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When Emotions are High Expect a Reversal

By Roger S. Conrad on Aug. 9, 2019

Once again, fear has the energy sector in its talons. Benchmark WTI Cushing oil has yet to break its mid-June low. But the S&P 500 Energy Index has already dropped by nearly 9 percent this month alone.

The Alerian MLP Infrastructure Index is down more than 11 percent. Worst hit of all have been mid-sized independent producers and the midstream companies and MLPs that serve them.

For example, Antero Midstream Corp (NYSE: AM) and Antero Resources (NYSE: AR) are off by 14.5 percent and 19 percent so far this month, respectively. Oasis Petroleum (NYSE: OAS) and Oasis Midstream Partners (NYSE: OMP) are lower by 49 percent and 22.6 percent, respectively.

That poor share price performance is in stark contrast to both corporate families’ solid second quarter numbers. And both Antero Resources and Oasis Petroleum largely affirmed previous production forecasts underlying their midstream affiliates’ expectations for volumes and therefore distributable cash flow and dividend growth.

Our Feature article takes a deep dive into results for each of our Actively Managed Portfolio recommendations. Notably, almost everything is down this month. But only one pick actually reduced guidance: EnLink Midstream LLC (NYSE: ENLC). And even that company covered distributions comfortably, while guiding toward better second half 2019 results.

Why the disconnect between the energy sector’s business and share price performance? Simply, investors are pricing in an expectation for much lower energy prices, especially for oil and natural gas liquids. The assumption is such a drop will force E&P companies to sharply curtail output, which in turn would reduce midstream companies’ cash flows available for distributions.

We see several holes in the argument. Shale producers have acquired cost discipline that many investors and participants still aren’t recognizing. That’s made them less susceptible to booms and busts than in the past. In fact, the generally solid second quarter results posted by best in class E&Ps already do reflect substantial declines in oil, NGLs and particularly natural gas prices from year ago levels.

Midstream companies have also greatly hardened their businesses against downturns the past several years. More than a few have disappeared. But for those left, building hefty payout coverage, cutting debt-to-EBITDA ratios and self-funding asset growth are the rule now.

There are definitely still pockets of vulnerability in energy, many of which we identify in the Endangered Dividends List. And it’s understandable for investor emotions to run hot in a volatile and down trending market.

But our strong advice now is to read what we have to say in this issue and steel yourself to stick with our Portfolio picks. Even the hardest hit now are setting up for a massive re-rating higher, even if all oil prices can do is stay around $50 a barrel.

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    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