• Twitter
Generic selectors
Exact matches only
Search in title
Search in content
  • Roger S. Conrad


Q1 Earnings and Guidance: Here’s What’s Critical

The prospect of deep cuts in production has sparked a bounce in oil prices. And at least for the moment, crude is trading over $20 a barrel again across North America, with global benchmark Brent in the upper 20s.

The real action, however, has been in energy stocks, which have literally vaulted from last to first in terms of S&P 500 sector performance. The S&P 500 Energy Sector Index is more than 50 above its March 18 low. The super majors-focused NYSE Arca Oil Index (NYSE: XOI) is up 55 percent plus. And the midstream-heavy JP Morgan Alerian MLP Index ETN’s (NYSE: AMJ) has exploded upward more than 80 percent.

None of these indexes are close to erasing year-to-date-losses, let alone declines since this energy down cycle began in mid-2014. But they’re clearly demonstrating the upside leverage survivors will have in the eventual recovery.

Selective on Energy Stocks, Cautious on Commodities

Two weeks ago, we noted energy stocks appeared to be breaking out of a multi-year trend of underperforming oil and gas prices on both rallies and dips. That trend has solidified since.

Oil has continued to slide. The market disruption that pushed the expiring May futures contract into negative territory has eased. But benchmark WTI Cushing is at a low to sub-teens price per barrel. Crude from Alaska, the Bakken and Canada has been trading under $10, and global benchmark Brent has periodically broken under $20.

The price of natural gas has been somewhat more stable. But after a mild winter in most of North America, benchmark Henry Hub is still well under $2 per thousand cubic foot. Gas at Canada’s AECO and Appalachia’s Marcellus is mired in the $1.50 range, too low for many producers to be profitable.

Energy Stocks Off Their Lows, Now What?

It’s still very early days to actually call it a trend. But for at least the last month, energy stocks are actually outperforming oil and gas prices.

That may be temporary. But at least for now, it’s a sharp break from the rule of the past several years. Since oil broke under $100 a barrel back in mid-2014, energy stocks have consistently lagged when oil has jumped. And when the price of the commodity has slipped, they’ve fallen much further and faster.

As a result, energy stocks have finished every mini-cycle of the past six years at lower levels. ExxonMobil’s (NYSE: XOM) March 31 bottom price of $30 and change is its lowest point since 2002.

Energy’s Great Guidance Re-Set

US oil prices are back in the neighborhood of $20 a barrel. And they’re showing every sign of going lower as COVID-19 fallout depresses demand and Saudi Arabia ramps up output like there’s no tomorrow.

Natural gas prices, meanwhile, have sagged under $1.70 per thousand cubic foot. They may catch a break on the supply front this year, as cutbacks of shale oil production reduce output of associated natural gas. But that may be more than offset by sagging demand, should efforts to reduce COVID-19’s spread result in a big drop in electricity usage.

The bottom line is energy producers are facing their worst operating environment since the early ‘00s. And unlike the last time prices dipped in 2015-16, their list of allies on Wall Street grows thin, all but cutting them off from economic outside financing. In effect, they’re on their own to generate the cash they need to operate.

The Name of the Game is High Grading

Unless there’s a monster rally in the last 10 days of March, oil prices are headed for their worst one-month performance in history. In fact, the decline so far is almost 17 percentage points greater than the previous record of -33 percent in October 2008.

Then as now, energy prices have been hammered by the growing likelihood of a global demand shock. That time around, the cause for concern was the Financial Crisis, which then had unknown dire consequences for economic growth. This time, it’s COVID-19 and its highly uncertain eventual impact on human health and the global economy.

Oil prices, however, simultaneously face a supply shock, as Saudi Arabia ramps up production even as demand comes under pressure. A similar move by the Saudis in 2015 was enough by itself to drive US prices down to $26 and change. This time around, combined with the demand shock, we now see a probability of oil prices in the mid-teens before there’s a hard bottom.

Our Best Foot Forward in a Shaky Market

When global markets shake, not much does well. That’s certainly been the case the past several weeks, as worries about the potential economic impact of COVID-19 have spread.

Energy stocks were just beginning a recovery earlier this year when Chinese authorities first indicated an elevated threat to public health. What’s happened since is a full-on retreat in major sector indexes, with both the Alerian MLP Index and S&P 500 Energy Sector Index taking out the lows of early 2016.

That’s extraordinary for the fact alone that benchmark oil prices are still more than $20 above their February 2016 low point of $26 per barrel and change. Even North American benchmark natural gas is trading 8 percent higher than its March 2016 nadir of $1.61 per thousand cubic foot.

When the Going Gets Tough, Tough Energy Companies Get Going

Roughly half the companies in our Energy and Income Advisor coverage universe have now reported Q4 results—and a more or less equal percentage of our Actively Managed Portfolio and High Yield Energy List stocks.

That still leaves a lot of news and numbers to come in a quarter where mountains of filing requirements tend to delay their release. But from what we’ve seen so far, it’s clear that quality is asserting itself in the energy sector.

Mainly, despite multiple headwinds, the best in class are still thriving as businesses. In contrast, companies with real weaknesses as businesses are imploding, and almost at the same rate they were in 2016 when the price of oil sank to just $26 and change.

In This Selloff Keep Your Eye on Earnings

Q4 earnings reporting season is moving into high gear. And so far, Energy and Income Advisor recommendations are holding their own despite volatile oil and gas prices, reduced industry-wide spending and generally hostile capital markets.

The bad news is with coronavirus fears pressuring global oil prices, the market isn’t paying much attention to the numbers. Nor do investors appear to be giving a lot of credence to management guidance for 2020 that’s considerably more conservative and therefore achievable, as fears of a global economic slide percolate.

Q4 Energy Numbers: Facing Down Low Expectations

A year ago, benchmark oil prices plunged from a high of $75 a barrel in early October to a late December low point of $42 and change. By contrast, Q4 2019 was relatively calm. The North American benchmark hugged the mid-50s before closing out the year in the low 60s.

Despite that relative steadiness, few Wall Street analysts expect favorable earnings comparisons for energy companies with year ago results. One reason is a flood of new associated natural gas supplies hitting the market in 2019, which resulted in Q4 benchmark prices falling to less than half where they traded in the year ago quarter.

But the larger worry weighing on the sector is the pronounced reduction in the national rig count that started in the second half of the year. We’ve commented early and often about North American shale producers’ ongoing conversion to the gospel of generating free cash flow, reversing their long-time practice of maximizing output at any cost.

Energy in 2020: By the Sectors

We’re coming to the end of 2019. The good news is, in stark contrast to a year ago, the wind is very much at our back for our energy stocks.

Performance of our Actively Managed Portfolio holdings wasn’t universally positive this year. But as we report in this issue’s Portfolio discussion, the winners appear to have more than offset the notable losers. And despite launching our High Yield Energy List with remarkably poor timing, even the most damaged companies over the year’s first 11 months appear to be finishing strong, with the expectation of better times in 2020.

This is the second of three issues this month highlighting our outlook for what we believe will be a very strong year for energy in 2020. The focus of the first was on the macro, under the title “Oil: Our 2020 Outlook.

We strongly encourage everyone to read that feature article first, as it explains what we see happening for the commodity and thereby sets the table for what comes next. The feature piece this time is in a discussion format where we highlight our sector-by-sector view for energy stocks, from producers and midstreams to service companies and refiners.

The final issue of this year focuses on individual recommendations and our portfolio strategy. It’s our “game plan” for taking advantage of what we believe will be a strong year for energy stocks in general, but with timing of rallies likely to vary sharply by sector.

Subscribe today to receive a sample issue of EIA
  • 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