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  • Roger S. Conrad


Can Energy Stay Hot?

Energy stocks are showing real signs 2019 will be the year they break out of a nearly five-year slump.

Both the S&P 500 Energy Index and the Alerian MLP Index posted total returns in the low teens for the first two months of 2019. That’s energy stocks’ best start to a calendar year since 2013, when those two indexes finished up 25 percent and 27.6 percent, respectively, en route to making all-time highs.

Benchmark WTI Cushing crude started 2013 in the low $90s per barrel, briefly broke down to the mid-$80s in April, then hit a high of $110 plus in late August before closing the year right around $100. Henry Hub gas, meanwhile, traded between $4 and $5 per thousand cubic foot for most of the year.

Those prices are a far cry from where we are now. But the trajectory of the commodities themselves has been generally encouraging in recent months. So is the fact that energy midstream master limited partnerships weren’t left out of this uptrend, as they were when oil rallied last year.

Where the Rubber Meets the Road

Earnings reporting and guidance call season often provoke investor confusion, angst and unfortunately all too often some very bad decisions. But they’re also where the rubber meets the road in this business.

Basically, companies have to own up to what’s going on with their operations, how strong their balance sheets really are and what challenges they face that could possibly derail their fortunes.

Earnings reporting seasons have more often than not been unhappy times for energy investors since oil prices first cut under $100 a barrel back in mid-2014. But for at least a year, we’ve noticed a decided change for the better, at least for the sector’s best in class companies. Basically, companies have gotten their acts together when they could, or else fallen of the map entirely.

The result is our Energy and Income Advisor coverage universes of producers, services companies, midstream/master limited partnerships and international companies have been winnowed down considerably. The vast majority is either decidedly back on track, or else are virtual zombies awaiting oblivion.

We’ve yet to see any real investor excitement flow back into the survivors. But there is certainly a lot to get pumped about when it comes to US companies, with surging energy exports and expanding output of oil and gas. Even in Canada there’s reason for optimism, as new transport capacity has cut the price differential between Western Canada Select and West Texas Intermediate Cushing to only around $10 a barrel.

There are multiple explanations why investors’ money hasn’t flowed back into energy stocks yet, starting with anxiety about energy prices and the global economy. But it always has when energy companies have continued to drive down costs and boost revenue on a sustained basis. And our bet is it’s only a matter of time at this point.

Focus on Dividends

Dividend investors can certainly be forgiven for distrusting energy companies’ dividends.

We launched the Energy and Income Advisor Endangered Dividends List on June 30. Of the original list of 16 names, only four have managed to avoid a dividend cut since. Of the dozen or so we’ve added to the list more recently, fewer than half have managed to hold up. And all 15 companies currently on the EDL are at high risk of making reductions sometime in the next 6 to 9 months, if not eliminating distributions entirely.

All of these cuts are, of course, on top of dozens more through the first half of 2018, dating back to when oil prices first broke under $100 a barrel back in 2014. And it doesn’t help that the latest round has come with benchmark West Texas Intermediate Crude oil prices still nearly twice their early 2016 lows.

The carnage has understandably made many skeptical that any energy company’s dividend is secure, no matter how good numbers and guidance get. Kinder Morgan Inc (NYSE: KMI), for example, earlier this month announced strong fourth quarter operating numbers, raised guidance and affirmed a 25 percent dividend increase for April. Its shares, however, managed only a small surge, which they’ve since given up.

Skepticism is even more clearly etched in prices of the three dozen or so master limited partnerships we track that currently yield 10 percent or more. Sure, some of them are headed for dividend cuts, with EDL companies at the greatest risk. But other high yield companies appear to have fallen despite all indications they’re still strong on the inside.

This issue, we highlight high yielders still likely to hold their payouts this year and recover their lost ground. Timing will depend squarely on what happens to oil and natural gas prices. The Alerian Index, for example, has closely followed oil prices, though recently outperforming the commodity.

Energy 2019: Auspicious Beginnings

The energy sector rally that began in the last days of 2018 has continued into early January. The long-suffering Alerian MLP Index is 15 percent higher than its post-Christmas Day low. The S&P 500 Energy Index is better by almost 14 percent, as is North American oil benchmark WTI Cushing.

Natural gas by the Henry Hub benchmark is flat after plunging more than one-third last month. But by and large, buyers are pushing up prices of energy stocks, including many of the higher yielding fare that took the biggest hits in late 2018.

Is this a rally with legs? Or will it prove to be just a bounce in a continuing decline?

That’s the big picture question we address in this issue’s Roundtable discussion. As the headline of our previous Energy and Income Advisor indicates, this is not 2014. And there are several encouraging signs that the energy sector has not only bottomed, but will be a strong outperformer in the New Year.

Certainly not every sector stock will prosper. For example, since our last EIA issue, two Endangered Dividends List members have eliminated distributions. And a company third is set to do the same later this month.

With North American oil and gas drilling activity expected to wane in the first half of the year, the door to accessing capital markets on economic terms remains slammed shut in the faces of all but the largest and strongest energy companies. That’s forcing companies up and down the energy value chain to self-fund virtually all capital spending, and in many cases debt refinancing as well.

The good news is four and a half years after oil cracked under $100 a barrel, the survivors of this battered industry are doing the job. Shale focused producers will adjust output with price swings. But the big capital investments continue to move forward, driving sector earnings and dividend paying power.

The only question is when a critical mass of investor dollars will flood back to the energy sector. We believe what we’ve seen so far presages a solid 2019.

Oil: It’s Not 2014

Crude oil prices accelerated their recent downtrend this week. West Texas Intermediate Crude at Cushing Oklahoma, the North American benchmark, has now dropped from high 70s to mid 40s in less than three months.

Prices in more transportation-constrained basins have fared worse. Edmonton Mixed Sweet, for example, is now trading for less than $40 a barrel. WTI Midland is as well, $7 a barrel less than WTI Cushing as swelling Permian Basin output has swamped available pipeline capacity.

Given the pounding we’d already seen in many energy stocks before this selloff, investors can be forgiven for thinking the sector is headed for another 2014-16 crash. This issue is devoted to those concerns.

Our feature article focuses on both the supply side and the demand side, with comparisons to two periods of steeply falling oil prices:

• The Financial Crisis of 2008, a period when global demand fell off a cliff.

• The 2014-16 oil crash, when Saudi Arabia and other traditional producers tried to flush out US shale producers by dramatically increasing output to flood supply and drive down prices.

Focus on MLPs: Still a Table Pounding Buy for the Patient

Six months ago, we returned from the 2018 MLP & Energy Infrastructure Conference with a full head of steam. Our most important takeaway: MLPs’ fundamentals and technicals were improving at the same time investor sentiment appeared to have sunk to a new low.

Our conclusion was we had a table pounding buying opportunity on our hands for the best MLPs. We highlighted the specifics in our June 15 roundtable “Picks, Pans and Takeways.”

Since then, MLPs staged a mild summer rally, only to give it all up and more in the autumn selloff following oil prices lower. But the underlying business fundamentals have continued to improve, especially for the sector’s best in class.

Energy Sector Earnings: The Recovery Continues

It’s hard to tell from the volatility of sector stocks. But third quarter earnings season is going well for best in class energy companies up and down the value chain.

A lot of oil and gas in North America is still bottlenecked by transportation constraints. That’s hampering producers in many places, notably the booming Permian Basin. Canada, meanwhile, is in a virtual depression with Western Canada Select recently fetching less than $20 a barrel and natural gas at the AECO hub going for just 48 cents per million BTU.

Energy and the Stock Market

Energy has a long history of marching to its own drummer. Sometimes, that makes things difficult for investors.

That’s not to say the energy sector is immune from stock market cycles, or even this autumn’s stepped up volatility. But it’s hard to argue that best in class energy stocks aren’t trading far closer to bear market bottoms than bull market highs.

This issue’s Energy & Income Advisor roundtable takes a deep dive into the broad market’s impact on the energy sector and what we expect to see the rest of this year.

Natural Gas Outlook and Portfolio Focus

The breakout of oil prices above $80 globally and $70 in North America have justifiably grabbed the headlines. But when it comes to most energy stocks, the outlook for natural gas is at least equally important to returns.

This issue of Energy and Income Advisor, we highlight current natural gas market dynamics and our near and longer-term forecast for supply, demand and prices. We then zero in on developments at several of the more natural gas heavy names in our EIA Actively Managed Portfolio and Focus List.

Our Views On Super Majors

In this issue of Energy and Income Advisor, Elliott and I highlight another Roundtable. This time, it’s our views on the giants of the energy investing universe: Super majors, the world’s biggest non-government oil and natural gas producers.

Following the template of our past Roundtables, we focused our comments on several key talking points: (1) Our general view of super majors as investments now; (2) Super majors’ success (or lack thereof) in keeping up with the latest technologies, processes and investment opportunities in the energy space; (3) The importance of super majors’ ongoing diversification efforts, (4) The relative importance of litigation, regulation and political turmoil to our analysis of super majors and (5) Our top recommendations of the super majors.

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  • Live Chat with

    Elliott and Roger on Jun. 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