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  • Roger S. Conrad

Changes to the International Portfolio

By Roger S. Conrad on Aug. 14, 2015

The International Portfolio’s conservative sleeve focuses on midstream (pipelines and processing) and downstream (refining, marketing and utilities) energy stocks.

Although these companies’ underlying businesses have continued to perform, the stocks have taken a hit from concerns about future growth and weakness in the Australian and Canadian dollars, which has eroded returns for US investors and reduced the value of their dividends. Nevertheless, we still sit on gains in most of these names.

However, the services and exploration and production companies represented in the International Portfolio’s aggressive sleeve suffered a double whammy: unfavorable trends in the currency markets and direct exposure to the collapse in oil prices.

Given their distance from key end-markets in the US and insufficient takeaway capacity, Edmonton Syncrude Sweet Blend fetches about $37 per barrel and Western Canada Select, a heavy-sour blend, trades for less than $23 per barrel—significant discounts to regional crudes of comparable quality.

(Click graph to enlarge.)North American Crude Prices

We’ve exercised extreme caution toward this group over the past year, exiting our weakest positions and cutting most to a Hold. And we’ve had Sell ratings on many of the producers and services companies tracked in out International Coverage Universe for the past year.

Long-standing Sell ratings on Canadian Oil Sands (TSX: COS, OTC: COSWF) and Penn West Petroleum (TSX: PWT, NYSE: PWE) hopefully saved investors some heartache and losses. And our International Portfolios has avoided the majority of the 23 Canadian oil and gas producers and services outfits that have slashed their dividend since June 30, 2014. These companies have slashed their payouts by an average of 72.9 percent and have given up about 76.4 percent of their volume in US dollar terms.

Nevertheless, the International Portfolio’s aggressive sleeve has taken absorbed some hard hits from the severe downdraft in crude-oil prices.

We expect even the hardest-hit International Portfolio holdings to survive the current down-cycle. However, we have concerns about how long this recovery might take; in some instances, we’re be better off taking a loss and re-allocating capital to stocks that stand a better chance of making money over the next few years.

We don’t like to sell a stock for a loss unless it’s the only prudent course; it pained us to exit Vanguard Natural Resources LLC (NSDQ: VNR) and Memorial Production Partners LP (NSDQ: MEMP) in December 2014, but cashing out of these names saved us from a lot more downside.

 

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      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor