Our bullish outlook for energy stocks and crude-oil prices has finally played out in the second quarter, with Brent and West Texas Intermediate trading above $70 per barrel on a tightening supply-demand balance and, more recently, news that the Trump administration would restore sanctions on Iran.
These developments have provided a welcome lift to the high-quality exploration and production companies on our Focus List, all of which reported strong first-quarter results and should be able to grow their hydrocarbon output while living within cash flow. In choosing these names, we focused on names with franchise assets, low production costs, capable management teams, and a record of operational excellence. This selectiveness gave us the courage to pound the table for Occidental Petroleum Corp(NYSE: OXY) after temporary challenges resulted in disappointing fourth-quarter results.
Midstream master limited partnerships (MLP) have also rallied with the improvement in oil prices, though income-seeking investors can still find good value in the space and a lack of depth in this market can create buying opportunities.
As the Energy & Income Advisorteam prepares to attend the MLP Association’s annual investor conference later this month, we’d like to highlight the group’s improving fundamentals—a reality that the market eventually will acknowledge.
Bad behavior and shoddy corporate governance continue to tarnish the group’s reputation, perhaps fairly. In the latest example, Loews Corp (NYSE: L) effectively hung Boardwalk Pipeline Partners LP’s (NYSE: BWP) unitholders out to dry.
The sponsor asserted that changes in the Federal Energy Regulatory Commission’s planned elimination of the income tax allowance on interstate pipelines that operate under cost-of-service agreements could trigger call options that allow it to purchase the Boardwalk Pipeline Partners’ outstanding units at their average daily trading price over the preceding 180 days.
The news tanked the stock and could set the stage for Loews to roll up the MLP at significantly lower price. Loews’ management team argued that legal obligations required this disclosure, but this announcement does little to improve the market’s perception of governance issues in the MLP space.
Although the wave of distribution cuts that have occurred in the MLP space have brought significant pain to investors, most of the names with assets worth owning have taken their medicine and put themselves on a path toward sustainability. Even Energy Transfer Equity LP(NYSE: ETE) and Energy Transfer Partners LP’s (NYSE: ETP) management team hinted that a simplification transaction could take place next year.
Meanwhile, the opportunity set for well-positioned MLPs continues to improve. The start-up of world-scale ethane crackers on the Gulf Coast has increased demand for ethane, while propane prices have also remained strong, boosting throughput and profit margins at gas-processing plants.
US oil and gas producers continue to take market share, while surging activity levels and output in the Permian Basin mean that oil and natural gas produced in this area trades at a significant discount to comparable benchmarks. This blowout in regional price differentials signals a need for additional takeaway capacity to alleviate local gluts and deliver these volumes to areas of need.
Improving balance sheets and fundamentals make our favorite MLPs must-owns in the back-half of the year. As the MLP Association’s annual investor conference approaches, we look forward to identifying emerging opportunities and highlighting the potential value traps that remain.
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.
Elliott and Roger on May. 25, 2022
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