Planning for a Pullback
An environment where oil prices remain lower for longer favors US independent exploration and production companies that own high-quality assets in the lowest-cost shale plays.
The best upstream operators continue to reduce their per barrel production costs through efficiency gains and enhanced drilling and completion techniques that boost per-well output. Some of the strongest names can generate a decent return on capital with oil prices in the mid-$30s per barrel.
Despite significant volatility, crude-oil prices have trended lower since the beginning of June. Our near-term outlook calls for West Texas Intermediate (WTI) to tumble into the $30s per barrel over the next one to three months, a period of seasonally weak demand.
This weakness could create another opportunity to buy our favorite exploration and production names.
International Intrigue
Our International Portfolio’s conservative allocation weathered the selloff in energy-related equities with aplomb and has continued its strong performance in 2016. The handful of names in our aggressive sleeve have also rallied hard this year. We revisit out strategy for the back half of the year.
Pre-Earnings Potpourri
With second-quarter earnings season about to kick off for the energy sector, this installment of Energy & Income Advisor tackles a number of recent developments affecting specific master limited partnerships and midstream operators and takes a look at our International Portfolio holdings.
The Upstream Cash Flow Crunch
The severe downdraft in the prices of crude oil, natural gas and natural gas liquids has pressured producers’ cash flow and outpaced reductions to service costs and capital expenditures. Accordingly, the cash flow shortfalls that predominated in the salad years have continued in the lean years, setting the stage for further spending cuts in 2016.
MLP Strategy Update
The recent relief rally hasn’t changed our outlook for the MLP space and investment strategy. Despite the severity of the selloff and rapidity of the recovery, even our favorite publicly traded partnerships could find themselves engulfed in another maelstrom of indiscriminate selling. Not only will squeezing out the excesses of the past take time, but a number of headline risks will continue to haunt the space over at least the next 12 months.
Lessons from the Past
We examine previous supply-driven down-cycles in oil prices and their implications for equity performance and stock selection in today’s market.
A Bull Market for Brazen Forecasts
Sensationalist predictions about oil prices have become all the rage over the past two months, but they won’t necessarily help investors make money. We explain our outlook for crude-oil prices and why a buying opportunity may be around the corner.
Getting Ready for a Real Buying Opportunity
Over the past two years, oil and gas producers have accounted for the bulk of the energy sector’s bankruptcies, laid low by excessive leverage, the collapse in commodity prices and inferior assets. Exploration and production companies haven’t emerged from the woods yet—but they’re not all goners. In fact, the buying opportunity that investors have awaited appears to be around the corner.
In a scenario where oil prices remain lower for longer, investors should focus on upstream operators with strong balance sheets, low production costs, a history of solid execution and franchise assets that can deliver output growth in a challenging environment. Names that can expand their output and win market share should outperform, while their cash-strapped peers or those with inferior assets will struggle.
The universe of exploration and production companies that meet our criteria is relatively small; don’t misconstrue this call as open season to buy upstream names indiscriminately. Not every oil and gas producer has the potential to outperform, let alone survive.
In this issue, we highlight a handful of our favorite names to scoop up during the coming buying opportunity. To help with timing, we’ve included dream buy prices for these stocks that reflect trough valuations in previous downturns and our outlook for commodity prices.
Dream Prices from a Nightmare Situation
Although we expect further downside in crude-oil prices to weigh on shares of oil producers and services firms, we have grown incrementally bullish on a select group of names that we would consider buying at previous trough valuations.
Big Time
Our favorite integrated oil companies’ bulletproof balance sheets are huge advantages in an environment where oil prices remain lower for longer. Big Oil has endured a great deal of criticism about massive capital expenditures and limited production growth, but unlike cash-strapped producers these companies have the wherewithal to address their shortcomings.
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Live Chat with
Elliott and Roger on Jul. 27, 2017
Portfolios & Ratings
Model Portfolios
Balanced portfolios of energy stocks for aggressive and conservative investors.
Coverage Universe
Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.
MLP Ratings
Our assessment of every energy-related master limited partnership.
International Coverage Universe
Roger Conrad’s coverage of more than 70 dividend-paying energy names.
Experts
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Roger S. Conrad
Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor
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Elliott H. Gue
Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor
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Peter Staas
Managing Editor: Capitalist Times and Energy & Income Advisor