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  • Roger S. Conrad


Look Before You Step

Last year, we called for the price of West Texas Intermediate crude oil to tumble to between $20 and $25 per barrel in the first half of 2016, citing the rapid growth in US oil inventories and limited storage capacity.

Unfortunately, the probability that oil prices will retrench to our target range has diminished significantly as the withdrawal season approaches. With the oil market entering a period of seasonal strength, hedge funds appear reluctant to push their luck on the short side until after the April 17 OPEC meeting.

Although investors shouldn’t expect this meeting to produce any earth-shattering agreements, you can count on oil ministers to try to jawbone oil prices higher or lower after the event, putting a floor of about $30 per barrel under WTI.

Any upside also appears to be capped, as a sustained rally into the low $40s per barrel would prompt shale producers to hedge their 2017 output, stemming the decline in US onshore production—the primary driver of a recovery in oil prices.

Moreover, even as global oil supply and demand rebalance in the second half of 2016, draining the excess inventories accumulated since mid-2014 will take at least a year, short-circuiting the V-shaped recovery in oil prices that some pundits continue to predict.

Bottom Line: We expect oil prices to trade between $30 and $43 per barrel for the balance of 2016, followed by a recovery to our lower-for-longer trading range of $40 to $60 per barrel in early 2017.

Despite this tight range, volatility and economic uncertainty will create excellent trading opportunities in energy stocks and master limited partnerships over the next three to six months. We’ll look to go long during the inevitable selloff in anticipation of a snap-back rally in late 2016, when incoming data points start to demonstrate that the global supply-demand balance has improved.

But in many cases, the recent oversold bounce in oil prices and energy stocks appears to be overdone, giving investors an ideal opportunity to exit any of the riskier, sell-rated names that they may still hold in their portfolios.

With many readers afraid of missing the boat on energy stocks, we explain why we remain bearish on refining stocks–a pocket or relative safety over the past year–and oil-field services and capital equipment names.

Energy Bonds: Patience and Selectivity Are Critical

Although bonds lack the liquidity of equities and require more up-front capital to purchase, income-seeking investors shouldn’t overlook the opportunities in this corner of the energy market. Because bonds have a higher position in the capital structure than stock, a company usually privileges its interest payments over dividends or distributions to investors who own common shares or units.Bondholders also tend to benefit when companies raise capital by issuing equity; shareholders don’t necessarily benefit from this dilutive action.

More in the Tank

The Bloomberg Global Tankers Index has given up almost 20 percent of its value since mid-October 2015 after a strong run earlier in the year. Despite this recent bout of weakness, shares of tanker companies have outperformed their peers in dry-bulk and container shipping over a similar time frame.

Although legitimate concerns have emerged about projected growth in the global tanker fleet over the next two years, much of the recent downside likely reflects profit-taking in a weak market and sympathy selling with oil prices and other shipping industries that face major headwinds.

Trading at 0.65 times book value, tanker stocks haven’t been this cheap since early 2013—even though industry fundamentals have improved significantly from three years ago. In our view, this disparity creates a good opportunity for investors to build positions in tanker companies.

The Most Wonderful (and Frenzied) Time of the Year

Fourth-quarter earnings season is in full swing, inundating investors with a deluge of news, numbers and management commentary—useful intelligence on how various industries and individual companies have coped with the macro developments that have dominated the tape for the past 18 months.

In our recent Live Chats (the next one is scheduled for Feb. 23), the preponderance of the questions focused on master limited partnerships (MLP), likely because of the extreme volatility the group has endured over the past year.

In this issue, we analyze fourth-quarter results from our MLP Portfolio holdings that have reported thus far.

Risk On, Risk Off

The most recent issue of Energy & Income Advisor, Dusting off the Crystal Ball, laid out our outlook for the stock market, the US economy and the prices of oil, natural gas and natural gas liquids (NGL) over the coming year. These views shape our strategy for investing in master limited partnerships (MLP) in the near term and for the long haul.

Any improvement in oil prices hinges on a decline in overall production, a chunk of which will come from shale plays in the US onshore market. We revisit our MLP Portfolio holdings with exposure to this risk and highlight name on our watch list as we look to high-grade the Portfolio.

Meanwhile, some of our favorite MLPs stand to benefit from low-cost basins winning market share and increasing visibility on long-term demand growth.

Dusting Off the Crystal Ball

At the beginning of each year, we update our outlook for the US economy, stock market and commodity prices in the year ahead.

Although we routinely adjust our forecasts to reflect incoming economic data and corporate earnings, the 24-hour news cycle constantly bombards investors with sensationalist headlines.

In this environment, having a road map can help to prevent disorientation amid this welter of information and infotainment. And with the massive upheaval in global energy markets, investors can easily get bogged down in minutiae.

We review what we got right and what we got wrong last year and highlight our outlook for the US economy, equity markets and energy prices–and the best ways to profit from these trends.

Kicking the Tires on Large-Cap MLPs

Over the past several months, we’ve fielded innumerable questions about whether specific master limited partnerships (MLP) will be able to maintain their distributions, with readers focusing on higher-yielding Portfolio holdings and names that we highlighted when we ran The Energy Strategist and MLP Profits. (Roger and I have covered MLPs for almost a decade.)

Our focus has always been on the quality of an MLP’s underlying assets and cash flow—the foundation for long-term wealth building. But in this environment, liquidity and cost of capital can also exert a profound influence on a partnership’s distribution policy, particularly for names with significant capital spending needs.

In this issue, we delve into many of the popular large-cap MLPs to evaluate the pressure points in their underlying businesses if energy prices remain lower for longer and their ability to meet near-term debt maturities and planned capital expenditures.

Tackling the Big Questions

All the upheaval in global energy markets has many investors scratching their heads about what the future holds for oil and gas prices, what to do with their existing positions in this sector and which groups within the space look attractive at current valuations.

Making sense of the constantly shifting energy landscape becomes all the more challenging in a 24-hour news cycle where history is dead, sensationalism rules the day and the loudest (or most controversial voices) get the most attention–regardless of their track record or the validity of what they’re saying.

Over the past year, we’ve consistently warned that elevated US oil inventories and steady production would squeeze oil prices lower in the fall and winter–a period of seasonally weak demand when many refiners idle capacity for upgrades and maintenance.

Our three-part strategy has also remained consistent: Taking advantage of short-lived recovery rallies to exit risky positions; hedging remaining energy exposure through positions in inverse exchange-traded funds, airlines, cruise operators and convenience stores; and waiting patiently for an opportunity to buy select names at dream prices.

This buying opportunity could be around the corner if oil and gas prices tumble further in coming months. Although oil prices remained relatively flat from 1985 to the mid-1990s, select energy stocks managed to outperform the broader market over this decade–a trend that could repeat itself if the price of West Texas Intermediate remains lower for longer.

Tactical Maneuvers

With few exceptions, energy stocks have been taken to the woodshed this year.

Fortunately, some proactive hedging has helped to offset some of the downside in our Model Portfolios. In January 2014, we began to take profits in some of our riskiest holdings and add exposure to airlines and other industries that tend to benefit from lower oil prices.

In this issue, we reassess our picks in the airline, cruise, convenience store and petrochemical industries in light of the increasing risk of a bear-market correction in 2016.


US Natural Gas: Outlook and Investment Guide

We’ve remained bearish on US natural-gas prices for the past several years, asserting that any short-term rallies induced by a cold winter would fail when prices approach $4 to $5 per million British thermal units.

The floor for the commodity sits around $2 per million British thermal units, though elevated inventories and production levels suggest Henry Hub prices could fall below this threshold this winter.

Nothing on the horizon suggests that US natural-gas prices will escape this trading range, while the near-term risks skew decidedly to the downside.

We expect front-month prices at the Henry Hub, the official delivery point for natural-gas futures that trade on the New York Mercantile Exchange, to struggle to top $3 per million British thermal units in 2016. The thermal fuel could also tumble to $1 per million British thermal units or less if a warm winter swells the volume of natural gas in storage.

In this issue, we delve into a handful of popular gas-focused producers, but opt to stand aside on even our favorite names for now. However, a buying opportunity could emerge in coming months if this winter ends up being warmer than usual.

We’re more bullish on midstream names that stand to benefit from growing demand for US natural gas at home and in Mexico.

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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