Feature Article

Its now just days before the start of Q1 earnings releases and guidance updates for energy companies. And the only thing that’s clear is the numbers will be considerably worse than what we saw in Q4.

Since the previous issue of EIA, six coverage universe members have announced distributions cuts. By the end of the month, 31 companies currently on our Endangered Dividends List will declare dividends. And we expect to see a sizeable number of them either cut or eliminate payouts in response to the recent drop in oil prices.

What are the main reasons energy stocks rallied so dramatically the past few weeks? Will they go higher this year? As we outlined in the last issue of Energy & Income Advisor, “Energy’s Great Guidance Re-Set,” we’re bearish on oil prices in the short term, because the supply-demand balance is weak and will remain weak even after record-sized cuts promised by OPEC+ last week.

Considering oil’s historic sell-off in recent weeks, it’s worth stepping back to look at the big picture and offer a more detailed short, intermediate and long-term outlook for the commodity.

In the March 25 Energy Commentary “Energy Bonds are Ripe Again,” we highlighted an emerging fixed income opportunity in bonds of battered energy companies up and down the value chain.

To call the High Yield Energy List we launched last May a disappointment so far would be the understatement of the year. The one thing that went right was that none of the initial 10 recommendations has cut its dividend, with the exception of EnLink Midstream (NYSE: ENLC).

We expect to see more pressure on energy stocks. So why shouldn’t someone just sell everything now and wait for a bottom? There are basically three reasons. First, market history teaches us that when energy does hit a final bottom, spotting it will be much more a matter of luck than insight or skill.

Some investors may raise an eyebrow at this recommendation, as well as our risk rating of the midstream MLP as “Conservative.” And Energy Transfer hasn’t held up well in the COVID-19-inspired energy sector selloff either, with the share price closing in on its lowest point in four years and the yield a distressed-looking 11 percent plus.