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  • Roger S. Conrad

Focusing on the Bigger Picture

By Elliott H. Gue on May. 31, 2016

Our outlook for oil prices and strategy for investing in energy stocks hasn’t changed appreciably since the end of 2015. In fact, we’re still following the same basic playbook we first outlined at the end of 2014, when the bear market in energy stocks and commodities remained in its early stages.

The Jan. 17, 2016, issue of Energy & Income Advisor, Dusting off the Crystal Ball, made the following predictions about crude-oil prices:

  • West Texas Intermediate (WTI) crude oil could tumble to between $20 and $25 per barrel in the first quarter, driven by elevated inventories and seasonally weak demand;
  • Oil prices would stabilize later in the year and start to recover toward their longer-term range of $40 to $60 per barrel; and
  • The timing of this recovery could be pushed back by weakness in the US and global economy and/or upstream operators bringing onstream the roughly 4,000 wells that have been drilled but not yet completed.

Our tactical advice for investing in energy stocks included a plan to book profits on our hedges and buy well-positioned energy stocks and master limited partnerships at dream prices. Our suggestions included:

  • As for ProShares UltraShort Oil & Gas (NYSE: DUG), investors should consider cashing out a quarter of their position at $90 per share, another 25 percent at $100, a third tranche at $108 and the remainder at $114. This approach enables us to lock in a partial profit in a topsy-turvy market while retaining some upside leverage to further downside in energy stocks.
  • We set Dream Prices for five upstream names: Chevron Corp (NYSE: CVX) at $70; Total (Paris: FP, NYSE: TOT) at US$35; EOG Resources (NYSE: EOG) at $63; Anadarko Petroleum Corp (NYSE: APC) at $50; and Concho Resources (NYSE: CXO) at $80.
  • We set or reiterated dream prices for four MLPs in the same issue: AmeriGas Partners LP (NYSE: APU) at $35; Dominion Midstream Partners LP (NYSE: DM) at $27; Shell Midstream Partners LP (NYSE: SHLX) at $30; and Spectra Energy Partners LP (NYSE: SEP) at $40.

These calls weren’t necessarily new. In fact, we had outlined the same strategy and set dream prices for several additional names in Getting Ready for a Real Buying Opportunity (Sept. 26, 2015), Those Who Misinterpret the Past are Doomed Not to Profit (Oct. 16, 2015) and Tackling the Big Questions (Dec. 2, 2015).

How did these calls pan out?

The price of WTI plummeted to a nadir of $26.05 on Feb. 11, 2016—slightly above the $20 to $25 per barrel range that we had called for since the end of 2015.

We ultimately sold half of our position in ProShares UltraShort Oil & Gas, cashing out a quarter of our holding at $90 for a 48.9 percent profit and another tranche at $100 for a 65.4 percent profit. Selling American Airlines (NSDQ: AAL) and Royal Caribbean Cruises (NYSE: RCL) in November 2015 also proved timely and locked in decent gains in a challenging tape for energy stocks.

Several high-quality names that we highlighted in late 2015 and early 2016 fell below our dream prices; these stocks have rallied hard since they joined the model portfolio in January. Anadarko Petroleum’s shares have surged 62.6 percent, while Concho Resources has gained 69.4 percent and EOG Resources has rallied 30.5 percent.

Investors who followed our dream prices would have picked up units of several MLPs, including AmeriGas Partners at $35 per unit for a 37 percent profit, Dominion Midstream Partners at $27 for a 9.4 percent profit and Spectra Energy Partners at $40 for a 19.8 percent profit.

Our calls weren’t perfect. Although our out-of-consensus warning in spring 2015 that WTI would tumble into the $30s per barrel worked out perfectly, crude-oil prices narrowly missed sliding into our updated target of $20 to $25 per barrel. And in hindsight, we should have sold more than half of our position in ProShares UltraShort Oil & Gas when the exchange-traded fund hit $100 per share in January and February 2016.

Oil prices have rallied much further and faster than we expected, though WTI remains within our longer-term range of $40 to $60 per barrel.

And unlike many of our peers and Wall Street analysts, our bearish outlook for oil and energy stocks meant that we slapped Sell calls on many of the biggest losers in 2014 and 2015, including Memorial Production Partners LP (NSDQ: MEMP), SeaDrill (NYSE: SDRL), Hi-Crush Partners LP (NYSE: HCLP) and National Oilwell Varco (NYSE: NOV).

Although some of these calls enabled us to lock in outsized gains, our cautious stance and Sell ratings should have helped investors to avoid some of the worst—and likely irremediable—damage inflicted during the bear market in energy stocks.

In March 2015, we cashed out of Valero Energy Corp (NYSE: VLO) for a 60 percent profit and explained why investors should avoid US independent refiners. Although we were early on this call, Valero Energy and other refiners have underperformed dramatically this year, as the rally in oil prices and elevated inventories of refined products have pressured crack spreads.

What’s Next for Oil and Energy Stocks

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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      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

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      Our assessment of every energy-related master limited partnership.

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      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