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  • Roger S. Conrad

Energy: Solid Earnings But Investors Fear the Future

By Roger S. Conrad on Nov. 24, 2019

Q3 results and guidance updates are all in for the Actively Managed Portfolio and High Yield Energy List, as well as for most of our coverage universes.

We’re still assessing how results affect our company-by-company outlook for the rest of the year and into 2020. But there are already a few clear takeaways.

First, our recommendations’ Q3 numbers were quite solid, including companies whose shares have taken hard hits lately. And they support guidance for capital spending, distribution policies and balance sheet strength.

That’s by no means true of every energy company we track, and there are plenty of disaster stories shaping up in our coverage universes. But our long-standing thesis is still very much intact: This is a much more sustainable and resilient industry than it was five years ago at the start of the decline.

Second, the market isn’t giving energy companies any credit for strong current business performance. That’s especially true for MLPs, where it’s become fashionable to doubt every number and forecast. Companies that have underperformed or raised concerns have been skewered, even when share prices have already fallen a long way.

Third, investors are treating energy companies’ guidance with extreme skepticism, even when management has consistently delivered in the past. That’s obvious from the muted reaction to good news, as well as the analyst incredulity behind many questions asked on energy companies’ third quarter earnings calls.

Why this disconnect between business performance and share price action? Simply, the stock market is doing what it always does during times of extreme uncertainty for an industry: Investors are pricing in the worst case.

For energy, it’s due to the confluence of several factors including a gloomy global economic and price outlook, producers employing fewer drilling rigs in many basins, growing pressure from major financial institutions for the industry to reduce carbon dioxide emissions and, for MLPs, doubts about the sustainability of their model.

It’s hard for even the most upbeat earnings call and numbers to fully answer that level of doubt. And when a sector has been beaten down for as long as energy has, it’s only natural for investors to throw in the towel and drive down share prices even further.

To ride the next recovery, energy companies must face down these challenges. The value chain in North America must continue adapting to changing shale economics. MLPs must tackle thorny issues regarding incentive distribution rights and financial reporting. And relaxed EPA regulations or no, energy companies will have to address greenhouse gas emissions to win back many institutional shareholders.

But it’s equally clear that oil and gas are essential as ever to a functioning economy. That means the best energy companies are setting up for a powerful rally from these extremely low levels. And our job remains to bring you the best bets well in advance.

In This Issue

1| Feature: Earnings Roundtable. Our freewheeling discussion of what we learned from energy sector Q3 numbers and guidance, and how they’ve affected out outlook.

2| Portfolios. Highlights of Q3 earnings and guidance for Actively Managed Portfolio and High Yield Energy List companies.

3| Endangered Dividends List. Most endangered companies elected to maintain distributions for the current quarter. The exception was Canada’s Ensign Energy Services (TSX: ESI, OTC: ESVIF).

Energy & Income Advisor

Your complete guide to energy investing, from growth stocks to high-yielders.

In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.

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  • Live Chat with

    Elliott and Roger on Nov. 26, 2019

  • 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.

    Experts

    • 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