so far in 2021.

Energy Earnings Approaching: Clues to the Cycle

By Q4 2021, total utilization of the largest oil pipelines in the Permian Basin will drop to 57 percent. That’s according to a recent survey from industry research firm Wood MacKenzie.

Some level of spare capacity is necessary for a functioning midstream system, to accommodate demand spikes and the fact that pipelines and related infrastructure must be periodically sidelined for maintenance. The current level, however, is quite elevated, basically for two reasons.

First, based on announced plans of producers for this year, US crude oil output is expected to drop well below the pre-pandemic level of 13 million or so barrels per day. Second, a sizeable amount of new shipping capacity came on line at the end of the previous decade to accommodate expected increases in shale output. That includes natural gas pipelines built to ship associated natural gas produced from oil wells, much of which historically has been flared.

Energy Bull Market: Positioning for the Next Phase

The nearly five-month long rally in energy stocks has taken a well-earned pause.

After racing to a nearly 90 percent return since Halloween 2020, the diversified S&P 500 Energy Sector Index has backed off a little less than 7 percent from the 52-week high. The midstream focused Alerian MLP Index has given back about 5 percent of its nearly 60 percent jump. And the S&P Oil & Gas Exploration Index is off about 6 percent after a more than 120 percent leap.

Despite their gains the past few months, many energy stocks up and down the value chain still trade in a lower range than they did the last time crude oil held above $50 a barrel, or natural gas was at $2 per million British Thermal Units for an extended period. And share prices are well below levels typical of the last time we saw $60 oil or $2.50 gas.

Worst to First: What’s Next for Energy’s Hot Stocks

After lagging the field the past few years, energy stocks have torn up the track so far in 2021. The S&P 500 Energy Sector Index is up more than 40 percent year to date, and almost 90 percent since results of the November presidential election became clear.

All of our Portfolio and High Yield Energy producers and midstream stocks are up strongly as well. ONEOK Inc (NYSE: OKE) is 90 percent higher since early November. Crestwood Equity Partners (NYSE: CEQP) has nearly doubled and Occidental Petroleum (NYSE: OXY) has more than tripled, to highlight just a few rags to riches stories.

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.

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  • Live Chat with

    Elliott and Roger on Nov. 30, 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.


    • 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