Feature Article

In a typical energy cycle, rising demand and higher prices eventually lead to increased production. That in turn means a volume boost for midstream and downstream systems, from gathering pipes and processing facilities near the wellhead to pipeline and storage systems that deliver crude oil to refineries, and from there to consumers and businesses.

May 2019 was a tough time to launch our High Yield Energy Target List, on the eve of the historic collapse of oil and gas prices. But 30 months in, we’re at a decidedly better place in the energy cycle. Our paper losses have become big gains. In fact, we’re at a point that justifies shuffling the deck a bit in favor of increasing yield.

As noted in the portfolio update this week, our only oil and gas services recommendation in the model portfolio right now is Schlumberger (NYSE: SLB). That’s been the right move as shares in SLB are the top-performing of the Big 3 services names over the past year.

Historically, the first group to turn higher in an energy up-cycle is the producers, including both exploration and production (E&P) stocks as well as the larger integrated oil companies. That’s because, as you might expect, cycles in energy stocks are largely driven by cycles in the underlying commodities, particularly oil and natural gas.

Commodity prices are volatile. That means earnings and cash flows of oil and gas producers are as well, including super majors with balance sheets stronger than those of many sovereign nations and high quality operations up and down the energy value chain.

What we’re expecting in Q3 earnings for all of the companies in our Model Portfolio and on the High Yield Energy List.

Earlier this month, the Petrol Retailers Association (PRA), an organization representing almost 70% of gasoline stations in the United Kingdom, reported that two-thirds of the nation’s stations were out of petrol (called gasoline on this side of the Atlantic).